12 Nov Offer in Compromise: How much Should You Offer?
When dealing with the IRS, having a target or strategy is important in finding a mutually beneficial compromise. The situation already lends itself to trying to pay as little as possible, but submitting a low-ball offer may receive a quick refusal leaving the taxpayer in a worse situation than before they began. When submitting an Offer in Compromise based on not being able to pay the amount due, as opposed to disputing tax liability, then the settlement must be greater than the taxpayer’s Reasonable Collection Potential (RCP). This is an IRS calculation that uses monthly income, monthly living expenses, assets, and other liabilities to determine what a taxpayer’s ability to pay is. A proposal for a repayment amount less than the RCP will guarantee rejection; therefore crafting a judicious offer is critical to finding a favorable compromise.
Another consideration when submitting an Offer in Compromise is that while a lump-sum payment is preferred, it is not required. The IRS will accept an installment plan up to 24 months for repayment, but the best-case scenario is to split the amount into five to seven payments at most. When the installments are spread over more than 12 months, the IRS will use two years of disposable income in calculating the RCP causing it to increase and thus forcing a larger minimum offer. Keeping the installments between just five to seven payments will give the taxpayer the best chance at having their offer accepted.
Every tax situation is unique and requires custom expert advice, so it is critical to seek consultation from a tax professional when pursuing a tax settlement of any kind.