IRS Offer In Compromise: Settle Tax Debt For Less

An Offer in Compromise (OIC) is an IRS program that allows you to settle your federal tax debt for less than the full amount you owe. According to the IRS, the agency considers your income, expenses, asset equity, and ability to pay when deciding whether to accept an offer. The IRS generally approves an OIC when the proposed amount represents the most the agency can reasonably expect to collect within the remaining time on your account.

An OIC is not automatic debt forgiveness. It is a formal agreement between you and the IRS in which you propose a specific dollar amount, and the IRS evaluates whether accepting that amount is in the government's best interest compared to pursuing the full balance through other collection methods. According to the IRS, three legal grounds can support an OIC: doubt as to liability (you dispute that you owe the amount), doubt as to collectibility (your assets and income are less than the full balance), and effective tax administration (you can pay but doing so would create an unfair economic hardship).

Who Qualifies For An Offer In Compromise

To be eligible for an OIC, you must have filed all required tax returns, made all required estimated tax payments for the current year, and not be in an open bankruptcy proceeding. According to the IRS, you must also have received a bill for at least one tax debt included in your offer. Business owners with employees must be current on federal tax deposits for the current quarter and the two preceding quarters.

Beyond the basic eligibility requirements, qualifying for an accepted OIC depends on your financial picture. The IRS uses national and local expense standards to determine what it considers reasonable monthly living costs. If your income minus allowable expenses leaves little or nothing for tax payments, and your assets have limited equity, you are more likely to have an offer accepted. The IRS provides a free Offer in Compromise Pre-Qualifier tool on its website that helps you check basic eligibility and estimate a preliminary offer amount before you invest time in the full application.

How The IRS Calculates Your Offer Amount

The IRS determines the minimum acceptable offer by calculating your Reasonable Collection Potential (RCP), which is the total of your net asset equity plus your future income the IRS expects to collect. According to the IRS, the RCP formula works as follows.

• Net asset equity. The fair market value of your assets (bank accounts, investments, real estate, vehicles) minus what you owe on them, with a quick-sale discount applied to certain assets.
• Future income. Your monthly disposable income (gross income minus allowable expenses) multiplied by a set number of months. For a lump-sum offer, the IRS multiplies by 12 months. For a periodic payment offer, the multiplier increases to 24 months.

Your offer must equal or exceed your RCP for the IRS to consider it. If the IRS determines your offer is too low, it will typically give you an opportunity to increase the amount before rejecting the application outright.

How To Apply For An Offer In Compromise

Applying for an OIC requires submitting Form 656 (Offer in Compromise), Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, a $205 non-refundable application fee, and an initial payment. According to the IRS, the application fee and initial payment are waived for taxpayers who meet the low-income certification guidelines on Form 656.

The application process requires full financial disclosure, including detailed information about your employment, income, monthly expenses, bank accounts, investments, real estate, and vehicles. According to the IRS, you can now check eligibility, make payments, and file your OIC through your Individual Online Account on IRS.gov. You can also mail the completed package to the address listed on Form 656-B, the Offer in Compromise Booklet, which contains step-by-step instructions for the entire process.

Lump Sum vs Periodic Payment Options

The IRS offers two payment structures for an accepted Offer in Compromise: a lump-sum payment or periodic payments spread over time.

• Lump sum. Submit 20 percent of your total offer amount with the application. If accepted, pay the remaining balance in five or fewer payments within five months.
• Periodic payments. Submit your first monthly payment with the application, then continue making monthly payments while the IRS evaluates your offer. If accepted, pay the remaining balance within 6 to 24 months according to your proposed terms.

According to the IRS, taxpayers who qualify for low-income certification do not need to submit an initial payment with either option and do not need to make monthly payments during the evaluation period. Choosing between lump sum and periodic payments affects how the IRS calculates your RCP. A lump-sum offer uses a 12-month future income multiplier, while a periodic payment offer uses 24 months, which means the minimum acceptable offer is typically higher under the periodic option.

What Happens While The IRS Reviews Your Offer

The IRS can take up to two years to evaluate an OIC application, and several important things happen to your account during that period. According to the IRS, while your offer is under review, the agency suspends most collection activity on your account, including levies and garnishments. However, the IRS may still file a Notice of Federal Tax Lien, and interest continues to accrue on the unpaid balance.

One critical detail: submitting an OIC suspends the 10-year Collection Statute Expiration Date (CSED) while the IRS evaluates your offer, plus 30 additional days if the offer is rejected and through any appeal. This means the total time the IRS has to collect your debt extends beyond the standard 10 years. If your CSED is approaching expiration, this suspension is an important factor to weigh before applying.

According to the IRS, if the agency does not make a determination within two years of receiving your application (excluding any appeal period), your offer is automatically accepted.

What To Do If Your Offer Is Rejected

If the IRS rejects your OIC, you have 30 days to appeal the decision by filing Form 13711, Request for Appeal of Offer in Compromise. According to the IRS, the appeal is reviewed by the Independent Office of Appeals, which is separate from the unit that evaluated your original offer. If the appeal is unsuccessful, the IRS will resume collection activity on your account.

An OIC is not the only path to resolving tax debt you cannot pay in full. Installment agreements allow you to pay over time in monthly installments. Currently Not Collectible status pauses all collection if you cannot afford basic living expenses. Penalty abatement can reduce the penalties on your balance even if the underlying tax remains. Taxpayers evaluating which resolution path fits their situation can compare all four options in the IRS tax debt resolution overview.

Frequently Asked Questions About Offer In Compromise

How Much Will The IRS Settle For?

The IRS will generally accept the lowest amount it believes it can collect based on your Reasonable Collection Potential. According to the IRS, this calculation considers your net asset equity plus your projected disposable income over 12 or 24 months, depending on the payment option you choose. There is no fixed percentage or formula that applies to every taxpayer.

Can I Apply For An OIC On My Own?

Yes, individuals can apply without hiring a representative. According to the IRS, all required forms and instructions are available in Form 656-B, the Offer in Compromise Booklet, and the IRS Pre-Qualifier tool can help you estimate whether your offer is likely to be accepted. However, taxpayers with complex financial situations or large balances often benefit from working with a CPA, Enrolled Agent, or tax attorney.

What Happens If I Don't Follow The OIC Terms After Acceptance?

If you fail to comply with the terms of an accepted OIC, the IRS can terminate the agreement and reinstate the original tax debt minus any payments already made. According to the IRS, OIC terms require you to file all tax returns and pay all taxes on time for the five years following acceptance. Missing a filing or payment deadline during this period puts the entire agreement at risk.

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