As IRS tax settlement attorneys, we are always asked, “how much should I offer in compromise to the IRS?” You probably have questions about the IRS Offer in Compromise program (i.e. the IRS one time forgiveness) if you are on this page. If you are looking for help with irs offer in compromise cases, then this page is for you!
So let’s go ahead and take a look at what this IRS one time forgiveness program is and then let’s go ahead and answer that question once and for all – “how much should I offer in compromise to the IRS?”
IRS Offer in Compromise
The IRS Offer in Compromise allows you to settle your IRS back tax for less than what you owe. You make a “calculated” Offer that the IRS may accept to wipe out your IRS back taxes.
CSED Qualifications for IRS Back Taxes Forgiveness
However, this IRS one time forgiveness is only available if it would be impossible to repay the total tax on a payment plan before the statute of limitations date (the “CSED”).
For example, if you owe $50,000 to the IRS and there are eight years left on the statute of limitations. Suppose the IRS determines you can afford a monthly payment plan of at least $520.
In that case, you do not qualify for the IRS Offer in Compromise because you could hypothetically pay the entire IRS back tax on a payment plan. You see, $520/month x 12 months x 8 years equals the $50,000 back tax.
As IRS tax settlement attorneys, we know this first test is crucial. Therefore, we use several methods to help with IRS Offer in Compromise “CSED” determinations to ensure the IRS Offer in Compromise can move forward.
First, we recommend a financial analysis to determine the IRS “payment plan” amount. Then do a CSED calculation to ensure you comfortably fit into this first prong of the IRS Offer in Compromise test. You want to ensure you qualify for IRS back taxes forgiveness.
Delinquent Tax Returns and Estimated Tax Requirements
Once you cross that first hurdle, the next step most taxpayers need help with IRS Offer in Compromise cases is filing delinquent returns. You must also ensure that you are current with estimated tax requirements if you are self-employed.
IRS tax settlement attorneys refer to this as being “current and compliant.” Generally, we recommend that taxpayers pull their IRS transcripts for the previous ten years (and the spouse transcripts, if married) to ensure no missing returns.
For example, suppose you request IRS back taxes forgiveness and have missing returns. The IRS will deny your IRS Offer in Compromise, keep any Offer deposits you mailed in, and will force you to reapply (with a new Offer deposit). When we are asked for help with IRS Offer in Compromise cases, being current and compliant is the first thing we check.
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“No one knows IRS back taxes forgiveness like we do. No one. I guarantee it. We have settled over $14,000,000 in taxes with a 99% success rate.”
Now, before we dive into how to settle IRS debt for less, it is essential to mention that you cannot pursue IRS back taxes forgiveness if you are in an open bankruptcy. Instead, wait to file your IRS Offer in Compromise until the bankruptcy is discharged – or wait to do the bankruptcy until the IRS one time forgiveness has been granted. When we help with IRS Offer in Compromise cases, we recommend checking transcripts to make sure open bankruptcy is not listed.
Formula to Calculate IRS Offer in Compromise
Now that you know the basic eligibility for the IRS Offer in Compromise, we are ready to answer the question, “How much should I Offer in Compromise to the IRS?”
The IRS Offer amount is not really a negotiation but more a calculation. Further, it is not a percentage or a “waiver.” These are all myths. IRS back taxes forgiveness is based on a mathematical formula.
It is determined by calculating the reasonable collection potential (“RCP”). First, the RCP is calculated by determining your future monthly disposable income (over 12 or 24 months). Generally, our IRS tax settlement attorneys recommend over 12 months as this is how to settle IRS debt for less.
This number is then added to your net realizable equity in assets. And voila – you now have your IRS Offer in Compromise settlement number.
IRS Offer in Compromise Net Realizable Equity in Assets
Let’s start with your net realizable equity in assets. Great IRS tax settlement attorneys will know how to help with IRS Offer in Compromise cases by getting this number as low as possible.
Cash and Bank Accounts. The cash balances will be the most current checking/savings/money market accounts. This amount is reduced by $1000, and the resulting amount gets added to the “net realizable equity in assets” number. Pro Tip: IRS tax settlement attorneys should know several tricks to reduce this amount. There are expenses you can pay down your cash balance with and tricks in the IRM 22.214.171.124 that can be deployed.
Retirement Accounts. These will be your 401(k), IRAs, and other retirement accounts. Typically, the value is the statement balance, less any taxes and penalties that would apply in a hypothetical withdrawal. Pro Tip: If you want to learn how to settle IRS debt for less, consider using the 401(k) loan trick to remove your retirement account as an asset. Experienced IRS tax settlement attorneys can help guide you on how to make this work.
Stocks and Virtual Currency. Generally, the current value, although a reduction for sale expenses would be allowed.
Real Estate. The value of the real estate is determined using the current fair market value multiplied by 80% (this is referred to as a Quick Sale Value . . . i.e., a fire sale). That amount is then reduced by any mortgage tied to the real estate. Real estate can be a tricky asset for IRS back taxes forgiveness. Therefore, verifying your starting fair market value (generally, using property tax records or recent sales) is essential.
Vehicles. This is the fair market value (use Kelly Blue Book) multiplied by 80% (the Quick Sale Value), less any loans on the vehicle. Leases do not generally count as an asset.
Life Insurance. Only include the cash value if it is a whole-life policy. Term life policies have no asset value.
So how does all of that work? Let’s take a look at an example. Bob has $1200 in his checking account, leases a car, and owns his house (FMV of $200,000 with a mortgage of $175,000).
The checking account is easy. $200 is the value there ($1200 less the $1000 reduction). No value in the lease. The house value is also zero (QSV is $200,000 x 80% = $160,000). The QSV of the house is less than the mortgage balance, so there is no value. So, Bob’s net realizable equity in assets is $200.
IRS Offer in Compromise Future Monthly Disposable Income
Once the net realizable equity in assets is determined, the next step in our quest to answer “how much should I offer in compromise to the IRS” is calculating future monthly disposable income.
The first step is to determine what the household’s gross income is. This may be gross wages, net self-employment income, social security, retirement benefits, or even alimony. For IRS back taxes forgiveness, any cash-in (except gifts and loans) will count as gross income.
Next, we will subtract necessary living expenses based on the household size. Allowable expenses have been determined by the IRS. Generally, these will include necessary expenses (ones necessary for the production of income or for the health and welfare of the taxpayer’s family).
Food, Clothing, and Misc. This is a catch-all category for groceries, dining out, apparel, supplies, credit card payments, clothing, etc. The IRS sets standards based on household size. Absent extraordinary circumstances, you are allowed the standard (even if it is higher than your actuals).
Housing and Utilities. This will consist of mortgage payments/rent, electric, insurance, gas, water, sewer, cell phones, cable, etc. The IRS sets standards based on the county of residence. Absent extraordinary circumstances, you are allowed the lower of your actual or the standard.
Transportation Expenses. This consists of ownership costs (lease or loan) and operating costs (gas, insurance, repair) of your vehicles (a household of at least two can have a maximum of two cars). The IRS also sets standards for transportation expenses. Absent extraordinary circumstances, you are allowed the lower of your actual or the standard. If you don’t have a vehicle, there is an option to take public transportation expenses.
Health Insurance Premiums. These are generally not capped and can include medical, dental, and vision insurance paid by the taxpayer.
Out-of-Pocket Health Care Costs. There is a standard (which varies depending on age) that every taxpayer will receive.
Current Taxes. This would include current withholding taxes, state taxes, local taxes, and estimated taxes.
Life Insurance Premiums. Term life insurance premiums (that are reasonable) are allowed as well. Whole-life premiums, however, are not allowed.
Other Expenses. Court-ordered payments (alimony or child support), child care expenses, delinquent state tax payments, representation fees for IRS tax settlement attorneys, etc., are some of the other expenses that are also allowed.
Once the allowable household monthly expenses are subtracted from the gross household monthly income, the result (assuming it is a positive number) is annualized (multiplied by 12). When we help with IRS Offer in Compromise cases, we always recommend the x12 multiplier as opposed to the x24 multiplier.
This is the “future income” number that is added to the “net realizable equity in assets” number, which results in the “reasonable collection potential.” That is, you now have an answer to what your Offer has to be when you ask, “how much should I offer in compromise to the IRS.”
Example of IRS One Time Forgiveness
Let’s go back to our example with Bob. Remember, Bob has $200 for his “net realizable equity in assets.” So Bob is single with no dependents and lives in Cuyahoga County (Cleveland) and has a salary of $50,400. Therefore, his gross monthly household income is $4,200 ($50,400 divided by 12).
Bob’s mortgage payment and utilities come out to $1800 per month. The standard for a household size of one for Cuyahoga County is $1509. So, Bob gets an expense of $1509.
Bob leases a Honda Civic for $449 per month and spends $400 on gas, insurance, and maintenance. The standard for ownership is $588 (so Bob gets the lesser, or $449). The standard for operating is $240 per month (so Bob gets the less, or $240). Therefore, Bob’s allowed transportation costs are $689.
Bob has $500 of health insurance premiums, $1040 of current taxes, and $250 of retirement contributions withheld from his paycheck. Bob is allowed the $500 premiums and the $1040 current withholdings. Bob also gets the $75 out-of-pocket healthcare expense. However, retirement contributions are not an allowed expense.
The food, clothing, and misc. category of expenses has a standard of $785 for a household size of one. Of course, Bob doesn’t spend anywhere near that, but he is allowed to take the standard.
So, we take Bob’s gross monthly household income ($4,200), subtract Bob’s allowed monthly expenses ($4,598), and come up with -$398. Since it is negative, Bob does not have a “future income” component (if it was positive, it would be multiplied by 12).
So, what is Bob’s Offer for his IRS Offer in Compromise? Just the “net realizable equity in assets” component of $200! Yes, Bob will qualify for an IRS one time forgiveness for just $200 to the IRS. It doesn’t matter if Bob’s IRS back tax was $10,000 or $10,000,000; his IRS back taxes forgiveness would still be $200.
So, how much should I offer in compromise to the IRS? In this case, $200.
Just because you owe tax doesn’t mean you should pay that amount in full. There’s a lot of tax relief options when facing crippling tax debt. As a proven Ohio tax lawyer, we don’t charge for a free case analysis to give you options.
Just because you owe tax doesn’t mean you should pay that amount in full. There’s a lot of tax relief options when facing crippling tax debt. As a proven Ohio tax lawyer, we don’t charge for a free case analysis to give you options.
Your Ohio tax attorney will defend you against the government. With decades of experience navigating the complexities of tax law, your Ohio tax lawyer will negotiate a manageable tax resolution – saving you thousands.
Working with an Ohio tax lawyer allows you to leverage our extensive experience and negotiating power to get the best possible tax solution. You’ll have the IRS or State off of your back for good when we close your case!
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I recently contacted the JMSells team for help with hefty IRS back tax issues. Brad in the office was level headed and listened to me panic patiently. He scheduled a phone consult with Josh and pulled all the needed documents from the IRS in advance of the scheduled call. On the morning of the call he emailed to advise me that my +/- $28,000 back tax, penalty and interest assessment had aged off my account because of my less-than-skillful ignorant neglect. I have not had such liberating news in half a lifetime. (He also provided the ledgers from the IRS) The call with Josh was not needed. I thanked the team and went on with my life, far less burdened. I whole-heartedly recommend the JM Sells team despite not having officially engaged their services. They won’t try to create fear, and will always take the steady, seasoned approach. You will be treated respectfully and will be kept in the loop. Lots of tacky tax “fixers” out on the wild web, but few with the class act of JM Sells. If I ever need help again, I know where I’ll turn. There is a reason they have 4.9 stars on Google Reviews. They earned them.
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Frequently Asked Questions
I get that the case analysis is free, but how much is it going to cost me if I want to hire an Ohio tax lawyer??
Great question. And you are right – the case analysis is absolutely free. With the case analysis, we will be able to tell you exactly what your options are to resolve your tax situation – Josh will also be able to offer you a guarantee – he will get the results promised, or your money back. Typically, our clients pay a flat rate for legal fees of around $2000 – $6000. We also offer payment plans.
You guarantee results? I've never met an attorney that will guarantee results. Is that for real?
Yes – that is “for real.” Josh is not like other attorneys. He will put his money where his mouth is. As a local and licensed Ohio tax attorney, he understands that other firms or even out-of-state scams have left a bad taste in your mouth. He wants to earn your trust before he earns your business. During your free case analysis, Josh will tell you the results that he will guarantee. If we can’t deliver – we refund your money. Take a screen shot of this if you want – it is legally binding! 🙂
I've got a ton of advertising from out-of-state groups. Are you really in Ohio?
We hear this one a lot! Yes, we are physically located in the state of Ohio . . . Our office is in Wadsworth, which is just north of Columbus . . . about 20 minutes from Akron . . . about 40 minutes south of Cleveland. And we do cover the entire state! Josh was born and raised in Ohio . . . he went to school in Ohio . . . he complains about the Browns, got excited that that Cav’s “next year” finally arriving in 2016, and knows that if you don’t like the weather, wait a few minutes – – – it’s Ohio afterall!
What exactly is the free case analysis? What if I don't want to wait and need help now?
Yeah, that’s a great question. First, the case analysis is where we will pull your IRS or Ohio tax files – – – this pulls the curtain back on what the government has in your file. We will see exactly what your specific tax situation is and determine the best resolution for you. This process generally takes just a day or two. Once we have those files, Josh will review them and put together a report for you outlining his findings and recommendations. He will jump on a call with you to go over this and to answer any questions you may have. Josh will also tell you exactly what the flat rate legal fee would be if you wanted to hire us and exactly how much you are going to save in taxes (your savings is almost always higher than the legal fee). That is the “phase 1” as we call it – the free case analysis.
If you have a tax emergency (wage garnishment, audit, bank levy), we can start working on day 1 – Josh would just consolidate everything for you so your situation can be handled immediately. Generally, if you have a tax emergency, we can get it resolved within a day or two.
I've heard about the IRS fresh start program (offer in compromise tax settlement) - what is that exactly? Does Ohio have one too?
The IRS Fresh Start program was an initiative started years ago by the IRS to help taxpayers start over after large sums of back taxes. The Offer in Compromise is part of that program. With an IRS Offer in Compromise, we can submit a settlement offer to the IRS to permanently settle your back taxes. It is true that you can literally settle for pennies on the dollar. However, the IRS uses a very complex formula to determine what you should offer. Your offer is based on available net assets and your future income potential. Factors such as age, household size, and location all factor into this analysis. We submit a lot of these settlements for our clients with great success. Josh will be able to tell you if you likely qualify for a settlement . . . and if you are on the fence of qualifying, Josh knows legal ways to get your income and expenses where they need to be for qualification purposes.
Ohio has a similar program for back taxes too. If you have Ohio tax, this is definitely something that your Ohio tax attorney will look at to determine your best course of action.
What other options are there if I owe back tax?
Besides the Offer in Compromise (settlement), there is (1) financial hardship (the IRS closes your account and stops trying to collect), (2) installment agreements with penalty removal (we get $1,000’s in penalties removed and set up a long-term installment agreement that can be as long as 84 months), (3) amended returns/appeals (sometimes we can lower or eliminate the tax bill just by amending the return or filing an appeal), (4) innocent spouse relief (if it wasn’t your fault, but was your spouse’s fault, we can pursue that option for relief), and (5) Collection Statute Expiration Date (occasionally, you may be close to the statute of limitations date, so we can petition to have the tax removed if the IRS doesn’t remove it automatically).
Josh has a lot of experience determining the best course of action – whatever he decided with you will likely save you a ton of money in taxes. Best of all, he does the case analysis for free, so you will know ahead of time what your options are without having to pay a dime!
I'm under audit by the IRS or the State of Ohio. Can you help me?
YES! And the sooner you contact us, the better. There are many deadlines involved with audits. A lot of issues can be avoided the sooner you contact us. Sometimes, simply having an attorney involved with the process will get you better results because the government does not want to deal with appeals.
You do NOT have to talk to the government once we are involved with your audit. We will represent you on your behalf.
Please don’t put this off – if you are under audit, contact us immediately. Even if the audit is done, you have a very limited amount of time (generally less than 90 days) to file an appeal – – – YOU WANT TO FILE THE APPEAL! Please get a hold of Josh as soon as you can – the results will almost always be better.
I got a letter from the State of Ohio for CAT or Sales Tax. What should I do?
Well – you should call Josh 🙂
But seriously, get in touch with our firm. We handle these Ohio tax cases all the time. Likely you used to have a business and when you shut things down, the state didn’t know you shut down. So, as a “courtesy,” they filed estimated returns for you for the last 5-10 years and are just now telling you about them (they are so nice, no?).
Josh is able to get most of these wiped out for you. Call us today for a free case analysis.
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