Based on the IRS formula, your minimum lump-sum offer is $3,600, paid within 5 months. You must send 20% ($720) with the application. A periodic-payment offer would be at least $7,200.
The math
Inputs
| Tax owed | $40,000 |
|---|---|
| Monthly income left after allowable expenses | $300 |
| Net equity in assets | $0 |
The formula in words
The IRS accepts an offer that is at least your reasonable collection potential: net equity in your assets plus future income. Future income = monthly income left after IRS allowable living expenses × 12 if you pay within 5 months, or × 24 if you pay over 6 to 24 months.
Step by step
| Step | Lump-sum offer | Periodic-payment offer |
|---|---|---|
| Future income | $300 × 12 = $3,600 | $300 × 24 = $7,200 |
| Plus net equity in assets | $0 | $0 |
| Minimum offer | $3,600 | $7,200 |
| Paid with the application | 20% = $720 + $205 fee | first monthly payment + $205 fee |
Result
- Minimum lump-sum offer (paid within 5 months): $3,600
- Payment sent with a lump-sum offer (20%): $720
- Minimum periodic-payment offer (paid over 6 to 24 months): $7,200
- Monthly payment on a periodic offer spread over 24 months: $300
- Application fee: $205
- Lump-sum offer as a share of the debt: 9%
- Debt settled for less with a lump-sum offer: $36,400
Assumptions
- The $300 is what's left after the IRS's allowable expense standards, not your own budget; the IRS often allows less than you actually spend, which raises this figure.
- No assets with equity beyond what's listed.
- Application fee and the 20% payment per Form 656-B; both are waived for low-income taxpayers who qualify.
- You must be current on filing and estimated payments, and the IRS decides whether to accept. Many offers are rejected, so check eligibility with the IRS pre-qualifier first.
- These are estimates that show how the math works, not financial, tax or legal advice. Lenders, card issuers and the IRS can calculate slightly differently.
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What the $3,600 Offer Actually Means
An offer in compromise lets you settle your tax debt for less than the full amount. Based on the numbers here, the IRS would accept a minimum lump-sum offer of $3,600, which is 9% of the $40,000 you owe. If accepted, the remaining $36,400 of debt is settled.
That $3,600 is not a random lowball. It comes from the IRS's own formula: your reasonable collection potential. With no net equity in assets, the entire offer is based on your future income. The IRS assumes you can pay $300 a month for 12 months if you pay within 5 months, which equals $3,600.
You must send 20% of the offer, or $720, with your application. The rest is due within 5 months of acceptance. There is also a $205 application fee, though it can be waived for low-income taxpayers who qualify.
Why the Periodic-Payment Offer Is Higher
If you choose a periodic-payment offer instead, the minimum is $7,200, paid over 6 to 24 months. That is exactly double the lump-sum offer. The reason is simple: the IRS multiplies your $300 monthly ability by 24 months instead of 12.
Spreading $7,200 over 24 months works out to $300 a month, which matches what you have left after allowable expenses. So the periodic option is easier on your monthly budget but costs more overall.
Which one makes sense? If you can raise $3,600 within 5 months, the lump-sum offer settles more debt for less money. If you cannot, the periodic offer keeps the payments manageable. Either way, the IRS decides whether to accept, and many offers are rejected.
What Drives Your Offer Number
Two things drive your minimum offer: your net equity in assets and your future income. Here, net equity is $0, so future income does all the work.
Future income is your monthly income left after IRS allowable living expenses, multiplied by 12 or 24. The $300 figure is what remains after the IRS's allowable expense standards, not your own budget. The IRS often allows less than you actually spend, which raises the amount left over and therefore raises your offer.
If your allowable expenses were higher, the monthly leftover would be lower, and your minimum offer would drop. If your leftover were higher, your offer would rise. That is the whole formula.
How to Change the Outcome
You cannot change the formula, but you can change the inputs. Here is what matters:
- Your allowable expenses. If the IRS allows you more for housing, transportation, or health care, your monthly leftover drops. A lower leftover means a lower minimum offer.
- Your asset equity. If you have equity in assets, it gets added to your offer. Here it is $0, which keeps the offer low.
- Your payment choice. A lump-sum offer uses 12 months of future income; a periodic offer uses 24. Choosing lump-sum lowers the total offer but requires faster payment.
Before you file, check the IRS pre-qualifier to see if you are eligible. You must also be current on filing and estimated payments. These are estimates that show how the math works, not financial, tax, or legal advice. Confirm your numbers with the IRS or a tax professional.
Practical Next Steps
Start by gathering your recent pay stubs, bank statements, and a list of your monthly expenses. The IRS will compare your actual spending to its allowable standards, so know where you stand.
Then decide between the lump-sum and periodic options. The lump-sum offer is $3,600 with $720 due at filing. The periodic offer is $7,200 with $300 monthly payments over 24 months. Both require the $205 application fee unless you qualify for a waiver.
File Form 656 and the related forms carefully. Missing information is a common reason offers get rejected. If you are unsure, the IRS pre-qualifier tool can tell you whether your situation fits before you pay anything.
Finally, remember that an offer in compromise is not guaranteed. The IRS reviews your ability to pay and may reject your offer even if the math works. Keep making any required payments and stay current on filing while you wait.
Frequently asked questions
Can I pay the $3,600 lump-sum offer in installments?
No. A lump-sum offer must be paid within 5 months of acceptance. You send 20% ($720) with your application, then the remaining balance is due within that 5-month window. If you need more time, the periodic-payment offer spreads payments over 6 to 24 months but has a higher minimum of $7,200.
What if the IRS says I can pay more than $300 a month?
The IRS uses its own allowable expense standards, not your actual budget. If it allows less for your expenses, your monthly leftover rises, and your minimum offer rises too. You can review the standards and provide documentation for special circumstances, but the IRS has the final say on what counts as allowable.
Do I have to pay the $205 application fee?
Not always. The fee is waived for low-income taxpayers who qualify. The 20% payment ($720) can also be waived for those taxpayers. Check the IRS pre-qualifier or Form 656-B instructions to see if you meet the low-income certification requirements before you file.
Will the IRS accept my offer if I owe $40,000?
Acceptance depends on your reasonable collection potential and whether you are current on filing and estimated payments. The math here shows a minimum offer of $3,600, but the IRS decides whether to accept. Many offers are rejected, so check eligibility with the IRS pre-qualifier first.