Generally speaking, an Offer in Compromise is where the IRS accepts less money than the taxpayer owes to settle their outstanding liability with the IRS. The IRS will only accept an OIC when all other tax collection alternatives have been exhausted. Other IRS tax collection alternatives may be a short extension of time to pay, an installment agreement (making monthly payments until the debt is paid in full), full payment of the debt or hardship status. Hardship status is where the taxpayer is unable to pay anything against their tax liability at the present time. It is usually a temporary solution due to unemployment or illness. Finally, a taxpayer may qualify for a bankruptcy discharge of the tax liability.

When the IRS considers an OIC, it is looking at the taxpayer’s Reasonable Collection Potential (RCP). The RCP is how the IRS determines whether or not a taxpayer has an ability to pay his tax liability in full. The RCP is based on the taxpayer’s assets such as real property, automobiles, bank accounts and any other assets. In order to come up with the total RCP, the IRS adds the taxpayer’s future anticipated income and then deducts any allowable expenses. Please note that I stated allowable expenses. The IRS has certain allowable expense standards and any expenses which are in excess of those standards must be proven to be necessary before the IRS will accept them.

There are three (3) categories of OIC’s: Doubt as to Collectibility; Doubt as to Liability; and Effective Tax Administration. Doubt as to Collectibility means that the IRS believes that it will not be able to collect the full amount of the tax owed based on the taxpayers ability to pay. Doubt as to Liability means that there is a legitimate doubt that the taxpayer owes the amount the IRS has assessed to the taxpayer. Effective Tax Administration is where although there is no doubt that the taxpayer owes the taxes and the taxpayer could pay the taxes, exceptional circumstances exist which allow the IRS to waive the amount due when the taxpayer demonstrates that it would create an economic hardship.

As I indicated earlier in this article, the IRS does appear to be trying to help struggling taxpayers in these difficult economic times. In fact, it appears that the IRS is even trying to look out for taxpayer’s FICO scores. Traditionally, the IRS did not care about what their tax debt collection efforts have done to taxpayers, their credit reports, their ability to borrow or their business reputations with their customers or vendors. However, in these difficult economic times, many individuals have trouble paying their monthly bills and most businesses are barely keeping afloat. As a result, the IRS is now taking a more friendly approach.

Instead of immediately filing tax liens, the minimum amount before a tax lien will be filed will now be $10,000. That amount will also be negotiable. Tax liens will also be withdrawn if a taxpayer enters into an installment agreement when he owes $25,000 or less. This is AMAZING! Taxpayers who have been making their payments on a regular basis can also request that their liens be removed. It is unheard of for the IRS to withdraw a Federal Tax lien without a tax debt being paid off in full. Additionally, the IRS is making it easier for small businesses to obtain Installment Agreements in order to pay off corporate or payroll tax debt. Finally, the IRS is making OIC’s more accessible to taxpayers.

A new streamlined Offer in Compromise program is now in place, where taxpayer’s who owe less than $50,000 and have incomes of $100,000 may qualify. The previous streamlined Offer in Compromise program was limited to taxpayer’s who owed less than $25,000. However, the current RCP standards are still in place. A second OIC program for taxpayer’s who are recently unemployed, gives the IRS the option to consider only the taxpayer’s current income (if any) and future earning potential. Generally, with an OIC, the IRS must consider the taxpayer’s previous income as well. This gives the IRS greater flexibility in deciding whether or not to accept an OIC and will theoretically open up the number of OIC’s accepted to a greater number of taxpayers.

Finally, the IRS may accelerate lien relief for taxpayer’s who need to refinance or sell their homes. For example, in the past it usually took in excess of 45 days for a tax lien to be released. Now the time frame is much shorter. Alternatively, in certain circumstances, the IRS will make the tax lien secondary to the primary lender in order for the taxpayer to be able to refinance or sell their home for less than the amount of the mortgage.

As you can see, the IRS is making significant efforts to assist taxpayer’s in these difficult economic times. Whether it is making OIC’s easier to qualify for or withdrawing tax liens, the IRS is trying to help taxpayer’s and not make their experience so painful.

If you have a client that has a Federal tax issue, that client needs to address the issue immediately. Unfortunately, procrastinating only makes the problem worse. I am happy to meet with tax clients for a complimentary initial consultation to discuss their options.

Mary E. King is a Florida Tax attorney with the Law Office of Mary E. King, P.L. in downtown Sarasota. She practices in the areas of IRS Problem Solving, Mortgage Foreclosure Defense, Estate Planning and Probate. She can be reached at (941) 906-7585.