How to Determine the Amount to Offer for an Offer in Compromise

How to Determine the Amount to Offer for an Offer in Compromise

• Mar 29, 2024

In the realm of tax resolution, few options hold as much promise for individuals burdened by tax debt as the Offer in Compromise (OIC) program. This initiative by the Internal Revenue Service (IRS) allows qualified taxpayers to settle their tax liabilities for less than the full amount owed. However, navigating the intricacies of the OIC process—particularly, determining the appropriate amount to offer—requires a thorough understanding of one's financial situation, IRS guidelines, and negotiation strategies.

Understanding the Offer in Compromise (OIC)

Before delving into the intricacies of determining the offer amount, it's crucial to comprehend what an Offer in Compromise entails. Essentially, it's a legal agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than the full amount owed if certain criteria are met.

The IRS considers three types of OICs:

1. Doubt as to Liability: When there is a genuine dispute over the existence or amount of the tax debt.
2. Doubt as to Collectability: When the taxpayer demonstrates that they cannot afford to pay the full tax debt.
3. Effective Tax Administration: When paying the full tax debt would create an economic hardship or would be unfair and inequitable.

For most individuals seeking relief from tax debt, Doubt as to Collectability is the relevant category. This means the taxpayer must prove that paying the full tax liability would cause undue financial hardship.

Qualifying for an Offer in Compromise

Determining eligibility for an OIC involves an assessment of the taxpayer's income, expenses, asset equity, and overall ability to pay. The IRS evaluates the taxpayer's:

1. Income: Including wages, self-employment earnings, rental income, and other sources.
2. Expenses: Such as housing, transportation, healthcare, and necessary living expenses.
3. Asset Equity: The value of assets that could be liquidated to pay the tax debt.

Additionally, the taxpayer must be current with all filing and payment requirements and not involved in an open bankruptcy proceeding. Meeting these criteria is essential for the IRS to consider an OIC application.

Importance of Offering the Right Amount

The success of an Offer in Compromise application hinges on offering the right amount. The IRS will not accept an offer that it deems too low based on the taxpayer's ability to pay. While they may approve an application that offers “too much,” this often just leads to the taxpayer continuing to struggle with paying their debt. When it comes to an OIC, striking the right balance is of the utmost importance.

Offering too little can result in the application being rejected, prolonging the resolution process and potentially leading to increased penalties and interest. Conversely, offering too much may unnecessarily deplete the taxpayer's financial resources.

Calculating the Offer Amount

Determining the appropriate offer amount requires a comprehensive analysis of the taxpayer's financial situation and careful consideration of IRS guidelines. Here are key factors to consider when calculating the offer amount:

• Income: Calculate the taxpayer's monthly disposable income by subtracting allowable expenses from monthly income. The IRS uses a formula to determine a taxpayer's ability to pay based on their disposable income over a set period.
• Expenses: Ensure all necessary and allowable expenses are accurately accounted for. The IRS provides guidelines and expense standards for various categories, such as housing, transportation, and healthcare.
• Asset Equity: Determine the value of assets that must be included in the offer calculation. While some assets may be exempt, others, such as real estate and investments, must be considered.
• Future Income and Expenses: Anticipate changes in income and expenses over the offer period, as this may affect the offer amount.
• Offer Terms: Consider whether the offer will be paid in a lump sum or through periodic payments. The IRS typically prefers lump-sum offers but may consider periodic payments based on the taxpayer's financial situation.

Navigating the Offer in Compromise process can be complex and overwhelming, but with expert guidance from the IRS Advocates, taxpayers can maximize their chances of success. Our team of experienced professionals specializes in helping individuals resolve their tax debts through Offers in Compromise and other tax resolution strategies.

If you're struggling with tax debt and considering an Offer in Compromise, don't hesitate to contact us for a free consultation. We'll assess your financial situation, explain your options, and guide you through the OIC process, ensuring you offer the right amount and achieve the tax relief you deserve. Remember, taking proactive steps to address your tax debt can lead to a brighter financial future. Contact the IRS Advocates today and take the first step toward resolving your tax issues.