Tax Seminar #3 – December 3 2012

Offers in Compromise Improving
E. Martin Davidoff, CPA, Esq.
On May 21 st , the IRS announced major revisions to the Offer in Compromise program
(http://www.irs.gov/newsroom/article/0,,id=257542,00.html). A major impact of such revisions
is to enable high-income/low-net-asset individuals a much greater opportunity to resolve their tax
debts through the Offer in Compromise (“OIC”) program. Here is why. Offers in compromises
are analyzed based upon one’s equity in assets and future net income. Prior to the May 21st
announcement, taxpayers had to include as part of their offer an amount equal to 48-60 months
of future net income. The May 21 st announcement reduces the multiple to 12-24 months, an
extraordinary reduction!
In his memorandum to subordinates, Scott Reisher, IRS Director of Collection Policy,
provided nine pages of interim guidance to the Internal Revenue Manual. The highlights with
respect to the future income component of OIC computations, provide:
• There will be no retirement of the first $400 of auto loan debt. Thus, even if the final
payment of the automobile will take place within the horizon of the current analysis, the
first $400 will be retained in the budget for evaluating the offer (5.8.5.17).
• Payments of student loans guaranteed by the federal government for post - high school
education will now be allowed (5.8.5.20.4).
• The IRS will continue to allow $200 per month for older (over 6 years old) or highmileage
(over 75,000 miles) motor vehicles as an additional operating expense above and
beyond the vehicle operating costs standards set forth on the IRS website. Up until the
May 21 st announcement, this additional $200 would NOT be allowed if the taxpayer had
a monthly automobile loan payment. Under the new standard, the additional $200 in
operating costs will no longer be tied to the absence of a car payment. 1
• Clarification that expenses for state and local income tax installment agreements will be
treated as allowable expenditures in proportion to the balance due to the state and/or
locality as compared to the amount due to the IRS (5.8.5.20.4(7)). Form 433-A(OIC) has
been revised to include a line item specifically for delinquent state and local taxes. The
new rules are detailed and intricate. Accordingly, if you are dealing with a state tax debt,
you should review the new guidance carefully.
• Future income is clearly defined in 5.8.5.23 as:
a. If the offer will be paid within 5 months, then only 12 months of future
income will be required; and
b. If the offer will be paid in more than 5 months but within 24 months, then
only 24 months of future income will be required.
Compare this to the previous standards of 48 and 60 months, respectively.
1 Note that the $200 of additional automobile operating expenses is only allowed in an offer environment. It is not
allowed in determining the amount of an acceptable installment agreement or in determining whether a taxpayer
qualifies for CNC (currently not collectible) status.
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