The IRS is relaxing the Offer in Compromise Program to save more taxpayers from debt that they will never be able to pay off with penalties and interest accruing. Recent changes in IRS regulations make this a great time to submit an offer.

As part of the "Fresh Start" program announced last year, the IRS is further loosening the reins on acceptance standards of the traditional Offer in Compromise Program.

An Offer in Compromise is just like it sounds.  It is an offer to the IRS to enter into a contract for you to pay less than you owe.  It is a great program, and the last published figures show that the average accepted offer settled for 12% of the amount owed.  That is truly pennies on the dollar.  The pertinent word, though, is accepted offer.

The offer works on a very simple premise.  If it appears to the government that it is not going to collect all the money a taxpayer owes within the time the IRS has to collect it(typically 10 years or less), they are going to accept less.

An offer candidate must prove that he can come up with at least the amount of his "reasonable collection potential" within 24 months.  The new standards instruct the IRS to only look at 1 year of future income if the taxpayer is offering to pay the offer amount in 5 months or less.  Offers to be paid in 6 to 24 months are to receive scrutiny of 2 years of future income only. 

The new calculation standards also revise traditional calculations of the taxpayer's future earning potential and allowable living expenses.  Previously, the IRS' offer examiners would not consider dilinquent state tax payments and student loan payments.  Now, they will.  Also, narrowed parameters and clarification of when a dissipated asset will be included in the calculation.  The changes are reflected in revised Internal Revenue Manual Section 5.8.5, if you are interested in the actual language of the new regs.

This should result in more IRS debt waivers, and there may have never been a better time to submit an Offer in Compromise.    


Travis Watkins
Senior Tax Attorney