Generally, there are three types of IRS offer in compromise:
- cash offers
- short-term deferred payment offers
- deferred payment offers (which have 3 payment options).
You should know that the amount of the offer considered acceptable for each type is different. But in all three cases the amount of the offer must include the “Quick Sale Value” of your assets (which turns out to be 80% of fair market value). Thus if your house is worth $100K and it is paid for, then you must offer the IRS 80% or $80K to settle your tax bill of $200K. In addition, in all three types of offers in compromise you must also offer the total amount the IRS could collect from your available income.
It’s the “available income” part of the offer in compromise that gets tricky. The whole idea is that you start with your income, subtract your monthly expenses, and then pay the IRS what’s left over for a certain number of months. As soon as you look at the offer in compromise form, however, you realize that expenses for housing and transportation are not calculated at what you actually pay. Instead, housing and transportation are based on “allowable standards” for specific geographic areas with in the U.S.
Here’s the bottom line rule: In the case of a cash offer, the offer amount must be equal to the quick sale value of assets (80% rule) plus an amount equal to 48 months of your income minus expenses. A short-term deferred payment includes the quick sale value plus 60 months of income minus expenses, payable not sooner than 90 days and not more than two years from acceptance of the offer. Last, a deferred payment requires that the offer amount includes the quick sale value (80%) plus the number of months left on the collection statute times income minus expenses.
Only a qualified offer in compromise tax lawyer should be utilized when submitting an offer in compromise. There are a great many fraudulent companies submitting “offers” whose main focus seems to be getting your money and moving on to the next victim. Always use a lawyer, that’s your takeaway.