WASHINGTON — The Internal Revenue Service today announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.

“This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” said IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

Today’s announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.
In certain circumstances, the changes announced today include:

• §  Revising the calculation for the taxpayer’s future income.
• §  Allowing taxpayers to repay their student loans.
• §  Allowing taxpayers to pay state and local delinquent taxes.
• §  Expanding the Allowable Living Expense allowance category and amount.

In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax 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.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

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 five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B,  Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow 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 based on percentage basis of tax owed to the state and IRS.

This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative.

In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, earlier this year, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

Here are some tips on using the IRS Data Retrieval Tool:

• Benefits The IRS Data Retrieval tool is an easy and secure way to access and transfer tax return information directly onto the FAFSA form, saving time and improving accuracy. Also, the increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.
• Eligibility Criteria Taxpayers who wish to use the tool to complete their 2012 FAFSA form must:
  • have filed a 2011 tax return;
  • possess a valid Social Security Number;
  • have a Federal Student Aid PIN (individuals who don’t have a PIN, will be given the option to apply for one through the FAFSA application process);
  • have not changed marital status since Dec. 31, 2011.
• Exceptions If any of the following conditions apply to the student or parents, the IRS Data Retrieval Tool can not be used for the 2012 FAFSA application:
  • an amended tax return was filed for 2011;
  • no federal tax return for 2011 has been filed ;
  • the federal tax filing status on the 2011 return is married filing separately; a Puerto Rican or other foreign tax return has been filed.
• Alternatives If the IRS Data Retrieval Tool can not be used and if the college requests verification documentation, it may be necessary to obtain an official transcript from the IRS. To order tax return or tax account transcripts, visit www.irs.gov and select  Order a Transcript  or call the Transcript toll-free line at 1-800-908-9946.

In addition to helping reduce the time and effort involved in completing and submitting the FAFSA form through the IRS Data Retrieval Tool, the IRS offers money-saving information to college students and their parents.  Important information regarding tax credits and deductions for qualifying tuition, materials and fees is available at the IRS Tax Benefits for Education: Information Center and in IRS Publication 970, Tax Benefits for Education both of which are available at www.IRS.gov.
Links:

• IRS Data Retrieval Tool/FAFSA 
• IRS Tax Benefits for Education: Information Center 
• IRS Publication 970, Tax Benefits for Education (PDF)
• Order a Transcript

An extension gives you an additional six months to file your tax return. But keep in mind that an extension of time to file is not an extension of time to pay. All outstanding balances are due on April 17, 2012.

Numerous Ways to Get an Extension

In order to get an extension, you need to file Form 4868 with the IRS.

Taxpayers can electronically file Form 4868 through IRS Free File or Free File Fillable Forms. Using Free File to prepare and electronically submit Form 4868 is free to everyone, regardless of income.

Paid preparers can also electronically file Form 4868 as can tax software that you run on your computer.

Finally, a paper version of Form 4868 is available for download from IRS.gov. However, the IRS will only provide an acknowledgement of your extension request if you e-file or Free File the request.

When you request an extension, you need to estimate your tax liability and pay any balance due bu the April 17th deadline. If you are unable to pay the total balance due, you should pay as much as possible and apply for an installment agreement.

When it comes to taking a cruise, your spending doesn’t end when you’ve booked the trip. Lots of cruise-related expenses have the potential to bust your budget, from the flight to your embarkation point to drinks on the cruise to shore excursions. So-called add-on expenses can equal or exceed the cost of your cruise if you’re not careful.

“The trend is for some cruise lines to offer relatively low prices to get people on the ship and then hit them with cash fees for little expenses here and there that after a week can really add up,” says Eileen Entin, owner of Diamond Cruise and Travel in Hightstown, N.J.

Payers of federal quarterly estimated taxes now can charge those four extra amounts throughout the year, not just in April. Then there are the state taxes that can be put on plastic, too.

Why? The process is relatively simple. First, decide which card has room for your tax debt. Then visit either company’s Web site or call its toll-free number. Five or six steps later, your payment is made.

In addition to these two services, most tax software programs allow you to pay electronically, and that includes by credit card. The convenience fee is still charged in these cases, but it goes to the software vendor, who then transmits it to the card processor. The software companies don’t charge extra for e-filers who say “charge it.”

Taxes: just another purchase
Another factor boosting tax charges: Americans view these transactions as just another purchase.

Taxpayers pay the IRS by credit card for the same reasons they regularly pay with plastic. It’s convenient, it allows them to put off paying a bill for a month, and, in many instances, it’s a way to rack up frequent-flier miles or other bonus points.

Jordan Goodman, author of “Everyone’s Money Book,” once paid a $28,000 tax bill with his American Express card. In the process, he accrued a lot of membership award points.

But, says Goodman, using credit cards to pay Uncle Sam isn’t right for everyone. You have to balance the convenience fee you’re charged when you make your tax payment. Will the amount of frequent-flier miles outweigh that fee?

“You have to do your arithmetic before committing to this,” agrees Donna LeValley, a tax attorney who has served as contributing editor of the popular J.K. Lasser “Your Income Tax Guide” series.

Increasing interest
For the credit card option to make sense, a taxpayer also must pay the credit card company promptly to avoid account interest.

Some credit cards that offer frequent-flier miles or other bonuses also charge a higher interest rate, so you could end up paying thousands of dollars in interest if you elect to pay only the minimum due each month. Bankrate.com tracks the most current annual percentage rates for air-mile cards.

You’re not off the hook either if you have a low-interest rate card or you shift your balance over to one. That’s because the credit card companies will quickly charge you the usual higher market rate even if you are one day late, Goodman says.

If you must pay taxes by credit, call your credit card company and ask them to issue a check to pay the IRS, your state, or both advises Eva Rosenberg, the Web’s Tax Mama. That way, you won’t pay the convenience fee, but will earn your frequent-flier miles or bonus points.

This method also is available through use of convenience checks that many card issuers periodically include in billing statements. However, these checks generally come with their own fees. And while many cards offer low introductory rates to encourage use of the checks, the ultimate interest could end up higher than what’s charged for regular plastic purchases. Interest rate information may not be listed on the check; check your card holder agreement or call the issuer.

These costs could, depending on what you owe Uncle Sam, match or outpace what you would have paid by simply charging your tax bill.

Other payment plans
Thinking twice about pulling out the plastic to pay your tax bill? There are other options for people who don’t have the cash on hand:

• Work out an installment agreement with the IRS. According to Edward Kaplan, an attorney with Green Radovsky Malone & Share in San Francisco, the IRS interest rate on tax deficiencies generally is much less than that charged by your usual credit card issuer. The IRS adjusts its rates quarterly based on the federal short-term rate, meaning interest for underpayments will stay at 5 percent for the quarter starting April 1.
• Get a personal loan from your bank or a credit union.
• Establish and draw on a home equity line. Interest here may be deductible on next year’s tax return.
• Avoid credit card vendor fees by using the Electronic Federal Tax Payment System. Businesses have been using EFTPS for years to directly transfer various taxes to the IRS. Now the agency is encouraging individuals to use the system for annual returns and estimated tax payments. Of course, this method requires you have the funds in your account to pay the IRS. You also need to enroll and get a PIN number, so don’t wait until the last minute. And check with your bank to see if it charges a transfer fee.

Again, each of these payment methods involves costs in addition to your tax bill. Only you can be sure whether one of these options, or paying with plastic, makes sense come April 15.

If you can pay the bill off within the grace period and the fees don’t outweigh the convenience and card perks, it could be the right move for you. But if you’re paying by credit card out of desperation because you don’t have the cash on hand, explore other payment avenues first.

One thing is clear regardless of which payment vehicle you choose. They all go down the same road to the ultimate destination: the tax collector.

Jenny C. McCune is a contributing editor based in Montana.