What Percentage Does The IRS Typically Accept?

a dollar symbol, cash flow

The Offer in Compromise (OIC) program is designed to help relieve some of the tax burden owed by struggling taxpayers. The Internal Revenue Service (IRS) received approximately 67,000 offers in compromise in 2015, but only about 27,000 were accepted. While the average amount the IRS accepted that year was $7,585, this amount should in no way be used to estimate the amount that will be acceptable to the IRS in every case. To determine the settlement value of an offer in compromise and to decide whether an offer will be accepted or rejected, the IRS uses a very specific formula.

The IRS Offer in Compromise Formula

The IRS formula for calculate an offer in compromise is broken down into two components.

Cash Flow

First, the IRS will evaluate the taxpayer’s current income and expenses to determine available cash flow. Proof of income from pay stubs or a profit and loss statement if a business is owned are items that the IRS uses to calculate cash flow. The taxpayer’s allowable living expenses will then be calculated. These expenses include things like housing costs, the cost of utilities, vehicle payments, clothing and food expenses. These expenses are subject to limitations and allowable amounts may be reduced to levels that the IRS deems “reasonable”.

After the taxpayer’s income and allowable expenses are tallied, the IRS subtracts the total cost of living expenses from the calculated income. This helps the IRS determine how much the taxpayer can afford to pay in monthly installments. If the settlement can be paid in full in five or fewer installments over a period of five months or less after the offer is accepted, the taxpayer’s available monthly cash flow is multiplied by 12 months. If the settlement cannot be paid in 5 or fewer months, the cash flow amount is multiplied by 24 and the taxpayer will have up to 24 months to complete payment.

Assets

After determining the settlement value of a taxpayer’s cash flow, the IRS turns to a valuation of the assets available. That amount is then added to the cash flow. The taxpayer’s house, vehicles, retirement plan, jewelry and other valuables minus any mortgages or loans are used to determine asset valuation. Then a 20 percent asset value reduction is applied, and the remaining result is the taxpayer’s IRS asset valuation.

For an OIC to be accepted, the total amount owed under current tax law cannot be collectible.

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