August 2013 Update
Wondering how the more lenient IRS “Fresh Start” Initiative is working since our last report? The news is mostly good. In their Fiscal Year 2014 Objectives Report to Congress, The U.S. National Taxpayer Advocate shared specific results and views about how taxpayers are doing under the Fresh Start Initiative. But there are cautions in the report as well. Be sure to read the important 2013 updates at the end of this post.
Highlights Originally published September 20, 2012
The 2012 IRS Fresh Start Program is the single best program the IRS has ever offered to U.S. taxpayers. The IRS Fresh Start program has been officially publicized by the IRS, but most people either don’t know about it or believe it’s too good to be true. Everything I am about to share with you can be verified on the official IRS.gov website. If you owe back taxes and qualify for the new program you’ll pay even less than you would have under the old Offer in Compromise program – as much as 60%-75% less than the previous Offer program.
The new Fresh Start program could end anytime – no one knows for sure. Many speculate that it will continue a short time until the economy and collections on back tax debt improve – I agree with this assessment. More on next page..
No Better Time Than This to Settle Your Tax Problems
There has been a radical change in the way the IRS handles Offer in Compromise settlement offers that I need to tell you about.
For those of you who aren’t familiar with the IRS’s Offer in Compromise program, it is a way for delinquent taxpayers to settle their tax debt for less than they owe, sometimes much less.
Using the Offer in Compromise strategy to settle your IRS tax problem is perhaps the one solution that most people truly hope they qualify for. Up until now the IRS’s Offer program has been a good program, but certainly not a great program. It has had several components that have made it difficult for people to qualify for the program. Sometimes, even if you did qualify for the program, the amount of required money it would take to settle your tax debt was more than you could afford.
It always frustrated me that the IRS was running its Offer in Compromise program, in what I viewed, as less than optimum, for both the client’s benefit and for the IRS’s benefit. The methodology the IRS used when analyzing a client’s financial situation seemed unfair to me. The IRS’s rules, and their application of those rules, worked to disqualify a lot of good people from being able to settle their tax debt for less than they owed.
The IRS’s way of running their Offer program was short-sighted for two reasons:
- the IRS wasn’t collecting as much money as they could be collecting, and
- my clients were being forced to use other strategies that sometimes wasn’t as good as the Offer program was.
At various times over the years, I’ve shaken my head in frustration, and wished that the IRS would change their Offer in Compromise program to a more practical and efficient program, which would benefit my clients, and would actually result in the government being able to collect more unpaid back taxes.
Well, just recently, the IRS made changes to their Offer program that I almost couldn’t believe were real. But it was real, because there I was, reading an actual IRS document discussing the new changes they were putting into place.
They not only made the changes that I had longed for over my 20-year career, but amazingly, they went even further and made it into a program that’s so potentially good for people who owe back taxes, that some might say the IRS has made it too easy on delinquent taxpayers. The tables have truly been turned.
These are the most radical, client-friendly changes the IRS has made to their collection policies in at least the last 20 years. The IRS calls these changes, and others (like their newly changed policies on tax liens and Installment Agreements), their “Fresh Start” initiative. This is one of the few times that the IRS’s name (Fresh Start) for one of their programs really lives up to its name, because it truly offers a Fresh Start to clients.
Are these changes here to stay?
I do have a great worry though about this “Fresh Start” program, and that’s that it won’t be around for very long.
From the outside, it appears these “Fresh Start” Initiatives, like the changes to the Offer program, were driven by the IRS wanting to appear compassionate during this recession. My opinion, and that of other seasoned tax professionals, is that these changes will not last forever, and that as soon as the recession is over so will be these great changes. I believe the IRS will remove these changes as soon as they possibly can, and then it will be back to the business of collecting taxes just like they’ve always done.
So, what am I saying? I’m saying that these changes help the IRS collect more money. They’re also a great public relations, making the IRS look “kinder and gentler”. I believe the recession made it much harder for the IRS to collect unpaid back taxes, and the IRS is simply recognizing that. I must give the IRS credit for recognizing that changes needed to be made and then actually making those changes. Changes of this magnitude and of this nature are very, very difficult for the IRS to do.
Largest Collection Agency in the Entire World
Let’s not forget the IRS is the collection agency for the U.S. Congress. The IRS is the largest collection agency in the world. Their job is simple: collect your money, through whatever means are required. For IRS personnel to change their mindset and to actually change the Offer in Compromise program so radically like this is almost unthinkable. Its totally against their nature. That’s why these changes are so significant.
So let’s get down to specifics. What exactly are the changes that have been made to the Offer in Compromise program, and what makes these changes so radical and beneficial for our clients? I’m about to have to get a little technical with you, so please bear with me as I’ll try to make it as understandable as possible.
First, I will tell you what an Offer in Compromise is, why it was structured like it was, and why it’s still structured this way to a degree.
Why did the IRS start an Offer in Compromise program?
It is instructive if we back up and ask the question, “Why does the IRS even have an Offer in Compromise Program?” In other words, what circumstance caused the IRS, or more properly, what caused Congress to think that it was beneficial to set up a program that allowed the IRS to collect less in tax than was actually owed?
The answer is that Congress likes to spend money. The more money, or tax revenue, they receive, the happier they are because they can spend more.
Congress could see that the amount of uncollected taxes on the IRS’s books was climbing to ever greater amounts. This is true because unpaid taxes have penalties and interest that pile on more and more debt on a delinquent taxpayer’s account. There are penalties for failure to file a tax return on time and penalties for failure to pay all the tax on time. The interest becomes a mountain too. Interest on top of the tax Interest on top of the penalties. And the interest on top of the interest. It’s no wonder the IRS hasn’t been able to collect all the tax money owed to it.
The IRS has a mountain of uncollected back taxes (and penalties and interest) out there, but only so many IRS people and time to collect it. Recognizing that fact, Congress decided to authorize legislation for the IRS to “compromise” or settle tax debts for less than was owed.
The goal of the IRS Offer program is collect “some” of the back tax debt just like an ordinary debt collector would. Congress can begin spending that smaller amount of money today, rather than wait for years to potentially collect a larger amount. Plus, it simply isn’t feasible to collect it all.
In other words, the IRS is saying to a delinquent taxpayer, “If you’ll agree to pay a portion of your total tax debt, we’ll write off the other portion.” The problem has been that the IRS hasn’t run the program in a way that really allowed them to collect much at all. They were reluctant to accept Offers because down deep in their little hearts they couldn’t bring themselves to let someone “get away with” not paying their taxes. The day-to-day reality was that the IRS has regularly used a whole host of reasons to disqualify folks from qualifying for an Offer in Compromise.
We’ll talk about that next.
The Way it Used to Be – The Bad ole Days
Up until these radical changes were made, the methodology the IRS typically used to calculate how much they would accept from a taxpayer as an acceptable Offer to settle their tax debt is as follows.
If you were offering to pay them the Offer amount with 5 months, they would calculate the Offer amount by pretending that they were able to successfully collect against you for the next 4 years. That meant they’d calculate how much money they could get out of you by pretending you were paying a monthly installment agreement for all that 4-year period, and they’d pretend that they were able to seize, or get you to pay to them some of the value of your equity in your assets. These two number (the disposable income and the equity in assets) were added together, and that’s how much money the IRS would think an acceptable Offer in Compromise should be.
If you said you couldn’t pay that amount within 5 months, and you wanted to pay your Offer amount over 24 months, then the IRS would calculate your disposable income component as if they were able to collect against you for 5 years instead of 4 years. In other words they are charging you some more money for them giving you 24 months to pay them instead of 5 months.
In a nutshell that’s how the Offer program was conducted for the last 18+ years, up until the big changes the IRS made recently with Fresh Start.
The way it is Now (but for how long?)
The old way the IRS calculated their Offers in Compromise was certainly a whole lot better than not having an Offer program at all, but it had some components that made it hard to pay even if you were a candidate to settle for less than you owed.
What I mean by that is that its great to be a candidate to settle your tax debt for “pennies on the dollar,” but what if you still are unable to afford to pay the amount of the Offer?
The problem was the IRS was demanding that you pay a lot of your future disposable income, but they were only giving you a very limited period of time to pay it to them. This made the Offer program unaffordable for a lot of people.
The new way the IRS is calculating their settlement Offers is they are no longer wanting as much of your future income. That’s almost unbelievable – the IRS no longer wants as much of your future income.
For Offers that are to be paid off over a two year period, the IRS now only wants 24 months of your future disposable income instead of 60 months worth. This is a huge 60% reduction in the amount they’ll settle for compared to what they used to. You read that right, a 60% reduction in the amount the IRS will settle for. Here’s an example of how this looks.
For Offers which are to be paid off within five months or less, the IRS now only wants 12 months of your future disposable income instead of 48 months worth. This is a massive 75% reduction in the amount they’ll settle for compared to what they used to. Here is an example.
This is a huge change. This is a gigantic benefit for taxpayers who owe back taxes. Under the IRS’s new program, a whole lot more people will now qualify to file for a settlement Offer.
It gets even better
In addition to all this, there are more great changes made by the Fresh Start Offer program. These include the IRS’ greater flexibility in determining allowable living expenses, and their fairer handling of how assets are dealt with. These are two more changes which will make even more people great candidates for the Offer program. For simplicity’s sake I won’t be discussing these items in this article.
How long will this gift from the IRS last?
We don’t know how long these great changes to the Offer program will be left in place. I don’t mean to sound pessimistic, but the IRS isn’t a charity. They aren’t in the business of giving money away any more than a bank or credit card company.
I can’t predict the future, but I strongly believe the IRS will change this program back to the way it was once the recession is over. I may be wrong, but I don’t think so.
Run, Don’t Walk (to an experienced Tax Attorney)
So, what is my recommendation to you if you owe back taxes?
If you’ve ever hoped you could settle your tax debt for less than you owe, there is no better time than now. Let me repeat, No better time.
While there’s still no guarantee that you’ll qualify for an Offer in Compromise, the odds are far better now than ever before that you’ll qualify, and the amount of the Offer could be from 60%-75% lower than ever before the Fresh Start program went into effect earlier this year.
This is like the time of the gold rush, but in reverse. Rush to get your debt forgiven.
If you wait, you may miss out on an opportunity that we tax attorneys and people with tax problems will look back on as “amazing”. It’ll be amazing for two reasons:
- how great the opportunity was, and
- how many people just ignored it and were still stuck with their tax debt.
The sad truth is you’ll have no one to blame but yourself if you don’t take action.
August 2013 UpdateWondering how the more lenient IRS “Fresh Start” Initiative is working since our last report? The news is mostly good. In their Fiscal Year 2014 Objectives Report to Congress, The U.S. National Taxpayer Advocate shared specific results and views about how taxpayers are doing under the Fresh Start Initiative.
- Q: Are more total offers from taxpayers being accepted by the IRS than before the IRS Fresh Start Initiative?
- A: Yes, total accepted offers are up 65% over the same period in 2011.
- Q: Is the overall IRS acceptance rate for offers increasing?
- A: Yes, the overall acceptance rate for OICs was 44% at the midpoint of FY 2013. That’s up from 38% the year before which was reported to be one of the highest offer acceptance rates the National Taxpayer Advocate had seen in years.
This means it’s still not too late to take advantage of the more lenient IRS Fresh Start Initiative.
Is there any bad news cited in the report? Yes. We’re preparing a briefing on that now and we’ll post a link here when we’ve published it. Check back soon – we’ll have the update by the first week of September 2013.