The IRS recently announced more changes to its offer-in-compromise (OIC) program as part of its “fresh start” initiative designed to help financially distressed taxpayers in IR-2012-53 (5/21/12). The most recent changes focus on the financial analysis used by the IRS to determine whether a taxpayer qualifies for an OIC, as set forth in the Internal Revenue Manual (IRM Parts 5.8 and 5.15). The changes include:

• Revising the calculation for future income – IRM 5.8.5.23 (2-23-10) - The IRS will now look at only one year of future income for offers paid in five months or less, and two years of future income for offers paid in six to 24 months, but all offers must be paid within 24 months of acceptance. However, deferred payments over the life of the collection statute no longer are allowed.
• Allowing repayment of student loans – IRM 5.8.5.20.4 (3) (10-22-10) – The IRS will now allow at least minimum payments on student loans guaranteed by the federal government for post-secondary education.
• Allowing payment of delinquent state and local taxes – IRM 5.8.5.20.4 (7) (10-22-10) - The IRS will now allow payment of such delinquencies in most cases based on a percentage basis of the tax owed to the state and IRS. Previously, monthly payments to state or local taxing agencies were not allowed as a necessary expense, even if the state or local taxing agency had a lien that was senior to the IRS's lien or was collecting funds through a wage attachment or approved installment agreement.
• Expanding the National Standard miscellaneous allowance – IRM 5.15.1.8 (10-2-09) – The IRS has expanded the allowance to include expenses such as credit card payments and bank fees and charges. The miscellaneous allowance is for expenses taxpayers may incur that are not included in any other allowable living expense items, or for any portion of expenses that exceed the Collection Financial Standards and are not allowed under a deviation.
• Modifying the parameters for calculating Reasonable Collection Potential (RCP) – IRM 5.8.5.1 (9-23-08) – The IRS also made significant changes to the definition of equity in income producing assets for on-going businesses (IRM 5.8.5.5.1 (10-22-10)), evaluating money in bank accounts (IRM 5.8.5.6 (10-22-10)), reducing equity in a vehicle (IRM 5.8.5.11 (10-22-10)), and evaluating dissipated assets (IRM 5.8.5.16 (10-22-10)), retired debt (IRM 5.8.5.17 (IRM 10-22-10)) and transportation expenses for older vehicles (IRM 5.8.5.20.3 (10-22-10)).

According to the IRS, the changes described above “will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.” To be fair, the IRS has made progress under its streamlined OIC program having accepted 19,562 OICs in FY 2011(up 41% over FY 2010) and a 20% overall rejection rate (down from 25% in FY 2009), according to the IRS National Taxpayer Advocate’s 2011 Annual Report to Congress. However, without more meaningful details such as the total number of OICs submitted, total rejected as “non-processable” and total rejected after full consideration, practitioners remain somewhat skeptical regarding whether there has, in fact, been a meaningful increase in OIC acceptance rates sufficient to justify recommendation to clients in lieu of an installment agreement or even bankruptcy given the up-front user fee and 20% deposit requirement for lump sum OICs required by Congress under §7122.

For a further discussion of offers in compromise, see 638 T.M., Federal Tax Collection Procedure – Defensive Measures.

Kenneth S. Savell, J.D., LL.M
IRS Practice and Procedure Group