How Much Should I Offer When Submitting an Offer in Compromise to the IRS?

An Offer in Compromise (OIC) can be a lifeline when confronted with an overwhelming tax debt. It enables you to resolve your tax liability for a lesser amount than the full amount owed. However, the process of determining the appropriate quantity to offer is complex and necessitates much financial analysis and strategy. There are many factors to take into account to achieve a favorable outcome.

What Is an Offer in Compromise?

The Offer in Compromise option is intended to provide taxpayers with a new beginning when the complete payment of their tax debt would result in financial hardship. If you can demonstrate that you are unable to pay your tax liability in full or that doing so would be unjust or inequitable due to exceptional circumstances, the IRS may consider your offer.

Factors to Take into Account When Establishing Your Offer Amount

There are a few factors to take into consideration when determining your offer amount. Some of these include:

  • Reasonable Collection Potential (RCP): The RCP is the foundation of your offer. The RCP is the IRS’s assessment of your financial capacity. It encompasses your prospective income and net realizable equity in assets after accounting for necessary living expenses. In essence, the IRS determines the amount of revenue it could potentially collect from you over a specific period by considering your income, expenses, and assets.
  • Monthly Income Available for Disposal: Begin by determining your total monthly income from all sources to determine your RCP. Subtract your essential living expenses, including rent, utilities, supplies, transportation, and medical expenses. Your monthly disposable income is the remainder. To establish a baseline for your offer amount, multiply this figure by 12 to represent one year of disposable income.
  • Assessment of Assets: The IRS evaluates your assets in addition to your monthly disposable income. This encompasses cash, investments, real estate, vehicles, and other valuable property. The value of any assets that can be liquidated to satisfy your tax debt must be incorporated. Nevertheless, the valuation of assets can be intricate and frequently necessitates negotiations with the Internal Revenue Service.

Determining the Minimum Offer Amount

In order to confirm that your offer is taken into account, it must exceed your RCP. A simplified approach to determining a minimum offer is as follows:

Step 1: Calculate Monthly Disposable Income. Combine your total monthly income from all sources and subtract your necessary living expenses. You are provided with your monthly disposable income.

Step 2: Determine Annual Disposable Income. To obtain one year’s worth of disposable income, multiply your monthly disposable income by 12.

Step 3: Include Net Realizable Equity in Assets. Evaluate the value of your assets that can be sold or liquidated and add it to your annual disposable income. For instance, if your monthly disposable income is $500, your annual disposable income would be $6,000 ($500 multiplied by 12). If your assets are valued at $4,000, the minimum offer sum should be $10,000 ($6,000 + $4,000).

Presenting the Offer

Once you have a figure, you may submit your offer using IRS Form 656, Offer in Compromise. In addition to the application form, you are required to submit an initial payment towards your offer amount and an application fee. The application fee and initial payment may be waived if you meet the criteria for low-income certification.

Payment Options for Your Offer

The IRS provides two principal payment options for an OIC:

  • Lump Sum Cash Offer: In conjunction with your application, you are required to submit an initial payment of a portion of the offer amount. You are required to pay the remaining balance in installments if the IRS accepts your offer.
  • Periodic Payment Offer: While the IRS evaluates your offer, you submit an initial payment with your application and continue to make monthly payments. Upon acceptance, you will continue to make payments until the full amount of the offer is paid, which is typically within 24 months.

Common Mistakes to Avoid

To prevent problems with your Offer in Compromise, avoid these common mistakes:

  • Low-balling the Offer: Rejecting an offer that is significantly lower than your RCP is possible. It is imperative that your proposal is both reasonable and indicative of your financial capacity.
  • Neglecting Asset Valuation: Conduct an accurate evaluation of the value of your assets. Your offer may be rejected or declared non-compliant if assets are overlooked or undervalued.
  • Incomplete Documentation: Ensure that all necessary forms and documentation are submitted. The process may be delayed or rejected as a consequence of incomplete submissions.

What Transpires During the IRS Review?

Several events transpire during the IRS’s evaluation of your offer. While reviewing your offer, the IRS suspends the majority of collection activities, including wage garnishments and bank levies.

Your tax liability is reduced by any non-refundable payments you make. You have the ability to specify the manner in which these payments are administered. While your offer is being reviewed, the IRS may submit a lien to protect the government’s interest in your assets.

Response and Timeline

The IRS typically assesses and responds to an OIC within six months; however, it may require up to two years. Your offer is automatically accepted if the IRS does not make a determination within two years of receiving it. You have the right to appeal the decision within 30 days if your offer is rejected.

Alternatives to an Offer in Compromise

If an Offer in Compromise is not appropriate for your situation or is rejected, you may wish to consider the following alternatives:

  • Installment Agreement: Pay your tax debt in monthly installments over a period of time.
  • Currently Not Collectible Status: The IRS may temporarily suspend collection activities if you are unable to pay any amount due to financial hardship.
  • Bankruptcy: In certain circumstances, the filing of a bankruptcy petition may facilitate the discharge of specific tax debts.

Contact Delia Law

It is necessary to conduct a thorough examination of your financial circumstances to determine the appropriate amount to submit in an Offer in Compromise to the IRS. Although the process may be intricate, enlisting the assistance of Delia Law can increase the likelihood of a successful result. Contact us today for more information.

image---can-i-get-innocent-spouse-relief-if-my-spouse-is-deceased-1200x628-v2 Blog Archive

Can I Get Innocent Spouse Relief if My Spouse Is Deceased?

The loss of a spouse is a difficult experience that could be further worsened by the discovery of unresolved tax issues. The IRS has provisions ...
image---who-can-claim-innocent-spouse-relief-do-i-qualify-1200x628 Blog Archive

Who Can Claim Innocent Spouse Relief? Do I Qualify?

Generally, spouses may be held accountable for tax errors or fraudulent activities committed by the other. In these specific cases, the IRS offers Innocent Spouse ...
image---my-employer-did-not-notify-me-of-an-irs-wage-garnishment-what-can-i-do-1200x628 Blog Archive

My Employer Did Not Notify Me of an IRS Wage Garnishment. What Can I Do?

It can be a distressing experience to discover that the IRS has garnished your wages without prior notification from your employer. It is essential to ...
Tax Levy on My Paycheck What Should I Do tax blog 10.22.24 Blog Archive

Why Is There a Tax Levy on My Paycheck? What Should I Do?

Why Is There a Tax Levy on My Paycheck? If you have unpaid federal taxes and you haven’t responded in a timely manner after receiving ...

Notice: All information on this website has been prepared for informational purposes only and does not constitute legal advice. -- View full disclaimer here.

Scroll to Top

Notice

Federal IRS Practice.  Attorney advertisement. Prior results do not guarantee similar outcomes. (1) Attorneys of Delia Law P.C. are only licensed in the jurisdictions mentioned in their biographies and not all lawyers mentioned or displayed in Website content may be able to assist clients without adding attorneys admitted in the specific jurisdiction; (2) Delia Law P.C.’s only offices are in Maryland and New York. Mentioned other locations are unstaffed virtual locations, by appointment only, that are not designed to suggest or create a permanent presence; (3) Local counsel are independent and not partners or employees of Delia Law P.C.; (4) All clients of Delia Law P.C. will receive additional, written information (about the lawyer assignment/licensing in the case, our fees etc.) before making a decision to becoming a client. All website Terms and disclaimers apply.

Prior results do not guarantee similar outcomes; attorney advertising. All information on this website has been prepared for informational purposes only and does not constitute legal advice. While this information may constitute attorney advertising in some jurisdictions, merely reading this information does not create an attorney-client relationship. Every case is different, any prior result described or referred to herein cannot guarantee similar outcomes in the future. All visitors to this Website are informed that Delia Law P.C. (“Firm”) works with affiliated lawyers (referred to as “Local Counsel”) in various cities and states across the United States. These Local Counsel may assist the Firm on a case-by-case basis, operate their own respective law firms, are independent of Firm, and are not partners, owners, of counsel, or employees of Firm. Clients and prospective clients should be aware that when referencing to Firm’s experience, this experience may combine the knowledge and experience of both Firm and its frequently used Local Counsel in the aggregate. Specifically, if and when Firm cooperates with Local Counsel, Firm will disclose the details to the client in writing for their approval. Delia Law P.C. is headquartered in New York City. References to a particular city or state in any article or anywhere on this website does NOT mean that Firm maintains an office with staff in that location, and it does NOT mean that Firm has attorneys physically located in that city or state. Firm’s lawyers are only licensed to practice state law in the states mentioned in their respective biographies. With few case-by-case exceptions, Firm’s practice is limited to matters and questions of federal law and federal procedure. Firm’s engagement letter and Firm’s website disclaimers provide additional details.