Yesterday, the IRS rolled out a shiny, brand new version of Form 656-B, the Offer in Compromise application booklet. After years of complaints from every corner of the tax world, including tax professionals, taxpayer advocacy groups, the government’s own Taxpayer Advocate panel, and even members of Congress, the IRS has finally fixed the worst problem that has ever existed with the Offer in Compromise program.
For the past 15 years, the IRS expected you to include in your offer amount the equivalent of your next 4 or 5 years worth of disposable income. In other words, the IRS would look at your current income, deduct your allowable household expenses, and then multiply that number by either 48 or 60…and then expect you to come up with that amount of money (plus the value of your assets) within the next few months, which obviously isn’t practical and defeats the very purpose of the OIC program.
Here’s an example: If you make $4,000 per month, and the IRS “allows” you credit for $3,500 in monthly expenses, then you have $500 per month left over. If you agree to pay your Offer amount in 5 months or less, they multiply that $500 times 48 months, which is $24,000. If you also happen to have $20,000 of equity between a car and your house, your minimum offer amount suddenly becomes $44,000, or almost an entire year’s salary…and they expect you to come up with that amount in 5 months. And if you owe the IRS less than this amount, then you’re not even eligible for the program.
In other words, the Offer program was really only an option for people that owed hundreds of thousands, if not millions, of dollars, and could come up with that kind of cash to make a lump sum payment, OR was only good for people that were absolutely destitute, with absolutely no assets and so little income that they couldn’t even realistically put a roof over their head.
Well, the IRS finally wised up after years of effort by tax consultants such as myself, advocacy groups, and the Taxpayer Advocate. Under the new rules announced yesterday, the IRS has dropped the “multiply by 48 or 60” rule and made it a “multiply by 12 or 24 rule”. If you are paying your offer amount in full within 5 months, this means that your minimum offer amount you must send the IRS just dropped by 80%.
If you would like professional assistance in determining your eligibility for and preparing your Offer in Compromise application, please get in touch with a tax firm near you by searching our directory of professional service providers.