What are the Different Types of Offers in Compromise?

1. Lump Sum Cash Offer

The Lump Sum Cash Offer is the most common type of Offer in Compromise. Luckily, for most taxpayers, it is also the cheapest. This is because it uses a forty-eight (48) month multiplier in calculating a taxpayer’s future earning potential as opposed to larger multipliers employed by the other offer types.

The IRS uses a multiplier to determine the future earning potential of a taxpayer seeking an Offer in Compromise. In short, the IRS calculates a taxpayer’s monthly net available income by comparing gross monthly income to his or her allowable monthly expenses. This monthly net available income is projected into the future for a set period of time, determined by the type of offer selected. For a lump sum cash offer, the IRS projects the net available income over the next forty-eight (48) months.

As applied, it means that if the IRS determines a taxpayer has $100.00 in monthly net available income, the IRS will ask for a Lump Sum Cash Offer in Compromise for at least $4,800.00. This $4,800.00 may increase if the IRS determines there is additional value in equity, retired debt, or dissipated assets.

This payment option is called “Lump Sum” for a reason. Although it is the cheapest, it is also one that must be paid off the fastest. The IRS only allows the taxpayer 150 days to pay the Offer in Compromise in full after the date of acceptance.

The only exception to the forty-eight (48) month multiplier is if the time remaining before the statute of limitations expires on the taxpayer’s tax debt is less than forty-eight (48) months. In that case, the IRS will use the number of months remaining.

Finally, the taxpayer usually has to make an initial deposit of 20% of the initial offer amount when they file a lump sum cash offer. This amount is not refundable even if the offer is rejected. The one exception is if the taxpayer qualifies for a hardship waiver and submits the accompanying form.

2. Short Term Periodic Payment Offer:

The primary difference, and benefit, of the short term periodic offer is that it does not require the taxpayer to pay the determined offer amount within 150 days. Instead, the taxpayer has to make regular payments for twenty-four (24) months after the offer has been submitted.

The catch is that rather than a forty-eight (48) month multiplier, the IRS will use a sixty (60) month multiplier. Thus, using the above example, the taxpayer’s Short Term Period Payment Offer will total $6,000.00, to be paid in monthly installments of $250.00 each. Thus, although the taxpayer will have more time to make their offer payments, the total offer amount will be larger. However, if the taxpayer has no net available income, the offer amount will be the same as a lump sum cash offer.

The final difference is that the first regular payment must be made with the initial short-term periodic payment offer. Subsequent payments continue while the offer is under consideration and are credited against the twenty-four (24) payment schedule after the offer is accepted. If the offer is rejected, the payments made will be applied to the taxpayer’s oldest tax liability. Any payments made are not refundable.

3. Deferred Periodic Payment Offer:

This is the least desirable type of offer and one that is not usually recommended for IRS tax settlement. The multiplier utilized in this type of offer is the number of months remaining on the taxpayer’s statutory period of collections on his or her most recent tax liability. In short, the taxpayer will be making monthly payments based on their net available income for as long as the IRS can collect on the liability or the liability has been paid in full.

There is little benefit to the taxpayer in this type of offer and the taxpayer may be better served seeking an installment agreement rather than a deferred periodic payment offer.

Keep in mind that although each offer may vary in when and how much a taxpayer may offer to pay, the process of calculating a taxpayer’s ability to pay is the same across the board. And ultimately, the type of offer selected by the taxpayer will depend on his or her individual financial situation.