Integrated Analysis of Business Valuation Accuracy and Reliability

Introduction

Business valuations serve as essential instruments in financial decision-making, estate planning, compliance, and transactions. However, concerns remain regarding their long-term accuracy and the dependability of the methodologies used. This comprehensive report merges insights from both technical and practical viewpoints to assess the level of valuation reliability, identify patterns of deviation, and suggest methodologies to improve credibility.​1

How Accuracy is Calculated

Valuation accuracy is assessed by comparing the initial valuation estimate to the actual financial performance or realized transaction value over time. The degree of accuracy is determined using the deviation percentage:

Key statistical measures include:

• Average Deviation: The mean percentage difference between the estimated valuation and actual results, indicating overall reliability.

• Standard Deviation: A measure of dispersion that highlights how much variation exists around the average deviation, offering insight into valuation consistency.​2

• Variance Analysis: A breakdown of differences between estimated and actual financial performance, used to adjust future valuation methodologies for improved accuracy.

These calculations help stakeholders understand the reliability of valuations over different timeframes and under varying market conditions. Regular assessments ensure that adjustments are made in response to external shifts and internal operational changes.

Degree of Accuracy by Type of Business Valuation

Different types of valuations exhibit varying degrees of accuracy based on their purpose and underlying assumptions. For example, ESOP valuations tend to be highly accurate due to regulatory scrutiny, while bankruptcy valuations often show wider discrepancies due to uncertain financial conditions.​3

ESOP (Employee Stock Ownership Plan) and Estate & Gift valuations are typically more accurate due to several reasons.

First, they are subject to strict regulatory oversight by organizations like the Department of Labor and the IRS, requiring accurate and well-documented valuations. This scrutiny helps ensure consistency.

Second, both types of valuations rely on stable and historical data, often from mature and predictable companies, which reduces uncertainty in financial forecasts.

Third, standardized valuation methods are applied, with ESOPs commonly using Fair Market Value and methods like Market and Income Approaches. Estate & Gift valuations use asset-based and market-driven approaches, which are also stable over time.

Fourth, these valuations require minimal speculative projections, relying instead on solid financial statements, thus decreasing the chance of error.

Lastly, ESOP valuations are updated annually to reflect changes in business conditions, while Estate valuations are based on previous transactions, linking them to real-world data.

These factors contribute to the overall accuracy of ESOP and Estate & Gift valuations compared to other types, such as Bankruptcy or Intellectual Property valuations, which involve more uncertainty.

Valuation Accuracy by Timeframe

Valuations are typically most accurate within one year of the report date, with increasing deviations as time progresses. Average and standard deviations demonstrate how assumptions may diverge from actual outcomes.​4

Valuation Accuracy by Industry

Industries with higher volatility, such as Technology and Healthcare, exhibit greater deviations over time compared to more stable sectors like Utilities. This is largely due to factors such as rapid innovation, regulatory changes, and shifting consumer demands in dynamic industries.​5

Valuation Accuracy by Methodology

The stability of valuation methods varies significantly, with Asset-Based Approaches showing the least deviation over time, whereas Income-Based and Discounted Cash Flow models are more susceptible to inaccuracies due to their reliance on long-term projections.​6 The choice of methodology has a direct impact on the level of deviation observed.

The stability of business valuation techniques varies widely depending on the approach each one estimates worth. Approaches based on assets typically show the least time-based fluctuation. They rely on consistent book values corrected for variables like depreciation and concentrate on concrete assets and liabilities that do not change much. Variations in one year are roughly 5% and increase to 18% over five years as a result of the stability of assets and liabilities.

Because the Income Approach calculates worth using anticipated future earnings, which can be influenced by operational, market, and economic uncertainties, it has a greater deviation. Over time, assumptions about expansion and costs can alter drastically. Variations for this technique span from 9% in one year to 27% over five years; longer projections introduce additional risk.

The method of Discounted Cash Flow (DCF) has the most volatility. Long-run hypotheses about cash flows and discounting rates determine it. Small changes in these assumptions can lead to large valuation changes. Deviations for DCF are 10% in one year and can reach 30% after five years, as economic conditions can undermine initial projections.

Moderate stability comes from market-based techniques including similar sales and past events. Market conditions affect these strategies; deviations over five years range from 7% to 22%. Likewise, Comparable Analysis varies depending on market trends; variations range from 8% to 25%.

Generally, the chosen valuation approach greatly impacts over time precision. To validate findings and adjust to shifting markets, analysts sometimes use a combination of approaches.

Factors Influencing Valuation Accuracy

Several internal and external factors impact valuation accuracy over time, making periodic reassessments essential. Below are key influencers that affect deviations:

• Economic Conditions: Market downturns or booms can significantly impact valuation accuracy, as economic cycles influence cash flows, risk perception, and asset values.​7

• Industry Growth Rates: Rapidly evolving industries experience higher volatility in valuation projections, particularly in technology and healthcare sectors where disruption is common.

• Regulatory Changes: Shifts in taxation, compliance requirements, or legal frameworks can affect financial outcomes and impact expected earnings, requiring updated valuations.​8

• Management Decisions: Internal strategic shifts, cost-cutting measures, or expansion plans can lead to variances between expected and actual valuation outcomes.​9

• Competitive Landscape: Increased competition or new market entrants can influence revenue projections and overall company value, requiring an assessment of original estimates.​10

• Inflation and Interest Rates: Changes in macroeconomic variables, such as inflation and interest rates, can influence discount rates used in valuation models, affecting future cash flow predictions.

Analysis of Overstatements vs. Understatements

A thorough analysis of valuation discrepancies uncovers a significant pattern: overstatements occur more frequently than understatements. This directional bias may stem from overly optimistic assumptions, the pressure to validate transaction prices, or forecasting models that inadequately consider risk factors. The inclination to inflate asset or income stream values heightens the risk of regulatory scrutiny, legal challenges, and financial errors.

Statistical evaluations reveal that around 62% of variations in business valuations lead to overstatements, where the projected value surpasses the actual outcome. In contrast, only 38% represent understatements. This disparity highlights the necessity of adopting retrospective testing, conservative forecasting methods, and hybrid valuation strategies to reduce upward bias.

Implications by Valuation Type

Valuation accuracy can vary greatly based on the context and the purpose of the valuation. For example, ESOP valuations, which are performed under strict scrutiny from the Department of Labor (DOL) and the IRS, generally achieve high accuracy, with reported ranges between 85% and 95%. This high level of precision is partly attributed to the regular updates and standardized methodologies that are mandated in ESOP engagements.​11

On the other hand, valuations conducted for bankruptcy proceedings demonstrate much greater variability, with accuracy levels falling between 40% and 70%. The distressed conditions of these businesses, along with unpredictable cash flows and operational instability, lead to a broader range of deviation. Similarly, intellectual property valuations face comparable challenges due to their dependence on speculative forecasts regarding future commercialization and licensing opportunities.

Strategic Recommendations for Improved Accuracy

To enhance the dependability of business valuations, it is essential to establish several strategic practices as standard procedures. A fundamental recommendation is to implement retrospective valuation testing. By regularly comparing projected values with actual results, companies can uncover persistent biases or erroneous assumptions and modify their models as needed.

Moreover, employing a hybrid weighting model—such as distributing 40% to the Market Approach, 40% to the Income Approach, and 20% to the Asset-Based Approach—offers a comprehensive perspective that integrates various valuation methodologies. This probabilistic approach mitigates excessive reliance on any one method and protects against deviations caused by outliers.

Additionally, stochastic modeling techniques, such as Monte Carlo simulations, provide an extra layer of sophistication by simulating a spectrum of possible outcomes and assigning probabilities to each scenario. This is especially beneficial in industries characterized by volatility or rapid growth, where uncertainty is prevalent.

Furthermore, the integration of rolling valuation frameworks and cross-peer evaluations improves model adaptability and guarantees thorough internal validation.

Turning Accuracy into Strategic Value

Ultimately, achieving accurate valuations is not solely about adhering to technical standards; it also involves gaining strategic insights. Organizations that integrate validation processes and regularly revise their assumptions are better equipped for robust financial decision-making, enhanced regulatory confidence, and increased client trust. As the financial environment becomes increasingly intricate, the capacity to validate and justify valuation conclusions evolves from being merely a best practice to a significant competitive edge.

Valuation in High-Volatility Industries

Valuation results are extremely sensitive to the dynamics of the industry. In fields such as Technology and Healthcare, the inherent volatility increases the likelihood of substantial valuation discrepancies. These sectors undergo frequent regulatory changes, rapid cycles of innovation, and shifting consumer preferences, which can swiftly make forecasts outdated. Consequently, valuation techniques that depend heavily on future cash flow estimates, like Discounted Cash Flow (DCF), may be particularly susceptible in these contexts.​12

In contrast, sectors like Utilities and Manufacturing display more stable revenue streams and slower rates of change. This consistency fosters more dependable valuation results, especially when employing methods based on historical performance and tangible assets. It is essential to acknowledge the impact of industry-specific factors when choosing valuation approaches and evaluating their long-term dependability.

Macroeconomic Influences on Valuation Accuracy

Broader macroeconomic factors significantly influence the precision of valuations. Changes in interest rates, inflation, and market liquidity can greatly impact discount rates and cost-of-capital assumptions, which are essential components of income-based and DCF valuation models. For instance, an unexpected increase in interest rates may lower present value estimates, resulting in valuations that are less than what was previously anticipated.​13

During times of economic uncertainty, valuation analysts need to exercise extra caution when incorporating optimistic growth projections. Conducting stress tests and accounting for economic fluctuations can improve the robustness of models and offer stakeholders more realistic expectations regarding potential valuation ranges.

Role of Professional Judgment and Bias Mitigation

Although valuation methods are based on financial principles, the importance of professional judgment is significant. Analysts need to use their discretion when choosing comparable companies, setting discount rates, or predicting future earnings. This element of subjectivity brings the potential for cognitive biases—such as optimism bias, confirmation bias, and anchoring—that can skew valuation results.​14

To mitigate these risks, companies should establish structured review processes, promote differing opinions during model creation, and perform sensitivity analyses to assess the effects of changing assumptions. Additionally, maintaining transparency in documenting key inputs and the reasoning behind selections enhances both defensibility and trust.

Value of Cross-Validation and Peer Review

Implementing cross-validation protocols and peer evaluations provides a robust method for improving the reliability of valuations. Independent assessments can reveal concealed assumptions, incorrect applications of methodology, or oversights in the analysis of financial information. Particularly in critical situations—like litigation, mergers and acquisitions, or regulatory disclosures—gaining insights from various experts diminishes the chances of mistakes and enhances the trustworthiness of the valuation report.

Conclusion

Business valuations are not just one-time estimates; they are ongoing evaluations with important strategic, legal, and financial effects. Valuations tend to lose accuracy over time, particularly in uncertain sectors. Therefore, valuators must use more careful assumptions and strict testing methods to provide reliable estimates.

To improve the accuracy of valuations, professionals should utilize retrospective testing, hybrid models, and advanced techniques like Monte Carlo analysis. Regular peer reviews, constant updates, and a deep understanding of industry and economic trends are crucial for ensuring valuations are accurate.

In summary, using these practices enhances credibility, boosts stakeholder confidence, reduces regulatory risks, and makes valuations more strategic. Valuations are generally most accurate within the first year and become less reliable in volatile industries. The Asset-Based Approach offers stable estimates, while Income-Based models can vary more due to reliance on forecasts.

For business owners, investors, and analysts, regular reassessments are essential. Adapting to economic changes and using various methodologies can improve long-term accuracy. Frequent valuation reviews help ensure informed financial decisions based on current market conditions.

1 Business valuations play a critical role in financial decision-making, with accuracy affected by methodology and industry volatility.

2 Ping Zhou and William Ruland, “Dividend Payout and Future Earnings Growth,” Financial Analysts Journal 62, no. 3 (2006): 58–69.

3 Internal Revenue Service. Valuation of Assets for Estate and Gift Tax Purposes. IRS, 2023.

4 Valuation accuracy tends to decline over time, with 1-year deviations averaging 8%, increasing to 25% over five years.

5 PwC. Valuation Practices in Dynamic Industries. PricewaterhouseCoopers LLP, 2020.

6 Shannon P. Pratt and Alina V. Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th ed. (New York: McGraw-Hill, 2008).

7 Robert F. Bruner, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins, “Best Practices in Estimating the Cost of Capital: Survey and Synthesis,” Financial Practice and Education 8, no. 1 (1998): 13–28.

8 U.S. Department of Labor. Fiduciary Requirements for ESOP Valuation Reports. DOL, 2022.

9 Ping Zhou and William Ruland, “Dividend Payout and Future Earnings Growth,” Financial Analysts Journal 62, no. 3 (2006): 58–69.

10 PwC. Valuation Practices in Dynamic Industries. PricewaterhouseCoopers LLP, 2020.

11 ESOP and Estate & Gift valuations have higher reliability (85–95% and 75–90%) due to regulatory scrutiny and use of historical financial data.

12 Valuation deviation is notably higher in high-volatility sectors like Technology and Healthcare compared to stable sectors like Utilities.

13 Macroeconomic variables, such as interest rates and inflation, significantly influence valuation outcomes by altering cash flow and risk assumptions.

14 Professional judgment introduces cognitive bias; mitigation strategies include peer review and retrospective validation.

Optimizing the “Offer in Compromise” Via Professionally Prepared Projections and Business Valuations

Background

As tax professionals, the ability to provide our clients with a “do over” as it pertains to their tax obligation can be one of the most helpful tools that can be provided. Obviously, this forgiveness or restructuring of one’s tax obligation requires the tax professional and their client to confront a litany of hurdles.

The Offer in Compromise (“OIC”) program was created by the IRS to allow taxpayers to settle their outstanding debt with the IRS for a lower, agreed-upon amount than what was originally owed. The idea behind the program is that many taxpayers cannot pay their tax liability without creating a significant financial hardship. The burden of proof to demonstrate one’s inability to meet their tax obligations rests on the taxpayer. Perhaps more so in this area where the taxpayer is seeking forgiveness or a restructuring on the tax obligation. To obtain this forgiveness, the IRS wants to know why you believe you will not be able to pay off the entire balance - the IRS isn’t going to take just any reason. Justification for the OIC does not include a recession, loss of a client, or poor record keeping. Nevertheless, the IRS has considered disability, substance abuse problems, huge balance amounts, dependent care, limited income potential as a result of advanced age, or serious health matters as good reasons. On average, over the past few years, the IRS accepted approximately $200,000,000 per year in OIC.

The acceptance of the OIC generally can be classified within three domains, these being:

• Doubt as to liability. A taxpayer meets this requirement only if an effective difference as to the existence or amount due by the taxpayer

• Doubt as to collectability exists. For example, where the taxpayer’s assets and income are less than the full amount of the tax liability. This is especially germane with distressed entities

• Despite there being no doubt that the tax obligation exists, and the obligation amounts are known, and OIC may be accepted if by compelling said payment (in full as current required before the OIC) would either create a significant economic hardship or would be unfair and inequitable because of extraordinary conditions.

Obviously, many taxpayers may wish to have their tax obligations “erased or restructured.” However, it is a challenging process that requires justification, time, the experience of the right tax professionals, determining the amount that can be paid within the agreed upon time, and solid validation for the OIC amount. On average the OIC process, excluding appeals, has taken 4 – 6 months. Many of your clients will want to opt for the OIC route simply because it is the only option that lowers the total value of the tax owed. It is also for this reason that this method is the most advertised settlement option by tax resolution companies and accounting firms. The Latin adage is most appropriate - ‘Caveat Emptor’ (‘let the buyer beware’).

Probability of Obtaining an OIC and How to Increase that Opportunity

The role of the professional tax advisor is critical in the OIC process, perhaps more so than virtually any other area of negotiations or presentations with the IRS. Over the past few years, on average, only 30% of the OIC were accepted by the IRS. However, when the taxpayer works with a team of professionals, this acceptance rate has been increased by 70%. These statistics are based on the over 70,000 OIC applied for to the IRS. The following chart illustrates the increase in the number of OIC accepted by the IRS:

This article addresses how to geometrically improve our client’s probability of having the OIC accepted on terms which are fair to all parties. The opportunity for having a successful OIC, that is fair to all parties, is a function of several critical components. These being:

• Communications

• Accurate information

• Professional prepared financial forecast/projections

• Business Valuation.

Communications

With regards to the OIC, the tax professional needs to be candid with their client which includes, but is not limited to, managing their expectations as to the amounts, the costs of this process, and the timing. For example, even if the OIC is “awarded,” the taxpayer needs to understand that they will be under IRS scrutiny to ensure the assumptions made to derive the restructure amount have not been materially altered.

The candid communications are not only with your client but with the IRS. Eliminate any surprises – be frank, prompt, professional, and ensure the data provided is accurate and supportive. The most common mistakes are to apply for an OIC that is totally unrealistic (too low) and not supportable.

Accurate Information

This component to a successful OIC process may appear to be too obvious, even to the most novice reader. Too often the embarrassing situation is needing to amend the process due to new information. This not only forces the process to “restart,” but one loses credibility as to the over information, amounts and ability of the client to manage their financing.

Many of the taxpayers are in this very predicament because they do not have the basic financial controls in place and information available. More times than not the client will not have audited financial statements with reconciling schedules for all the transactions in question. The tax preparer must recreate the financial periods based upon limited data years after the events in question.

Spend the time and prepare a detailed set of documents with each applicable account/transaction reconciled and documented. For those areas that have gaps in support – document said gaps and advise the IRS representative accordingly.

Professional Prepared Financial Forecast/Projections

Before outlining the financial projections, allow me to summarize the importance of this process. The OIC is based upon the taxpayer’s ability to pay based upon the current economic environment and their future revenue stream(s). The preliminary amount that the IRS will pay is a function of two basic economic factors, these being:

• What is the ability of the taxpayer to be able to pay over the next year or two? In other words, the financial projections of the taxpayer, PLUS:

• The adjusted net value of their current economic situation. This will

  be presented in more detail below.

A financial projection is a forecast of future revenues and expenses. Typically, the projection will account for internal or historical data and will include a prediction of external market factors. In general, you will need to develop both short- and mid-term financial projections. At a minimum, the financial projections should include:

• A sales forecast, generally, for a three-year period

• List all the associated expenses required to generate said sales

• Identify and quantify all the Capital Expenditures required to support the revenue stream

• Develop a cash-flow statement

• Develop an Income Statement projections

• Develop a Balance Sheet

• Breakeven analysis

Use the historical financial results as a basis. Include the overall market and the results of your competitors. Document the differentiators associated with the taxpayer.

My recommendation to eliminate seasonality and provide comparability is to have the first three years monthly, summarized into quarterly and annual results. Detailed supporting document is a prerequisite for the OIC. OIC applicants are generally put through a demanding financial analysis before the application is approved.

The above preparation by a professional should not be considered onerous. A taxpayer and all entities should have a financial plan in place. After all, this is just rudimentary financial forethought. The adage is “failing to plan is a plan for failure.”

On your projections, be as accurate as possible even if you must present best- and worst-case scenarios. For if the IRS accepts the taxpayer’s OIC, the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer doesn’t fulfill their obligations by the terms and conditions of the OIC, the IRS could classify the OIC as in default. Recall that for the accepted OIC, the terms and conditions generally include a requirement that the taxpayer timely file all tax returns and timely payments of all taxes for 5 years. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties.

In summary, ensure that the projections are achievable, and that the taxpayer can fulfill their obligations. If an unforeseen material issue arises, notify the IRS and have a plan on how the taxpayer is going to mitigate this exposure. Again, as stated above, no surprises to the IRS.

Business Valuation

This stage of the OIC process – the Business Valuation - is the “Achilles Heel” for most non-individual applications for the OIC. Recall, the OIC financial basis is driven by the ability to pay in the future (Projections) and the current economic environment (a Business Valuation). The IRS has not only defined the requisite requirements of an IRS valuator, but the IRS is most specific on the methodology and processes germane to business valuations to be submitted to the IRS.

A business valuation is a complex process, especially when addressing atypical business environments — distressed entities and the IRS. The IRS requires that the business valuator be a “Qualified Appraiser.” The regulations state a “Qualified Appraiser” is one who has earned an appraisal designation from a professional appraisal organization, has the appropriate education and experience, and performs appraisals on a regular basis.

Since 1959, the IRS (IRS Revenue Ruling 59-60) has created the expectations for its valuation requirements. In summary these being:

• The nature of the business and its history

• The book value of the company stock and its financial condition

• The dividend paying ability of the firm

• The presence of goodwill and other intangible assets

• Sales of company stock, sizes of stock blocks to be valued

• Market price of stock of companies in the same line of business whose stock trades freely on the open market

The tax authorities are typically interested in the business cash flow outlook. So, a realistic earnings forecast is useful both for your income-based business valuation as well as meeting the level of transparency expected of a well thought out business appraisal. However, as described below this is easier said than done.

Why is the Business Valuation so much more Complex for the OIC?

• Attestation. The IRS requires that the valuation be formally certified by the business valuator. Furthermore, the business valuator for the IRS engagements must state that their opinion is not based to limit one’s tax payment but is a true reflection of the value of the business. Any offense to this certification carries severe professional penalties and liabilities. There are many business valuation firms that do not work with the IRS requirements due to this risk plus those listed below.

In addition, although all business valuations require proper document and supporting documentation, generally, the business valuations for the IRS are at the extreme end of the spectrum as it relates to documentation and supporting documentation. As you are aware, the burden of proof is on the taxpayer and the taxpayer is requesting a significant restructuring of a debt that is owed.

• Going Concern. This is the #1 challenge associated with a business valuation associated with an entity that has significant tax obligations. In non-accounting terms: can this entity survive in the long-term given the overall obligations in comparison to its ability to pay? By definition of the OIC the entity’s unable to address its financial/tax obligations, when there is a significant likelihood that an entity will not survive the immediate future (next few years), traditional valuation models may yield an over-optimistic estimate of value.

• Valuation Methodologies. Generally, a business valuation weighs three methods of valuing the entity:

  • Market Base – what is the value of their competitors in the market?

    However, with the tax obligation outstanding and its inability to pay, this

    does not allow for a meaningful valuation comparison to their competitors

  • Income Method (commonly referred to as the Discounted Cash Flow) – this

    approach measures how much net income can be generated over the long-

    term life of the entity at a discounted rate based upon risks. This method

    also presents its own challenges with the OIC process. First, as described

    above, does the entity have a long-term opportunity – is it a “going

    concern?” Secondly, the risks associated with an entity in arrears to its tax

    obligation plus its inability to pay such obligations yields an extremely

    high-risk factor. This quantified risk factor can be so high that this income

    method will not yield meaningful results

  • Asset Method – what are the value of the underlying assets of the entity

    less its liabilities/obligations. Remember for the IRS purposes, generally -

    the valuator can reduce the valuation by the tax obligation in full. For the

    sake of simplicity, let us assume that we can determine all the assets both

    tangible and intangible (including goodwill and Intellectual Properties).

    The challenge in the asset method of valuating the assets in such an entity

    are what premise does one value these assets?

  • Fair market value (FMV) is the price that property would sell for on

    the open market. It is the price that would be agreed on between a

    willing buyer and a willing seller, with neither being required to act,

    and both having reasonable knowledge of the relevant facts.

  • The fair value as the “the price that would be received to sell an

    asset or paid to transfer a liability in an orderly transaction between

    market participants at the measurement date.”

  • The orderly liquidation value (“OLV”) is typically included in an

    appraisal of hard tangible assets (i.e., equipment). It is an estimate

    of the gross amount that the tangible assets would earn in an

    auction-style liquidation with the seller needing to sell the assets on

    an “as-is, where-is” basis.

  • Forced Liquidation Value (“FLV”) is the values expected to be

    produced if the company or machinery and equipment had to be

    disposed of much more quickly. For example – what if the assets

    must be sold within 90 days. This would significantly diminish the

    value of the assets in comparison to the OLV.

When selecting a Qualified Appraiser, ensure that the firm has significant experience in dealing with distressed or challenged entities. The core facts are so different and require a totally different set of parameters. Secondly, ensure that the Qualified Appraiser has had experience in being an expert witness so that they can explain their methodology, procedures and working papers.

• Risk of the entity – The foundation of the business valuation is based upon the ability to generate revenue and its correlated risks. As briefly described above, the risks associated with materially outstanding tax obligations as it pertains to the entity’s survivability generates a risk (discounted rate) so high that the associated results are too often skewed to be beneficial or reflective of the true economic value of the entity.

• The format and components required by the IRS in the OIC environment are atypical. Therefore, experience in dealing with distressed entities, understanding of the tax code, ability to communicate the results as an expert witness and knowledge of the business valuation methodologies are prerequisites that a Qualified Appraisers needs to assist you, the tax professional, in optimizing your client’s chances of obtaining the OIC.

Mythic of the OIC Amounts

Although the IRS has numerous guidelines on how to determine the OIC amount if accepted, there are no “fast and set” calculations to derive the OIC amounts and/or payment schedules. There is no doubt that the criteria is based upon the ability to pay in the future (projections) + the valuation of the net assets. But it is the combination of the aforementioned factors that determine the amounts involved.

The reality is success with an OIC is based on a full understanding of the IRS investigative process into ability to pay coupled with the net value of the assets in question. It is not a one size fits all situation; the amount of one person’s settlement has no bearing on the success of another’s. The IRS does not have a set percentage of settlement to the amount owed.

An Offer in Compromise does not affect your credit. Credit services have no idea that you have filed an offer or are seeking relief. The key is that your offer is accepted. Once the offer is accepted and paid, any tax lien should be released.