An Offer in Compromise can be filed as one of three types, according to method of payment. These are: (1) Lump Sum Cash; (2) Short Term Periodic Payment; (3) Deferred Periodic Payment. It should be noted that the type of Offer has an effect on the total price.

Regardless of the payment method, the IRS takes what follows into consideration when deciding to accept an Offer in Compromise: (1) Monthly available income; (2) Dissipated Assets (assets lost unnecessarily after the accumulation of tax debt); (3) Retired Debt (debt that is expected to expire); and (4) Assets.

The primary distinction between payment methods is realized by how the IRS factors monthly income into the calculation of the Offer amount.

The Lump Sum Cash Offer is usually the least expensive payment method because it employs the shortest time period to determine the the total earning potential of the taxpayer (48 months). That is to say, it uses all income surplus within a 48-month period to generate the Reasonable Collection Potential (RCP). Thus, if the IRS calculates that the taxpayer has $50 surplus income per month, then they will use $2,400 as the starting point for Offer in Compromise negotiations, factoring in dissipated assets, retired debt, and assets as they would normally.

In the event that the Statute of Limitations on the tax debt expires before the 48-month period is expected to end, then the IRS will calculate the earning potential within the shorter time-frame. Careful analysis must go into any offer decision.