Business Q&A: Loosened IRS guidelines make it easier to settle tax debts

Tax attorney Travis Watkins discusses the changes in the IRS offer in compromise program.

Q&A with Travis Watkins

Loosened IRS guidelines make

It easier to settle tax debts

Q: I understand the Internal Revenue Service has changed the rules for settling tax debt for less than a taxpayer owes through the offer in compromise program. How does the process work?

A: If the IRS approves your offer in compromise (OIC), your entire tax debt is forgiven when you pay the accepted offered amount. Since savings can be substantial, OIC requirements are strict. The IRS considers the equity you have in assets that could be seized for full payment, as well as the disposable income (i.e. your income less allowable expenses) you could pay each month toward your total tax debt. The OIC rules changed recently, for the better. The IRS still looks at assets that could be seized to pay the total debt, but the disposable income you must pay has been reduced significantly. The monthly amount of disposable income used to be multiplied by 48, but it is now multiplied by 12. For instance, if your income is $4,000 per month and your disposable income is $1,500, your OIC (plus asset equity) would be $1,500 times 12, or $30,000, versus $72,000 ($1,500 times 48) under the old rules. The IRS will average your last six months of disposable income if you are self-employed. If your total debt is under $50,000, you may qualify for a streamlined OIC, which receives less scrutiny from IRS examiners. These are big developments, but some of the new rules are expected to expire this summer.

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