Offers in Compromise

This is a frequently asked, but often misleading question. In the Offer program, the focus is on collectability rather than liability. While a broad range of settlements could be between 5% and 50% of the existing tax liability, the Service is not primarily concerned with the size of the debt, but rather with the taxpayer’s ability to pay it during the short term future.

In order to properly answer this question, a preliminary financial analysis is necessary.

The Service will analyze the liable taxpayer’s net equity in assets as well as a discounted stream of future disposable income for up to the next five years. The Service will use various techniques to value the taxpayer’s net equity in assets, and examine a monthly budget to determine net disposable income.

Once gross monthly income is reduced by the Service’s allowable expenses, a general rule is to multiply the difference by 50 in order to calculate the income portion of the required Offer amount.

These two components (net equity in assets plus the discounted stream of future disposable income) equal a taxpayer’s Reasonable Collection Potential. If the Service is being offered more than what is otherwise available through reasonable collection, it should accept the Offer.