The Internal Revenue Service (“IRS”) recently published updated figures, reducing allowable expenses used in determining whether they will accept a taxpayer’s offer in compromise (“OIC”).
If a taxpayer has an outstanding tax debt with the IRS, the IRS has the authority to settle or reduce these taxes under an OIC filed by a taxpayer. Where the taxpayer can demonstrate “doubt as to collectability” or that the taxes should be compromised on the basis of “effective tax administration” (where exceptional circumstance exist so that paying the tax would pose a serious economic hardship, be unfair, and would be inequitable), the IRS can agree to accept less than what is owed. The IRS, recognizing it may be better to collect some of the taxes rather than less or even none of it, is often willing to accept an OIC.
The IRS evaluates a taxpayer’s ability to pay under an OIC by reviewing financial information from the taxpayer, submitted through an IRS financial statement form (Form 433-A (OIC) for individuals, or 433-B (OIC) for businesses). The Form 433 requires the taxpayer to identify personal/business information, including assets, debts, and income and expenses. For individuals, the IRS allows certain personal living expenses in evaluating ability to pay an OIC. These expenses include housing expenses, automobile expenses, health care costs, and more.
However, the IRS doesn’t allow taxpayers to claim all of their actual personal expenses, but instead limits or “caps” these expenses. The IRS has established national and local standards based on the size of the taxpayer’s family and other factors, and sets maximum allowances that vary by location. The taxpayer is allowed the amount actually spent, or the applicable standard expense, whichever is less. This often results in a taxpayer with larger personal expenses, being allowed a smaller deduction because of the local limits, and this then produces more monthly income for the taxpayer, which increases the OIC amount.
The IRS recently issued updated tables, effective March 28, 2016, reducing the monthly dollar amounts it will accept as allowable personal living expenses, making it more difficult for taxpayers to qualify for an Offer in Compromise, or at least increasing now the amount that must be offered under an OIC. Although OICs remain as a useful tool in settling tax debts with the IRS, the new IRS expense tables now make it more important than ever to consult with a tax professional to determine whether an OIC is a feasible option to resolve federal taxes.