IRS Offer in Compromise Doubt as to Collectability
If you owe a lot of back IRS taxes and you can't pay them, The IRS may agree to settle for less than you owe. This process is called Offer in Compromise Doubt as to Collectability.
IRS Offer in Compromise – Who Qualifies?
Both individuals and businesses may qualify for a Doubt as to Collectability Offer in Compromise.
It is easier to get an Offer for an individual or self-employed individual compared to a business, particularly if the business owes back payroll taxes, because the IRS believes it is an unfair advantage to accept an Offer for a business. The IRS does accept Doubt as to Collectability Offer in Compromise for businesses, but special considerations have to be made when filing the Offer for a business.
IRS Offer in Compromise – Minimum Offer Amount
The Doubt as to Collectability Offer in Compromise is composed of two parts: assets and Collectability. Both parts added together equal your minimum Offer amount.
Part 1 – Debt on Assets
The first part is debt on assets. If you do not own any assets, then you can skip this part.
The IRS will compare the debt owed on assets to the value of the asset. If the debt is less than value of the asset, then you have equity in the assist. The IRS will compare the debt to value for all assets owned. This is done to determine the amount of equity in the assets you own. The total amount of equity is then added to the Offer.
1) Bank account balance
2) All real estate including homes and land
3) Investments and retirement accounts
4) Whole life insurance
5) Cars, boats, ATVs
6) Business Equipment
7) Business Account Receivables
8) Any other valuable assets
Example 1 – You own a house worth $200,000. There is a $150,000 mortgage on the home. You have $50,000 of home equity. (200,000 – 150,000 = 50,000). The IRS will include the home equity in the Offer.
Example 2 – You own a house worth $200,000. The home is under water. There is no equity in the home. The IRS will not include the home in the Offer.
The IRS will do an equity calculation for each asset you own. All assets will equity will be included in the Doubt as to Collectability Offer in Compromise.
Part 2 – Collectability
The second part is to determine your Collectability. The IRS will start with gross income or wages. Then the IRS will subtract necessary household expenses.
Household expenses include:
1) Food and clothing
2) Housing and utilities
3) Auto loan and operating costs
4) Health costs
5) Term life insurance
7) Other secured debts
The IRS will subtract all household expenses from your gross income. This is your Collectability. (Income – necessary household expenses = Collectability) Finally, the IRS will multiply your Collectability by 12. The result is included in your Offer.
Example 1 – Your gross income is $5,000 per month. Your household expenses are $4,500. 5,000 – 4,500 = 500. $500 is your Collectability. Then multiply your Collectability by 12. 500 x 12 = 6,000. The IRS will include $6,000 in your Offer.
Example 2 – Your gross income is $4,250 per month. Your household expenses are $4,500. 4,250 – 4,500 = -250. Your Collectability is $0. The IRS will not include Collectability in your Offer.
Please note: The IRS places limits on certain household expenses. For example, the limit for housing and utilities is about $1,500 for a family of four. Housing includes mortgage, rent, home insurance, telephone, cell phone, cable, internet, and all utilities.
Minimum Amount to Offer = Part 1 (Equity in Assets) + Part 2 (Collectability)
Your final Doubt as to Collectability Offer in Compromise is Equity in Assets + Collectability. If the final Offer calculation is less than the back taxes, then you may qualify for an Offer. If not, then you do not qualify.
Example 1 – You owe $50,000 in back taxes. Equity in assets = $28,000. Collectability = $30,000. Minimum offer amount = $58,000. (28,000 + 30,000 = 58,000) You do not qualify for an Offer in Compromise. The IRS will ask you to set up an installment agreement.
Example 2 – You owe $50,000 in back taxes. Equity in assets = $0. Collectability = $6,000. Minimum offer amount = $6,000. (0 + 6,000 = 6,000) You qualify for an Offer in Compromise. The IRS will accept a settlement for $6,000.
If Equity in Assets and Collectability are both zero, then we recommend offering between $500 to $1,000.
Learn More About Calculating an Offer in Compromise
Free eBook Download
4 Steps to Calculating an Offer in Compromise
Learn step-by-step how to calculate an offer in compromise and whether a tax settlement is possible for your situation.
IRS Offer in Compromise – How Long Does it Take?
For individuals or self-employed individuals, it takes four months to one year to get an Offer accepted, depending on the amount of IRS back taxes owed. If you owe less than $50,000 then it should take four months. If you owe more than $50,000 then it may take up to a year.
For businesses, it may take up to a year to get an Offer accepted.
IRS Offer in Compromise – When do you Pay?
You will pay the offer amount within five months of the Offer acceptance. For example, if you file an Offer today and it takes the IRS four months to accept the Offer, you will pay the Offer in about nine months. (four months for acceptance + five months = nine months)
Should you Hire a Tax Professional?
We recommend that you hire a tax professional experienced with IRS tax problem cases.
Preparing a Doubt as to Liability Offer in Compromise is like an art: you need experience and all the right tools to get the job done right the first time. Making sure it is done right the first time increases your chances of IRS acceptance.
Offer in Compromise – 10 Steps to Acceptance
1) Download Form 656, Offer in Compromise Booklet, Instructions and forms to file an Offer
2) Find out if you qualify for an Offer by calculating equity in assets and Collectability
3) Mail the prepared Doubt as to Collectability Offer in Compromise via Certified Mail
4) The IRS will sent you a letter of Offer submission within 30 days
5) The IRS will hold off on collecting back taxes while your Doubt as to Collectability Offer is pending
6) Your Doubt as to Collectability Offer will be assigned to an IRS Offer Specialist
7) The IRS Offer Specialist will review the Offer with you or your representative
8) The IRS Offer Specialist will accept or deny the Doubt as to Collectability Offer
9) If your Doubt as to Collectability Offer is denied, you have the right to appeal the decision
10) If your Doubt as to Collectability Offer is accepted, you have five months to full pay the settlement amount