In general, an Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. In the past many expenses that taxpayers were paying were not included in the financial calculations to determine the amount that could be paid to the IRS. Some of the limitations that have been revised include the following:
- Revising the calculation for the taxpayer’s future income.
- Allowing taxpayers to repay their student loans.
- Allowing taxpayers to pay state and local delinquent taxes.
- Expanding the Allowable Living Expense allowance category and amount
- Allowing credit card minimum payments in the expense category
It should be noted that the credit card payments will be lumped in with other personal care items and clothing and listed under miscellaneous. The 2011 amount is listed first and the 2012 amount is listed second below.
Allowance 2011 ; 2012
1 person $87 ; $116
2 persons $165 ; $209
3 persons $197 ; $251
4 persons $235 ; $300
When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income, instead of four, for offers paid in five or fewer months. They will use two years, instead of five, for offers paid in six to 24 months. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.