Volume 16 Issue 3 -- May/June
Volume 16 Issue 3 -- May/June 2012
After our last newsletter went to press, the IRS announced yet another, potentially significant, set of revisions to its Offer in Compromise (OIC) program. The goal of the latest changes is to make the OIC program more widely available.
In a nutshell, the most important of these changes are the following:
Perhaps a recognition of the rigidity of the prior rules and their implementation has produced new, surprisingly liberal guidelines for the analysis of OICs. These changes are reflected in new rules for the Financial Analysis of Offers, as set forth in the Internal Revenue Manual.
In evaluating Offers, the Internal Revenue Service (IRS) looks at the value of assets, called “Asset Equity Table,” as well as the stream of future income, referred to as the “Income/Expense Table.” The purpose of computing assets and income is to include in the Offer the Reasonable Collection Potential (RCP) based upon these two factors: (1) equity in assets and (2) income.
Previously, the guidelines required including income or cash flow over 48 or 60 months (or, in some cases the remainder of the ten-year collection period) if the OIC was not to be paid in a lump sum. Now the IRS has reduced the period of time over which cash flow payments are to be calculated to one or two years, depending upon whether the Offer is paid in five or fewer months.
For example, assuming no equity in assets and available cash flow of $5,000, the total income for one year would be $60,000. If that $60,000 could be paid in five or fewer months then the OIC may be accepted. If it cannot be paid in five or fewer months, then the Offer would have to include $120,000 payable over up to 24 months.
Previously, the IRS insisted on the inclusion in the Offer of 80% of the value of all assets, the so called Quick Sale Value. Now, for some assets, the approach is markedly different. The IRS states that if an asset is producing income, the income from the asset, but not the equity, should be included in the reasonable collection potential for the OIC.
A quick example: If a machine worth $100,000 with no debt produces $5,000 of income per month, then only the income of $5,000 per month but not the equity in the machine itself should be included in the OIC.
In the past all cash had to be included in an OIC without any reductions. The new guidance surprisingly permits $1,000 of cash to be subtracted from a bank and or savings account. In addition, certain living expenses can also be excluded from cash. The example contained in the new guidelines is $10,000 of cash should be reduced by the $1,000 and living expenses of $3,000 also, leaving cash of only $6,000 to be included in the OIC. This is a welcome change for those trying to get an OIC accepted.
Under the new financial guidelines, $3,450 per car can be excluded in projecting the equity in assets of a car. If a family has two cars, they can exclude up to $6,900. The new rules do not apply to airplanes, boats, and trucks. The issue of what to do with a pickup truck, which may be the only vehicle in some families, is not addressed in the new guidance.
Previously, there could be no deductions, generally, for student loans not being repaid. Now, in certain cases, there can be a reduction (expense) factored into assumed cash flow. Also, state and local taxes were never deductible in the past when computing cash flow for an OIC, but now an allocation formula can be used to claim a portion of those taxes as expenses when computing available cash flow.
There are also potentially significant changes in the way the IRS will treat dissipated assets (assets transferred for less than fair market value).
If implemented reasonably, the new guidelines could make OICs more affordable and available for more taxpayers.If you have questions about OICs, please contact Newland & Associates, PLC.
To read a more detailed article about the Guidelines for OICs, click here.
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