The Internal Revenue Service looks at all your assets and your income. It then compares that with your "necessary" expenses. The excess of your income over these necessary expenses, together with the equity in your assets, is used to determine what is an acceptable offer. The amount of the acceptable offer depends on how you plan to pay.
"Necessary" expenses
"Necessary" expenses are based on your income and number of family members. They cover housing, transportation, taxes, general household costs, and some medical, insurance, and other expenses if you can prove they are necessary. The trick, of course, is getting the Internal Revenue Service to accept more of your expenses than they would ordinarily allow.
Your actual expenses often are much higher than the "necessary" expenses, because the IRS does not consider some important costs. For instance, credit card payments and any other unsecured debts are ignored.
Payment plans
If you plan to pay the full amount of your offer within ninety days from acceptance of the offer, you will need to pay an amount that is at least the equity in your assets plus four years (48 months) worth of your excess income (monthly income less necessary expenses). For example, if you have $2,000 in a bank account, $3,000 equity in your home, and excess income of $100 per month, the minimum acceptable offer would be $9,800 ($2,000 + $3,000 + $100 times 48) - even if the amount of unpaid taxes demanded by the IRS is much higher than $9,800.
If you plan to pay the offer over more than 90 days but less than two years, the amount will need to be the equity in your assets plus five years (60 months) worth of your excess income. For example, using the example above, the acceptable offer would need to be at least $11,000 ($2,000 + $3,000 + $100 times 60).
Other requirements
To file an offer in compromise, you must have filed all of your income tax returns. If you have any returns that should have been filed but weren't, the Internal Revenue Service will reject the offer.
You must also file all your income tax returns and pay all taxes when due for the next five years after the offer is accepted. Failure to do so can void the offer even if you have already paid the offer amount to the IRS.
How long will it take the IRS to decide whether to accept the offer?
This varies, depending on where you live, but the whole process can take anywhere from a few months to over a year.
What if the IRS rejects my offer?
Generally, if you have done your homework before submitting an offer, it will not be rejected. The IRS may respond by asking for more than you offered. If so, then you will need to negotiate a final settlement. But there are times when the Internal Revenue Service and you cannot reach agreement, and the offer will be rejected. You can accept the rejection or appeal the decision.
An appeal will be heard by an appeals officer who is independent and often gives a very fair decision. Form 9423 is used to appeal.
If you do not appeal, your case will go back to Collection for further processing.
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