Understanding the IRS Offer in Compromise formula is crucial if you’re trying to lower your IRS debt with this program. A successful Offer in Compromise can substantially reduce your IRS debt, allowing you to pay off the remaining amount in monthly installments. But you’ll have to calculate your offer before you apply for an OIC, and doing it wrong will get your offer rejected.
If you’re worried about the math, our tax attorneys can determine the Offer in Compromise amount for you—but in this article, we’ll cover how it works.
In a Nutshell
Although there are many details to consider when formulating your Offer in Compromise, it all comes down to one basic idea: You want to find out how much money/assets you have available to pay your IRS debt. If that amount is less than what you owe (and you meet the other Offer in Compromise requirements), then your offer will likely be accepted.
There are 2 basic Offer in Compromise formulas:
- On a 5-month repayment plan: (Available Monthly Income x 12) + Value of Personal Assets
- On a 24-month repayment plan: (Available Monthly Income x 24) + Value of Personal Assets
Read on to learn how to calculate your Available Monthly Income and Value of Personal Assets so you can determine your Offer in Compromise amount!
First Step of the Offer in Compromise Formula: Calculate Your Available Monthly Income
Monthly Income – Monthly Expenses = Available Monthly Income. In other words, what you’ll have in your pocket each month that can be applied toward your IRS balance.
Here are some of the things that count as income:
- Wages
- Net business income (if you’re a business owner)
- Distributions from an account, such as a retirement account
- Social Security payments
- Child support
- Alimony
For the full list, see IRS Form 433-A, Section 5: Monthly Income and Expenses.
Let’s say that you add it all up and your monthly income comes out to $1,500.
Now, you need to calculate your monthly expenses. These include (but are not limited to):
- Housing and utilities
- Car payments and maintenance costs
- Out-of-pocket medical coverage
- Childcare
- Food, clothing, and misc.
- Current year income taxes
Let’s say your monthly expenses come out to $1,400.
$1,500 of Monthly Income – $1,400 of Monthly Expenses = $100 of Available Monthly Income… But not so fast! For each category of expenses, the IRS has pre-set caps on how much can be claimed.
Using our previous example, let’s say that your monthly expenses are actually $1,400, but the IRS will only allow you to claim $1,200.
$1,500 of Monthly Income – $1,200 of Allowable Monthly Expenses = $300 of Available Monthly Income to pay off your debt.
As you can guess, this calculation gets complicated. Perhaps your eyes are already glazing over and your mind is drifting toward tonight’s dinner plans.
If that’s the case, don’t worry; our experienced Chicago tax attorneys can help. In fact, we may be able to negotiate exceptions to the IRS’s strict formula so that you can pay less! Contact us today to get OIC help from our experienced tax attorneys.
Step 2 of the IRS Offer in Compromise Formula: Determine the Value of Your Personal Assets
When calculating your collection potential, the IRS isn’t just looking at your paychecks and other income; the agency wants to know about all your financial assets. This includes property, vehicles, cryptocurrency, stocks and bonds, furniture, jewelry, collectibles, and more.
In addition to your income and expenses, Form 433-A asks for a list of your assets with the current market value for each.
For our example formula, let’s say that your Personal Assets amount to $5,000.
Offer in Compromise Formula Options: 5 Months or 24 Months
The IRS offers 2 repayment options for an accepted Offer in Compromise:
- 5-month repayment (“lump sum”)
- 24-month repayment
Once you know your Available Monthly Income and Value of Personal Assets, you can plug these numbers into the formula to determine what your total offer amount should be.
Offer in Compromise Formula: 5-Month Repayment
For a 5-month repayment plan, use this formula to determine your total Offer in Compromise amount:
(Available Monthly Income x 12) + Value of Personal Assets
Using the numbers from the examples above, the formula would look like this:
($300 x 12) + $5,000 = $8,600
On a 5-month repayment plan, you must pay 20% of your offer amount with the application. So in this example, you would pay $1,720 upfront and have 5 months (beginning when the offer is accepted) to repay the remaining $6,880.
If you have the funds to cover it, your debt to the IRS can be settled in just 5 months, and you’ll save thousands of dollars in the long run!
However, not everyone can afford to pay off their debt so quickly.
Offer in Compromise Formula: 24-Month Repayment
For a 24-month repayment plan, use this formula to determine what you should offer in your Offer in Compromise:
(Available Monthly Income x 24) + Value of Personal Assets
Using the numbers from the examples above, the formula would look like this:
($300 x 24) + $5,000 = $12,200
With a 24-month repayment plan, there’s no upfront payment required. Your monthly payment would be just over $500, and your outstanding IRS bill would be repaid within 2 years of your Offer in Compromise being accepted.
Feeling Overwhelmed? We Can Help!
It is possible to submit an IRS Offer in Compromise on your own, but it can be a real pain to do so—plus, you may not end up getting the best settlement amount possible. Our tax attorneys have years of experience with tax debt settlements, and we’ve secured pennies-on-the-dollar offers for some clients.
If you want professional guidance for your tax debt questions, don’t hesitate to give us a call. We can help you decide the best path for your financial future!
