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The IRS is accepting more offers-in-compromise from taxpayers who cannot pay the full amount of their back taxes.

IRS Accepting More Offers-in-Compromise

  • 9/12/2012

IRS Accepting More Offers-in-Compromise

The IRS is accepting more offers-in-compromise (OICs) from taxpayers who cannot pay the full amount of their back taxes, an IRS official said at an American Bar Association Section of Taxation webcast. In 2010, the IRS accepted 27 percent of offers; that number rose to 34 percent in 2011, said Scott Reisher, director of collection policy, IRS Small Business/Self-Employed Division, on the webcast.

The IRS has seen an 80 percent increase in accepted offers in 2012, according to Reisher, and is trying to take a fair and reasonable approach to disposing of OICs. Most cases are resolved within nine months, he notes.

Carol Luttati of the Law Offices of Carol M. Luttati, New York, said that, in the “old days,” the IRS did not have to accept an OIC, but that this seems to be changing. Reisher agreed that, if taxpayers cannot pay their tax liabilities in full, “it is good policy to settle for less” and to “secure revenues that cannot be collected in other ways.”

However, each case is decided based on the taxpayer’s facts and circumstances, so acceptance is not certain, Reisher said. Moreover, taxpayers may be asked to sign a collateral agreement that they will pay more if they acquire more income or assets.

The investigation

The IRS will still investigate the taxpayer’s assets and do a financial analysis, according to Reisher. The IRS will also consider the taxpayer’s age, earnings potential, the pending collections statute of limitations, and other factors. However, income forecasts now look at only the next two years, rather than four years.

The IRS makes a determination as to the taxpayer’s allowable living expenses, based on collection financial standards that are generally updated in April each year, Reisher said. The goal of these standards is to reduce subjectivity among IRS employees evaluating taxpayer finances. However, collection employees retain some discretion in applying the standards.

The standards now recognize unsecured debt obligations, such as credit card debt, as living expenses, without requiring additional documentation from taxpayers, Reisher explained. The IRS did this by increasing the standard for allowing miscellaneous expenses. The standards also recognize that taxpayers with federal tax debts may also have state tax debts, and allow some payments for state taxes, rather than requiring that all funds go to federal obligations.

Currently not collectible

Reisher said the IRS will allow taxpayers to enter into a “currently not collectible” (CNC) status for a year or more, where they do not make any payments. These used to be rare, but CNC requests are now treated differently. CNC status is available to businesses, as well as individuals, as an alternative resolution option.

Reisher noted that the collection process can be divided into three phases.

The notice phase, which can involve one to four notices sent to individuals and one or two notices sent to businesses. This is the best opportunity for taxpayers to minimize interest and penalties. The IRS is not taking enforcement action at this stage.

Next is the automated collection service (ACS) phase, where IRS employees can apply basic enforcement tools such as liens or levies.

Finally, the IRS uses revenue officers who have broader powers to take enforcement action, such as issuing summons or seizing assets.

Installment agreements

Reisher discussed the IRS’s streamlined program for installment agreements, including expanding thresholds from $25,000 to $50,000 for individuals, and from $10,000 to $25,000 for businesses. Taxpayers need to provide minimal financial information and must be willing to pay installments by direct debit, Reisher said. He stressed that default rates on direct debit arrangements are the lowest among IRS collection techniques.

The IRS can terminate an agreement if there is a taxpayer default, and take more drastic collection action if it chooses. Reisher pointed out that taxpayers who want a streamlined arrangement can pay down their outstanding liabilities so that they meet the applicable threshold.

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