An offer in compromise is math with consequences. The IRS adds up what it believes it could collect from you, called reasonable collection potential or RCP, and compares that to what you offer. If your offer is less than RCP, it is usually rejected unless special circumstances apply.
For a lot of homeowners in Tampa, the largest piece of RCP is the equity in the house. Florida law gives that house real protection from ordinary creditors. In an offer, the IRS counts it anyway, with some important Florida-specific wrinkles. This guide covers how. For the offer program generally, see my offer in compromise guide for Hillsborough County.
The basic formula
The IRS rules for evaluating an offer’s financial side are in IRM 5.8.5, Financial Analysis. You submit Form 656 with Form 433-A (OIC) for individuals. RCP has two parts:
- Net realizable equity in assets. Bank accounts, retirement accounts, vehicles, real estate and other property, valued at what the IRS could realistically get for them.
- Future income. Your monthly disposable income after allowable expenses, multiplied by a number of months that depends on how you propose to pay.
Real estate goes into the first bucket. The question is how much.
Quick sale value and net realizable equity
IRM 5.8.5.4.1 defines net realizable equity as quick sale value less amounts owed to secured lien holders with priority over the federal tax lien. Quick sale value is an estimate of the price a seller could get when under financial pressure to sell, usually within 90 days or less. The IRM says normally, QSV is calculated at 80 percent of fair market value.
Here is a simplified example. A Seminole Heights house worth $400,000 with a $250,000 first mortgage:
- Quick sale value: 80 percent of $400,000 is $320,000.
- Less the first mortgage: $320,000 minus $250,000.
- Net realizable equity: $70,000.
That $70,000 goes into RCP. If the rest of your RCP is small, your offer probably needs to be at least $70,000 plus the future income component. The fair market value is where most disputes start, so a recent appraisal or a solid broker opinion is worth having.
Florida homestead does not take the house out of the math
People are surprised by this, so it bears repeating. The Florida homestead exemption protects your home from forced sale by most creditors under Article X, Section 4 of the Florida Constitution. It does not bind the IRS. Treasury Regulation 301.6334-1(c) says state homestead exemption laws do not exempt property from federal tax levy. The IRS can reach the home through its lien and, with a federal judge’s approval, through levy. See IRS seizure of a principal residence.
Because the IRS could reach the equity, the offer evaluation counts it. Homestead status is not a line item that reduces your RCP.
That said, the IRM is not blind to reality. The examples in IRM 5.8.5.13 address a taxpayer with little equity, where the cost of moving would consume it, and say it may be appropriate to accept the offer under effective tax administration or doubt as to collectibility with special circumstances. Facts like age, health and the lack of affordable alternatives in the Tampa housing market belong in the offer narrative.
When only one spouse owes: entireties property
This is where Florida law changes the numbers. Many Hillsborough County couples own their homes as tenants by the entireties. If only one spouse owes the IRS, the IRS cannot simply count all of the equity.
IRM 5.8.5.13 says that for real estate and related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayer’s portion is usually 50 percent of the property’s net realizable equity. That mirrors the collection guidance at IRM 5.17.2.5.2.4 and Notice 2003-60, which say the liable spouse’s interest is generally deemed to be one-half.
Then comes the part worth fighting for. A note in IRM 5.8.5.13 says that when the property does not appear to have been transferred into the tenancy to avoid tax collection, net realizable equity may be reduced below 50 percent, based on the difficulty of liquidating or borrowing against the taxpayer’s share. That makes sense. Nobody lends against half of an entireties interest, and nobody buys one at an auction. The IRS itself has said administrative sale of entireties property is not a preferable method.
In the example above, if only one spouse owes and the home has been entireties property since it was bought, the starting point drops from $70,000 to $35,000, and there is a principled argument for less. That can be the difference between an offer that works and one that does not.
The note has a condition: the property must not appear to have been moved into the tenancy to avoid collection. A couple who re-deeded the house into entireties ownership after the IRS sent bills will have a harder time. My guide on retitling property after a tax debt explains the risks.
Ability to borrow
The IRS does not only ask what your house would bring at a sale. It asks whether you could borrow against the equity to pay. If you can, the IRS may expect you to. The IRM examples include a situation where a reverse mortgage could fund an installment agreement, and the offer is rejected in favor of that agreement.
If you cannot borrow, show why. A filed Notice of Federal Tax Lien, low income, poor credit, or the fact that only one spouse owes and the other will not sign are all real obstacles. Lender denial letters are better evidence than explanations.
The other side of the house: monthly expenses
Your home also shows up in the future income part of RCP, as a monthly expense. The IRS allows housing and utilities up to the local standard for your county and household size, or your actual cost if lower. For Hillsborough County, those numbers are in my guide to IRS housing standards for Hillsborough County. If your actual mortgage, taxes, insurance and utilities exceed the standard, you need documentation and a reason the IRS should allow more.
When a non-liable spouse lives in the home, the IRS allocates shared expenses between the spouses in proportion to income under IRM 5.15.1.5. The non-liable spouse’s income is generally not counted as the taxpayer’s, but it affects how much of the mortgage the taxpayer gets credit for.
Dissipated equity
If you recently pulled equity out of the house, or used cash to pay down the mortgage after the tax debt arose, expect questions. IRM 5.8.5.18 lets the IRS include dissipated assets in RCP, generally using a three-year look-back, with exceptions for transfers around the time of assessment or during an examination. My guide on sheltering cash in a Florida homestead explains why paying down a mortgage rarely helps.
Building a Florida homeowner’s offer
- Get a credible current value, not a guess from a listing site.
- Pull the recorded deed from the Hillsborough County Clerk to prove how title is held and since when.
- Confirm from transcripts whether the liability is separate or joint. Joint liabilities get no 50 percent treatment.
- Document mortgage balances, property tax and insurance costs, and any HOA or condo dues.
- Explain special circumstances in writing: age, health, the local cost of replacement housing.
GetIRSHelp.com explains the offer in compromise process in more detail.
The IRS will count your house. Your job is to make sure it counts the right house, the right share and the right number.