Owe the IRS? Major Settlement Changes Announced

The IRS has recently announced some major changes that will make it easier for people with unpaid tax debt to resolve it with the government. The IRS uses a settlement program called an Offer In Compromise to adjust unpaid tax debts. The idea of cheap resolution for outstanding tax debts has long been more promise than reality. However, with these recent changes, it could result in many more successful settlements.

The change with the largest impact will likely be the method the IRS uses to calculate future income. The IRS uses a tabulation method to evaluate a settlement offer, provided there is no misconduct involved. The IRS will generally accept a settlement of tax debt when offered the net liquidation value of the taxpayer’s assets and the net present value of the taxpayer’s future disposable income. The IRS has just changed how it calculates future income to make it easier on the taxpayer.

The taxpayer’s disposable income must first be determined to come up with the amount of future income that must be paid as part of a tax settlement. Disposable income is calculated by deducting standard living expenses from net income received by the taxpayer. The IRS determines the amount for standard living expenses from the Bureau of Labor Statistics.

Prior to this, some major potential expenses were disallowed such as student loan payments for college. However, the IRS will now allow the deduction of payments for all government guaranteed student loans used to pay for any education after high school. This will be a huge relief for taxpayers paying off student loan debts. 

The most significant change in the way in which the government calculates net future income involves the multiplier used to convert monthly disposable income into a settlement payment to the IRS. Now this is going to get a little technical so stay with me. The IRS will accept payment of an accepted settlement in two different ways, lump sum or short-term payments and deferred payment over a period of 24 months. Before the recent change, the IRS multiplied monthly disposable income by 48 to determine its net present value if the payment was to be made within six or fewer months from acceptance. If a 24-month payment period were chosen, the IRS would have multiplied the disposable income by 60 to determine its net present value.

The future income net present value multiplier has been reduced by 36 months in each category. If a settlement is to be paid in cash or within six months, disposable income is multiplied by 12. If a settlement is to be paid over a period of 24 months, disposable income is multiplied by 24. For taxpayers with no home equity and few other assets, this will cut the amount of an acceptable settlement offer to as little as a fourth of the amount that would have previously been required.

There are other changes that affect the way the net value of the taxpayer’s assets is calculated that will be beneficial to many taxpayers, especially families. For example, the IRS will now disregard the first $3,450 of equity in up to two vehicles in calculating asset liquidation value. Moreover, taxpayers can now keep one month’s worth of allowed living expenses in their bank account plus $1,000 without adding to the liquidation value calculation. Again, this will lower the settlement threshold for many taxpayers.

These changes in the Offer in Compromise program standards should prompt a flood of new offers. In addition, many pending settlements that would not have been accepted will now be allowed. This will be a huge relief for many struggling Americans with unpaid tax debt.