In determining an acceptable amount of an Offer in Compromise based on doubt as to collectibility, the IRS will analyze the taxpayer's net worth on a quick sale basis and combine the net worth with the taxpayer's future ability to pay.
In determining the amount of an acceptable Offer in Compromise, the IRS first makes a determination of the value of the taxpayer's assets on a discounted basis. Once a determination is made of the taxpayer's net worth on a quick sale basis, IRS then determines the taxpayer's ability to make future payments. In determining the amount of an acceptable Offer in Compromise, a cash value is assigned to that future ability to pay and that value is aggregated with the value of the taxpayer's assets to determine a value of an acceptable Offer in Compromise The aggregate number becomes the minimum amount which the taxpayer may pay in an Offer in Compromise to settle his tax liabilities.
Unless you have a special hardship case that warrants a lower Offer in Compromise amount, or can prove that you do not actually owe the tax bill, the IRS will generally apply the following principles in evaluating Offers in Compromise: In determining the amount that the IRS could collect from you, the IRS looks at the Reasonable Collection Potential to arrive at a minimum Offer in Compromise. In determining the Reasonable Collection Potential, the IRS looks at the following two factors: Your Realizable Value of your assets and your Future Income.
Realizable Value Of Your Asset
In determining the amount of an acceptable Offer in Compromise, the Realizable Value of your assets equals the net equity you have in all of your assets. The starting point for consideration of any Offer in Compromise will be based on the value of the taxpayer's assets, less any encumbrances, which have priority over the Federal Tax Lien. In determining the amount of an acceptable Offer in Compromise, the liquidating or quick sale value of assets will be used.
In determining an acceptable Offer in Compromise amount, the IRS also takes into consideration the amount that can be collected from the taxpayer's future income.
In evaluating those future income prospects, the taxpayer's education, profession or trade, age and experience, health, and past and present income will be considered by the Offer in Compromise specialist. In evaluating future income potential an evaluation will be made of the likelihood that any increase in real income will be available to pay the delinquent taxes.
IRS generally determines the amount it could collect from your future income by subtracting necessary monthly living expenses from your monthly income over a set number of months. Generally the IRS will multiply your disposable monthly income by either 12 or 24 months to determine your future income. The 12 and 24-month multipliers were reduced by the IRS Fresh Start Initiative in May of 2012. Prior to the IRS Fresh Start Program, the multipliers ranged from 48 to 60 months, making settlements much more expensive. Taxpayers who were previously shut out of the settlement process, may now have another chance to reduce their IRS debts.
Reasonable Collection Potential
A minimum acceptable offer is generally calculated by adding you realizable value of your assets plus your future income.