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How do I Qualify for an IRS Offer in Compromise?

Updated: Aug 22


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The IRS Offer in Compromise (IRS OIC) program can allow a taxpayer to settle their tax liability for much less than the amount they owe. The most common tax settlement is the IRS OIC for “doubt as to collectability” – which means: the IRS will never be able to collect the amount of tax debt owed by the taxpayer before the collection statute expires (Statute of Limitations). The IRS always wants to accomplish 2 goals. One goal is to collect money and any settlement made will be put in the "collection column."

The 2nd goal is to close a file so the agency can move to the next file. An IRS Offer in Compromise certainly does that. It is our job to prove to the IRS that accepting an Offer in Compromise is in their best interest.

What are the Offer in Compromise IRS (IRS OIC) requirements?

There are four basic requirements:

1. You are in filing and payment compliance (filed the last 6 years of returns and have enough withholding and/or estimated tax payments so you do not owe for future tax years),

2. You qualify for an IRS Offer in Compromise if you cannot pay the taxes owed with your assets or future income before the statute of limitations to collect expires,

3. You do not have to be "destitute" to qualify. It is our job to show the IRS That you do not have any money left over after paying your "allowable expenses," and

4. You can stay in compliance for the five tax years after acceptance. How to determine if you qualify for an OIC?

Let’s assume you meet the filing/payment compliance requirements and you owe back taxes. Do you qualify for an IRS OIC?

To understand if you qualify, you will need to compute whether you can pay before the IRS collection statute expires (the collection statute is 10 years from each date of assessment of tax).

The formula isn't simple for an amateur to calculate: Can taxpayers pay the taxes they owe with their net equity in assets, plus any future disposable income (paid monthly) before the collection statute of limitations expires? An illustration of the OIC settlement amount

We will take a look at a "simple example" to illustrate how to calculate an offer amount. Theoretically, a taxpayer who owes $50,000 for 2016 (we will also assume that the IRS has 100 months left on the statute of limitations to collect), and has net realizable equity in assets and future income as follows:

Net realizable equity (NRE) in assets (only asset is the home): $10,000

Home that is owned with a mortgage:

Fair market value of $150,000

Quick sale value at 80% = $120,000 (IRS rule that values asset sales at “quick sale value”)

Loan proceeds of $110,000

The NRE equals $120,000 (QSV) less $110,000 (loan)= $10,000

Future monthly disposable income (MDI): $200 a month

Two earners, with allowable IRS living expenses (subject to limits placed on a taxpayer by the IRS Collection Financial Standards):

Monthly average gross income: $6,000

Monthly average necessary living expenses and expenses to produce income, limited by IRS Collection Financial Standards: $5,800 (for categories such as: food/clothing/misc.; housing/utilities; transportation expenses; medical expenses; and other, such as taxes paid, health insurance, term life insurance, child care costs, court-ordered payments, etc.)

The MDI: $6,000 (average gross income per month) less $5,800 (average necessary living expenses per month) = $200

Will this taxpayer qualify for an OIC? In this simple case, the taxpayer qualifies for an IRS Offer in Compromise. Why is that? The taxpayer has $10,000 in NRE and $200 in MDI – both of which will not pay the IRS in full before the collection statute expires.

The formula is straightforward but complicated for a novice to navigate. What’s difficult is determining asset values, assets to be included in an OIC, average monthly income, and regular necessary and allowable monthly living expenses. The IRS limits allowable living expenses, meaning the IRS will scrutinize and potentially limit a taxpayer’s actual expenses in an OIC application.

Although historically the IRS has been approving approximately 42% of the Offer in Compromise submitted, the tax professionals at Flat Fee Tax Relief have a 96% OIC success rate. We feel that due to the COVID-19 crisis, the IRS will be overwhelmed with settlement requests. If you owe the IRS $10,000 or more, this may be the best time to get rid of your tax debt.

This article is brought to you by the tax pros at Flat Fee Tax Relief. We are strategically located in Florida, and California. This provides our teams with extra hours to connect with the IRS due to the time zones. We start work at 8 A.M. Eastern to 6 P.M. Pacific time.


CALL 1-866-747-7435



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