The Offer in Compromise is for tax-burdened individuals who hope to settle their claims once and for all by paying an amount that is lower than their total tax dues. This amount, has to at least match or be greater than the reasonable collection potential calculated by the Internal Revenue Service (IRS) for the Service to accept your Offer. The Total Offer Amount that you specify in Form 656 depends on a number of variables such as cash, investments, and accounts receivable; the “realizable value” of your personal assets; and your monthly disposable income for a period of 48 or 60 months. The latter, many experienced tax consultants say, is the crux of your Offer Amount.
Calculation of monthly disposable income is in turn, based on your monthly household income and expenses and thus it is imperative, that you learn how to arrive at these values so that eventually you can calculate the Total Offer Amount that most realistically represents your current financial situation.
In this context, it is worth clarifying that the total monthly income and expenses of your household includes the incomes earned by and the expenses incurred on account of all those who reside in your house, like your spouse or partner and your children.
When you sit down to calculate this amount, you can use personal finance software like Microsoft Money or Quicken, or a pen and paper.
How to Calculate Total Monthly Household Income for the Offer in Compromise
This is not a difficult task at all considering that the Form 656 lists a number of sources from which you or any member of your household can derive an income. These sources include wages or salaries and pension received by you and/or your spouse as well as any sum of money received as bonuses, commissions, or as overtime payment. While calculating the monthly household income, you will also need to take into account any earnings generating from rents, by conducting a business, and payments that you receive from partnership ventures or trusts. The interest and dividends that you derive from any investments and the royalties that you earn should also be included in your monthly income calculations.
The funds that are made available to you as part of Social Security, Unemployment, and Disability benefits also become added to your monthly household income as do payments made for child support and/or alimony.
How to Calculate Total Monthly Household Expenses for the Offer in Compromise
Section 5 of Form 656 lists a number of counts on which you can incur expenses and these include the following: your rent and/or mortgage payments, tax and insurance payments, and the charges you notch up for utilities in the realm of electricity, gas, water, phone, and garbage disposal. When calculating your monthly expenses, you will also need to deduct the cost incurred for medical payments not covered by your health or life insurance schemes, credit card payments, and sums of money that you need to pay up as directed by the court, like those as alimony, for child support, and restitution.
In this context, it is worth mentioning that when calculating your monthly household expenses, you can apply specific national standards while trying to end up at a realistic figure for your housing and transportation costs and those incurred to maintain your household goods. These standards are available from IRS charts and are applicable on the basis of your income and the number of individuals constituting your household. However, calculating the expenses based on these variables can be a tricky affair unless you are guided by an experienced tax consultant.
So, now that you know how to calculate both your monthly household income and expenses, you are a step closer to filling out Form 656.