What is the IRS's Average Settlement Price?

How Much Will The IRS Usually Settle For?

What is the IRS's usual settlement? The Internal Revenue Service (IRS), approves many Offers in Compromise each year with taxpayers about past-due taxes payments. In exchange for a lump sum settlement, the IRS reduces a taxpayer's tax obligation debt.

In 2020, the average Offer in Compromise approved by the IRS was $16,176. How did we reach this amount? The IRS received 17,890 offers in compromise with a total value of $289.4million (resource) in 2020. Divide $289.4 million by 17,890 and voilà! You get an average offer of compromise of $16,176

This number is, naturally, meaningless. It is not a hypothetical standard that the IRS will accept. That is the real question. This article will explain how the IRS determines whether an individual is eligible for the Offer in Compromise program. It will also discuss how it decides what kind of deal it accepts.

What is an offer in compromise?

The Program in Compromise is an IRS tax obligation relief program that reduces the tax obligations of individuals and entrepreneurs. This program is also known as the government tax negotiation program. It can help you save hundreds of dollars if you use it correctly. You pay less than the full amount due (your deal amount). The program is not available to everyone who has a tax obligation financial debt.

The OIC is basically a negotiation between you and IRS. The IRS is just like any other lender. If they can convince you that you cannot pay off your entire financial debt, they will prefer you to pay some money over nothing. Let's suppose you owe $50,000 to the IRS. There is no way you will be able to pay that amount before the 10-year statute of limitations (the time the IRS must collect taxes). There are two options:

1. The 10-year law can be applied to you
2. Pay an OIC

While waiting for the statute to expire might seem appealing, there are a few people who choose not to wait. The IRS can seize all of your possessions including your salary and financial savings. You may also lose your credit rating for many years. It is risky to wait, so a deal in compromise can be a better option. This allows the IRS to assess your collection potential.

Is there any chance that my IRS request for an OIC will be approved?

The IRS received 54,225 compromise offers in 2019 and accepted only 17,890 of them - that's an approximate 33% success rate.

Most tax obligation relief specialists have acceptance rates as high as 90%. Because they can spot better applications and determine if the taxpayer fulfills the requirements, and they also understand that the IRS will likely say yes. Tax lawyers and tax agents are the best tax relief business. They offer a money-back guarantee and affordable rates. A specialist tax obligation relief company will help you save time and money on unnecessary applications.

How does the IRS determine the minimum offer it will accept from a client?

Your OIC calculation is calculated by the IRS using two steps. It's based on your monthly earnings and the value of your possessions. This allows the IRS to estimate your "sensible collection opportunity."

How do you calculate an offer in compromise?

Let's break that formula down into its two main components.

Let's take that formula and break it down into its two main components:

1. Capital
2. Property

Cash Flow

The IRS will first need to determine how much you could pay each month if you prepare a layaway or installation agreement. The internal revenue service will request your pay stubs, current earnings, and loss declarations if you have a small business to calculate this amount.

After that, the IRS may require you to know how much money you have available for living expenses such as utilities, food, and car (non-luxury), payments. The IRS might require you to limit your living expenses to the minimum level it considers "sensible".

To assess your ability to pay, the IRS subtracts your allowable living expenses from your income. This amount, which is your monthly disposable earnings, will be used by the IRS to determine your OIC.

You will need to collect information about your household's monthly average gross earnings as well as real costs. This includes your family members who contribute cash to cover costs.

Property appraisal.

The IRS also estimates your possessions' value. The property includes your house, car, retirement plan, jewelry, and all other belongings of family members. How is your possession valued? The IRS subtracts any home loans or funding you have on each asset and then lowers it by 20%. Let's say you own a $200,000 home, but owe $195,000 for it. For your offer quantity, your residence deserves $4,000 ($ 5,000 x 0.8).

What settlement methods does the IRS accept for offers?

On its website, the IRS offers a variety of payment options for taxpayers. You can pay your offer by money order or check payable to the USA Treasury. Additionally, you can make your payment(s) via the Federal Tax obligation Repayment Service (EFTPS).

What is the success story of Offer in Compromise?

Not all offers in compromise are approved. Only 3 of 10 compromise offers are approved. There are many success stories for taxpayers who want to reduce their tax obligation financial obligation, and take part in the offer-in-compromise program.

Although it can be difficult, there are many success stories of taxpayers who reduce the amount they pay to the IRS after receiving an offer amount.

What is the minimum income required to be considered a low-income entrepreneur who has tax debt?
It is important to know how to pay the IRS if you have past-due tax obligations bills for your company and personal tax returns. It all depends on your service's legal structure.

If your business is a sole proprietorship, one IRS form 656 can be used. If your business is not a sole proprietorship linked to your social security number, a different offer with an application fee and also supply payment is required.

The updated Kind 656 also includes new low-income qualifications standards and directions. You do not need to pay the application fee if you meet the criteria for low income.

Do you prefer to apply for tax relief by yourself, or should you hire a professional?

You should try to negotiate your tax obligation amount with the IRS directly if the amount you owe is lower than $5,000. While tax obligation relief firms can be beneficial in helping you negotiate a deal amount with the IRS, the expense they incur when managing small tax financial debt customers can exceed the cost savings.

However, if you have a larger tax bill or are concerned about a possible tax audit, it is worth speaking with a tax attorney. To schedule a complimentary examination with a senior tax obligation professional, click here

These services are often well worth the cost for taxpayers who struggle to navigate the IRS settlement process. My tax settlement just suggests tax obligation relief companies that offer affordable fees, repayment options, and tax attorneys.

Why are so few people granted an OIC?

First, most applicants may not qualify. First, not all applicants will be eligible. Second, they may have future income or equity that could pay their tax liability. This is generally 10 years after the tax was assessed. A taxpayer may be able to pay $20,000 of tax debt and have $50,000 in a retirement account. Exceptions to this rule will make it difficult for the IRS to settle with the solvent taxpayer.

It may also be prohibitively expensive to settle. The taxpayer might not be able to fund the OIC settlement.

Final Regulations were published on March 12, 2020. They increased the OIC user fees from $186 to $2005 for OIC applications received after 4/27/2020. Although a 10% increase may seem excessive, it is only a fraction of the cost of an OIC. The OIC user fee is usually not prohibitive for many. What amount is required to settle the tax bill is the real cost. This is known as the "offer amount", and it represents the amount that the IRS will accept to settle a tax invoice.

Taxpayers will not be eligible for an OIC if they have not filed all tax returns and paid all estimated taxes for the current fiscal year. Business owners who have employees must have made all federal tax deposits for their current quarter to be eligible. An OIC is not available to taxpayers who are in bankruptcy.

 

The true cost: the offer amount

Many people believe that the IRS negotiates with taxpayers about the amount it will take for the tax bill to be paid. Some people believe the IRS will take a small percentage of the tax bill or waive penalties and interests in a settlement. These myths are false.

An OIC is granted to taxpayers who meet the requirements. The IRS will determine how much it can offer. An OIC's "offer amount" is the amount that the IRS can reasonably collect from the taxpayer before the statute expires. This is their "Reasonable Collection Potential". RCP is the IRS's accepted amount to settle tax liabilities. RCP equals the taxpayer's net realizable equity (NRE) and a portion of their future disposable income (typically 12 or 24 monthly, depending on the OIC payment methods).

A visual representation of the OIC settlement amount

Let's take an example to show how offer amounts are calculated. Let's say that a taxpayer owes $50,000 in 2016. The IRS also has 100 months to collect.

NRE in assets, (only asset: the home): 10,000

• A mortgage is required to purchase a home.
  • Fair market value: $150,000
  • Value of your home at "quick sales value" (QSV of 80% = $120,000) (IRS rule that values assets at (QSV).
  • A loan of $110,000
  • NRE: $120,000 QSV (less $110,000 Loan) = $10,000

Future monthly disposable Income (MDI), $200 per month

• Two earners with allowable IRS living expenses (subjects to IRS Collection Financial Standards limits on taxpayers):
  • Monthly average gross income of $6,000
  • The IRS Collection Financial Standards limit monthly average living expenses and expenses to generate income to $5,800. This includes categories like food/clothing/misc. ; housing/utilities, transportation expenses, medical expenses; and any other such as taxes paid or term life insurance, tax-ordered payments, child care costs, and so on.
  • MDI: $6,000 (average monthly gross income) less $5,800 = $200 (average living expenses per month).

First, does the taxpayer meet the requirements for an OIC? The taxpayer is eligible for an OIC in this instance. The taxpayer has $20,000 in NRE and $200 MDI. These funds will not be paid to the IRS before the collection statute ends.

Here's how they can be qualified: The taxpayer's total "ability" to pay the IRS before it expires is equal to $10,000 (equity), plus the amount it could charge the taxpayer in monthly payment ($200 per month in MDI for 100months or $20,000) before the collection deadline expires. This totals $30,000 The IRS will not collect any tax liability due in full before the expiration of the collection statute because the $30,000 is less than the $50,000 total amount owed. The IRS can write off $20,000 if $50,000 is owed less than $30,000, essentially.

Next is the offer amount. The taxpayer will not have to pay $30,000, but rather a calculation of the NRE and a future multiplier for MDI. The taxpayer can choose which payment option they prefer to determine the future multiplier for MDI. The offer amount can be paid in one of two ways. A lump-sum cash offer pays the amount in five or fewer monthly installments. A periodic payment offer pays the amount in six or more monthly installments for 24 months. The future income multiplier will be 12 months if the taxpayer chooses to pay the IRS via the lump sum cash option. If the taxpayer uses a periodic payment offer, the future income multiplier will be 24 months.

The lump-sum cash offer is $12,000. This represents $10,000. The taxpayer can settle their tax bill of $50,000 if they can show the IRS that their NRE amount is $10,000 and that their MDI is $200 per month. TIP: The NRE and MDI calculations involve many complex rules that must be followed to accurately calculate OIC eligibility and the offer amount. If these calculations are missed, taxpayers may discover that they do in fact not qualify for the offer or that their offer amount is higher than they can afford to pay in the future.

As illustrated in the example, the real cost is the "offer amount". Can a taxpayer pay $12,400 for their tax bill? Many people cannot, and therefore cannot, use the OIC program.

There are two upfront fees when you submit an OIC to IRS for acceptance. The $205 user fee is one and the partial payment of the offer amount is the other. The taxpayer must be able to pay some of the OIC unless they are a low-income taxpayer. Any upfront payment is non-refundable.

OIC Upfront Costs

The IRS will request that the taxpayer pay a portion of the OIC offer amount along with the $205 user fee. The IRS will ask for 20% of the offer amount if the taxpayer chooses a lump sum payment. This would mean that 20% of $12,400 ($2,480) would be required.

The IRS will require the taxpayer to pay monthly payments if they choose the periodic payment option. OICs typically take between 7-and 12 months. This means that taxpayers can send the IRS 7-12 months' worth of payments while they are being reviewed. The payments can be substantial and the IRS may not accept them. In 2019, 1 of 3 OIC applications was approved.

OIC costs don't end here. If their OIC is accepted, taxpayers will lose their next tax refund. Tax professionals may charge fees. You can also add additional costs to the equation if there is an appeal ( 15% of OIC applications go directly to IRS appeals to resolve any disagreements).

The OIC is a costly and inefficient solution if the taxpayer isn't sure if their OIC will be approved with the amount they propose to offer.

Alternatives

Low-income taxpayers don't have to pay an OIC user fee, down payment, or have to submit an OIC application. According to the IRS, low-income taxpayers are those who earn less than 250% of the poverty level. These income threshold amounts are provided by IRS Form 656 (the OIC Application). The OIC application requires that all taxpayers who meet the income threshold requirements must still be able to pay the offer amount within the agreed time frame.

Other IRS collection options for taxpayers include Currently Not Collectible status (CNC), installment agreements, and a Partial Pay Installation Agreement (PPIA). The IRS will not accept taxpayers' monthly disposable income if they are in CNC status. PPIA is a status where the taxpayer can pay the IRS monthly but cannot pay the entire tax bill before the collection statute ends.

PPIA and CNC can be more effective than OIC as these agreements don't always require the taxpayer to pay the IRS out of the equity in assets. In financial hardship, taxpayers will not be required to use equity (i.e. Equity in a home or savings is not available to taxpayers who are experiencing financial hardship. The bank won't give a taxpayer a home equity loan. PPIA and CNC are more realistic options for taxpayers.

Both of these agreements may be more beneficial financially if the taxpayer is eligible. Both CNC and PPIA are temporary agreements between the IRS. The IRS may request to renegotiate terms if the taxpayer's financial situation improves before the collection statute ends.

Last tip

The OIC should not be considered the only solution for taxpayers. All IRS collection options should be considered by taxpayers with tax debt. If they cannot pay the full amount, taxpayers should consider challenging any balances, penalties included.

It is best to assess your tax situation, your finances, and IRS collection options, then devise the best way to pay the lowest amount. Focusing on the OIC alone can lead to costly mistakes and leave your tax debt unresolved.

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