If you’re drowning in tax debt and looking for a way to settle for less than what you owe, the IRS Offer in Compromise (OIC) might be your golden ticket. But before you start dreaming about a massive tax debt reduction, let’s break down what it takes to qualify, how the process works, and the key strategies to increase your chances of success.
What Is an Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the full amount owed. The IRS offers this program to individuals and businesses that can prove they are unable to pay their full tax liability due to financial hardship.
Who Qualifies for an Offer in Compromise?
Not everyone qualifies for an OIC. The IRS carefully evaluates offers based on three primary criteria:
- Doubt as to Collectibility – The IRS believes that it is unlikely they will ever be able to collect the full tax debt from you.
- Doubt as to Liability – There is a legitimate dispute over whether you actually owe the tax debt.
- Effective Tax Administration – Even if you technically can pay, forcing you to do so would create an undue financial hardship.
To get an idea of whether you qualify, you can use the IRS Pre-Qualifier Tool on their website.
How to Apply for an Offer in Compromise
Applying for an OIC involves submitting Form 656, Offer in Compromise, along with a financial disclosure (Form 433-A for individuals or Form 433-B for businesses). These forms require a detailed look at your financial situation, including:
- Income
- Expenses
- Assets
- Liabilities
You must also include an application fee of $205 (unless you qualify for a low-income waiver) and an initial payment based on your offer structure.
Offer Payment Options
There are two primary ways to pay your OIC:
- Lump-Sum Cash Offer
- You pay 20% of your total offer amount upfront.
- The remaining balance must be paid in five or fewer installments within five months.
- Periodic Payment Offer
- You make an initial payment and then continue making monthly payments while the IRS reviews your offer.
- If the offer is accepted, you continue making payments until the total amount is paid off (typically within two years).
What Happens After You Submit Your OIC?
Once you submit your offer, the IRS will:
- Review your financial information to determine if you truly cannot pay the full amount.
- Temporarily halt collections while reviewing your application.
- Make a decision in 6-12 months (sometimes longer).
- Either accept, reject, or counter your offer.
If rejected, you have 30 days to appeal using Form 13711, Request for Appeal of Offer in Compromise.
Tips to Improve Your Chances of Approval
- Be Realistic with Your Offer – The IRS will reject offers that are too low compared to what they believe they can collect.
- Make Sure Your Tax Filings Are Current – You must have filed all required tax returns and made estimated payments for the current year.
- Demonstrate Financial Hardship – Show that you lack the income and assets to pay off the full amount.
- Avoid Underreporting Income – The IRS will verify everything you submit.
- Consider Professional Help – Tax professionals, like attorneys or enrolled agents, can improve your chances of getting an offer approved.
Is an OIC the Right Option for You?
The Offer in Compromise program is a fantastic option for taxpayers who truly cannot pay their full debt. However, it’s not a magic fix for everyone. The IRS rejects most OIC applications because they believe the taxpayer can pay through an installment plan instead.
If you don’t qualify for an OIC, consider:
- Installment Agreements – Monthly payments to the IRS.
- Currently Not Collectible (CNC) Status – If you can’t afford to pay anything at all.
- Bankruptcy – Certain tax debts may be dischargeable.
Final Thoughts
If you’re struggling with tax debt and think you might qualify for an Offer in Compromise, act fast. The IRS is more likely to accept an offer when your financial situation is dire, rather than waiting until you’ve recovered. If in doubt, consulting a tax attorney or enrolled agent can significantly improve your chances of success.
