In order to get an Offer in Compromise for federal tax debt, you need to make sure your financials will work for the IRS Offer in Compromise formula. Keep on reading to see how the IRS determines whether or not to accept an Offer in Compromise.
Below is a video guide explaining the Offer In Compromise formula. Keep reading after for a more in-depth analysis.
Financial Aspects of The IRS Offer in Compromise Formula
The IRS first will look to see if you have filed the required tax returns and are up to date on estimated tax payments if required. Then they get to the IRS Offer in Compromise formula. The formula is a calculation of your financial situation based on a number of factors. The IRS will require you to fill out Form 433-A(OIC) in order to see if you qualify financially. Here we will go through the factors they consider when evaluating your Offer. This covers Doubt as to Collectability Offers, which is the most common form and most likely to be accepted. Form 656 will show the total amount of your settlement.
Available Assets at Quick Sale Value
If you have more assets than the tax balance due, typically you will not qualify for an Offer in Compromise. Settlements have happened for clients who have a home paid off in full but do not count on it. If you are sitting on more cash than you owe, we would not submit an Offer in Compromise for you. However, if all you had was a small home and if you moved out you could not afford rent after a while, this may be a rare case where you still might get an Offer in Compromise accepted.
Income vs. Expenses
Are your expenses more than your income? If you do not have a lot of available assets then your odds are pretty good. The IRS is going to check if those expenses are considered reasonable. The agent assigned to your case will look to the IRS Collection Financial Standards to determine if your expenses are “reasonable.” These numbers are based partially on national data and local data. Counties that have higher living expenses will have a higher housing and vehicle allowance. Expenses for food and clothing are the same nationally. They will look at your actual expenses for taxes.
Expenses That Are Falling Off May Effect The IRS Offer In Compromise Formula
The IRS will look at expenses that are falling off over the next five years. Lately, they have not been as strict about this calculation as they were in previous years. The most common item for this issue is car payments. For example, you have a car payment of $300 per month, but the car payment ends in one year. The IRS will then calculate that you have $300 of funds available per month after the date of the payment drop-off. There are some ways to counter the argument that this income will be available.
Arguments In Favor Of Leaving The Expense If IRS Says It Drops Off
First, you can state that the vehicle mileage will be over 75,000 by that date and thus the IRS should allow $200 per month of additional vehicle expenses at that date. The second option is to say that you will have to get a new car by that date as it will become unreliable, and the car payment is not really ending. When you have a lease, the IRS will accept the fact that you must get a new lease or car once it is over.
You stand to save a lot if your IRS Offer In Compromise is accepted.
How The IRS Offer In Compromise Formula Is Calculated
There are two methods for the Offer In Compromise calculation. One is based on you paying off the settlement amount within 5 months. The other is based on you paying the settlement amount within 24 months.
Five-Month Payoff IRS Offer In Compromise Formula
The formula for this one is: (available income per month x 12) + amount of available assets based on Form 433-A(OIC) = Amount IRS will accept for an Offer In Compromise that is paid within 5 months of acceptance.
Example: You have $200 available each month after reasonable expenses and $10,000 in assets available according to Form 433-A(OIC). The formula would be: (200 x 12) + $10,000 = $12,400.
The IRS would require a 20% down payment and a $186 fee to start processing the Offer in Compromise. You can pay nothing upfront if you qualify for a fee waiver.
Twenty-Four Month Payoff IRS Offer In Compromise Formula
The formula for this one is (available income per month x 24) + amount of available assets based on Form 433-A(OIC) = Amount IRS will accept for an Offer In Compromise when paid over 24 months.
Example: You have $200 available each month after reasonable expenses and $10,000 in assets available according to Form 433-A(OIC). The formula would be: (200 x 24) + $10,000 = $14,800.
The IRS would require you to pay a $186 application fee and your first monthly payment of the 24 monthly payments. You make payments while the Offer is pending. If you qualify for a fee waiver you do not need to pay the application fee. Nor do you need to pay any payments while the Offer is pending.
The Cheapest Offer In Compromise
The Offer In Compromise paid within five months saves more money in most cases. We try to get our clients this type of Offer In Compromise in most cases that we do. If you cannot pay the 20% down but can afford the monthly payment, the 24-month option might be for you. Not everyone qualifies for an Offer In Compromise. Be wary of salespeople at tax relief companies that state you qualify right away over the phone.
If you want an Offer In Compromise and need help, submit a request for us to call you on our sign-up page or call us at (888) 515-4829. One of our tax attorneys will give you an accurate assessment of your case.
