Karen Tenenbaum, Esq., LL.M. (Tax), CPA and Moshe Zupnick, Law Clerk

 

High inflation in 2022 propelled the IRS to make some changes to the Offer in Compromise (OIC) program. In April, the agency updated the Collection Financial Standards used to determine a taxpayer’s reasonable collection potential (RCP) and revised the documentation certain taxpayers must provide when applying for an OIC. Complying with these provisions is essential to ensuring an appropriate offer is made and expediting approval. 

Increased Collection Financial Standards

An OIC allows a taxpayer to settle a tax debt for less than the full amount owed. Generally, the IRS will not accept a taxpayer’s offer unless it is equal to what the IRS would reasonably be able to collect from the taxpayer. The RCP is the sum of the net equity of assets along with a twelve or twenty-four month multiple of the taxpayer’s monthly discretionary income. Monthly discretionary income is calculated by deducting the taxpayer’s allowable necessary monthly expenses from the taxpayer’s monthly household income. The Collection Financial Standards set forth the amount allowed for necessary monthly expenses for food, clothing, housing, utilities, out-of-pocket healthcare, transportation, and other miscellaneous items. The amount varies based on the taxpayer’s age, geographic location, and family size. 

As of April 25, 2022, the IRS has raised these standards to address the high inflation rate. The new allowances have increased as follows:

    • Food, Clothing, and Other Items: Most categories are up 8% or 15%.
  • Out-of-Pocket Healthcare: These have increased by 10% for those under 65 and 8% for those over 65.
  • House and Utilities: There is no national standard, however, local rates are on the IRS website. New York, Nassau, and Suffolk counties have increased their standards by 7%.
  • Transportation: Public transportation expenses and vehicle ownership costs are up 12% and 10% respectively. There are no national standards for vehicle operating expenses, but New York local rates are up 14%.

The IRS website has details on the specific allowance amounts.

No Withholding of Tax Refund

Importantly, the IRS took another step to benefit taxpayers suffering in this economy. Previously, the IRS had a policy of withholding a taxpayer’s tax refund through the year in which the taxpayer’s OIC was accepted. This meant that if a taxpayer had an offer accepted in 2021 for a tax debt from 2018, the taxpayer would not receive their 2021 refund. This has changed and taxpayers can now get their current year’s refund. 

Additional Documentation for OICs for Taxpayers with Businesses

The IRS is now requesting additional financial information from certain taxpayers. Previously, if a taxpayer with an ownership interest in a business had a tax debt that was strictly personal (e.g., 1040 income), the taxpayer only had to submit Form 433-A (OIC), Form 656, and all relevant documentation. That same taxpayer now must also submit Form 433-B along with the business’s profit and loss information for six to twelve months prior to submitting the OIC, bank statements, loan statements, notes, accounts receivable, and other pertinent documentation. 

Conclusion

Staying abreast of changes is critical to determining whether your client qualifies for an OIC and if so, calculating the appropriate amount of the offer so it is accepted by the IRS. 

 

Karen Tenenbaum, Esq., LL.M. (Tax), CPA is the Founder and Managing Partner of Tenenbaum Law, P.C. (www.litaxattorney.com), a tax law firm in Melville, N.Y., which focuses its practice on the resolution of IRS and New York State tax controversies. Karen can be reached at ktenenbaum@litaxattorney.com and 631-465-5000. 

Moshe Zupnick is a law clerk at Tenenbaum Law, P.C., where he represents individuals and business entities in tax controversy matters involving Federal and New York State audit and collection issues. Moshe can be reached at mzupnick@litaxattorney.com and 631-465-5000.