Offer in Compromise Rules Made More Flexible in Expansion of Fresh Start Program

The IRS on Tuesday announced that it is making the terms under which it will accept offers in compromise more flexible (IR-2012-53). The changes are part of the IRS’s expansion of its Fresh Start program and are designed to help financially distressed taxpayers clear up tax problems more quickly.

The changes affect the financial analysis used to determine if a taxpayer is eligible for an offer in compromise. In calculating a taxpayer’s reasonable collection potential, the IRS will now look at only one year of future income for offers paid in five or fewer months (down from four years). It will look at two years of future income for offers paid in six to 24 months (down from five years). All offers must be fully paid within 24 months of the date the offer is accepted.

Among other things, the new rules revise the calculation for the taxpayer’s future income; allow taxpayers to repay their student loans and to pay state and local delinquent taxes; and expand the allowable living expense allowance category and amount.

Other changes include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. Equity in income-producing assets generally will not be included in the calculation of reasonable collection potential for ongoing businesses.

The changes are reflected in revised Internal Revenue Manual Section 5.8.5.