The Offer in Compromise is for anyone hoping to settle their claims by paying a lower amount than their total taxes dues. This amount needs to match or be greater than the reasonable collection potential. This amount is calculated by the Internal Revenue Service (IRS) and is integral to accepting your offer.
The total offer amount you specify in Form 656 depends on a number of variables. These include 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. In case you couldn’t tell, your disposable income is typically the crux of your offer amount. It is a strong determining factor in whether or not the IRS accepts your offer.
Calculation of your monthly disposable income is based on your monthly household income and expenses. Because of this, calculating income for the Total Offer Amount is imperative for your OIC’s acceptance. It must realistically represent your financial situation.
The total monthly income and expenses of your household includes the incomes earned by everyone in your household. This includes your spouse, partner, and children.
Calculating income for the offer in compromise
Fortunately, form 656 features a comprehensive list of all the sources of income you may have. This includes wages, salaries, and pension received by your family as well as bonuses, commissions, or overtime.
Additional income includes:
- earnings from rent(s)
- business operations
- payments from partnership ventures
- interest and dividends on any investments
- social security (if applicable)
- unemployment & disability (if applicable)
- child support/alimony (if applicable)
What about calculating monthly household expenses?
Section 5 of form 656 lists will list the number of areas you can mark as expenses. This includes:
- your rent and/or mortgage payments
- tax and insurance payments
- utilities (gas, water, electric, etc.)
In addition to these deductions, look at medical costs (not covered by insurance), car payments, and alimony (if applicable).
You can apply national standards to reach a realistic figure. This is especially useful for housing and transportation costs, as well as maintenance of your household goods. These standards are available from IRS charts and are applicable on the basis of your income.
Calculating the expenses can be a tricky affair unless you are guided by an experienced tax consultant.