An offer in compromise allows you to settle your tax debt for less than the full amount owed. It may be a legitimate option if you can’t pay your full tax liability or doing so would create a financial hardship. The IRS will consider your equity in assets and your ability to pay by analysis of your income and expenses. The IRS will generally accept an offer in compromise when the amount offered represents the most they can expect to collect within a reasonable period of time. The service refers to this amount as the full collection potential.
The calculation of your ability to pay is referred to as “The Calculation of Future Income”. Future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income less normal living expenses for a specific number of months into the future. The number of months used depends on the payment terms of the offer.
(1)If the offer is paid in 5 or fewer installments in 5 months or less the calculation of future income is limited to 12 months worth. So for example your monthly ability to repay is $300 per month. The calculation of future income is than $300 X 12 which is $3,600.
(2)If the offer will be paid in more than 5 installments or more than 5 months up to a maximum of 24 months the calculation of future income is 24 months worth.
You must be current with all your filings before the IRS will even consider your offer. You are not eligible for an OIC if you are in open bankruptcy proceeding. Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date. There is also a “Bad Boy Policy” which says that if the taxpayer doesn’t stay compliant for 5 years the IRS can reassert the forgiven tax liability.
Your initial payment will vary based on your offer and the payment option you choose:
Lump Sum: Submit an initial payment of 20 percent of the total offer amount with your application. Then pay the remaining balance of the offer in 5 or fewer payments after receiving written acceptance of your offer from the IRS.
Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.
If your offer is rejected you can fight on. You may appeal a rejection within 30 days using Form 13711 Request for Appeal of Offer in Compromise