Under new IRS rules, the IRS has streamlined its Offer-in-Compromise Program to allow the IRS greater flexibility in considering a taxpayer's ability to pay.  

An offer-in-compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt by accepting less than full payment in certain circumstances.  It is submitted using IRS Form 656 and a $150 application fee is required. 

Formerly, taxpayers requesting a periodic payment offer-in-compromise were required to submit the first installment payment with their application.  Thereafter, taxpayers were required to make monthly installment payments while the offer-in-compromise was being considered.

Under the new IRS rules, taxpayers requesting a periodic payment offer-in-compromise are still required to submit the first installment payment, and later monthly installment payments while the offer-in-compromise is considered.  However, taxpayers who qualify as low income or file an offer-in-compromise based solely on doubt as to actual liability for the tax deficiency may receive a waiver of the application fee and partial payment requirements.

Also under the new IRS rules, taxpayers with an annual household income of $100,000 and less than $50,000 in tax liability are now eligible for the Offer-in-Compromise Program.  And to cut down on the processing time of an offer-in-compromise, the IRS will now personally contact taxpayers to get additional information instead of corresponding solely by mail.

Submission and payment rules for taxpayer's requesting a lump sum offer-in-compromise have not changed under the new rules.

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In 1998, former Democratic presidential candidate John Edwards reported $360 thousand in wages and $5 million in a distribution of profit from his S Corporation law practice.  In 2010, GOP presidential candidate Newt Gingrich reported $444,327 in wages and $2.4 million in a distribution of profit from his S Corporations.  By deferring most of their S Corporation earnings into a distribution of profit, Edwards and Gingrich, combined, saved over $200 thousand in tax by not paying Medicare Insurance tax.

The Internal Revenue Code imposes a self-employment tax on personal service income that does not arise from the employer-employee relationship.  Internal Revenue Code Sections 1402.  The self-employment tax has two separate taxes - a social security tax and a Medicare insurance tax.  While the social security tax only applies to the first $106,800 of wages, tips, and net earnings, the Medicare insurance tax has no limitation.  To decrease their tax liability a wealthy individual actively engaged in providing services to their S Corporation just classifies a large portion of his S Corporation earnings as a distribution of profit, not wages. 

The IRS is aware of this loophole and reclassifies an S Corporation distribution of profit as a wage, and subject to the Medicare insurance tax, if the wage is not "reasonable compensation," i.e. earned through the shareholder's personal services.  More wealthy individuals are expected to consider this loophole when a part of Obama's new health reform law takes effect in 2013.  Couples with compensation greater than $250 thousand ($200 for singles) will then pay the 2.9% Medicare insurance tax on all compensation, plus an additional .9% Medicare surtax on compensation above these amounts.

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A Bankruptcy Court held that the cash value of two disability insurance policies cannot be "claimed as exempt as the net cash value in a life insurance or an endowment policy, but are exempt from the bankruptcy estate as the right to receive a disability benefit.  In re Bowen, No. 11-71289 (C. D. Illinois) (Order entered September 23, 2011).

In 2011, Steve and Kim Bowen filed a voluntary Chapter 7 bankruptcy petition.  Their Schedule C -- Property Claimed as Exempt, filed with their petition, included the cash value of two disability insurance policies with a value of $7,777.  The appointed bankruptcy trustee included the two disability insurance policies in the Bowen's bankruptcy estate concluding that the policies were not exempt as life insurance because they were disability insurance policies, and they were not exempt as a disability benefit because Mr. Bowen was not receiving disability benefits at the time the bankruptcy petition was filed.

The Bankruptcy Court found that a debtor's "contingent right to receive payment at some uncertain point in the future" was a protected right.  Therefore Mr. Bowen's right to receive disability payments included any disability benefits received at the time the petition was filed, and the accumulated cash value of the two disability insurance policies.  This applies whether disability benefits come from a public, i.e. SSDI, or private source. 

The Bankruptcy Court agreed with the Trustee that the cash value of the two disability insurance policies was not exempt as life insurance, but disagreed with the Trustee that the policies were not exempt as a disability benefit.

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