IRS Relaxes Rules for Tax Debt Settlement

In response to overwhelming household debt and tax liabilities, the Internal Revenue Service (IRS) recently announced it intends to aid struggling Americans by possibly reducing their tax debt.

In May 2012, the IRS altered one of its program qualifications so people drowning in tax debt could more easily benefit from the Offer in Compromise (OIC) program. OIC is an expansion of the Fresh Start program, which was originally created to help people and small businesses pay back taxes and possibly avoid tax liens.

According to the IRS, the OIC will allow certain taxpayers to negotiate and settle with the government for less than they owe if the tax debt creates a significant financial hardship. This effort, it is anticipated, will help people reduce their liability more quickly. Circumstances regarding payment negotiation will revolve around income, ability to pay, expenses and asset equity.

Paying Down Tax Debt

To be eligible, applicants have to be current with all filing and payment requirements and cannot be in the midst of an open bankruptcy proceeding. Candidates will be required to pay a nonrefundable $150 application fee and an initial tax payment, although these amounts can be later applied to the tax liability. People who meet the Low Income Certification guidelines are not required to include these payments up front nor make monthly installments during the evaluation time period.

The initial payment required will depend upon the form of payment option chosen. Those who choose to pay a lump sum will have to submit 20 percent of the total offer with the application. The remaining balance of the offer would be due within five or less payments upon written acceptance. Another option is to continue to make monthly installments while waiting for approval and if accepted, pay monthly until the debt is down to zero.

According to the IRS, a Notice of Federal Tax Lien may be filed while a person is waiting for an offer to be accepted, but all other collection activities will be suspended. During this time, the collection time is extended and the taxpayer is not required to make payments on an existing installment agreement, only the payments associated with the offer. If a determination is not made within two years of the OIC application receipt date, the offer is automatically accepted.

The intention of the revised program is to make more people eligible to eliminate tax debt as well as decrease the overall processing. In fiscal 2011, the IRS was said to only accept 34 percent of all applications, and processing typically required six months to a year. Economists say they expect the changes will especially help the middle class in need of serious debt relief.

A formula will be used to establish an amount the IRS will accept from taxpayers; however the variables have changed to make it easier on the taxpayer.

Relaxed Rules for Taxpayers

One of the most significant changes in the program is that the multiplier used to create a payoff number has been reduced. Previously the disposable income amount was multiplied by 48 or 60; now it will be multiplied by 12 or 24. For people with an ongoing business, the equity in the assets will not be included when determining total assets to disposable income.

In the past, the IRS used a set of National Standards to determine a person’s housing, household and transportation expenses. If a taxpayer had a high mortgage payment, for example, in an area with traditionally lower payments according to the National Standard, the IRS would use that lower number. The National Standard tables for housing, transportation and household expenses have been relaxed a bit as well.

Another important change within the revised program is that the agency previously did not allow unsecured debt, such as credit cards, to be considered part of the overall debt equation. Delinquent state and local income taxes as well as student loan payments were not part of the formula either, until now.

If an application is not accepted by the IRS because it considers the offer too low, a letter will be sent indicating the amount the IRS would accept. A report can be requested to explain why an offer was rejected, which may help if an applicant would like to resubmit an offer.

The IRS is not required to accept less than full payment of tax debt owed but it may be more likely to do so if there is doubt as to whether the full amount could ever be collected or there is any question in liability.

OIC program participants must agree to file on time and pay taxes for the following five years. If the OIC is revoked by the IRS, the full amount of tax liability would be reinstated along with the addition of penalties and interest.  Aggressive collection efforts would then begin.

In debt? We can help!

  • Amount
  • Type
  • Contact

How much do you owe?

What can we help you with today?

Related Articles

Tablet Screen with Tax Refund displayed on it

Practical Suggestion for Tax Refund: Pay off Credit Card Debt!

Most Americans will face a nice little dilemma in 2018. Thanks to tax cuts, we are going to take home more of our paycheck. But what should we do with that extra cash? If you use credit cards, finding the answer is a lot easier than executing it, so ...

Continue Reading
road sign with tax refund written on it

Best Ways to Spend Your Tax Return

The big financial question for America over the next few months is: How should I spend my tax refund? The Internal Revenue Service says most of you – somewhere between 75 and 80 percent – are getting one. The average tax refund in 2015 is going to be ...

Continue Reading
file tax return on a calendar

Didn’t File Taxes Yet? Here’s How To Limit Damage

April 15 has come and gone, but millions of Americans are still fretting over their taxes, mostly because they haven’t paid them yet. The IRS estimates that 25 percent of taxpayers missed the April 15 deadline, meaning about 30-40 million people ...

Continue Reading
As April 15 tax deadline approaches, IRS warns of identity theft and fraud.

Taxpayers Beware: Filing Scams and Refund Fraud on the Rise, Says IRS

There is encouraging news from the IRS this week: Statistically speaking, you likely are due a refund when you file a tax return. There is also discouraging news: That refund may end up with someone who stole your identity. So it goes with America’s ...

Continue Reading
Education tax credits can help young couples

Education Tax Credits Offer Big Savings for College Students and Their Families

As the April 15 deadline to file taxes approaches, it's important for college students and their parents to be aware of education tax credits, which can save families thousands of dollars a year. The American Opportunity Tax Credit and the Lifetime Learning ...

Continue Reading
Tax return preparation

IRS Shares Tips on How to Avoid Fraudulent Tax Preparation Services

Tax fraud related to identity theft is a rapidly growing problem. It involves thieves using your personal identifying information to file false tax returns in order to receive big refunds. Thieves can get ahold of your information in any number of ways, such ...

Continue Reading
Counting bills next to tax form

Identity Theft, Tax Fraud Increase as IRS Attempts to Curb Crimes

  As if tax season isn’t difficult enough, taxpayers must now be on alert for suspicious activity that could indicate that they are victims of tax-related identity theft.   During last year’s tax season, the Internal Revenue Service ...

Continue Reading
Payroll tax hike affects everyone

Payroll Tax Hike Could Throw Economy into Reverse

The government is taking a bigger bite of American workers’ paychecks this year, which could mean another slowdown of the U.S. economy. American workers are paying 2 percentage points more in Social Security taxes this year after Congress and President ...

Continue Reading
Get Help Now

Overwhelmed with debt? You have options for lower monthly payments!