RETURN TO CHART

INSTRUCTIONS FOR USING THE CHART:

Part 4 King's Legal Guide to Offers-In-Compromise

OIC CALCULATION STEPS FOR INCOME ONLY

The process of determining how much to offer the IRS involves first calculating how much surplus projected income can be paid, and second, the cash value of the taxpayer's equity in assets, calculated on a "quick sale" basis. You take the surplus income and add the cash value of equity in assets, and this figure is the offer amount. The actual amount of the liability has no bearing on the amount of the offer. The offer is based strictly on what the IRS could reasonably hope to collect by levy and other seizures over a period of time, which may be 48 months, 60 months, or longer. If the amount of the offer is fairly close to what the IRS believes they could collect by levy and other seizures over a 48-month or 60-month period, they are supposed to accept the offered amount in full satisfaction of the liability.

 PART A - Income [IRM § 5.15.1.11]

The portion of the offer based on the taxpayer's income involves several steps. Actual income is reduced by what the IRS deems to be reasonable monthly expenses for the health and maintenance of the taxpayer and taxpayer's family. The monthly surplus, if any, is then multiplied by a number of months determined by how the offer is structured. If the resulting budget fits the IRS "one size fits all" expense figures(sometimes called "standards") the calculation of the amount of the offer is merely a matter of simple multiplication.

 If the offer is to be paid in 5 or fewer payments, the monthly surplus is multiplied by 48; if a "short term offer," by 60 months ; if a longer period, by the number of months remaining to the expiration date for collection. See IRM § 5.8.5.6.

 This coincides with the 3 basic payment options offered by the IRS. See Part ____ of this book ("Payment Options").

The process of doing the math on the budget involves keeping an eye on what the IRS will likely find acceptable, and an eye on the taxpayer's actual feasible budget. It is not uncommon for the taxpayer to conclude that he or she simply cannot live on what the IRS claims he or she should be able to live on. In such cases vigorous negotiation during the offer process may result in extra expenses allowances. If not, the offer is quite simply unfeasible and should not be submitted.

RETURN TO CHART

NOTES:

At Step 12 on the Chart, to determine how much money should be offered to compromise the claim, the monthly surplus (if any) is multiplied by a factor 48 months, 60 months, or the number of months remaining until the statute of limitations for collection expires. Which multiplier you select depends on whether you seek a "cash offer" of up to 5 partial payments, or a "short term offer" of regular installment payments in an installment agreement of 2 years, or a "deferred payment" plan of monthly payments for the number of months remaining on the statute of limitations.

REFERENCE: IRM section discussing payment options IRM § 5.8.5.6

The 20% payment with offer:

For a "lump sum" payment the taxpayer is required to submit a non-refundable good-faith payment amounting to 20% of the total amount being offered in compromise; the payment is non-refundable in the event the offer is rejected.

For either of the remaining 2 payment options, the 20% up front payment is not required, but the taxpayer is required to make the first payment provided for in the proposed installment plan; this payment is also non-refundable in the event the offer is rejected.

REFERENCE: IRS Bulletin 2006-22 (July 2006).

STEP 1. Enter size of household (i.e., the number of people)

STEP 2. Enter the taxpayer's actual expenses in all categories

STEP 3. Calculate difference with IRS national standards

STEP 4 Adjust actual budget if necessary

A. Food, clothing, personal, household, garden
B. Health expenses

STEP 5. Local standards for housing, utilities, etc.

STEP 6 Compare with IRS figures

STEP 7. Return to step 1 and adjust if necessary

STEP 8. Transportation

STEP 9. Compare budget with IRS transportation figures

STEP 10. Compare with IRS standards

STEP 11. Enter the taxpayer's actual income

STEP 12. Adjust "other necessary expenses"

STEP 13. Select payment option and multiply

 

 

Step 1. Enter size of household (i.e., the number of people). Return to top / RETURN TO CHART

 All of the expense guidelines or "standards" start with how many people are in the "household." A brief definition of the "household" is found on IRS Form 656:

 "The entire household includes spouse, domestic partner, significant other, children, and others that contribute to the household."

 This is an imprecise definition. Does it mean you count a "significant other" only if he or she contributes to the household"?

 In any event, you select a number, either 1, 2, 3, 4, or more.

 

STEP 2. Enter the taxpayer's actual expenses in all categories. Return to top / RETURN TO CHART

The categories are broken down by the IRS into several key categories. These are, national (for food, clothing, household needs etc.), national standards for health care, local standards for housing (mortgage or rent, insurance, property taxes, utilities, etc.), local for transportation (divided into "ownership" and "operating" costs, and "other necessary expenses."

The IRS Collection Financial Standards for "national" categories are uniform over the country. The "local" standards for housing and related expenses are based on county of residence. The "local" standards for transportation are referenced to metropolitan areas.

The allowance for "other necessary" expenses are the taxpayer's actual expenses, to the extent that they are reasonable and necessary.

In the typical case the taxpayer's actual expenses for all categories are likely to be deemed excessive by the IRS. The task for the taxpayer is to examine exactly which expenses exceed the IRS guidelines and attempt to trim the budget to allow some measure of "surplus" income.

 

STEP 3. Calculate difference with IRS national standards. Return to top / RETURN TO CHART

The national standards currently have two tables on the IRS web site, one for the category including food, clothing, household needs, etc., and another for necessary health care expenses. These standards, or expense limits, are uniform and do not vary by state or other locale. That the IRS should deem such expenses to be uniform seems to defy common sense, but nevertheless that is the current IRS policy.

The flow-chart treats the budget comparisons with the IRS standards as two separate steps (see step 4 "a" and "b").

a. Food, clothing, household needs, toiletries etc.

b. Health care expenses

 Compare actual expenses for food, apparel, household needs, garden needs, and etc. with the IRS "national" standards. The taxpayer is allowed the IRS figure regardless of actual expenses for each category.

 If the calculation shows the taxpayer's actual expenses are less than the standard, he or she will still be allowed the standard figure. This may in some cases help the budget absorb what would otherwise be a surplus. If the calculation shows the actual payment exceeds the standard, the standard will be used.

 

Return to top / RETURN TO CHART

NATIONAL

CATEGORY

a. HOUSEHOLD SIZE ACTUAL STANDARD ALLOWED SUBTOTAL

Food 1 $1,000 $750 750 750

2 $1,000

3 $1,500

750

Apparel 1 300 250 250 1,000

2 450

3 525

 

Household 1 500 450 450 1,450

2

3

Total actual 1,800 1,450

 Amount taxpayer must trim his budget $350

 

Return to top / RETURN TO CHART

NATIONAL

CATEGORY

b. HEALTH CARE EXPENSES

The IRS moved this category from a state-governed figure to a uniform national figure.

The bulletin issued by the IRS explains:

National Standards: Out-of-Pocket Health Care

These Out-of-Pocket Health Care Standards are effective on October 1, 2007 for purposes of federal tax administration only.

The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for out-of-pocket health care expenses.

Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed.

Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses.

Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer's most recent year income tax return.

The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

NATIONAL - Out-of-Pocket Costs &endash; health care

"B" HOUSEHOLD SIZE ACTUAL STANDARD ALLOWED SUBTOTAL

SIZE OF HOUSEHOLD

1

2

3

4

5

 CATEGORY

 Health care 1 $1,000 $750 750 750

2 $1,000

3 $1,500

750

 

STEP 4 Adjust actual budget if necessary. Return to top / RETURN TO CHART

If the actual exceeds the allowed limit, return to Step 1 and adjust the budget. This may involve some "belt tightening." Note, however, that amounts greater than the standard may be allowed if reasonable and justified.

If the taxpayer's actual expenses do not exceed the allowed limit, proceed to Step 5.

 

STEP 5. Local standards for housing, utilities, etc. Return to top / RETURN TO CHART

Enter the taxpayer's state and county. This governs the amount allowed under the IRS standards.

If the actual exceeds the allowed limit, return to Step 1 and adjust the budget. This may involve some "belt tightening." Note, however, that amounts greater than the standard may be allowed if reasonable and justified.

If the taxpayer's actual expenses do not exceed the allowed limit, proceed to Step 6.

 

STEP 6 Compare with IRS figures. Return to top / RETURN TO CHART

If there are no excessive expenditures, proceed to step 8.

 

STEP 7. Return to step 1 and adjust if necessary.Return to top / RETURN TO CHART

If any of these actual expenses exceed the IRS limit, return to step 1 and try to adjust the actual budget to fit the IRS.

 

STEP 8. Transportation. Return to top / RETURN TO CHART

Enter state and metropolitan area of taxpayer's residence.

 

STEP 9. Compare budget with IRS transportation figures. Return to top / RETURN TO CHART

a. Ownership amount

b. Operating costs

Transportation expenses are divided into 2 subcategories. These are, "a" ownership costs, and "b" operating costs.

The IRS Manual rule for ownership costs is that the taxpayer is entitled to take either the actual expense (car payment) or the IRS limit, whichever is less; if the taxpayer has no vehicle, or has one that is paid off, he/she is not entitled to take any ownership expense.

This step and step 10 are basically the same step.

 

STEP 10. Compare with IRS standards. Return to top / RETURN TO CHART

At this step, compare the taxpayer's actual transportation expenses with the IRS limits; if any over-the-limit expenses exist, return to Step 1 and adjust if possible. Although categorized by the IRS under "local" standards, the figure for vehicle ownership is a fixed national expense. The operating expense is variable and linked to the taxpayer's metropolitan region.

The basic rule is that for either ownership or operating costs the taxpayer is allowed the standard, or the actual expense, whichever is less; however, if the taxpayer does not own a vehicle he/she may use the national standard for public transortation expense.

Note: the IRS Manual on financial standards for transportation states: IRM § 5.15.1.7 

If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. The taxpayer is allowed the amount actually spent, or the standard, whichever is less.

If a taxpayer has a car, but no car payment, only the operating costs portion of the transportation standard is used to figure the allowable transportation expense. The taxpayer is allowed the amount actually spent, or the standard, whichever is less.

Taxpayers with no vehicle are allowed the standard amount monthly, per household, without questioning the amount actually spent. So, if the taxpayer has no expense for either ownership or operating expenses (because he/she has no car) the taxpayer may claim the standard public transportation expense. IRM § 5.15.1.7 (05-01-2004)

 

STEP 11. Enter the taxpayer's actual income. Return to top / RETURN TO CHART

This is another reality test for the taxpayer's budget. If the taxpayer's income is insufficient to fund the theoretical surplus which is the sum of the expenses categories, clearly the taxpayer has no surplus income with which to fund an offer for anything more than a nominal amount. If the taxpayer can demonstrate that this inadequate income is something beyond his or her control, and that it is likely to continue without much improvement in the near future (say, 48 months), then this factor clearly helps the taxpayer make a feasible offer.

If, on the other hand, the taxpayer's take-home income clearly exceeds the expenses as entered, then the IRS will be looking at that excess. The Service will multiply the one-month surplus by either 48, or 60, or some other number, depending on the payment option elected by the taxpayer.

 

STEP 12. Adjust "other necessary expenses" Return to top / RETURN TO CHART

If the result of the calculation is excessive surplus, or the income is not sufficient to pay the projected budget, it might be prudent to return to Step 1 and rethink the last category, "other necessary expenses."

The IRS Manual rule for other necessary expenses is that the taxpayer is entitled to the full actual expense, as long as it is reasonable and necessary.

 

STEP 13. Select payment option and multiply. Return to top / RETURN TO CHART

Result: The amount to be offered based on reasonably collectible income.

 

 

 

PART B - ASSETS

 

Proceed to Part 2: Calculation of value of equity in assets.