How to Use an IRS Offer in Compromise Calculator
One of several ways you can handle a tax debt with the IRS is through an offer in compromise. However, like many financial and tax-related topics, it can be difficult to navigate the help documents and web pages relevant to the process, and thus can be a challenge to figure out what to offer.
How an Offer in Compromise Works
The Offer In Compromise (OIC) program is one of a few different ways the IRS is willing to work with people to alleviate their tax debt.
According to the IRS:
“An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed.”
It works like this: you, as a taxpayer, end up with tax debt. You know you owe the IRS $XXXX, and you know you can’t pay that value with the income and assets you currently possess. You draft a letter to the IRS offering a compromise; you state your case and offer to pay $XXX, a lower but more reasonable amount that you can pay.
The IRS will analyze your circumstances and your assets, and see what they think of your offer. If the offer is reasonable and you meet their guidelines, the offer may be accepted, and you are then required to pay that amount. If the offer is not accepted, you will be able to pursue other means of alleviating your tax burden, but you will not be able to get an offer in compromise.
There are generally three reasons why the IRS may accept an offer:
- You believe the IRS is incorrect about the amount of tax debt owed. If there is a genuine legal reason to believe the tax burden is incorrect, an offer in compromise can settle that burden without further proceedings.
- You cannot reasonably pay the amount owed. In cases where a tax debt is high, but assets and income are low, you may not meet the threshold necessary to reasonably pay that debt. An offer in compromise can give you a more reasonable target to pay.
- You cannot pay the tax debt without unreasonable burdens, such as being unable to pay living expenses. If the tax debt would create an unreasonable economic hardship, the IRS may accept an offer in compromise.
These are actually three different kinds of OIC. Offer in Compromise: Doubt as to Collectability, Offer in Compromise: Doubt as to Liability, and Offer in Compromise: Effective Tax Administration.
In order to actually submit an offer in compromise, you need to be able to calculate what a reasonable offer is. This can be complicated, which is why there are several calculators available online. Our goal with this post is primarily to analyze these calculators and identify which one is the best one to use.
Explaining the Reasonable Collection Potential
The key number that you calculate for an offer in compromise is called the Reasonable Collection Potential, or RCP. To calculate this number, you need the net value of your assets and the ongoing monthly income you earn, minus expenses.
Your RCP is equal to your Net Asset Value + (your Monthly Disposable Income * 72)
For example, let’s say you have $10,000 in assets. Your monthly income is $4,000, but your rent + utilities + food and other expenses are $3,500, so you only have $500 in monthly disposable income.
Take that $500 and multiply it by 72. Why 72? 72 is six years’ worth of monthly payments. In this case, this would total up to $36,000. Add to this your $10,000 in assets, and you have $46,000. This is your RCP.
Your offer in compromise must be your RCP or higher. If you try to offer the IRS $36,000, they will perform the above calculation and will recognize that you’re offering less than your reasonable collection potential, and will decline your offer.
Remember: an offer in compromise is not a negotiation. There is no back-and-forth, no negotiation, no compromise process. It’s simple math; either you offer what you can pay, or you pay what you owe. Those are the only two valid values. There is an appeals process if you think the IRS is not considering all of the factors, but it’s rare that a taxpayer is able to successfully appeal. The IRS is typically quite thorough.
While it might seem like the RCP calculation is pretty straightforward, there are a lot of little details to consider. For example:
- Have you successfully itemized all of your ongoing expenses?
- Are there expenses that you consider necessary, that the IRS might not?
- Do you have an accurate assessment of the net value of your assets?
- Are some of your assets protected in whole or in part, such as your home?
- Is your current economic hardship temporary?
These questions and more must be answered to accurately calculate an offer in compromise, and the calculation can vary from state to state and county to county, despite the IRS being federal jurisdiction.
Thus, the use of an online calculator can be very helpful for accurately calculating your RCP. Here are some options you can try, and our analysis of them.
1: The IRS Pre-Qualification Tool
You can find the official IRS pre-qualification tool for an offer in compromise here. This is the most complex and most accurate of the calculators available, but it is not necessarily user-friendly.
On page 1, you will be asked several questions.
- Are you in an open bankruptcy proceeding? If yes, you cannot get an offer in compromise.
- Have you filed all of your federal tax returns? You must file all returns to be eligible for an offer in compromise.
- Have you made all required estimated tax payments? If you are required to submit estimated payments, you must have submitted them to be considered.
- Are you self-employed with employees, and if so, have you filed all tax deposits? Again, you must be up to date in order to be considered.
On page 2, you will be asked information about your location and your tax burden, including your zip code, state, county, number of people in your household, your total tax burden, and the most recent year you’re asking for an offer in compromise to cover. Tax burdens over 10 years old are not considered active for an offer in compromise.
On page 3, you will be asked to itemize your assets. These include your bank balances, the market value of your home, the balance of your home loan, the equity you have on any vehicles you own, the equity of your retirement accounts, the equity of any other real property you own, the equity of any other assets such as motorcycles, planes, or boats, the value of any stocks, bonds, or investments, and a field for any other miscellaneous assets.
On page 4, you will need to fill out the information about your monthly income. This includes your gross wages, including from pensions, social security, or unemployment, any interest or dividends, distributions from partnerships or S-corps, net rental or business income, child support, alimony, and any other income you have.
On page 5, you will be asked to itemize your monthly expenses. These include your rent, mortgage, and utilities, vehicle loan or lease payments (or public transportation costs, if you own no vehicles), health insurance premiums, life insurance premiums, federal/state/local taxes, court-ordered payments, and child dependent costs.
Submit all of this information and you will be given a calculated rundown of what your reasonable collection potential is, and thus what you can offer in compromise when you submit your form to the IRS.
Overall, this is a comprehensive calculator, though it can be difficult to identify every asset and every expense you have on an ongoing basis. Remember, as well, that temporary loss of income does not qualify you for an offer in compromise. You cannot lose your job for a month, qualify for an offer in compromise, and then get a job with a higher income. This will cancel your offer in compromise and your overall tax debt will come due.
2: Solvable’s Offer in Compromise Calculator
This calculator is presented by the tax company Solvable. You can find it here.
This tool begins by asking you several screener questions. The questions are more robust than the ones offered by the IRS and include several situations that can disqualify you from an offer in compromise, such as being under IRS audit and waiting for a determination on an innocent spouse claim.
Once you pass the screener questions, you will be able to add your numbers. The first page is assets and asks about the same assets as itemized in the IRS calculator. The second page is income and again asks the same categories as the IRS calculator, albeit in a more nicely presented way. The third, as you may expect, are expenses, and again covers the same categories as the IRS calculator.
Once you’ve filled out all three pages, the calculator will determine how much less than your tax debt you can offer as an offer in compromise. You can then choose an option: file the form with the IRS on your own, file it with the guidance of the Solvable team, or hand over your information and let Solvable do it for you. The choice is yours. Remember as well that an offer in compromise does have a fee to file, but that working with a tax debt relief company will also have associated fees and may be more expensive than filing on your own.
3: ALG Tax Solutions Offer in Compromise Calculator
This calculator is provided by ALG Tax Solutions and can be found here.
This calculator does not have screening questions and simply dives right into asking you about your assets. They also divide up each category of assets into different types of assets, which can make it easier to determine the total value of your assets.
They do the same with your income and your expenses, which again, can make it easier to calculate the total value of each category with a higher degree of accuracy.
The biggest downside to this calculator is that they require you to input your name, email, and phone number in order to get your final estimate. It’s also worth mentioning that they don’t ask for your total tax burden; instead, they simply calculate your overall potential offer in compromise values, whether you’re doing a monthly payment option or a lump sum payment. It’s up to you to determine if this will be more or less than your existing tax debt.
4: Free Offer in Compromise
This final calculator comes from the exact match domain FreeOfferInCompromise.com and can be found there.
This calculator is very simple, and thus, the most complex of all of them. It simply offers a handful of fields you can use to input your total disposable income, your total assets, and your tax burden, and calculates from there. It does not ask you to itemize any information, and does not ask for your expenses; you’re expected to calculate your income minus your expenses on your own. As such, this is the least useful of the calculators on our list.
There are other calculators on the market, but the best have already been listed. None of them are truly 100% reliable, however, and they all are dependent upon you providing them with accurate numbers.
In general, the best option is to talk directly with a tax attorney or CPA. They will know what questions to ask and how to identify different assets, expenses, and income streams in a way that can easily calculate an offer in compromise.
Remember that, while you may not qualify for an offer in compromise, there are other ways to handle a tax debt that seems insurmountable. Working with a tax debt relief agency is your best option, but you must be able to operate in good faith and have accurate records of your assets, expenses, and income, in order to relieve your tax debt.