IRS Offer In Compromise Calculation
Writen by Sergio Melendez | Last updated 01/08/2025
Evaluating to settle your IRS tax debt should include calculating an offer in compromise! I have successfully navigated many OICs on behalf of my clients, and I will walk you through the calculation of the Offer In Compromise.
TLDR | Key Takeaways
IRS Offer in Compromise (OIC) allows taxpayers to settle tax debt for less than owed if the IRS cannot collect the full amount.
The Reasonable Collection Potential (RCP) is the basis for the OIC calculation and includes:
Assets & Net Value: IRS considers vehicles, real estate, retirement accounts, life insurance policies, personal property, and digital assets (cryptocurrency, NFTs).
Monthly Income: Includes wages, self-employment income, rental income, and other sources. The IRS subtracts necessary expenses to determine disposable income.
Monthly Expenses: Housing, transportation, medical costs, and dependent care. The IRS follows national and local standards to assess reasonable living expenses.
National & Local IRS Standards determine what’s reasonable for expenses based on your location.
The IRS compares your RCP to your tax debt. If your RCP is lower than your debt, they may accept the OIC.
Working with a Tax Professional is crucial for accurate reporting and improving your chances of a successful OIC.
The IRS uses a specific formula to determine your minimum acceptable offer amount. This formula looks at two main factors:
Your net equity from assets (NEA)
Net Monthly Disposable Income (NDI)
Let me break down how we calculate each part.
First, we need to determine what the IRS calls the "quick sale value" of your assets. Here's how I calculate this for my clients:
Take the current market value of each asset
Multiply it by 80% (the quick sale value)
Subtract any loans or encumbrances
The total gives us your RVA
For example, if you own a house worth $300,000 with a $250,000 mortgage, the calculation would be: ($300,000 x 0.80) - $250,000 = -$10,000 (In this case, there's no equity to include)
Your NDI depends on which payment option you choose:
Lump Sum Cash Offer: Monthly disposable income x 12
Periodic Payment Offer: Monthly disposable income x 24
To find your monthly disposable income:
Add all monthly income sources
Subtract allowable monthly expenses (based on IRS Form 433-A guidelines)
Your minimum acceptable offer = Net Disposable Income + NEA
Let's look at a real example:
NEA: $10,000
Monthly disposable income: $500
Choosing lump sum payment option
NDI: $500 x 12 = $6,000
Minimum acceptable offer: $16,000
How do I make the Calculation official?
Breaking this process down makes it far easier to approach:
Complete IRS Form 433-A: This form id the official calculator for the IRS. It gathers your current financial info. It’s crucial for calculating your OIC amount.
Determine Your Monthly Income: Include all income sources. Paychecks, rental income, and self-employment revenue all count.
Identify Allowable Expenses: The IRS has strict guidelines for what counts as necessary. Items like housing, transportation, and healthcare are included, but luxuries are excluded.
Evaluate Asset Equity: Calculate the equity in your home, vehicles, or other assets. For instance, if your car’s value is $15,000 but you owe $10,000, your equity is $5,000.
Run the Numbers: Plug your figures into the formula to determine your offer amount.
Next Steps
If OIC calculator, proceed with the FORM 656
Gather your financial Support Documents
List all assets and their current values
Submit an Organized Packet
Negotiate with the IRS.
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