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IRS Settlements Get a Little Easier

The IRS announced new guidelines for its Offer in Compromise (OIC) program yesterday (May 21, 2012). The OIC program is the means by which the IRS will, in certain circumstances, settle tax bills for “pennies on the dollar”.

While tax resolution companies often make lofty claims about their ability to reduce tax debts through OIC, the reality is that a small percentage of the settlement plans proposed to the IRS are actually accepted. The OIC program is generally only available to taxpayers whose financial situation renders it unlikely that the IRS will ever get paid in full. Generally speaking, a successful OIC will require the taxpayer to pay over to the IRS an amount equal to all equity the taxpayer has in all of his or her assets, plus all monthly “disposable income” of the taxpayer multiplied by several months (often 48 months).

The ability of most taxpayers to pay the calculated OIC settlement amount is dependent upon some friend or relative assisting with the cash needed to settle. How many people can pay over to the IRS 100% of their property, plus 4 years worth of disposable income? The answer is “very few”.

At first glance, it appears that these new OIC guidelines will make it much easier for a taxpayer who has some amount of income, but nearly no assets, to qualify for tax forgiveness. This will likely make the program more attractive to individuals emerging from a Bankruptcy proceeding.

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