Gary W Lundgren, EA

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In Mid May 2012 the IRS released significant changes to the Offer in Compromise (OIC) process that will benefit the taxpayer.   Additionally the Forms 656 and 433-A(OIC) were changed.  Click on the links in the previous sentence to  download the forms.


Changes to Allowable Living Expenses
The IRS most significantly increased the amounts allowed for the 'Food, Clothing, Personal Care, Misc' and 'Housing & Utilities' categories.  This gives some additional consideration for those who have some credit card debt.  You may not get allowance for all, but this is better than before.  Additionally now the IRS takes into account State tax debt and student loans.  For the latest Standards allowances click here.



Changes to Calculation of Retirement and Investment accounts
Retirement and investment accounts are taken out of the 80% category and put into a new 70% category.  That increases the reduction in the asset value by 10% to account for selling costs and resulting taxes.  That consequently reduces the value of the asset further giving the taxpayer a better resolution.



Changes to Calculation of Present Value/Future Payment Ability
The calculation of future payment ability has been hugely reduced.  Now the present value of future payment ability is computed by multiplying the net payment ability for cash offers (that would be paid within 5 months of the OIC's acceptance) are multiplied by 12, and deferred OIC's (that would be paid monthly over 2 yrs) are multiplied by 24.

Previously the IRS calculated the present value of future payment ability by multiplying the net payment ability by 48 for cash offers, and 60 for deferred OIC's. You can see this is a BIG BIG difference.  Hooray!



Changes to Evaluation of Retired Debt
Retired debt is for such things as a car loan or other debt, whereas the debt will be paid off within 5 years of when the Offer in Compromise is expected to be submitted.  5yrs equals 60 months of payments. Example: if you only have 30 months of payments left on a loan, then there will be 30 months of those payments available.  That gets added into the Offer analysis.  In the past when calculating retired debt we reduced payments on car loans by the $200 allowance the IRS gives in Offer situations for over-aged/over-mileaged vehicles.  We further reduce the total value of the retired debt according to the rule based on the OIC being paid in 5 months or 24 months.

Now the IRS will not consider a car loan that will be paid off in 2 yrs or more.  For loans paid off in less than 2 yrs they give a further reduction of $400 against the payment.  So, if you have a car loan with payments of $450 that will be paid off in 1 yr they only count $50 ($450 - $400 = $50) in the calculation.  That is multiplied by the calculation in present value as mentioned above.  In this case if it were a cash offer, the retired debt would be $600 ($50 X 12 = $600).



Changes to Evaluating Dissipated Assets
The IRS will now only look back 3 yrs in most cases, instead of up to 10 yrs as in the past.

A dissipated asset is when you dispose of money or property on non-priority debts or expenses instead of paying your tax debt.  Tax debt takes priority over unsecured debt or any unnecessary expenses to support food, shelter, clothing and welfare.  Under law a statutory lien arises upon assessment of the tax, when the tax return is assessed or accepted by the IRS.  This statutory lien does is not effective against secured creditors who perfected their interest prior to the IRS filing a notice of tax lien.  This is one of those little details most people are not aware of.

While for collection purposes the IRS can't do much about it unless they pursue a transferee liability assessment against the recipient, for Offer purposes it is still considered to be an asset.  The IRS considers that you deliberately excreted assets beyond their reach.



Changes in Evaluation of Vehicles
The IRS now allows a $3,400 exemption for vehicles.  If there is a single taxpayer he is only allowed for one and operating expenses for one vehicle, regardless of how many vehicles exist.  The extra vehicles are deemed unnecessary.  For married couples, allowance and operating expenses for 2 vehicles is allowed.  Two vehicles is the maximum allowed for a household regardless of how many vehicles exist.  The extra vehicles are deemed unnecessary.  There may be argument advanced for children of driving age if it can be proven alternate transportation for necessary needs cannot be otherwise obtained.  That will be judged on a case by case basis.