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Posted on Oct 22, 2013 in Tax | 0 comments

What is an offer in compromise?

What is an offer in compromise?

An offer in compromise is an agreement between you and the IRS where the IRS agrees to accept less than the total amount you owe.  The process can take a long time and certainly requires a lot of organization and patience, and will require you to provide a lot of personal and financial information to the IRS.    Negotiating with the IRS is not like negotiating with any other unsecured lender.  There isn’t much dickering back and forth.  There is a formula that the IRS uses that determines that amount they are allowed to accept.  This formula is based on your gross monthly income, allowable living expenses and the net realizable equity you have in the assets you own.  Typically, determining your gross monthly income is pretty straightforward, but there can be some challenges if you are self-employed or your income varies from month-to-month.  The IRS has limits on the monthly expenses it will allow based on national standards for expenses like household living expenses, medical expenses, and transportation costs.  Most of the time the allowable expense is much lower than the actual monthly expense.  Finally, the IRS will look into the assets you own and your ability to use the equity to pay this debt.  The IRS will use these numbers to calculate the amount they will be willing to accept for an offer in compromise.  If you are interested in working through this calculation, you can check out Form 656-B from the IRS to walk through the process of calculating your offer amount.  One important thing to note when filing an offer in compromise is that during the time the offer is being investigated the statute of limitations for collections is tolled – meaning it stops running.  If your offer is accepted and paid properly then it doesn’t matter because your debt is clear.  However, if your offer is not accepted then that can lengthen the collection period by a significant time as it can take over one year to complete the offer in compromise process.

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  1. […] week on the podcast we discussed resolving your tax problems with the IRS using three methods: the offer in compromise, the installment agreement and currently noncollectable status.  We also discussed the timing […]