Copyright ©​ Daniel Cullinane CPA.

When  reviewing a taxpayer's budget to determine ability to pay in the future, the IRS applies Allowable Living Expense Standards.  The standard allowances impose parsimonious budgets upon a taxpayer in collection determinations by incorporating average expenditures for basic necessities. Notwithstanding substantial criticism of the IRS over the years it is insisted upon applying  the same standards for food and clothing in all areas of the country whether high cost locales like Alaska, Hawaii and New York City or lower cost Midwestern areas. These standards are used when evaluating offer in compromise requests. In response to criticisms from the National taxpayer Advocate and taxpayer representatives, the IRS expanded the National Standard miscellaneous allowance to include additional items Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charge. In the past the IRS refused to recognize taxpayer obligations to pay student loans and state tax delinuencise. the new guidance now allows payments for loans guaranteed by the federal government for the taxpayer's post high school education. In addition, payments for delinquent state and local taxes may be allowed base on percentage basis of tax owed to the state and IRS

On the asset side of the RCP equation the IRS now allows taxpayers to exclude $3,450 from the equity of motor vehicles used for commuting or for the health and welfare of the family. The IRS also allows the taxpayer to exclude from assets the aggregate combined value of $1,000 in a bank account plus allowable expenses for one month. Of particular note for the small business person the IRS will completely exclude the value of all income producing assets.


Since 2012 the IRS has been much more willing to compromise with taxpayers with overwhelming tax debt than in the prior decade. IRC 7122 permits the IRS to accept offers in compromise in settlement of tax obligations for less than the full outstanding tax liabilities. The willingness of the IRS to exercise this authority has ebbed and flowed through the years.  In 2012 as part of its Fresh Start initiatives, the IRS greatly liveralized the standards that it uses for acceptable offers.  The statistics for the most recent fiscal years are:
Offer in Compromise                     2012                    2013                         2014

Offers                                               64,000                 74,000                     68,000

Offers Accepted                            24,000                 31,000                     27,000

% Accepted                                      38%                     42%                          40%

The 2010 Taxpayer Advocate's report to Congress illustrates the ebbs and flow of the offer environment during the first decade of this century. The acceptance rate went up and down but never reached 40% acceptance rates and for all of the decade was in the 25% to 30% range.In general , an offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer's liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer's income and assets to make a determination of the taxpayer's "reasonable collection potential" OICs are subject to acceptance on legal requirements. To determine the taxpayer.s ability to pay the IRS determines a value of the taxpayer's assets and adds the value of his ability to pay in the future. The combined value of those components is know as "Reasonable Collection Potential" (RCP)

The Fresh Start changes that caused the upward movement  in the number of accepted offers included:
Revising the calculation for the taxpayers future income
Allowing taxpayers to repay their student loans 
Allowing taxpayers to pay state and local delinquent taxes 
Expanding the Allowable Living Expense allowable category and amount
Excluding a portion of the taxpayer's bank accounts from the value of her assets
Excluding a portion of the taxpayer's equity in motor vehicles from the value of assets
Excluding from the value of assets the value of assets used to produce income

Under the Fresh Start policies when the IRS calculates a taxpayer's reasonable collection potential, it will now look at only one year of future income for offers paid in six to 24 months of the date the offer is accepted. The prior policy resulted in IRS demands for very large compromise payments even when the taxpayer had few assets.  The revisions has resulted in a 75% reduction in the amount required to settle tax obligations in five or fewer installments. They will result in a 60% in the amount required to be fully paid within 24 months


Daniel Cullinane CPA

25 Plaza 5 25th fl Jersey City NJ                                          phone 732-516-1648 fax 732-516-9778

MBA Taxation

Daniel Cullinane CPA

2500 Plaza 5 25th fl  Jersey City NJ 07311                                                          phone 732-516-1648  fax 732-516-9778

                 MBA TAXATION