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Doesn’t Everyone Deserve a Fresh Start?

May 14, 2015

In doing tax collection work, the issue that needs to be addressed by practitioners and by revenue officers at the Internal Revenue Service is whether we can balance the need for the government to collect the tax against the ability of the taxpayer to pay the tax. Recognizing this, the IRS went through the process of easing the standards for troubled taxpayers in order to allow them to enter into what is known as an offer-in-compromise. This process of easing is known, in part, as the Fresh Start Initiative that was put into effect during 2012.

This OIC program is not for everyone. If the IRS believes that, based on the taxpayer assets and earning potential, they can receive a full payment within the time allowed by law (normally ten years), they will normally reject a submitted OIC application.

On the other hand, if there is enough uncertainty in collecting a full payment, the IRS can be persuaded to consider an OIC application. This will allow them to get the most payment in a shorter amount of time -- and enable them to clear the taxpayer debt from their inventory. Keep in mind, the IRS needs to be convinced that it is in their interest to accept this offer, not that of the taxpayer.

In summary, this is how the calculation goes.  The OIC is made up of 2 components: net equity and net income. Net equity consists of cash plus assets (normally discounted at 20% of their fair market value) less allowable debt. Added to that is net income, which consists of gross income less allowable monthly expenses. Depending on the method of payment, the net income is then multiplied by 12 or 24 (if the taxpayer wants to pay off the offer in 5 monthly installments or less, then the multiplier is 12; if the taxpayer wishes to do it with 6 to 24 monthly installments, the multiplier is 24).

Note: Prior to 2012, the multipliers were 48 and 60, respectively. A big difference!

There is much more to say on this topic -- and I’ll be saying it in future postings. Stay tuned.

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Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.

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