The IRS has allowed a taxpayer to make an Offer In Compromise (OIC) to settle tax debt for some time. But in 2012, the option became more attainable for certain individuals, as part of the IRS Fresh Start initiative. Previously, the IRS looked at 5 years worth of expected available income. Now, the IRS will look at 2 years of expected income, and in some cases, only one year. Here are some details.
An OIC allows you to settle your tax debt with the IRS for an amount less than what you actually owe, based on your reasonable collection potential (RCP). Essentially, the IRS is calculating how much they think you can pay, and is agreeing to accept that amount, even if it is only a fraction of your tax debt. To come up with the amount, the IRS will want to know your income and expenses for a certain time period. Here is where things have changed a bit. If you can pay in 5 months or less, the amount you are required to pay is based on one year of future available income. If you can pay in 6 to 24 months, the amount is based on two years of future available income. The IRS looks at income and expenses in each case and will need documentation. The key is finding a lump sump of money, in a rather short period of time. Friends or family can sometimes be helpful.
The IRS also changed its installment plan option so more taxpayers could utilize it. The installment plan is just as it sounds, it allows the taxpayer to make payments over a period of time. During that time, the IRS will typically not pursue enforcement action, such as filing a tax lien or levying your property. The maximum amount owed that can be settled with the installment plan has been raised to $50,000 (from $25,000) and the maximum term of payments has been increased to 72 months (from 60 months). If you owe less than $25,000 a streamlined option is available.
If an OIC or an installment agreement isn't an option for you, or if you haven't decided which route to take, remember these pointers:
- Always remember that there are separate fees for not filing and not paying. Even if you can't pay, file on time to avoid even more penalties.
- Figure out how much you can pay. Penalties and interest charges are based on the amount still owing; you can reduce those fees by paying at least a little.
- Plan for the future. Figure out what caused the shortage this year, and adjust your withholding so you won't have the same problem at the end of this year