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How Much Tax Debt Can You Settle in an Offer in Compromise?

The IRS Offer in Compromise (OIC) program can be used to settle tax debts for less than what you owe. The most important factors in your offer will be your reasonable collection potential and the amount of your offer. If your offer exceeds your reasonable collection potential, the IRS should accept your offer and wipe out your remaining tax debt.

Your Tax Debt

The amount of your tax debt isn’t as important as those other two factors. Because the OIC program is based on your financial situation, the amount you owe isn’t as relevant as what you can afford to pay.

Yes, some taxpayers can eliminate tens of thousands of dollars from the tax debt using an OIC. But not everyone qualifies for this treatment, and many offers get rejected by the IRS.

Your Collection Potential

The IRS wants your offer to be at least as much as your reasonable collection potential. First, they’re going to look at your monthly income. Do you have a steady paycheck, or are you unemployed or disabled? If you can pay off your tax debt with an installment agreement, the IRS generally won’t consider an OIC.

The IRS then has standards to determine your allowable living expenses each month. The IRS can disallow some of your actual expenses if they exceed the IRS standards. 

What’s left after your monthly expenses is the money the IRS believes it could collect from you each month. This forms one part of your reasonable collection potential.

Equity in Assets

The IRS also views your equity in assets as a potential source of revenue. You may be able to sell or borrow against your home or 401(k) plan and put the money towards your tax debt. The IRS takes all of your equity—which includes your asset values minus any debt on the assets—and then multiplies it by 80%.

This amount is then added to your monthly cash flow multiplied by either 12 or 24 months. The total is your reasonable collection potential.

There may be several parts of the calculation that are subject to dispute. You may have to convince the IRS that their calculations regarding your assets values or monthly expenses are incorrect and that your collection potential is lower than they think.

Whether you owe $25,000, $50,000, or $100,000 or more, the Offer in Compromise program can be an effective way to settle your tax debt. Contact a tax attorney to determine your eligibility and to get assistance making your offer.

The Gartzman Law Firm can help you with back taxes and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.