An offer in compromise should be considered a tax settlement with the Internal Revenue Service. When a taxpayer owes money to the IRS, under certain circumstances the taxpayer can submit a proposal to pay less than the amount of tax due. While many people know what an offer in compromise is, many taxpayers ask a tax attorney how much their offer in compromise will be- what will we offer the IRS? How much will the offer be? The answer a tax attorney must or should provide is, “it depends.” While many people may expect this answer from a tax attorney, it is true. An offer in compromise is calculated by the taxpayer’s reasonable collection potential, which is viewed as the taxpayer’s ability to pay. Thus, because each taxpayer’s situation is different, there is no equation to use when estimating what a taxpayer will pay. There is no general percentage to apply to the amount of tax owed by the taxpayer to estimate what the IRS will accept when submitting the offer in compromise.
When calculating an Offer in Compromise amount, a tax attorney should look at the following issues and figures.
– Total Household Income; and,
– National Standards for allowable living expenses
– Other allowable expenses
– Equity in assets including all property such as home, car, investment accounts, business interests and any other assets.
– Available reductions in equity dependent upon the asset and use of the asset.
Based upon the above figures, a taxpayer’s disposable income can be calculated. The taxpayer’s disposable income is then multiplied by 12 or 24 depending upon the repayment terms of the offer in compromise proposed by the taxpayer. This figure is then added to the taxpayer’s equity in assets after applicable discounts are applied. The total figure through this equation is considered the taxpayer’s ability to pay. If the amount is less than the total amount due than our tax attorneys would consider the taxpayer to be a possible candidate for the offer in compromise program and discuss the options with the client. If the amount calculated through the offer equation is greater than the total tax liability, then the taxpayer may not be a candidate for an offer in compromise. However, if circumstances change, our tax attorney’s position may change regarding the possibility of submitting an offer in compromise. Moreover, a taxpayer may be able to qualify for an effective tax administrative offer in compromise, whereby the taxpayer show the ability to satisfy their tax debt, but due to extraordinary circumstances, full payment would create an economic hardship on the taxpayer.