I've heard the IRS sometimes make deals, is that true?

What we’re talking about today is called an Offer in Compromise, and it’s not a deal or a giveaway plan. An Offer in Compromise is a program designed to determine how much you can afford to pay, no more, no less.

There’s actually a simple formula – it’s actually maybe not so simple – that determines how much of an Offer in Compromise you’re actually allowed to get or how much your Offer in Compromise will actually be. I’m actually talking really fast because we don’t have much time and there’s a lot of ground to carry here today.

The first step is we need to look at what your monthly income is versus your monthly allowable expenses and the difference between those two equals your monthly disposable income.

The second step is your offer equals your monthly disposable income in an algebra formula plus your assets and that equals the amount of your offer.

It’s really not magic, it’s just numbers, it’s an analysis. When we do an analysis of your situation, we’ll help you to determine if you qualify. Certainly not every taxpayer qualifies for an Offer in Compromise and that’s what actually makes us different than the national tax resolution companies out there. There are actually offer mills. Their salespeople will tell you that you qualify for an Offer in Compromise no matter what as long as you go ahead and come up with a credit card number today and that’s how we’re a little bit different.

I wanted to do this video to debunk some of those myths and see if we can’t help some of you from being victims to some of these unscrupulous companies. If anyone guarantees you an Offer in Compromise after a 15-minute conversation – run. In fact, if anyone offers you an Offer in Compromise or guarantees you an Offer in Compromise, I also suggest you should probably think that there might be something fishy going on here.

Let’s talk about the three types of offers, and I realize that this text is probably pretty small on the video, so I’m going to try and go over it very thoroughly.

The first type of an offer is actually called a cash offer and that’s when the offer will be paid in full within five months of the offer’s acceptance. Now, it looks like this. The algebra problem looks like this. Your monthly disposable income, which you will recall is the difference between your monthly income and your monthly allowable expenses.

Monthly disposable income x 48 + your assets = your offer amount.

In this example, if you had a monthly disposable income of $50, we multiply that by 48, that’s $2400. Let’s assume you had zero in assets for now.

50 (monthly disposable) x 48 + 0 (assets) = $2400

That would mean that your Offer in Compromise was $2400, and it doesn’t matter if you owe $200,000 or $2 million or $20,000, your offer is going to be $2400 in this particular scenario.

There is also a second kind of offer, and it’s called a short-term deferred offer. The short-term deferred offer is payable out over a 24-month period. It’s a very similar algebra problem. It looks like this:

Monthly disposable income x 60 + your assets = your offer amount.

You’ll notice that the multiplier (48) in the cash offer has actually changed to 60 and so you’re going to pay a little bit more in order to have the option of paying this thing out over a 24-month period. So, in this example that I did for you, you have $50 monthly disposable income again, multiply it by 60, equals $3000, let’s assume zero in assets, so your offer is $3000 but it’s payable out over 24 months, so that equals $125 per month for 24 months.

50 (monthly disposable) x 60 + 0 (assets) = $3000 over 24 months = $125/month

Now, this always kind of make me scratch my head because if you just demonstrated that all you have is the ability to pay $50 a month, how in the world do you pay $125 a month for the next 24 months? The answer is you’re going to have to get that extra money somehow from friends or family because you’ve just demonstrated, again, that you can only afford $50 a month. But I can see in certain unique circumstances that might be worthy of pursuing.

The last type of offer in this scenario for doubt as to collect ability offers (which is actually the subject of this video) is called a long-term deferred offer and that’s paid out over the number of months remaining on the collection statute of limitations.

The collection statute of limitations you can think of as the 10 years from the date of the assessment of the tax. There’s actually another video that I’ve done that details exactly what that means, but let’s just suffice to say that in many cases, there’s 120 months (which is 10 years) because lots of people come in, we file the returns and then we file offers soon thereafter.

In this scenario, the algebra problem is your monthly disposable income times the number of months left on the collection statute plus your assets, equals your offer amount.

Monthly disposable income x number of months left on collection statute + your assets = your offer amount.

Let’s put some numbers to that – $50 times 120 months is $6,000, let’s assume zero in assets. That would $6,000 divided by 120 months or $50 a month for 120 months.

$50 x 120 + 0 = $6000 ÷ 120 months or $50/month for 120 months

I don’t normally advise to go this route. I think 120 months is a really long time be making payments perfectly on time and you need to know that there’s actually a catch – there’s a couple of catches to Offers in Compromise – but the one that comes to mind right now is that you’re actually on probation of sorts for five years after your offer is accepted and paid.

So, if your offer is accepted and paid and you have some kind of problem in year three, so you default your Offer in Compromise, then all of the tax penalties and interests come roaring back and you could actually have a much larger problem than you originally had. So, you’ve got to be aware. If you get an Offer in Compromise, you’ve got to be perfect for the next five years.

We already talked about the cash offer, we talked about the short-term deferred offer, we talked about the long-term deferred offer, let’s talk about your required documents. You need a 433A and a 433B, if you’re in business, you’re going to need a Form 656. You’re going to need at least three months worth of documentation proving your expenses and income – things, such as bank statements and paychecks stubs. You’re going to need a filing fee of $150. You’re also going to need a check for a 20% of your down payment if you’re talking about a cash offer. If you’re talking about a long or a short-term deferred offer, you get to start making the payments when you file your offer. I think that’s just yet another argument that cash offers are really the way to go. So, your checks or your filing fee and your 20% down payment are to be made out to the US Treasury and accompany your Offer in Compromise.