IRS Law Blog

Owing a lot of money to the IRS can increase your chance of offer in compromise acceptance.

You may not expect that having a big tax debt can help you in an offer in compromise, but it’s true.

It is all because of the way the IRS calculates if they should accept your offer.

The IRS will accept an offer in compromise if they calculate you will never be able to pay back what you owe.  And as we will see, that can result in more favorable results for those owing more.

The IRS offer in compromise calculations for the amount you can pay back are based on the following:

• The amount you can pay every month in an installment agreement.  In making their calculation, the IRS will take your earnings, deduct your reasonable living expenses, and arrive at what is left at the end of each month.  If the IRS determines your living expenses are not reasonable, they will not permit them.  You can find what is reasonable by reference to the IRS Collection Financial Standards.  For example, the IRS would not permit you to have a $750 monthly car payment.  Instead, they will want you to find a way to send some of your car payment to them.

After determining your installment agreement payment, the IRS will multiply it by the time that remains on the statute of limitations on collection.  The IRS has 10 years to collect, starting with when you filed your tax return.  For example, if the IRS calculates you can pay them $100/month and 72 months remain, they will find you can pay them $7,200 ($100 x 72).

• The equity in your property, including your cars, house, and retirement account.  The IRS calculates equity by determining the value of your property and deducting any loans.  The difference is what you would receive if your property was sold.  The equity in your property can be as low as zero.  For example, if you have a car and owe your bank on your purchase loan an amount equal to its value, you have no equity, and the IRS will not add it to their offer in compromise calculation.

If the sum total of your installment agreement payments and equity in property are less than what you owe, the IRS can approve an offer in compromise.

Now that you know how the offer in compromise calculations work, here are two examples of how owing more can result in an increased likelihood of acceptance:

Example #1 – You owe the IRS $25,000.

Your neighbor owes the IRS $25,000, and the IRS calculates you can pay $100/month in an installment agreement.  The IRS has 72 months left to collect.  In addition, you have $50,000 combined equity in your house, car, and retirement account.

The IRS will calculate you can pay $7,200 over the remaining 72 months they have to collect (100/month x 72).  The IRS will then add the $50,000 of equity in your property.  The IRS will determine that they can collect $57,200 ($7,200 + $50,000) from you.

You owe IRS the IRS $25,000, yet they calculate you can pay back $57,200.  Your offer in compromise will be rejected as the IRS will determine you can pay more than what is owed.  The IRS has no incentive to settle for less as they calculate you have the financial ability to fully repay.

The IRS will deny your offer in compromise from calculating they can collect $57,200 on a $25,000 tax debt.

Example #2 – You owe the IRS $200,000.

You owe the IRS $200,000 and your finances are the same:  You can pay the IRS $100/month over 72 months ($7,200) and have $50,000 of equity in your house, car, and retirement account.  The IRS makes a determination that they can collect $57,200 from you.

But now you owe $200,000 and the IRS calculates you can only repay $57,200.  Your offer in compromise will be approved as the IRS will determine you cannot pay what is owed.  The IRS is now incentivized to settle for less as they will never get it all.

The IRS will accept your offer in compromise for $57,200 and forgive $143,800 of taxes ($200,000 owed less your $57,200 that can be paid).

With the same finances, your offer in compromise will be rejected at $25,000 because you can pay in full but at $200,000 it will be accepted.

The IRS offer in compromise calculations favor settlement when you owe more.

The IRS offer in compromise calculations are designed to help those that cannot pay.  An offer in compromise is about numbers:  financial equations that determine if you can pay.  Prior to filing an offer in compromise, make sure you understand the complexities of the IRS calculations to ensure they work to your benefit.  It is important to know that owing more money increases your chances.