Recent Changes to IRS Offer in Compromise

Current rules allow taxpayers with tax debt up to $100,000 to apply for an offer in compromise. This option is available to taxpayers who do not have sufficient funds to pay their full tax liability and paying this debt would create a financial hardship. The IRS looks at your income, assets and expenses to determine if you can pay your debt.Taxpayers have the option of making a lump-sum payment or getting on a short-term payment plan. Recent changes affect how the IRS calculates your future income when determining whether to accept a taxpayer’s offer in compromise. While the old rule allowed the IRS to consider four years of income for a lump-sum offer in compromise, the current rule only allows it to consider one year of income. For short-term periodic offers in compromise, the IRS considers two years of income instead of the previous standard of considering five years of income. This shorter window helps taxpayers who have recently encountered a decrease in income, such as from a job loss or reduction of hours, to qualify for this process.

The Internal Revenue Service also recently revamped the process involved with making an Offer in Compromise. Prior to the change, taxpayers would check boxes that corresponded with their situation out of three options: Doubt as to Liability, Doubt as to Collectability or Effective Tax Administrative Offer. These three options are still the only ones available. However, a Doubt as to Liability Offer now has a separate form that must be completed. This option may be used when identity theft occurs or when the taxpayer is arguing that the debt is not actually theirs to pay.

Another important change deals with how a taxpayer prepares an offer based on a Doubt as to Collectability. The new process uses a specific form that is coupled with a worksheet to help determine the amount of the offer.

The IRS is instructed to reject any Offer in Compromise application if the taxpayer has not filed all required tax returns. An exception is if there is a valid extension on file, which should be noted in the application. To qualify for an offer in compromise, a taxpayer cannot be in bankruptcy or be delinquent on any current tax payments.

Another major change that Congress is hoping to implement is an increase in the responsiveness and communication from the IRS. Senators introduced bipartisan legislation aimed to improve IRS customer service, overhaul the appeals process and increase protections for taxpayers. If passed, the bill would also codify the existing low-income taxpayer exception that allows them to have the application fee and partial payments waived for any offer in compromise that they make.

The IRS is currently allowed broad authority to enforce the payment of tax debt on taxpayers, including the ability to garnish wages, issue liens on real and personal property and intercept the receipt of other funds. Another recent addition to this all-encompassing power is the ability to reject passport applications. However, this enforcement action will not be taken against taxpayers who have settled their debt through an accepted offer in compromise.

Rate of Acceptance

According to the IRS’s Data Book, the current offer in compromise rate is 40.32 percent. In 2017, 62,000 offers in compromise were submitted with 25,000 ultimately being accepted. With nearly half of applications being accepted, it is often worth the time and process for taxpayers to attempt this option.

If you owe tax debt and would like to see if you qualify for an offer in compromise, find out more information on offer-in-compromise.com.