IRS widens taxpayer debt forgiveness program

The National Debt Clock, which displays the current United States gross national debt and each American family's share, hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York May 16, 2011.

WASHINGTON (Reuters) - More middle-class Americans will be able to work out their debts to the U.S. Internal Revenue Service because of changes in a tax payment forgiveness program, the agency announced on Monday.

The "Offer in Compromise" program lets taxpayers negotiate agreements with the IRS to pay less than the full tax owed. The announced changes make the program more flexible for taxpayers, with some people able to pay off their debts faster, according to the IRS.

The IRS announcement focused on the financial analysis used to determine which taxpayers qualify for an Offer in Compromise.

Additionally, the program gives taxpayers flexibility to payoff student loans and local taxes while making the federal tax payments.

"This is going to be a big deal for middle-class people," said Keith Fogg, a tax professor at the Villanova University School of Law who formerly was an IRS district counsel.

Participation in the program has jumped since 2009 because of the weak economy. The IRS accepted 34 percent of workout offers it received in fiscal 2011, up from 25 percent in fiscal 2010. To stay in the program, an individual must agree to file and pay taxes for the next five years.

Negotiations in the program can take months. A Treasury Inspector General for Tax Administration report in March said the program suffers from backlogs and delays.

(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and Carol Bishopric)