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How to calculate an Offer in Compromise

How to calculate an Offer in Compromise

Are you in tax debts that your income is insufficient to pay off? Will collection efforts by the IRS  put you in extreme financial difficulty? If you have answered yes to any of these questions, then an offer in compromise may be the best option for you.

The offer in compromise program is an ethical tax relief strategy initiated by the IRS as part of its fresh start program. The IRS fresh start program is a series of policies that make changes to the standard procedures of collection by the IRS in order to make it easier for both businesses and individual taxpayers to settle their tax liability.

Put in simple terms, an offer in compromise will enable you to gain tax relief by giving you an opportunity to settle your tax debts for less than the original amount. If you qualify, then you may negotiate a new payment agreement with the IRS to settle your outstanding tax liabilities.

When it comes down to trying to get an offer in compromise accepted, knowing how much you will be required to pay is vital. Contained in the paragraphs below is information about how to calculate an offer in compromise.

How to calculate an Offer in Compromise amount

You will be able to calculate a minimum OIC amount using Form 656, offer in compromise, provided by the IRS on their official website. In order to fully determine the amount you will be required to pay, you also have to complete Form 433-A, Offer in compromise, which is a collection information statement for wage earners and self-employed persons.

The IRS Form 433-A requires you to provide the following information:

Section 1: personal and household information

Section 2: Employment Information for wage earners

Section 3: Personal asset information

Section 4: Self-employed information

Section 5: Business asset information (for self-employed persons)

Section 6: Business income and expense information (for self-employed persons)

Section 7: Monthly household income and expense information

On the other hand, businesses must fill out the 433-B OIC Collection Information Statement for Businesses. Form 433-B requires the following information:

Section 1: Business information

Section 2: Business asset information

Section 3: Business income information

Section 4: Business expense information

Once the forms are completed, you will move to section 8 (for individual taxpayers) or Section 5 (for business entities) to calculate your minimum offer amount.

If you plan to pay a lump sum in 5 or fewer payments (which will take 5 months or less), simply multiply your “remaining monthly income” by 12 and the result you get will be your “future remaining income.”

If, on the other hand, you plan to make periodic payments (which would usually span a duration of 6 to 12 months). In this case, you will need to multiply your “remaining monthly income” by 24 and the result you derive will be your “future remaining income.”

Once you have calculated your future income, you can add it to the total sum of equity that you have available in assets. Once they are added together, you will have a figure that the IRS will accept for an offer in compromise.

Therefore, calculating the total amount that the IRS will accept for an offer in compromise goes as thus:

Remaining monthly income x 12 (or 5) = Future monthly income

Future monthly income + Available equity in assets/ Available business equity in assets = OIC amount.

Do you need help getting your offer in compromise approved? We can help you!

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.