How the IRS Calculates Your Offer in Compromise (And What You Can Do to Lower It)
If you owe more to the IRS than you could possibly pay, an Offer in Compromise (OIC) might feel like your last hope — and in many cases, it is. But despite the ads you’ve seen about “settling for pennies on the dollar,” the IRS doesn’t pull your offer amount out of thin air.
In fact, they use a specific financial formula — and if you understand how that formula works, you can plan smarter, file stronger, and possibly reduce the amount the IRS expects from you.
Let’s break it down.
What Is an Offer in Compromise?
An Offer in Compromise is a formal agreement between you and the IRS to settle your tax debt for less than the full amount owed. It's not a loophole. It's not “getting away with it.” It's a legitimate IRS program meant for people who truly can’t pay.
But here’s the catch: the IRS will only accept your offer if they believe it’s the most they can reasonably expect to collect from you within the statute of limitations.
That’s why understanding the OIC calculation formula is critical.
The IRS OIC Formula (Yes, There’s a Real Math Equation)
Here’s the basic formula the IRS uses to determine your “reasonable collection potential”:
👇
OIC Offer = Disposable Income × Multiplier + Net Realizable Asset Equity
Let’s break down the parts:
- Disposable Income = Your monthly income minus allowable monthly living expenses
- Multiplier =
- 12 (if you’re offering to pay the full amount within 5 months)
- 24 (if you’re offering to pay monthly over 6–24 months)
- Asset Equity = Value of your bank accounts, vehicles, retirement, real estate, etc., minus certain exemptions
Lump Sum vs. Periodic Payment — What’s the Difference?
| Offer Type | IRS Multiplier | Payment Terms |
|---|---|---|
| Lump Sum Offer | 12 | Pay in 5 or fewer monthly installments |
| Periodic Payment Offer | 24 | Pay in monthly installments over 6–24 months |
Choosing lump sum results in a lower total offer — but you need to have the funds available up front.
Real-World Example
Let’s say:
- Monthly income: $4,000
- Monthly allowable expenses: $3,500
- Net disposable income: $500
- Asset equity: $1,000
Lump Sum Offer:
($500 × 12) + $1,000 = $7,000
Periodic Payment Offer:
($500 × 24) + $1,000 = $13,000
That’s a $6,000 difference just based on payment type.
What the IRS Considers “Allowable Expenses”
The IRS won’t let you claim just anything. They use national and local standards to cap your monthly expenses in categories like:
- Food, clothing, and household supplies
- Housing and utilities (based on your zip code)
- Vehicle ownership and operating costs
- Health insurance and out-of-pocket medical costs
- Court-ordered payments (child support, alimony)
Expenses outside of these categories may be allowed — but only if you can prove they’re necessary for your health, welfare, or ability to earn a living.
How Asset Equity Affects Your Offer
The IRS adds up the equity in your:
- Bank accounts
- Vehicles
- Real estate
- Retirement accounts
- Investment accounts
- Business assets
They’ll subtract certain allowances (like 20% off vehicle value or retirement penalties), but anything left is added directly to your offer amount.
Want to reduce this part of the equation? It has to be strategic — and legal.
6 Ways to Lower Your IRS OIC Calculation (Legally)
- Wait for a financial dip.
If your income just dropped or you're between contracts, now may be the best time to file. - Maximize allowable expenses.
Rent, health insurance, transportation — the closer you get to the IRS’s maximum allowances, the lower your net income. - Time your asset reduction wisely.
Liquidating assets too close to filing may raise red flags — but low balances help reduce equity. - Challenge unfair valuations.
The IRS will often overvalue your assets unless you submit appraisals or proof of liquidation costs. - Use lump sum if possible.
Paying in 5 months instead of 24 can cut your offer in half (literally). - Get professional help.
A CPA who handles OIC cases knows how to work the IRS formula — not manipulate it, but strategically present it.
Try It Yourself: Use Our Free IRS OIC Calculator
Want to see what your estimated IRS settlement might look like? We’ve created a free calculator you can use right now.
Just enter your monthly income, allowable expenses, and asset equity. You’ll get an instant estimate based on IRS formulas — no guesswork.
👉 Click here to try the Offer in Compromise Calculator
Why Some Offers Get Rejected
Even if your math looks perfect, OICs can still be rejected for:
- Missing documentation
- Unfiled tax returns
- Inaccurate or outdated Form 433-A (OIC)
- Payment issues during processing
- Unrealistic expense claims
- Poor timing (e.g., income likely to rise again)
Getting an OIC accepted isn’t about sympathy — it’s about strategy.
Want Help Lowering Your IRS Settlement?
We help clients across Orange County and Southern California submit strategic, accurate, and well-supported Offers in Compromise — and get them accepted.
Whether you’re in the middle of IRS collections or just want to explore your options, our CPA-led team can guide you from start to finish.
Call (657) 218-5700 or schedule your confidential consultation now.
Final Word
The IRS doesn’t negotiate emotionally — they calculate based on data.
But the better you understand that data, the better you can control the outcome.
FAQ: Offer in Compromise Calculations
Can I include credit card debt in my expenses?
Not usually. The IRS doesn’t allow unsecured debt like credit cards unless it’s directly related to business or medical necessity.
What if my spouse has income?
The IRS may include part of your spouse’s income in your monthly household total, even if you file separately. It depends on how your finances are shared.
What if my income changes after I submit the offer?
You’re required to update the IRS if your financial situation changes while your offer is being reviewed.
Is there a minimum amount I must offer?
Technically no, but if your calculated offer is too low, the IRS will reject it outright.
📣 About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.
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