Work Out a Deal with the IRS

If you’re having trouble paying taxes – including the 2019 tax bill now due on July 15 – the IRS may be willing to cut you some slack.

Strategy: Make the IRS an offer it can’t refuse. Specifically, ensure that you meet the guidelines established under the IRS “Offer in Compromise” (OIC) program.

The IRS just announced it has issued new final regulations refining these rules (IR-2020-55, 3/12).
An OIC is an agreement between a taxpayer and the IRS settling the taxpayer’s tax liability for less than the full amount owed. If the liability can be fully paid through an installment agreement or other means, the taxpayer generally isn’t eligible for an OIC.

To qualify, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year and deposited payroll taxes for the current quarter if he or she is a business owner. Generally, the IRS won’t accept an OIC unless the amount offered by the taxpayer is equal to or greater than the “reasonable collection potential” (RCP). This includes the value that may be realized from the taxpayer’s assets – including real estate, automobiles, bank accounts and other property – as well as anticipated future income (less certain amounts allowed for basic living expenses).

Under the new regs, the application fee for the OIC program has been raised from $186 to $205. This new fee is nonrefundable. However, the applicants who meet the definition of a “low-income taxpayer” may be entitled to a waiver of their OIC application fee if their income is below 250% of the poverty level. A new provision in the Taxpayer First Act of 2019 provides another way for low-income taxpayers to qualify for this waiver. Normally, the IRS determines if taxpayers fall at or below 250% of the poverty level by examining their household’s size and gross monthly income. The new act creates an additional standard for the IRS to use in making the calculation. Now the IRS will also look at a taxpayer’s AGI from the most recent tax return to determine if he or she is at or below 250% of the poverty level.

If the IRS accepts the taxpayer’s OIC, it expects the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer doesn’t abide by all of the terms and conditions of the OIC, the IRS may determine that the OIC is in default. If the IRS rejects an OIC, the taxpayer will be notified by mail. The letter will explain the reasons for the rejection and provide detailed instructions on how to appeal.

Visit https://www.irs.gov/taxtopics/tc204 for more information.