What Are the IRS Allowable Expenses for an Offer in Compromise?

An Offer in Compromise is based on your Reasonable Collection Potential, not the amount of debt you owe to the IRS.  Therefore, start here to figure your amount you could Offer:

1. Gather your documents and compile your information.  Grab a month’s worth of bank statements, paystubs, utility bills, car payments; anything you pay each and every month;

2. Calculate the equity in your assets.  This means take the Quick Sale Value (QSV) which is 80% of the full value, less encumbrances (amount left on the loan) to determine the equity in your assets.  For example: A 2013 Chevrolet Impala with 36,000 miles is worth approximately $10,500, according to Kelly Blue Book.com.  Let’s say you have a loan on the vehicle in the amount of $11,200; there would not be any equity in this vehicle.  However, using this same information without a loan, there would be $10,500 worth of equity less $3,450 for the IRS allowance.  Therefore, your equity would be $7,050.  If this is your only vehicle will the IRS show up and seize the property to pay towards your liability, no!  But, if you had three more of these vehicles and you are the only person using them, then, yes, you could be asked to sell these vehicles as in the IRS’ eyes you are one person who needs one vehicle. 

3. Determine your NET disposable income.  If you are paid weekly, take your net pay times 4.3.  If you are paid bi-weekly (every 2 weeks no matter what day it falls on), take your net pay times 2.17.  If you are paid bi-monthly (on the 1^st and 15^th or variation), take your net pay times 2.  Example: Every two weeks taxpayer is paid a NET pay of $1,000.  Therefore, $1,000 times 2.17 equals $2,170

4. Determine your “reasonable collection potential”.  This means looking at your NET income versus your monthly expenses (be realistic) to determine what your disposable income is at the end of every month, rather what amount are you left with in your bank account when all bills have been paid.

5. Lastly, calculate how this amount will be paid.  If you are choosing the Lump Sum Offer, you will calculate your disposable income times 12.  If you are choosing the Deferred Offer, you will calculate your disposable income times 24.

Required Forms for an Offer in Compromise

To Request an OIC, you must be sure to file the following items in order for your Offer to be received, reviewed and forwarded to an Offer Examiner:

1. Submit Forms 656 and 433-A (Individual) OIC or 433-B (Business) OIC.

2. Submit the Application Fee for each Form 656 you send in.  Fee is currently set at $205.

3. Submit the 20% down payment unless you are considered low income. 

4. Any and all documents required to be reviewed.  For example, bank statements, income statements, investment accounts, vehicle ownership and operating costs, etc. Any item you wish to include as an income or expense must be accompanied by a document proving this is your income or that you pay that expense.

5. Ensure all tax returns are filed.  If you recently filed a return, it will not be in the IRS system yet so you will need to send a copy of that return with your Offer.

Failure to provide the above will cause your Offer to either be returned or rejected without further review or consideration. 

Allowable Expenses

As you are going through this financial portion, you will find the IRS has what is called National Standards. This standard is based upon how many people reside in the household and in what county you reside. 

They use these standards to keep an even platform for taxpayers.  If you are grossly overstating your expenses in each of these categories, it’s important to know your overspending could be disallowed thereby causing your “reasonable collection potential” to increase. Some of these categories include: