IRS cuts distressed taxpayers slack

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In March, Internal Revenue Service announced that it was relaxing the rules on tax settlements. One such rule is the use of 3-year income averages to determine an offer in compromise, which is an agreement between a taxpayer and IRS that settles the taxpayer’s tax liabilities for less than the full amount that is owed.

Now, if your income fluctuates, IRS might consider only your current tax-year earnings. The process can take up to 9 months. If you’re a candidate during this time, don’t make any changes to your financial situation, advises Brian Compton of Tax Resolutions Services. If your offer is accepted, Compton says, you must promptly file returns and pay taxes for the next 5 years or IRS will revoke the settlement, and you’ll owe what you owed before, plus penalties and interest.