Offer in Compromise: Eligibility & Negotiations with the IRS

The submission of an Offer In Compromise is one of the most comprehensive methods by which to deal with unpaid IRS tax liabilities. An Offer In Compromise essentially is an offer to the IRS to pay a sum less than the total tax owed in order to have the remainder of the liability written off by the IRS.

The IRS will determine whether, based on the taxpayer’s income, expenses and assets, the offer represents the reasonable collection potential of the IRS on the debt. The IRS will determine the reasonable collection potential by determining the net difference in the taxpayer’s monthly income versus expenses and multiplying the net difference by a factor of either 12 or 24 months depending on the payment option the taxpayer selects. The IRS will add to the income and expense factor, the net realizable equity in assets. The net realizable equity in assets is determined by adding the total balance in all bank accounts minus an allowance of $1000 plus 80% of the value of all other assets such as real property, vehicles and retirement accounts minus any loan balance on that asset and minus allowances for personal use vehicles.

If the offer amount is determined to be equal to the reasonable collection potential then the IRS will accept the offer. If the IRS determines that the reasonable collection potential is greater than the offer amount but still less than the total debt then they will submit a counter offer to the taxpayer.

An offer can be submitted using either a lump sum payment or periodic payment method to fund the offer. Submissions using the lump sum payment method require a 20% down payment of the offer amount to be paid with the offer with the remainder of the offer due within 5 months of acceptance. Under the periodic payment method, the offer amount is paid over 24 monthly payments beginning with the submission of the offer. The periodic payments continue to be due during the period of time the IRS is reviewing the offer for sufficiency. If the offer is rejected the down payment and any periodic payments made, are retained by the IRS and applied to the tax debt.

Taxpayers who meet the low-income threshold may qualify to submit their offer without the required down payment or periodic payments. In addition to the down payment and periodic payment requirements, the submission of an offer requires a $186 application fee unless the low-income threshold is met.

Taxpayers who have a marginal net income after factoring in reasonable living expenses and who have little to no equity in their assets are typically the best candidates for an Offer In Compromise. Other good candidates are taxpayers whose debt is so substantial that even in spite of their sizeable income and equity in assets will appreciate a reduction in the tax through an Offer In Compromise.

To find out if you qualify for tax relief programs, including the Offer in Compromise, contact J David Tax Law today. Our experienced tax attorneys will fight for you and keep you informed throughout the process.