Determining How Much To Offer The IRS For An Offer In Compromise Agreement

If you owe money to the IRS, it's possible to negotiate with the agency to pay less than the assessed amount. The agency has what's called an Offer in Compromise program that lets taxpayers submit a settlement offer for an amount they're willing pay. The trouble is, you have to offer an amount the IRS finds acceptable; otherwise, it won't agree to the settlement. Here's what you need to know about the Offer in Compromise program to help you calculate an offer amount that will be approved by the IRS.

Grounds for Compromise Agreement

Before the IRS will entertain the idea of accepting a settlement through the Offer in Compromise program, you must establish grounds for asking the agency to consider your bid. There are three reasons the agency will accept:

  • Doubt About Liability – This is for when there is a dispute about whether you actually owe taxes or a disagreement about the amount of taxes assessed.
  • Doubt About the Collectibility of Taxes – This is used when it's evident the IRS will not be able to collect the total amount owed within the statute of limitations based on your available assets and income.
  • Doubt About Effective Tax Administration – In this case, there's no dispute the taxes are owed, and it's clear the agency can collect the total amount within the statute of limitations. However, requiring you to pay the balance in full would cause some type of economic hardship or create an unfair and inequitable situation for you.

For example, you own a home that has enough equity in it to pay off your tax debt. However, the home has been specially modified to accommodate your disability. You could submit your offer based on the effective tax administration grounds because forcing the sale of your home would create a significant hardship on you if you don't have the income to afford another suitable place to live.

If your case doesn't qualify under these grounds, it's unlikely the IRS will accept an Offer in Compromise agreement. However, the agency does allow people to pay off their tax obligations via an installment program. You can learn more about the payment program by visiting the IRS website.

Calculating the Amount You Can Pay

When determining whether or not to accept your settlement offer, the IRS calculates the Reasonable Collection Potential (RCP) for your account. To get this number, the agency combines your assets and income and subtracts your allowable expenses. If your settlement offer comes in below the calculated RCP, it will likely be rejected.

You can estimate what your RCP is by adding up all of your assets (including your portion of jointly owned assets) minus the amount it would cost to liquidate them. For instance, if you own a CD worth $5,000 but you would get hit with a $200 early termination fee, then actual value of the asset would be $4,800. For a home, you would need to subtract the balance of your mortgage note and selling/closing costs from the estimated market value to get the amount that would be available to pay your tax debt.

Next, you need to calculate your future income for the next year or two, depending on how long you estimate it will take you to pay the tax debt off. If you think you can pay off the amount within 5 months, then you only need to add your income potential for the next year. If you think it will take you sometime between 6 and 24 months, then you'll need to add two years worth of income.

Lastly, subtract your allowable expenses from your total. Your allowable expenses include things you need to live such as food, clothing, and personal care products. Healthcare expenses, transportation costs, housing, and utilities are also allowed. In some cases, the IRS will let you include credit card payments and student loans. You can find a more complete list of allowable expenses on the agency's website.

The number you get after subtracting the assets from the liabilities should give you an idea of how much the IRS expects you to pay, and the amount you ultimately offer cannot be less than this total.

If you find that you just don't have the income to pay your tax debt and the IRS is not willing to work with you, contact a bankruptcy attorney or visit websites like Certain types of tax debt is dischargeable in a bankruptcy, and an attorney can help you determine how much—if anything—you would be liable for after completing a chapter 7 or chapter 13 case.