The formula takes the "net income" as calculated per the comments above, and multiplies that monthly "extra" cash flow by 60 months, then discounts it by a nationally published interest rate (currently 9%). That represents five years worth of payments the IRS figures you could give it. To that number you must add your "net worth" in your assets.

To calculate "net worth" you start by listing the value of all assets. This is an opportunity to lower the ultimate amount you will pay the government. The regulations require you to state the fair market value. By that the IRS means the value if you could hold out for a while to get top dollar. However, most experienced CPAs and lawyers list the "fire sale" value if you had to sell quickly under great pressure, which is exactly what the IRS is doing to you. Obviously, "fire sale" values are quite different from "take your time" fair market value. As long as you can document the values from independent third parties, you should be able to argue your numbers, not the IRS figures.

Subtract from the total asset value any loans that predate the IRS lien. The IRS will disallow or ignore any unsecured debts (regardless of date) and any secured debts dated after their lien. They will also disallow any related state tax obligations, even though the state obviously will not ignore them. Getting the IRS to allow you to reflect any debts is often a difficult chore.

You will also need to add to this some intangible "assets" to complete your net worth. For example, if you have credit cards with a $30,000 line of credit which currently have $25,000 of outstanding charges, the IRS will ignore the $25,000 liability, but count the remaining $5,000 unused credit as an "asset" for net worth purposes. In other words, the IRS assumes that you could borrow off the card limit and give all the cash to the IRS.

This combination of "net worth" and five years of "cash flow" as the IRS calculates them becomes the minimum amount that the IRS will even consider to compromise your outstanding tax debt. While the IRS prefers to get cash quickly from an Offer in Compromise, you can propose to pay this amount in a few installments over a year or two. In general, if you can pay the IRS in a lump sum within 15 to 30 days of notice of acceptance, then your offer will have a better chance of being accepted.

You should keep in mind that you must make all tax filings and tax payments on time as well as make all Offer in Compromise payments on time for five years after acceptance. If you pay off the Offer in full but miss a tax payment or are late on a tax filing anytime in the next five years, the entire original tax debt that was written off (plus additional penalties and interest) will be imposed again, and the IRS will never again consider waiving that debt. Since the Offer is a discount that the IRS might give you, NOT something it is required to give you, you cannot sue in any court to enforce it once you mess up. You are essentially begging the IRS for undeserved mercy, which the IRS agent may or may not choose to give initially, but which the IRS has an immovable policy against if you miss anything for five years afterwards.