Now, before we dive into how to settle IRS debt for less, it is essential to mention that you cannot pursue IRS back taxes forgiveness if you are in an open bankruptcy. Instead, wait to file your IRS Offer in Compromise until the bankruptcy is discharged – or wait to do the bankruptcy until the IRS one time forgiveness has been granted. When we help with IRS Offer in Compromise cases, we recommend checking transcripts to make sure open bankruptcy is not listed.

Formula to Calculate IRS Offer in Compromise

Now that you know the basic eligibility for the IRS Offer in Compromise, we are ready to answer the question, “How much should I Offer in Compromise to the IRS?”

The IRS Offer amount is not really a negotiation but more a calculation. Further, it is not a percentage or a “waiver.” These are all myths. IRS back taxes forgiveness is based on a mathematical formula.

It is determined by calculating the reasonable collection potential (“RCP”). First, the RCP is calculated by determining your future monthly disposable income (over 12 or 24 months). Generally, our IRS tax settlement attorneys recommend over 12 months as this is how to settle IRS debt for less.

This number is then added to your net realizable equity in assets. And voila – you now have your IRS Offer in Compromise settlement number.

IRS Offer in Compromise Net Realizable Equity in Assets

Let’s start with your net realizable equity in assets. Great IRS tax settlement attorneys will know how to help with IRS Offer in Compromise cases by getting this number as low as possible.

• Cash and Bank Accounts. The cash balances will be the most current checking/savings/money market accounts. This amount is reduced by $1000, and the resulting amount gets added to the “net realizable equity in assets” number. Pro Tip: IRS tax settlement attorneys should know several tricks to reduce this amount. There are expenses you can pay down your cash balance with and tricks in the IRM 5.8.5.7 that can be deployed.
• Retirement Accounts. These will be your 401(k), IRAs, and other retirement accounts. Typically, the value is the statement balance, less any taxes and penalties that would apply in a hypothetical withdrawal. Pro Tip: If you want to learn how to settle IRS debt for less, consider using the 401(k) loan trick to remove your retirement account as an asset. Experienced IRS tax settlement attorneys can help guide you on how to make this work. 
• Stocks and Virtual Currency. Generally, the current value, although a reduction for sale expenses would be allowed. 
• Real Estate. The value of the real estate is determined using the current fair market value multiplied by 80% (this is referred to as a Quick Sale Value . . . i.e., a fire sale). That amount is then reduced by any mortgage tied to the real estate. Real estate can be a tricky asset for IRS back taxes forgiveness. Therefore, verifying your starting fair market value (generally, using property tax records or recent sales) is essential.
• Vehicles. This is the fair market value (use Kelly Blue Book) multiplied by 80% (the Quick Sale Value), less any loans on the vehicle. Leases do not generally count as an asset.
• Life Insurance. Only include the cash value if it is a whole-life policy. Term life policies have no asset value. 

So how does all of that work? Let’s take a look at an example. Bob has $1200 in his checking account, leases a car, and owns his house (FMV of $200,000 with a mortgage of $175,000).

The checking account is easy. $200 is the value there ($1200 less the $1000 reduction). No value in the lease. The house value is also zero (QSV is $200,000 x 80% = $160,000). The QSV of the house is less than the mortgage balance, so there is no value. So, Bob’s net realizable equity in assets is $200. 

IRS Offer in Compromise Future Monthly Disposable Income

Once the net realizable equity in assets is determined, the next step in our quest to answer “how much should I offer in compromise to the IRS” is calculating future monthly disposable income.

The first step is to determine what the household’s gross income is. This may be gross wages, net self-employment income, social security, retirement benefits, or even alimony. For IRS back taxes forgiveness, any cash-in (except gifts and loans) will count as gross income. 

Next, we will subtract necessary living expenses based on the household size. Allowable expenses have been determined by the IRS. Generally, these will include necessary expenses (ones necessary for the production of income or for the health and welfare of the taxpayer’s family). 

• Food, Clothing, and Misc. This is a catch-all category for groceries, dining out, apparel, supplies, credit card payments, clothing, etc. The IRS sets standards based on household size. Absent extraordinary circumstances, you are allowed the standard (even if it is higher than your actuals).
• Housing and Utilities. This will consist of mortgage payments/rent, electric, insurance, gas, water, sewer, cell phones, cable, etc. The IRS sets standards based on the county of residence. Absent extraordinary circumstances, you are allowed the lower of your actual or the standard. 
• Transportation Expenses. This consists of ownership costs (lease or loan) and operating costs (gas, insurance, repair) of your vehicles (a household of at least two can have a maximum of two cars). The IRS also sets standards for transportation expenses. Absent extraordinary circumstances, you are allowed the lower of your actual or the standard. If you don’t have a vehicle, there is an option to take public transportation expenses.
• Health Insurance Premiums. These are generally not capped and can include medical, dental, and vision insurance paid by the taxpayer.
• Out-of-Pocket Health Care Costs. There is a standard (which varies depending on age) that every taxpayer will receive.
• Current Taxes. This would include current withholding taxes, state taxes, local taxes, and estimated taxes. 
• Life Insurance Premiums. Term life insurance premiums (that are reasonable) are allowed as well. Whole-life premiums, however, are not allowed.
• Other Expenses. Court-ordered payments (alimony or child support), child care expenses, delinquent state tax payments, representation fees for IRS tax settlement attorneys, etc., are some of the other expenses that are also allowed.

Once the allowable household monthly expenses are subtracted from the gross household monthly income, the result (assuming it is a positive number) is annualized (multiplied by 12). When we help with IRS Offer in Compromise cases, we always recommend the x12 multiplier as opposed to the x24 multiplier.

This is the “future income” number that is added to the “net realizable equity in assets” number, which results in the “reasonable collection potential.” That is, you now have an answer to what your Offer has to be when you ask, “how much should I offer in compromise to the IRS.”

Example of IRS One Time Forgiveness

Let’s go back to our example with Bob. Remember, Bob has $200 for his “net realizable equity in assets.” So Bob is single with no dependents and lives in Cuyahoga County (Cleveland) and has a salary of $50,400. Therefore, his gross monthly household income is $4,200 ($50,400 divided by 12). 

Bob’s mortgage payment and utilities come out to $1800 per month. The standard for a household size of one for Cuyahoga County is $1509. So, Bob gets an expense of $1509.

Bob leases a Honda Civic for $449 per month and spends $400 on gas, insurance, and maintenance. The standard for ownership is $588 (so Bob gets the lesser, or $449). The standard for operating is $240 per month (so Bob gets the less, or $240). Therefore, Bob’s allowed transportation costs are $689. 

Bob has $500 of health insurance premiums, $1040 of current taxes, and $250 of retirement contributions withheld from his paycheck. Bob is allowed the $500 premiums and the $1040 current withholdings. Bob also gets the $75 out-of-pocket healthcare expense. However, retirement contributions are not an allowed expense. 

The food, clothing, and misc. category of expenses has a standard of $785 for a household size of one. Of course, Bob doesn’t spend anywhere near that, but he is allowed to take the standard. 

So, we take Bob’s gross monthly household income ($4,200), subtract Bob’s allowed monthly expenses ($4,598), and come up with -$398. Since it is negative, Bob does not have a “future income” component (if it was positive, it would be multiplied by 12).

So, what is Bob’s Offer for his IRS Offer in Compromise? Just the “net realizable equity in assets” component of $200! Yes, Bob will qualify for an IRS one time forgiveness for just $200 to the IRS. It doesn’t matter if Bob’s IRS back tax was $10,000 or $10,000,000; his IRS back taxes forgiveness would still be $200.

So, how much should I offer in compromise to the IRS? In this case, $200.

Help With IRS Offer in Compromise

Help with IRS Offer in Compromise cases is essential if you want to know how to settle IRS debt for less. The IRS Offer in Compromise process is a challenging process with many nuances. It can take almost two years to resolve. Contact our IRS tax settlement attorneys today to discuss your IRS Offer in Compromise.

The trusted firm for help with IRS Offer in Compromise cases.