Although the financial analysis guidelines used to determine eligibility for the IRS Fresh Start program drew significant criticism from the tax payer advocate dept. Its original concept was to grant financially distressed taxpayers an opportunity for settlement on back taxes owed. However with the onslaught of offers being submitted to IRS, it would take 12 to 14 months for a taxpayer to go through the application process. Due to this lengthy processing time, this clean slate program also became one the most abused avenues of relief by delinquent taxpayers. Taxpayers who owed back taxes could essentially get a one year extension to pay their debt simply by applying for the OIC.
According to IRS regulations, while an offer is in review no collections will be enforced against the taxpayer. Bank levies, wage garnishments and property seizures came to a halt while IRS considers that taxpayer’s eligibility. This stipulation allowed delinquent taxpayers to take advantage of the system by submitting offers for the sole purpose of buying time without enforced collections. This abuse caused the IRS to tighten guidelines in their settlement program. IRS added a $150 application fee believing this would slow down the number of frivolous applications being submitted. Not long after with minimal change in the number of applications, IRS tightened its reigns a little more by requiring the taxpayer to submit 20% of their monetary offer in addition to the $150 application fee. This new maneuver by IRS was enforced in an attempt to reduce the number of frivolous offers being submitted and is believed to have been effective.
The IRS Fresh Start initiative Offer in Compromise was announced by IRS in May of this year. IRS made significant changes to the financial analysis which determines eligibility and offer amounts. This could prove to be very advantageous to offer applicants. National Standards for absolute necessary living expenses that were once used in the calculations are now replaced by the applicant’s actual expenses – within reason of course. The old OIC program did not take into consideration payments for student loans, credit cards or old medical bills. The Fresh Start initiative Offer in Compromise is now taking all of these into account when considering offer amounts and repayment terms. The important part taxpayers need to know about this IRS Fresh Start Program is the calculation used to determine an offer amount.
The amount of an acceptable offer is determined by a taxpayer’s monthly Net Disposable Income (NDI) and the Quick Sale Value (QSV) of any assets. NDI is the difference between the taxpayers income and their absolute necessary monthly expenses. In other words whatever is left over after all the bills are paid. QSV is usually 80% of whatever the retail value of that asset would be. Taking this into consideration will mathematically show the taxpayer if they qualify for settlement. If a taxpayer intends to pay the settlement offer in full, the equation used would be: Taxpayers NDI x 48 months + QSV of assets = Offer Amount. If a taxpayer is going to pay what they’re offering over a 24 month period rather than one lump sum, the equation used would be: Taxpayers NDI x 60 months +QSV of assets = Offer Amount.
Obviously if the taxpayer chooses to pay the amount offered in monthly payments the offer amount is a bit higher than that of a taxpayers who pays in one lump sum. Knowing this empowers taxpayers with the ability to determine if IRS is legitimately offering them an opportunity for settlement or their just looking to buy more time to collect on the debt. Let’s use this equation in an example. Let’s say a taxpayer owes $20,000 in back taxes and wants to make an offer of which they intend to pay over 24 months once it’s approved. This taxpayer has a monthly NDI of $350 after all their bills are paid and this taxpayer is not a homeowner nor has any other assets. The equation would be as follows: $350 x 60 months + $0 QSV = $21,000 – Offer Amount. This example shows that an acceptable offer amount in this situation is actually more than what the taxpayer owes in back taxes. This taxpayer would not qualify for an offer.
It’s very important to understand the simple math used in determining settlement offers so taxpayers aren’t mislead by less than reputable tax firms or the IRS. From 2007 through 2012 statistics show only two out ten applications were approved for settlement. Due to the fact it still takes more than 12 months for an application to be processed, we have yet to see if the approval rate of the Fresh Start Program is any higher than the original Offer in Compromise. Is this Fresh Start Program really what IRS claims it to be? This could be a very smart business move for the IRS in a declined economy.
What many taxpayers don’t know is the IRS only has 10 years from the date of assessment to collect back taxes. While a taxpayer’s case is in review for Offer in Compromise, the collections expiration statute clock stops ticking. In other words it gives IRS the ability to collect on back taxes owed sometimes 12 to 24 months after the 10 year collections statute would have already expired. Could IRS be promoting this Fresh Start Program for protect their bottom line?
Right now America is in a declining economy and increased unemployment rate. Right now there are masses of financially distressed Americans who owe back taxes but even the IRS can’t get blood from a stone. Pushing their ability to collect possibly out to a time of an improved economy could essentially save accounts receivables that would have otherwise been lost due to the 10 year collections statute.
Only time will tell if the IRS Fresh Start Program will generate higher application approval rates. There are many ways to get through a back tax issue with the IRS. Every case has its own specific remedy. If a taxpayer qualifies, they can pay significantly less than what’s truly owed without false promises of Offer in Compromise settlements. Call a reputable tax resolution firm like Tax Help MD at (888) 632-4506 for more information. With professional guidance a taxpayer can be allowed to pay back the IRS on their terms rather than terms set by the IRS.
You can learn more about the IRS Fresh Start guidelines here.
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