We are getting questions as to how much help clients with substantial assets will actually get from the new offer in compromise rules the IRS announced on May 21, 2012. Here is a short answer which well sums it up.
The new IRS offer in compromise rules will lower the cost of an offer for almost any taxpayer wanting to settle a tax debt. However, the changes will be felt most dramatically by taxpayers with income only, but with little or no assets, or at least assets with very little, if any, equity.
The reason is that an offer is calculated on both future earnings and the quick sale value of assets. Therefore, if a person has no assets, the offer will be calculated only on future earnings. Because the new rules shorten, and by a lot, the period for measuring the amount of future income which is taken into account in determining the amount to settle, the biggest change is definitely for asset poor taxpayers.
For example, under the new rule, the lowest offer amount for a no asset offer will be one that is paid in 5 months or fewer (because the new rules looks at future earnings for only 12 months, down from 48 months under the old rules). An offer payable in more than 5 months, up to 2 years, looks at future earnings for 24 months, down from 60 months). So, if a person shows an ability to pay, say, $400 a month (determined using the government national standards), the offer amount (assuming no assets) is $4,800 (12 x 400). Under the old rule the amount would have been $19,200 – so the new rule results in a 75% reduction in the amount needed to settle. The same offer payable in up to two years would be $9,600 (400 x 24), 60% less than the old rule amount of $24,000 (400 x 60).
The IRS also expanded the National Standard miscellaneous allowance to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments, bank fees and charges. The new rules now allow payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
These changes should be very helpful for distressed taxpayer, but obviously will have a much smaller impact on taxpayers with substantial assets. The taxpayer with assets will still have to go through the process of valuing the assets and including a certain percentage of their net equity in the offer amount to settle the debt.
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