An IRS offer in compromise is available to virtually anyone who owes the IRS back taxes. But it is important to avoid confusing the program’s widespread availability with success in getting your offer accepted.
After all, the last thing you want to do is waste time and money with the IRS on an offer that has no chance. The offer in compromise program does work – but only in the right situation. To have success with an IRS compromise, you have to understand the IRS guidelines for analyzing your offer.
Is there a point where you could earn too much money to get a compromise accepted, and as a result have to consider other options with the IRS (installment agreements, tax bankruptcy).
There are two rules to follow when considering how your income could affect the success of your offer in compromise:
The first rule is that the IRS has no set rules that limit an offer in compromise to certain income levels. There are no earnings caps to the availability of an offer in compromise. Whether you make $25,000 or $250,000, the IRS compromise guidelines will not, standing alone, make you ineligible for settlement.
The second rule, though, is that the IRS does have living expense guidelines that limit how much you can spend to get to “yes” in a compromise.
Sure, the IRS says, go ahead and make $250,000 – but if you spend it in a way that is different from what the IRS guidelines permit, your compromise could run into trouble.
The IRS determines the amount of your settlement by figuring out how much they think they can collect from your cash flow over the time they have to collect your tax debt from you.
Cash flow is defined by the IRS as your earnings less your monthly living expenses (remembering that the IRS has guidelines that limit your living expenses). The IRS has 10 years to collect a debt from you, beginning on the date you initially owed the IRS the money.
If your monthly cash flow, after being multiplied by the amount of months the IRS has left to collect the debt from you, is less than what you owe, then your in the game for an offer in compromise. If your monthly cash flow, as defined by the IRS, can full pay what you owe, then your offer will be rejected.