How much money will the IRS settle for in an Offer in Compromise?
The average amount the IRS settles for in an Offer in Compromise is $10,234. Sounds good, doesn’t it? How did I come up with that amount? In 2017 the accepted 25,000 offers (at a 40.3% acceptance rate) and settled for $256 million.
If only it was that easy – everyone would be doing it, right?
Now, that does not mean you can settle with the IRS for that amount, or that there is a 40% chance your offer will be accepted. The IRS uses a specific formula in determining the settlement value of an OIC and whether to accept or reject the Offer. Your success depends on how you fit into the IRS formula.
The IRS Offer in Compromise formula works like this:
Determine Disposable Income
First, the IRS will figure out how much you have in disposable income. They do this by asking for your paystubs and other sources of income or, if you are self-employed, a recent profit and loss statement from your business.
Next, the IRS wants to know about your monthly living expenses. Some of those expenses – like your housing and utilities, car payment and food/clothing – are subject to IRS limitations. The IRS calls these limitations National Standards, sometimes also referred to as allowable living expenses.
Your income, less your allowable living expenses, equals your monthly disposable income. The IRS is going to put a value on your cash flow for purposes of determining your OIC settlement value.
If you can pay the IRS the amount of your Offer settlement (both income and assets ) within five months after acceptance, the IRS values your monthly disposable income by multiplying it by a factor of 12. So, $200 of monthly cash flow equates to a settlement valuation of $2,400.
If you cannot pay the settlement off within five months, the IRS will grant you 24 months payment terms (both income and assets). However, your monthly disposable income would be multiplied by a factor of 24, increasing the valuation to $4,800.
Determine Value in Assets
After determining the settlement value of your disposable income, the IRS will then turn to a valuation of your assets and add that to the value of your disposable income.
You will need to determine what your assets are worth. This would include your car(s), house(s), retirement plan(s) and any other assets. Subtract any loans to arrive at equity, and in most cases, reduce that by 20% to get to your IRS valuation.
Offer Amount
Add your cash flow (multiplied by a factor of 12 or 24) to your asset value, and you have your proposed IRS settlement amount.
That formula yields an average of $10,234 to the IRS. It could result in more or less for you, depending on your financial circumstances.
Keep in mind the IRS disagrees with taxpayers’ valuations and calculations 60% of the time and rejects those Offers.
Success with an Offer in Compromise is based on a full understanding of the IRS investigative process into your income, living expenses and assets. It is not a one size fits all situation; the amount of one person’s settlement has no bearing on the success of another. The IRS does not have a set percentage of settlement to the amount owed. It all depends on convincing the IRS that your financial situation is dismal, and that the IRS will never get paid after applying their internal guidelines. The more you can do that, the better your settlement and chance of success.
Should you get help?
I have seen many people try to prepare their own OIC and fail because they do not fully understand the art of dealing with the IRS. Yes, you can submit an Offer in Compromise yourself but if you are trying to considerably reduce your debt, I recommend you rethink your position.
An “accepted” OIC is not the same as a “successful” OIC.
There is more to it. Sure, the average taxpayer can fill out the forms and after spending hours reading and rereading the instructions provide the substantiation needed for an application to be accepted. How do you measure success? To me, success is measured with an approval on the LOWEST DOLLAR AMOUNT the IRS will accept.
If you feel that you may be in over your head, or just want to get a second opinion, let’s set up a short call. To avoid the back and forth emails and phone tag, I have included a link to my Calendar https://calendly.com/taxman/tax-problem-resolution-initial-consultation. Let’s set up a 30 min. phone conference to get to know each other. The phone number to call is 855-829-5877 and my extension is 203.
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