Some days, it seems like you can’t listen to the radio, watch television, or use the internet without coming across an advertisement for a company that promises to settle your tax debt for next to nothing. These ads are usually talking about an Offer in Compromise, an IRS program that allows some taxpayers to negotiate a settlement for less than what they owe in back taxes. Here’s what those ads fail to mention: not every taxpayer with tax debt is eligible for an IRS Offer in Compromise.
An Offer in Compromise can be extremely helpful in resolving your back taxes. However, a thorough analysis must be performed to determine whether or not you are a good candidate for the program. It’s also important to consider if another tax resolution method is a better fit for your situation.
At East Coast Tax Consulting Group, we always recommend the best resolution strategy for your situation. Get help from our offer-in-compromise CPA today. After a thorough analysis of your tax debt and other financial factors, we can decide if an Offer in Compromise is right for you or if you should consider alternatives.
Key Takeaways
Determining IRS Offer in Compromise Eligibility
For the IRS to approve your offer, you must propose a reasonable compromise. The amount you offer depends on:
- The equity in your assets,
- Your excess monthly income (after allowable expenses), and
- The time period over which you’ll pay your offer.
Generally, the IRS values your property at quick sale value, minus any debt you have on the property. The quick sale value is usually about 80% of a property’s fair market value. The IRS also provides allowable expenses in multiple categories based on national and local standards, which are updated annually.
Your Offer in Compromise eligibility partially depends on your excess monthly income after these expenses:
- Food, Clothing, and Other Items
- Housing and Utilities
- Car Expense: Ownership
- Car Expense: Operating
- Out-of-Pocket Health Care Expenses
You are allowed the full IRS standard for food, clothing, and other items, as well as out-of-pocket health care expenses, even if you spend less. All other allowable expenses must be documented and are limited to the IRS standard, except under special circumstances. Some other expenses, such as medical insurance, court-ordered payments, federal, state, and local income taxes, and FICA taxes, are generally allowable without limitations.
There are two payment duration options. You can pay your offer in five or fewer installments within five months of acceptance with a lump sum cash offer. This requires you to make a 20% nonrefundable payment with your offer. You can also use a periodic offer, which means paying within 24 months of submitting your offer. In determining the amount of excess income to be included in your offer, a multiple of 12 is used in a lump sum cash offer, while a multiple of 24 is used in the periodic offer.
Normally, the IRS will not accept an offer if the taxpayer is able to fully pay the debt within the remaining statute of limitations for collections.
Offer in Compromise Examples
These examples should give you a better understanding of how an offer amount is calculated and whether you may be eligible for an Offer in Compromise.
Example 1: A Wantagh Family of Four
Taxpayer A and his wife owe three years of back taxes totaling $90,000. The remaining statute of limitations on collections is four years.
The couple owns a home in Wantagh, NY, where they live with their two young children. The home is worth $ 600,000 and has a mortgage of $ 490,000. Taxpayer A is employed and earns $150,000 a year. His wife does not work, as she takes care of their children. For offer purposes, the taxpayers do not have any equity in their home, as the quick sale value of $480,000 ($600,000 x 80%) is less than the mortgage of $490,000.
The family’s actual monthly expenses are as follows:
- Food, Clothing, and Miscellaneous Items: $1,900
- Housing and Utilities: $4,200
- Car Expense: Ownership
- Taxpayer A’s Car Lease: $525
- Wife’s Car Lease: $300
- Car Expense: Operating
- Taxpayer A: $400
- Wife: $300
- Health Insurance: $ 850
- Term Life Insurance: $50
- Charitable Contributions: $50
- Income and FICA Taxes: $3,000
- Other: $925
The offer amount is calculated below:
| Category | Actual | IRS Standard | Allowable |
|---|---|---|---|
| Wages (Monthly Income) | $12,500 | – | – |
| Food, clothing, misc | $1,900 | $2,129 | $2,129 |
| Housing and utilities | $4,200 | $4,829 | $4,200 |
| Vehicle #1 ownership/lease costs | $525 | $662 | $525 |
| Vehicle #2 ownership/lease costs | $300 | $662 | $300 |
| Vehicle #1 operating costs | $400 | $401 | $400 |
| Vehicle #2 operating costs | $300 | $401 | $300 |
| Health insurance | $850 | – | $850 |
| Out-of-pocket health care costs | – | $336 | $336 |
| Life insurance | $50 | – | $50 |
| Taxes (fed, state and local) | $3,000 | – | $3,000 |
| Total allowed expenses | – | – | $12,090 |
Total income: $12,500
Total allowable living expenses: $12,090
Total disposable monthly income: $410
| Offer Amount | ||
|---|---|---|
| Lump Sum Cash Offer | Periodic Payment Offer | |
| Disposable monthly income | $410 x 12 | $410 x 24 |
| $4,920 | $9,840 | |
| Plus asset equity | $0 | $0 |
| Offer amount | $4,920 | $9,840 |
Remember, this taxpayer owes back taxes totaling $90,000. The lump-sum offer of $4,920 and the periodic payment offer of $9,840 represent potential tax savings of approximately $85,000 and $80,000, respectively. You can see that charitable contributions and other personal expenses incurred by the taxpayers are not allowed in computing the offer amount, thereby increasing the required payment. The family in this example can borrow the money needed to fund their offer and thus are good candidates to resolve their IRS back taxes with an Offer in Compromise.
Example 2: A Renter in Ft. Lauderdale
Taxpayer B is single and lives in Ft. Lauderdale, FL, where he rents a condo. He owes the IRS $30,000 in back taxes, and the remaining statute of limitations on collections is five years. Taxpayer B earns $80,000 a year and has no assets other than his personal belongings.
His monthly living expenses are as follows:
- Food, Clothing, and Miscellaneous Items: $1,000
- Housing and Utilities: $2,900
- Car Expense: Ownership: $500 (Lease)
- Car Expense: Operating: $400
- Health Insurance: $100
- Income and FICA Taxes: $1,600
- Other: $100
The offer amount is calculated below:
| Category | Actual | IRS Standard | Allowable |
|---|---|---|---|
| Wages | $6,667 | – | – |
| Food, clothing, misc | $1,000 | $839 | $839 |
| Housing and utilities | $2,900 | $2,295 | $2,295 |
| Ownership/lease costs for one vehicle | $500 | $652 | $500 |
| Operating costs for one vehicle | $400 | $400 | $400 |
| Health insurance | $100 | – | $100 |
| Out-of-pocket health care costs | – | $84 | $84 |
| Taxes (fed, state and local) | $1,600 | – | $1,600 |
| Total allowed expenses | – | – | $5,818 |
Total income: $6,667
Total allowable living expenses: $5,818
Total disposable monthly income: $849
| Offer Amount | ||
|---|---|---|
| Lump Sum Cash Offer | Periodic Payment Offer | |
| Disposable monthly income | $849 x 12 | $849 x 24 |
| $10,188 | $20,376 | |
| Plus asset equity | $0 | $0 |
| Offer Amount | $10,188 | $20,376 |
With $30,000 in total tax debt, the lump sum offer of $10,188 and periodic payment offer of $20,376 represent potential tax savings of approximately $19,800 and $9,600, respectively. The taxpayer in this example is also able to borrow the money needed to fund his offer. At first, this looks like another example of IRS Offer in Compromise eligibility.
However, the taxpayer’s disposable monthly income, as calculated by the IRS Collection Standards, is sufficient to fully pay his outstanding taxes over the remaining statute of limitations (5 years), including any additional interest and penalties. Therefore, the IRS will not accept his offer and instead require the taxpayer to enter into an installment agreement.
Is an Offer in Compromise Right for You?
An Offer in Compromise can help struggling taxpayers resolve their IRS tax problems. An extensive analysis of each taxpayer’s situation must be performed to determine if it is the right resolution. Contact East Coast Tax Consulting Group to learn more about Offer in Compromise eligibility.
Nearby Areas We Serve
Wherever you are in South Florida, East Coast Tax Consulting Group delivers real solutions to tax problems. We proudly serve individuals and businesses in Delray Beach, Boca Raton, Boynton Beach, Highland Beach, and surrounding Palm Beach County cities. Our decades of experience with clients in South Florida means that you will receive local, personalized advice and advocacy from our tax professionals.
- Boca Raton
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Frequently Asked Questions
Who qualifies for an Offer in Compromise? +
Qualification depends on the taxpayer’s financial situation. The IRS evaluates income, assets, expenses, and future earning potential to determine whether the taxpayer has the ability to pay the full balance. If the IRS determines that the taxpayer can reasonably pay the debt through other methods, such as an installment agreement, the offer will typically be rejected.
What forms are required to submit an Offer in Compromise? +
Taxpayers must submit Form 656 (Offer in Compromise) along with a detailed financial disclosure. Individuals typically complete Form 433-A (OIC), while businesses complete Form 433-B (OIC). These forms provide the IRS with information about income, assets, expenses, and liabilities.
Does submitting an Offer in Compromise stop IRS collection activity? +
In many cases, active collection efforts such as levies are paused while the IRS reviews the offer. However, federal tax liens may remain in place until the offer amount is fully paid and the settlement terms have been satisfied.
Do I need to be current with my tax filings to submit an Offer in Compromise? +
Yes. Before the IRS will consider an Offer in Compromise, you must be current with all required tax filings. This means all individual or business tax returns must be filed. If you are self-employed or operate a business with employees, you must also be current on estimated tax payments and payroll tax deposits.
What happens after the IRS accepts an Offer in Compromise? +
Once an offer is accepted, the taxpayer must fully comply with the payment terms and remain tax compliant for the next five years. This includes filing all required tax returns and paying any new taxes on time. Failure to comply during this period may cause the IRS to revoke the settlement and reinstate the original tax debt.