Determining whether you qualify for an IRS Offer in Compromise (OIC)
How does the Internal Revenue Service determine whether to accept an Offer in Compromise (OIC)?
There are several criteria which the IRS uses in determining whether to accept a proposed Offer in Compromise. Simply put and ignoring the complex rules, they are as follows:
Net Value of your Assets
The first thing the IRS looks at is how much your property and possessions are worth. They use a quick sale value, usually 80% of the actual value. For example if you own a home worth $200,000 and owe $150,000, the IRS value is calculated as follows: First, the quick sale value is 80% of the actual value or $160,000. Then the mortgage amount is deducted, leaving $10,000 of equity in the property by IRS standards. That amount must be paid to the IRS in an OIC.
Each item of significant value is dealt with the same way. There are, however, exemptions that the IRS doesn’t consider in determining your asset value in an Offer in Compromise:
- Furniture and furnishings
- Personal property
- Equity in a vehicle for each person of $3,500
- $1,000 in the bank
- Tools of your trade if you need them for business or employment
- Income producing assets if you are in business
- Other deductions (you will need to ask your Tax Attorney about them)
The second thing that the IRS wants to settle an Offer in Compromise is an amount equal to your excess income times 12. In an OIC, the IRS will determine how much your income is and then they will allow you a certain amount for living expenses. The amount of expenses they will allow in an Offer in Compromise is determined by the size of your family and where you live. For example if you live in a large city like New York or Los Angeles, they will allow more for housing than if you live in a small city. They also base transportation expenses on where you live.
Once it has been determined how much excess income you have it is multiplied by 12. Simply put the IRS wants, in an Offer in Compromise, as much as they could get from your excess income for a period of 1 year.
The amount of your OIC must be paid to the IRS within 5 months after they accept your Offer in Compromise.
You need a competent Tax Attorney to assist you in filing your Offer in Compromise. Statistics show that very few OIC’s are accepted that are done by the taxpayer themselves. They are very complicated and there are many decisions that must be made which affect whether your Offer in Compromise will be accepted.