How Much Do I Offer to Qualify for an IRS Offer-in-Compromise?
This post is a continuation of a series on the IRS offer-in-compromise program. Click here and here to read about the OIC process and programs. In this post, I am going to get right to the heart of it. How much do I need to offer the IRS to settle my IRS debt?!
“Pennies on the Dollar”
Before we get to it, let me clear up some of the misinformation out there. The IRS is not a used car salesman. You just don’t pitch an offer and say, “Let’s make a deal!” I had a potential client ask me point blank, “So how much should I offer? 10% or 15% of what is due?” The gentleman owed about $50,000+ in unpaid taxes. He also had a successful business, a home (with no mortgage), several pieces of land, and a very nice car. All told, I think he was worth about $300,000 to $400,000.
If you were the IRS, would you settle his tax debt for $5,000 or $7,500? No way! You’d never take that deal. Neither will the IRS. So what will the IRS settle for?! Let’s talk about reasonable collection potential.
What is Reasonable Collection Potential
The IRS looks at offers-in-compromise as a simple math problem. What amount of money could be collected from the taxpayer if the IRS sold the taxpayer’s property and was paid any excess household income once all necessary living expenses were paid? This is called reasonable collection potential.
Reasonable collection potential is the sum of the taxpayer’s equity in assets and net monthly household income.
Equity in assets is the value of your assets (car, home, retirement, etc.) reduced to account for a quick sale (auction or a fire sale) and for certain exemptions allowed by law (e.g. you have an exemption of $3,450 in your car). This is called reducing your assets to “quick sale value”.
Net monthly household income is your average monthly income reduced by allowable household expenses. Allowable expenses do not equal what you actually pay for things like food, clothing, housing. In fact, the IRS provides you with what it considers to be a reasonable amount for such things. I often find that housing allowed by the IRS is not enough to cover the actual amount, which can be a real problem. You can find these amounts here.
Determining the Offer Amount
Once you’ve established the “quick sale value” of the assets and net monthly household income then you have your reasonable collection potential. Your offer is going to be based on this amount. The final figure depends on how quickly you can pay the offer amount in full.
If you can pay 20% down and the remainder within 5 months of acceptance, your offer would be the quick sale value of assets plus 12 times your net monthly household income. This is called a lump sum offer.
If you cannot pay it that quickly, you can do a long-term payment plan over 24 months. The offer in this case would be quick sale value of assets plus 24 times your net monthly household income. This is called a periodic payment offer.
So in summary, you need to offer the IRS enough to show you’ve offered your reasonable collection potential. This is the sum of the quick sale value of your assets and net monthly household income. The offer amount is the quick sale value of assets plus net monthly household income multiplied by either 12 or 24 for a lump sum offer or periodic payment offer.
Reasonable collection potential is a starting point. There are situations where you can offer less than your reasonable collection potential. Those situations are very rare. In most cases, this formula is how your offer is calculated.
There are however strategies to minimize your reasonable collection potential. If you think you may qualify for an offer-in-compromise then you can reach out to me to discuss your case further.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.