Mechanics of Calculating IRS Offers in Compromise
It is important to realize that this offer procedure with the IRS is entirely discretionary and is based on the “RCP” or reasonable collection potential of each individual taxpayer (True economic Status). This is simply the net realizable value of all your assets plus your future income (less necessary living expenses) for the payback period. The net realizable value is the quick sale value of your assets (usually 80% of fair market value) less the liabilities attaching to the property. Generally, an offer will not be accepted for less than your RCP amount, and you will be required to submit a financial disclosure (form 433) with the OIC (form 656). The 433 will be investigated by the IRS before the OIC is accepted.
There are basically two types of payment based offers, lump sum and periodic payment.
Interestingly, the lump sum can be made up of 5 or less payments and the other, 6 or more. With
the lump sum offer, you will be required to place 20% of your offer as a deposit (TIPRA) on your liability when
your offer is submitted. Low income taxpayers may qualify for a waiver of this TIPRA payment. The deposit for the periodic payment offer is much lower, which is usually
the first installment on your offer. There is no law that specifies the structure of the payments,
except for the initial payment. The acceptance of this payment plan is discretionary with the IRS
and will be based on a case by case basis, relating to your specific financial situation.
There are several exceptions to the general rule, relating to special circumstances in the interest
of effective tax administration, that may apply to your specific case.
So, what happens if the IRS denies your offer? The Service will keep your TIPRA payment and send you a rejection notice. How long can they take to notify you? Two years. Yes, the law says that if the IRS does not notify you of a rejection within two years, the offer is deemed to be accepted. The catch, you have to make all the contracted payments, just as if the IRS had accepted your offer until you find out through the notification process.The 24-month mandatory acceptance period provided for in IRC 7122(f) ends when Collection rejects or returns the offer, or the offer is withdrawn.