Offer In Compromise Terminology

Some of the terms used by IRS in their Offer in Compromise program may be a bit confusing. However, with a little help, you should be able to get up to speed pretty quickly. Take a look at the terms and their definitions below. If you have any questions, or if you'd like to see some additional information, let me know.

Realizable Value: The quick sale value amount minus what you owe to a secured creditor. The creditor must have priority over a filed Notice of Federal Tax Lien before IRS will allow a subtraction from the asset's value.

Fair Market Value: The amount you could reasonably expect from the sale of an asset. Provide an accurate valuation for each asset. Determine value from realtors, Blue Book valuations for used cars, publications, furniture dealers, or other experts on specific types of assets. Please include a copy of any written estimate with your financial statement.

Future Income: IRS usually determines the amount they could collect from your future income by subtracting necessary living expenses from your monthly income over a set number of months. For a cash offer, you must offer what you could pay in monthly payments over forty-eight months (or the remainder of the ten-year statutory period for collection, whichever is less). For a short-term deferred offer, you must offer what you could pay in monthly payments over sixty months (or the remainder of the statutory period for collection, whichever is less). For a deferred payment offer, you must offer what you could pay in monthly payments during the remaining time IRS could legally receive payments.

Reasonable Collection Potential (RCP): The total realizable value of your assets plus your future income. This total is generally the minimum amount you can offer.

Necessary Expenses: The allowable payments you make to support you and your family's health and welfare and/or the production of income. This expense allowance does not apply to businesses. IRS Publication 1854 explains the National Standard Expenses and gives the allowable amounts. IRS derives these amounts from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. They also use information for the Bureau of the Census to determine local expenses for housing, utilities, and transportation.

Note: If the IRS determines that the facts and circumstances of your situation indicates that using the scheduled allowance of necessary expenses is inadequate, they will allow you an adequate means for providing basic living expenses. However, you must provide documentation that supports a determination that using national and local expense standards leaves you an inadequate means of providing for basic living expenses.

Not Generally Allowed: IRS typically does not allow you to claim tuition for private schools, public or private college expenses, charitable contributions, voluntary retirement contributions, payments for unsecured debts such as credit card bills, cable television charges and other similar expenses as necessary living expenses. However, they will allow these expenses when you can prove that they are necessary for the health and welfare of you or your family or for the production of income.

Quick Sale Value: The amount you could reasonably expect from the sale of an asset if you sold it quickly, typically in ninety days or less. This amount generally is less than fair market value (FMV), but could actually be equal to FMV or higher, based on local circumstances.