The Internal Revenue Service (IRS) offers several useful methods of settling your tax debt if you don’t have the financial ability to repay it. One of these is an offer in compromise (OIC), which lets you pay off your entire debt for a lower amount. It’s important you know how to calculate your IRS offer in compromise amount to provide the right offer.
The IRS considers your ability to pay, your income, your expenses, and your asset equity to assess what the minimum amount for an OIC is, and what it can reasonably expect to recover.
Information Needed to Calculate the Offer
The IRS requires significant information in your application for an OIC. This information is also how you can determine the minimum offer the IRS might accept. Form 433-A is used for individual taxpayers, including wage earners and those who are self-employed. It requests some key information like:
- The household: The form requires information about yourself and your household, including whether you have any dependents, who in the household contributes to the household income, whether you own or rent your living space, and whether you were married and lived in a community property state.
- Employment: Wage earners provide employment information like your employer, your pay period, whether you have ownership interest in the business, and how long you’ve been employed at this business. The same questions are asked for your spouse. If you are self-employed, then you must provide information about whether the business is a sole proprietorship, any business interests you have, the gross monthly payroll, and more.
- Personal assets: You have to list information about and the value of numerous personal assets. This includes your bank accounts, investment accounts, digital assets, retirement accounts, the cash value of life insurance policies, and the vehicles you lease or own. The value of many of these assets includes subtracting the loan balance. Personal assets also include real property like a home, timeshare, condo, or co-op, and any mortgage you pay. Other valuable assets should also be reported, like art, jewelry, collections, or an interest in a non-publicly traded company.
- Business assets: This applies to those who are self-employed. These are assets like bank accounts, digital assets, business vehicles, real property, machinery or equipment, tools, or books, but do not include anything listed in personal assets.
- Monthly income: Your monthly income should include your gross wages, Social Security, pension payments, and other income. You also include your spouse’s income, rental income, dividends and interest, royalties, distributions, child support, alimony, and other sources of income. For those who are self-employed, you should also include the business’s income, like dividends, receipts, interest, rental, and other income.
- Monthly expenses: Your monthly expenses should consider costs like food, clothing, personal care products, housekeeping supplies, vehicle loan or lease payments, utility costs, home or renter’s insurance costs, a mortgage, your monthly rent, health insurance premiums, court-ordered payments, child care costs, monthly taxes, secured debts, and more.
Those who are self-employed should also consider all of the business’s expenses, like gross wages, rent, supplies, utilities, business insurance, secured debts, purchased inventory, and more.
Partnerships, limited liability companies, and corporations should use Form 433-B.
Calculating the Offer
There are several steps to calculate the reasonable offer for an OIC. First, add up your total household income, and subtract from it your total household expenses. This creates your remaining monthly income. Take this remaining monthly income and either:
- Multiply by 12. This is for an OIC lump sum payment, meaning you are paying the OIC in five months or less.
- Multiply by 24. This is if your OIC is a periodic payment OIC, and you are paying it within six to 24 months.
This will get you your future remaining income. Take this amount and add it to:
- Your available individual equity in personal assets
- Your available business equity in assets, if you are self-employed
This final number is your minimum offer amount.
Only in special circumstances are you able to pay less than this minimum amount. If you can’t afford the minimum amount, you must pay what you can and provide a reason and proof for why you are not able to pay the minimum amount.
FAQs About How to Calculate Your IRS Offer in Compromise Amount
How Do You Calculate an Offer in Compromise With the IRS?
You calculate an offer in compromise with the IRS by calculating your total household income and your total household expenses, then subtracting the expenses from the income. Then, this amount is multiplied by either 12 or 24, depending on how many months your offer will be for. Then, add this number to the total available equity you have in individual or business assets. The resulting number is what your offer should likely be, except in special circumstances.
How Much Does the IRS Usually Settle for With an Offer in Compromise?
The IRS usually settles for what it thinks it can reasonably collect from you and what you can reasonably pay based on your financial circumstances. The IRS reviews financial information like income, asset equity, and expenses. If there are unique circumstances in your situation that prevent you from paying the standard amount for an OIC, then you should include the information needed to prove those circumstances.
What Is the Downside of an Offer in Compromise?
The downside to an offer in compromise is that they are very hard to secure, and if you can secure one, you might still be in financial hardship. If you offer too high an amount in your OIC, it can be hard to make the payments you agreed to. Too low, and the IRS is unlikely to accept the agreement. This is why you should hire Palm Beach IRS tax attorney to determine a reasonable amount that won’t cause hardship.
What Is a Reasonable Offer for an Offer in Compromise?
What is a reasonable offer for an offer in compromise will depend on your financial circumstances. Each OIC proposal is unique and relies on information like your income, your household’s income, the value of your assets, your investments, your insurance policies, your expenses, and more. Because of this, there is not one single reasonable value to offer for every taxpayer.
Hire an Offer in Compromise Lawyer at TaxSmith, LLC
The IRS only accepted 21% of OICs in 2024, totaling $163.4 million. There were also 3,805 appeals of rejected OICs the same year. Reach out to TaxSmith, LLC, to learn how we can help you calculate and file your OIC.
