Getting a letter saying you owe money to the IRS ranks right up there with learning you have to get teeth pulled. It is anxiety-inducing, and you want it over quick. If you do not have the money to pay the IRS, it feels even worse. Before you go into full panic mode, you may qualify for an offer in compromise.

What is an offer in compromise?

An offer in compromise happens when you and the IRS agree to settle an outstanding tax debt for less than the full amount. However, not everyone qualifies for an offer in compromise. If you could pay your tax debt through an installment plan, you will not qualify for this kind of payment.

How is the amount determined?

The offer in compromise amount must be equal or greater than what the IRS determines is your reasonable collection potential (RCP). The IRS comes up with this number by examining your assets, like your house, cars and bank accounts. This RCP also includes your future earnings minus what you need to live on.

More than offering a reasonable number, there are three specific qualifications the IRS uses to determine if an offer in compromise is appropriate:

  • There is some doubt about the existence or amount of the tax debt owed.
  • If your assets and income are less than what you owe, your ability to pay the full amount is considered doubtful.
  • Even if the IRS is sure about the amount owed and you could afford to pay it, they may also accept an offer in compromise. The IRS would do so if paying the amount would create a severe financial hardship, or if there are other circumstances that would render it unfair.

Figuring out what is a fair offer of compromise can be difficult. If you are unsure how to calculate an appropriate offer of compromise, you may consider reaching out to a tax law attorney.