By: The Attorneys of Tenenbaum Law, P.C.
As published in Nassau Lawyer, Journal of the Nassau County Bar Association, 63 Nassau Lawyer 3 (December, 2012).
The IRS has been making changes to its collection policies in order to assist financially distressed taxpayers in these difficult economic times. The IRS Fresh Start program established new procedures in 2011 and 2012 regarding lien filing and lien withdrawal.
Parameters have been modified for entering into a Streamlined Installment Agreement, allowing eligible individual and business taxpayers to satisfy their debts to the IRS over time without the delay, expense and difficulties of extensive examination of their income and expenses. In addition, the IRS has announced significant changes to its Offer in Compromise program. For many taxpayers, the modifications will result in a much lower acceptable Offer amount.
Streamlined Installment Agreements and Withdrawal of Liens
While the IRS relies on liens to secure its debts, lien filings could cause non-tax related problems for taxpayers, such as affecting the taxpayer’s credit rating, and consequently his ability to refinance his home or obtain credit for other purposes. Employers may view IRS liens as a negative factor in deciding whether to hire a prospective employee. The taxpayer who has lost his job and cannot pay his taxes is thus further disadvantaged by not being able to find work.
To assist taxpayers, the IRS Fresh Start program has raised the threshold as to when a lien is required to be filed, and made it easier for liens to be withdrawn. Under Fresh Start, in certain circumstances, if an individual taxpayer owes less than $25,000 and is in an Installment Agreement with payments by direct debit, the taxpayer can request that an IRS lien be withdrawn. Liens can also be withdrawn upon request for liabilities that have been paid in full. This will help eligible taxpayers clean up their credit report when they are making efforts to address their tax problems.
Streamlined Installment Agreements have been available for some years, for individual taxpayers who owe $25,000 of assessed tax, interest and penalties. Under Fresh Start, the threshold has been doubled, to $50,000 for eligible individual taxpayers. In general, an Installment Agreement may require a detailed look at the taxpayer’s income and expenses, with supporting documentation; liens are routinely filed; and supervisory approval may be needed. By comparison, a Streamlined Installment Agreement usually does not require submission of much, if any, paperwork; managerial approval is not needed; and no lien determination is required.
Often, a Streamlined Installment Agreement for under $25,000 can be set up in a telephone call with a discussion of the taxpayer’s income and expenses. For Streamlined Installment Agreements involving assessed balances between $25,001 and $50,000, limited written financial information may be required, and payments must be by direct debit. For both, payment in full must be within six years or within the time remaining on the statute of limitations, if shorter.
Businesses may also qualify for a Streamlined Installment Agreement if the business owes less than $25,000 and payment will be in full within 24 months. Payments must be by direct debit. This is an increase over the prior threshold of $10,000.
As with the usual Installment Agreements, Streamlined Installment Agreements are not available for taxpayers who are not current with filing their tax returns. Eligible taxpayers can submit an application for a Streamlined Installment Agreement online through the IRS website.
The expanded availability of Streamlined Installment Agreements has benefited many taxpayers who formerly might not have qualified to pay the IRS over time. In negotiating a standard Installment Agreement, the IRS may request an individual taxpayer to liquidate available brokerage accounts, borrow against the equity in his house, or make monthly payments that might be larger than he believes he can afford. With a Streamlined Installment Agreement, a taxpayer can retain his savings and equity in his house, and plan his payments to the IRS as part of his usual budget. Moreover, the taxpayer may avoid liens being filed.
Changes to Offers in Compromise
Recent modifications to the Offer in Compromise program have resulted in drastically lower Offers being considered by the IRS. Offers in Compromise are a way for taxpayers to settle their liabilities with the IRS. Taxpayers who are unable to pay their debts to the IRS may apply for an Offer in Compromise; an accepted Offer will satisfy the full amount of tax, interest and penalties for all outstanding liabilities.
The IRS reviews the net equity in the taxpayer’s assets, and the taxpayer’s future available income; together, the result is the taxpayer’s “reasonable collection potential,” or RCP. If the RCP indicates that the taxpayer would be able to pay his or her outstanding liabilities in full with a lump sum or an Installment Agreement, the taxpayer generally does not qualify for an Offer in Compromise. If the taxpayer cannot pay the balance in full, then the IRS and the taxpayer must determine an amount for an acceptable Offer, based on the RCP.
Prior to May, 2012, the taxpayer could choose one of three lengths of time to pay the Offer: lump sum, defined as within five months; within two years; or within the time remaining on the ten-year statute of limitations for collection. Prior to May, 2012, the future income was calculated by including 48 months of net available income for lump sum Offers; 60 months of net available income for Offers to be paid in two years; or net available income for as many months remained on the statute, for longer Offers.
Currently, all Offers must be paid either within five months, or within two years. For Offers to be paid within five months, the calculation is of net available income for 12 months. For Offers to be paid within two years, the calculation is of net available income for 24 months.
Thus, prior to May, 2012, for example, if the IRS had determined that a taxpayer’s monthly available income was $1000, the future income component of the Offer amount would be either $48,000 or $60,000, or up to $120,000. The same taxpayer today would be looking at a future income calculation of $12,000 for a lump sum Offer, or $24,000 for payment within two years. Clearly, the savings is dramatic. The changes have also been significant for taxpayers who have much greater income, and correspondingly large debts to the IRS.
An Offer in Compromise is not based solely on future income, however. The RCP also includes net equity in assets. With respect to motor vehicles, IRS policy now allows $3450 from the net equity in each vehicle to be excluded from the Offer amount, up to two vehicles. The vehicles must be used for work, for the production of income, or for the welfare of the family. For a typical taxpayer and spouse with two cars, this could reduce the Offer amount by close to $7000 from the pre-May, 2012 figures.
Additional taxpayer-friendly changes for Offers included, among other items, modifying the calculation of future income to allow the exclusion of payments on certain student loans, and a percentage of payments made towards outstanding state and local taxes. 
It’s Time to Resolve Liabilities
The recent updates to IRS collection policies should enable many taxpayers, and especially a greater number of struggling and lower income taxpayers, to benefit from Installment Agreements and Offers in Compromise. For the IRS, the policies should result in more monies being collected over a shorter time period, and less money being expended on pursuing taxpayers who do not have the money or resources to satisfy their tax debts promptly. Right now, it appears to be a win-win situation for both the taxpayers and the government, and a good time for taxpayers to seek to resolve outstanding tax liabilities.