IRS Law Blog

Be careful if you have stumbled across the IRS’ offer in compromise online calculator.

The IRS’ online calculator is just a computerized system that attempts to tell you if a compromise is an option. But, like many machines, the calculator has its pitfalls.

Qualifying for an offer in compromise is complex – the IRS has an entire book they reference for determining if and how you qualify. This book, the Internal Revenue Manual, details specific human instances – like yours – that the computer calculator does not account for. These real-life circumstances can significantly impact your compromise. 

The kicker is, even if you use this online calculator and it directs you to go forward with your compromise, once you file your OIC you will be met by an IRS offer in compromise investigator, who is trained in the Internal Revenue Manual.

The IRS OIC investigator will have questions about your finances – lots of them – before finalizing any offer in compromise. The online calculator does not ask you these questions, and as a result, can fail you, as these details are key to determining your compromise. 

The IRS OIC calculator is not a reliable tool because it doesn’t predict the human elements of the compromise investigation.

Let’s take a look at two scenarios. The first scenario focuses on how an IRS investigator can manipulate your income to be greater than what you told the OIC calculator. The other scenario lets us in on a loophole that can allow you more money for your car expenses than what’s programmed into the OIC calculator. In both circumstances, the online tool leads us astray. 

IRS Can Manipulate Your Net Business Income

If you are self-employed, the IRS can manipulate your income to reconstruct what your OIC settlement will look like.

If you operate your own business, your net business income, or profit, most likely varies. Your profit may not be the same on a monthly basis, nevertheless per year. 

For example, your self-employment income was $150,000 in 2021, and income in 2022 was $90,000. So, when you find yourself looking at the OIC calculator, you input your 2022 income, and are told you qualify for an offer in compromise.

However, once the human, an IRS compromise investigator, gets involved, they will look at all your finances, and may select the 2021 income for the compromise, rather than the 2022. As a result, they determine you make more than you actually said, your compromise is rejected, and you are back where you started. Even more, this whole process may take up to a year.

So, how do you determine what number to input on the calculator when you have a varying profit? And how do you defend yourself against an OIC investigator’s mission to overstate your income?

The Internal Revenue Manual provides us with the solution: income averaging. Specifically, Internal Revenue Manual 5.8.5.20 “Future Income” permits us to average your income over three years. This combats discrepancies due to “slow years” or uncontrollable forces that affect your income.

Nowhere on the OIC calculator are you alerted to income averaging, and it is unlikely the IRS investigator will share this strategy to fairly represent your income.

If you are self-employed, be careful relying on the OIC calculator and the investigator. There’s more to your compromise than they make you believe.

The IRS’ Internal Revenue Manual has a loophole that can grant us more money for operating our vehicles than the OIC calculator allows. 

The IRS uses “Collection Financial Standards,” which are ceilings, or caps, on how much they think you should spend on living expenses. One ceiling the IRS imposes is on the cost of operating your vehicle, capping how much you spend on gas, car insurance, and maintenance. The ceilings the IRS places on your vehicle operating costs are based on where you live: if you live in Chicago, the cap will be greater than if you lived in a smaller city.

For example, the Collection Financial Standards and the IRS OIC calculator allow a Chicago resident to spend $267/month on vehicle operating costs. However, the IRS imposes this number on every person in Chicago, regardless of personal circumstances. It does not account for your everyday realities – what if you have a long daily commute to work, or your job requires you to drive to different locations each day?

The solution to the IRS limiting your monthly vehicle operating costs is in Internal Revenue Manual 5.8.6.22.3, “Transportation Expenses.” This allows us to bring in more money for vehicle expenses that are necessary for you and your family’s health, welfare, or production of income. The IRM also specifically allows you a commuting expense – but you won’t find this flexibility in the OIC calculator. 

Instead of relying on the OIC calculator, it’s necessary to be familiar and well-versed in the Internal Revenue Manual. Then, we can create a realistic OIC settlement strategy that best reflects the compromise guidelines and your financial situation.

An offer in compromise is complicated. The IRS’ OIC calculator asks you to input numbers regarding your finances, but these are nuanced numbers that have a significant impact on your compromise. The OIC calculator does not incorporate negotiation tools and flexibility that will help give us a better settlement. 

The IRS offer in compromise calculator has significant pitfalls. It fails to let you in on specific guidelines that could benefit your compromise. It is difficult to trust a computer to help you with an offer in compromise, as a settlement plan needs to be done on an individual basis, with humans who understand its nuances.