Are you drowning in tax debt, feeling the weight of the IRS on your shoulders, and wondering if there's any way out? You're not alone. Many taxpayers find themselves in similar situations, and for some, an Offer in Compromise (OIC) can be a legitimate path to financial relief. But the burning question is: "How much should I offer in compromise to the IRS?"
This isn't a simple question with a one-size-fits-all answer. The IRS is a complex agency, and their decision to accept an OIC is based on a meticulous evaluation of your unique financial circumstances. Making the right offer is crucial, as a lowball offer will likely be rejected, and an offer that's too high defeats the purpose of seeking relief.
This comprehensive guide will walk you through the process, helping you understand the key factors the IRS considers and how to calculate a realistic offer.
Understanding the IRS Offer in Compromise (OIC)
Before diving into the numbers, let's understand what an OIC truly is. An OIC is an agreement between you and the IRS that settles your tax debt for less than the full amount you owe. The IRS will generally accept an OIC when it believes that the offered amount is the most it can reasonably expect to collect from you. This program is designed for taxpayers who are genuinely unable to pay their full tax liability or doing so would cause severe financial hardship.
There are three main reasons the IRS may accept an OIC:
- Doubt as to Collectibility: This is the most common reason. It means the IRS believes you cannot pay the full amount of your tax debt due to your current financial situation. Your offer in this scenario should reflect your "Reasonable Collection Potential" (RCP).
- Doubt as to Liability: This applies when there's a genuine dispute about whether you actually owe the tax debt or the amount the IRS claims you owe. This is less common and typically involves legal arguments about the tax law.
- Effective Tax Administration: Even if you could technically pay the full amount, paying it would cause economic hardship or be unfair and inequitable due to exceptional circumstances. Examples might include a long-term illness, disability, or other unique situations.
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| How Much Should I Offer In Compromise To The Irs |
Step 1: Engage with Your Reality - Are You Even Eligible?
This is where the rubber meets the road. Before you spend time calculating offers and filling out forms, you need to honestly assess if an OIC is even a viable option for you. The IRS has strict eligibility requirements.
- Have you filed all required tax returns? This is non-negotiable. You must be current with all your tax filings. If you haven't, that's your first step, not applying for an OIC.
- Are you in an open bankruptcy proceeding? If so, you generally won't qualify for an OIC until the bankruptcy is discharged or dismissed.
- Have you received a bill for at least one tax debt included in your offer? The OIC addresses existing tax liabilities, not future ones.
- Are you making all required estimated tax payments for the current year? If you're a business owner with employees, you must also have made all required federal tax deposits for the current quarter and the two preceding quarters.
- Are you in an active audit or investigation? While not an automatic disqualifier, it can complicate the OIC process.
A fantastic starting point is the IRS's Offer in Compromise Pre-Qualifier Tool online. This free tool allows you to input your financial information and get an immediate, albeit preliminary, assessment of your eligibility and a potential offer amount. While not a guarantee, it's an excellent way to gauge your chances.
Step 2: Unearthing Your Financial Truth - Gathering Key Information
This is the most critical and often the most challenging step. The IRS will scrutinize every aspect of your financial life. You need to be thorough, accurate, and brutally honest with yourself and the IRS. Any inconsistencies or missing information will delay or derail your application.
Tip: Reading in short bursts can keep focus high.
Here's what you'll need to gather:
Sub-heading: Personal Information
- Your full name, current address, and Social Security Number.
- Spouse's full name, current address, and Social Security Number (if applicable, even if you file separately, their finances may be considered).
- Information for all other persons in your household or claimed as dependents: name, age, relationship, and if they contribute to household income.
Sub-heading: Income Documentation
- Pay stubs: Recent pay stubs for you and your spouse (usually the last 3 months).
- Tax returns: Copies of your federal income tax returns for the past several years.
- Business income and expenses: If you're self-employed, detailed records of your business income and expenses (profit and loss statements).
- Other income sources: Documentation for social security, pensions, unemployment, alimony, child support, rental income, interest, dividends, etc.
- Bank statements: Statements for all checking and savings accounts (usually the last 3-6 months) to show income deposits and spending habits.
Sub-heading: Expense Documentation
- Housing costs: Rent or mortgage statements, property tax bills, homeowner's insurance.
- Utilities: Electric, gas, water, internet, phone bills.
- Transportation: Car loan statements, car insurance, gas receipts, public transportation costs.
- Food: While the IRS uses National Standards for food, it's good to have an idea of your actual spending.
- Medical expenses: Health insurance premiums, doctor bills, prescription costs (especially for chronic conditions or high out-of-pocket expenses).
- Childcare/Dependent care costs: Receipts or statements.
- Court-ordered payments: Alimony, child support.
- Loan statements: Credit card statements, personal loans, student loans.
- Other necessary living expenses: Be prepared to justify any expenses that fall outside the IRS's standard allowances.
Sub-heading: Asset Documentation
- Bank accounts: Current balances for all checking, savings, and investment accounts.
- Real estate: Property deeds, mortgage statements, recent appraisal (if available) for your home and any other real estate you own.
- Vehicles: Car titles, loan statements, Kelley Blue Book or NADA values for all vehicles you own.
- Retirement accounts: Statements for 401(k)s, IRAs, etc. (Note: The IRS often considers a portion of these assets in the OIC calculation).
- Other valuable assets: Life insurance with cash value, stocks, bonds, collectibles, boats, etc.
Step 3: Crunching the Numbers - Calculating Your Reasonable Collection Potential (RCP)
This is the heart of determining your offer amount. The IRS will calculate your "Reasonable Collection Potential" (RCP), which is essentially their estimate of how much you can realistically pay. Your offer must generally equal or exceed this amount. The RCP is comprised of two main components:
Sub-heading: 3a. Disposable Monthly Income (DMI)
The IRS determines your disposable income by taking your gross monthly income and subtracting allowable monthly living expenses. This is where the National and Local Standards come into play.
- National Standards: These are fixed amounts the IRS allows for food, clothing, personal care products, and miscellaneous items, based on your family size and income level. You are allowed these amounts regardless of what you actually spend.
- Local Standards: These apply to housing, utilities, and transportation, and vary by geographic location. For housing and utilities, you're generally allowed the lesser of your actual expenses or the standard amount. For transportation, there are standard amounts for vehicle ownership (loan/lease payments, insurance) and operating costs (gas, maintenance).
How to Calculate Your DMI:
- Total Monthly Income: Add up all your gross income from all sources.
- Allowable Expenses:
- National Standards: Look up the current National Standards on the IRS website (search "IRS National Standards for Allowable Living Expenses").
- Local Standards: Look up the current Local Standards for your area on the IRS website (search "IRS Local Standards for Housing and Utilities," "IRS Local Standards for Transportation").
- Other Allowable Expenses: These can include health care costs, court-ordered payments, and certain taxes.
- Subtract Allowable Expenses from Income:
Total Monthly Income - Total Allowable Expenses = Disposable Monthly Income (DMI)
Sub-heading: 3b. Equity in Assets
The IRS will also look at the equity you have in your assets that could be used to pay down your tax debt.
- Equity Calculation: For each asset, determine its fair market value (FMV) and subtract any outstanding loans or liens against it.
FMV - Loan/Lien Balance = Equity
- Quick Sale Value: For some assets (like real estate or vehicles), the IRS may use a "quick sale" or "liquidation" value, which is typically 80% of the asset's FMV, acknowledging that you might not get full market value in a forced sale.
FMV x 0.80 = Quick Sale Value
- Exempt Assets: Some assets are partially or fully exempt from collection (e.g., a certain amount of cash in bank accounts, basic household items, necessary tools of trade). The IRS OIC booklet (Form 656-B) provides details on these exemptions.
Adding it all up:
The IRS will generally calculate your RCP as:
Tip: Reread tricky sentences for clarity.
(Disposable Monthly Income x Number of Months of Future Income) + Equity in Assets
The "number of months of future income" depends on your proposed payment plan:
- Lump Sum Offer: Your DMI is typically multiplied by 12 months. With a lump sum offer, you make an initial non-refundable payment (20% of your offer) and then pay the remaining balance in 5 or fewer payments within 5 or fewer months of acceptance.
- Periodic Payment Offer: Your DMI is typically multiplied by 24 months. With this option, you make monthly payments while your offer is being considered and continue for up to 24 months after acceptance.
Example Calculation (Simplified):
Let's say you have:
- Disposable Monthly Income (DMI): $300
- Equity in assets (after exemptions): $5,000 (e.g., $10,000 equity in a car, but only $5,000 is considered after exemptions/quick sale value)
- You choose a Lump Sum Offer.
Your RCP would be: ($300 x 12 months) + $5,000 = $3,600 + $5,000 = $8,600. Your offer should be at least $8,600.
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Step 4: Crafting Your Offer - Form 656 and Supporting Documents
Once you have a solid understanding of your RCP, you're ready to formally prepare your OIC.
Sub-heading: Completing Form 433-A (OIC) or 433-B (OIC)
- Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals: This is the detailed financial statement you'll use to present all the income, expense, and asset information you gathered in Step 2. Be meticulous and attach all supporting documentation.
- Form 433-B (OIC), Collection Information Statement for Businesses: If you're applying for an OIC for a business, you'll use this form.
Sub-heading: Completing Form 656, Offer in Compromise
This is the official form where you propose your offer amount and state the reason for your offer (Doubt as to Collectibility, Doubt as to Liability, or Effective Tax Administration).
- Be realistic: Your proposed offer on Form 656 should be equal to or greater than your calculated RCP.
- Explain special circumstances: If your offer is less than your RCP due to unique hardships (e.g., future medical expenses, inability to work), you must clearly explain and document these on Form 656. The IRS may consider these "special circumstances" under the Effective Tax Administration criteria.
Sub-heading: Including Initial Payments and Application Fee
- Application Fee: As of the current date, there is a non-refundable $205 application fee for most OICs. You must include this with your submission unless you qualify for the low-income certification.
- Initial Payment:
- Lump Sum Offer: You must include a non-refundable payment equal to 20% of your offer amount with your Form 656. This payment is applied to your tax debt.
- Periodic Payment Offer: You must include your first month's payment with your Form 656 and continue to make monthly payments while the IRS reviews your offer. These payments are also applied to your tax debt.
- Low-Income Certification: If your income falls below certain thresholds (based on family size and location), you may qualify for a waiver of both the application fee and the initial payment. Check the instructions for Form 656 for the most current low-income guidelines.
Step 5: Submission and Negotiation - The Waiting Game
After assembling your complete package, make copies of everything for your records, and send the original documents to the IRS address specified in the Form 656 instructions.
Tip: Focus more on ideas, less on words.
- Stay Compliant: While your OIC is under review, it is critical to stay current with all your tax filing and payment obligations (including estimated taxes). Falling behind can lead to your OIC being rejected or defaulted.
- Be Prepared for Questions: The IRS will assign a revenue officer or examiner to review your OIC. They may contact you for additional information, clarification, or to request further documentation. Respond promptly and accurately.
- Negotiation: The IRS may counter your offer if they believe you can pay more. Be prepared to negotiate, but also know your financial limits. This is where professional guidance can be invaluable.
- The Wait: The OIC process can take several months, sometimes even over a year, due to the thoroughness of the IRS review. Patience is key.
Step 6: What Happens Next? Acceptance or Rejection
Sub-heading: If Your Offer is Accepted
Congratulations! This is the goal. If your OIC is accepted, you will receive a formal acceptance letter from the IRS.
- Payment Terms: You must adhere strictly to the agreed-upon payment schedule (either the lump sum or periodic payments).
- Future Compliance: The OIC agreement usually stipulates that you must remain compliant with all tax filing and payment obligations for a period of five years after the offer is accepted. Failure to do so can result in the OIC defaulting, meaning the IRS can reinstate the original full tax debt.
- Lien Release: Once the agreed-upon OIC amount is paid in full, any federal tax liens against your property will be released.
Sub-heading: If Your Offer is Rejected
Don't despair immediately. A rejection isn't necessarily the end of the road.
- Appeal Rights: You generally have 30 days from the date of the rejection letter to appeal the decision. The appeal process allows you to present your case to an independent IRS Appeals Officer.
- Re-evaluation: The IRS will typically provide reasons for the rejection. Carefully review these reasons. It might be due to incomplete information, an insufficient offer, or the IRS believing you have a greater ability to pay.
- Alternative Resolutions: If an OIC isn't feasible, explore other options like:
- Installment Agreement: Set up a monthly payment plan with the IRS for up to 72 months.
- Currently Not Collectible (CNC) Status: If you genuinely cannot afford to pay any amount without extreme hardship, the IRS might place your account in CNC status, temporarily halting collections. However, interest and penalties continue to accrue, and the IRS will periodically review your financial situation.
The Importance of Professional Help
While you can navigate the OIC process yourself, it is highly recommended to seek assistance from a qualified tax professional. This could be a Certified Public Accountant (CPA), an Enrolled Agent (EA), or a tax attorney. Here's why:
- Expert Knowledge: They understand the intricacies of IRS tax law, collection procedures, and the OIC guidelines.
- Accurate Calculations: They can help you accurately calculate your RCP and determine a realistic offer amount, significantly increasing your chances of acceptance.
- Effective Communication: They know how to communicate with the IRS, respond to inquiries, and negotiate on your behalf.
- Avoiding Pitfalls: They can help you avoid common mistakes that lead to rejection, such as incomplete documentation or unrealistic offers.
- Reduced Stress: Dealing with the IRS can be incredibly stressful. A professional can shoulder much of that burden.
10 Related FAQ Questions
Here are 10 frequently asked questions, starting with "How to," with quick answers to further assist you:
How to know if an Offer in Compromise is right for me?
You can use the IRS's online Offer in Compromise Pre-Qualifier Tool to get a preliminary assessment of your eligibility based on your financial information. Generally, it's for those who genuinely cannot pay their full tax debt or doing so would cause significant hardship.
How to qualify for low-income certification for an OIC?
Your adjusted gross income (AGI) must be at or below a certain threshold based on your family size and location, as specified in the instructions for Form 656. If you qualify, you won't have to pay the application fee or the initial payment.
How to find the IRS National and Local Standards for expenses?
The IRS publishes these standards online. You can typically find them by searching "IRS National Standards for Allowable Living Expenses" and "IRS Local Standards for Housing and Utilities" or "IRS Local Standards for Transportation" on the IRS website.
QuickTip: Don’t skim too fast — depth matters.
How to calculate the equity in my assets for an OIC?
For each asset, subtract any outstanding loan balances or liens from its fair market value (FMV). The IRS may use a "quick sale" value (often 80% of FMV) for certain assets. You'll also need to consider any IRS exemptions.
How to appeal a rejected Offer in Compromise?
You typically have 30 days from the date of the rejection letter to file an appeal. The letter will provide instructions on how to submit your appeal to the IRS Appeals office, where an independent review will be conducted.
How to stay compliant with the IRS during the OIC process?
You must file all required tax returns on time and make any necessary estimated tax payments for the current year. Failing to do so can lead to the immediate rejection or default of your OIC.
How to avoid "OIC mills" and scams?
Be wary of companies that guarantee unrealistic settlements or demand large upfront fees. Reputable tax professionals will never guarantee an outcome. You can check the credentials of tax preparers through the IRS website.
How to pay the application fee and initial payment for an OIC?
You can pay by check or money order sent with your Form 656, or use the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay, selecting the appropriate "Offer in Compromise" payment option.
How to get help filling out OIC forms?
The IRS provides detailed instructions within the Form 656 booklet (Form 656-B). They also offer a free video series on their website guiding taxpayers through completing Forms 433-A, 433-B, and 656.
How to proceed if an OIC isn't accepted and I can't appeal?
If an OIC isn't accepted and an appeal isn't successful, or you choose not to appeal, you can explore other tax resolution options such as an IRS Installment Agreement (monthly payments) or requesting "Currently Not Collectible" status if you're experiencing extreme financial hardship.
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