There is much confusion among taxpayers as to how an Offer in Compromise works. Generally speaking to accept an OIC, the IRS wants as much as they believe they will be able to collect from the taxpayer over the next 4-5 years.
The amount the IRS will be able to collect from a taxpayer and hence the amount that they will be willing to accept in an Offer in Compromise is usually determined as follows:
First, they look at the value of all of a taxpayers assets. This is measured by what the quick sale value of the assets is. With a house, for example, they generally look at 80% of its current value, less the amount of the mortgages against the home. For vehicles, they use the same formula.
For a taxpayers personal property, generally they do not use the value of their household items and they allow a reasonable amount for tools of trade.
Then after determining how much the value of the taxpayers assets is, they look at income and expenses. To simplify, they want the amount of excess income times 48 or 60 depending on how the OIC is structured. For example if someone has $100 per month of excess income, the IRS will require either $4,800 or $6,000 depending. Then the amount of the value of the assets would be added to that to arrive at the Offer in Compromise amount.
We have simplified how an OIC works for purposes of this article. Offers in Compromise are very, very complicated and if not done very carefully, will almost certainly result in a rejection. A tax attorney is highly recommended to handle an OIC. For more information about Offers, visit our website: www.martellelaw.org/offer-in-compromise