An offer in compromise (OIC) can allow you to settle your tax debt with the IRS for less than what you owe. One of the tricks to obtaining an OIC, however, is that you have to offer the IRS an amount that they deem to be fair—or, in other words, that they believe to be the maximum amount they can reasonably expect to receive for your debt. Offer too little, and your application for an OIC will be denied. Offer too much, and you’ll end up paying more than you may have needed to, and risk being unable to meet the terms of your OIC. So, how do you know how much to offer to the IRS in your OIC application? Keep reading to find out more.
Types of OICs
Before we talk about the amount you should offer, let’s talk about your options. There are actually two types of OICs available to taxpayers:
Now that you understand the options available to you when applying for an OIC, let’s talk a little bit more about just how much you should offer to maximize your chances of being approved.
How Much Should You Offer?
The amount you offer to the IRS should, essentially, be the maximum amount you can afford to pay on your debt. This amount is calculated using your monthly disposable income and the reasonable resale value of any property that you can sell; together, these two numbers form what the IRS calls your “reasonable collection potential,” or RCP. You can calculate this number yourself using your total monthly income—including paychecks, rental income, account distributions, SSI, child support, alimony, and any other income sources—minus your necessary living expenses.
If you are applying for a lump sum OIC, you would take this number (known as your monthly disposable income) and multiply it by 12. Then, add in the reasonable value of any property you are willing and able to liquidate, and this number will represent the minimum amount to submit to the IRS for your lump sum OIC. If you’re applying for a periodic payment offer, you would multiple your monthly disposable income by 24 and add liquidated asset values to determine the minimum offer amount.
Generally speaking, however, you will want to provide an offer that’s slightly higher than this minimum amount. This minimum represents that reasonable collection potential, or RCP, we mentioned a moment ago. This means that the IRS can reasonably collect that amount on their own by pursuing regular collection actions against you. If you hope to have an OIC application approved, a number slightly higher than your RCP would catch their attention and make you more likely to be approved for the payment plan.
Choosing Between Lump Sum and Periodic Payment OICs
As we’re sure you can see, a periodic payment OIC doubles the amount you have to offer to be approved for an OIC, as compared to a lump sum payment. This might make a lump sum OIC much more appealing, but it’s incredibly important to remember that you must be able to make that lump sum payment within five months, in five or fewer payments. If you fail to do this, you will once again owe the entire tax debt. If you are able to produce a payment amount exceeding your RCP within that time period, a lump sum OIC will help you settle your debts faster and for less money. However, if that time period isn’t feasible for you, paying more for a periodic payment OIC can still get you the debt relief you need, with a lower risk of defaulting on your plan.
If you’re behind on your taxes and hoping to receive an OIC from the IRS, we strongly encourage you to reach out to the IRS Advocates. Qualifying for an OIC and proposing the correct amounts can be more difficult than it sounds, but out advocates can help. Call to schedule a consultation today.
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