Key Takeaways
- Settle tax debt for less than owed.
- Eligibility requires filed returns and no bankruptcy.
- IRS bases offer acceptance on realistic collection ability.
- Application includes financial forms and a fee.
What is Offer in Compromise?
An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed. This option is designed for situations where the taxpayer's ability to pay is limited or when there is doubt about the full collectability of the debt.
The IRS evaluates your financial situation, including income, expenses, and assets, to determine if your offer is acceptable.
Key Characteristics
Understanding the main features of an Offer in Compromise helps you decide if it fits your circumstances.
- Eligibility: You must have filed all required tax returns and not be in a bankruptcy proceeding.
- Application Fee: A non-refundable fee applies, but low-income taxpayers may qualify for a waiver.
- Financial Disclosure: You must submit detailed financial forms, including income, expenses, and asset information.
- Offer Grounds: Includes doubt as to collectability, doubt as to liability, or effective tax administration.
- Payment Terms: Accepted offers require payment in lump sum or periodic installments within IRS timelines.
How It Works
You begin by submitting a complete OIC package, including Form 656 and supporting financial statements, showing your take-home pay and asset equity. The IRS calculates your reasonable collection potential to assess whether your offer reflects your true ability to pay.
If the IRS finds your offer insufficient based on their evaluation, you may increase it or face rejection. During the review, collections are generally suspended, but the IRS can place a lien to protect its interest.
Examples and Use Cases
Offers in Compromise are commonly used by taxpayers experiencing financial hardship or disputes over tax liability.
- Individuals: A taxpayer with limited disposable income and significant asset equity might settle a $30,000 debt for a reduced sum based on their financial situation.
- Businesses: Companies like Delta facing complex tax obligations may explore OIC options to manage outstanding debts when cash flow is constrained.
- Credit Management: Those rebuilding credit might also consider alternatives such as the best credit cards for bad credit alongside an OIC to regain financial stability.
Important Considerations
An Offer in Compromise requires full compliance with future tax obligations for at least five years; failure to comply voids the agreement and reinstates the full debt. The IRS may take months to process offers, and understanding your precise ability to pay is critical before submitting.
Careful evaluation of your financial condition, including realistic income and expenses, improves your chances. For exploring credit options that may complement your tax situation, see our guide on the best low interest credit cards.
Final Words
An Offer in Compromise can reduce your tax burden if you meet the IRS criteria, but the application requires careful documentation and upfront fees. Start by using the IRS Pre-Qualifier Tool to assess your eligibility before submitting your offer.
Frequently Asked Questions
An IRS Offer in Compromise (OIC) is an agreement that lets eligible taxpayers settle their tax debt for less than the full amount owed, based on what the IRS believes it can realistically collect. It is designed for those facing financial hardship or when there is doubt about the tax debt amount or collectability.
To be eligible, taxpayers must have filed all required tax returns, made all required estimated tax payments, not be in an open bankruptcy proceeding, and have received a bill for at least one tax debt. Employers must also have made tax deposits for the current and past two quarters.
The IRS accepts Offers in Compromise based on three main grounds: doubt as to collectability (the offered amount exceeds what the IRS can collect), doubt as to liability (evidence shows the debt amount is incorrect), and effective tax administration (full payment would cause economic hardship or be unfair).
You apply by submitting Form 656 along with Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, plus supporting financial documents and a $205 non-refundable application fee, unless you qualify for a waiver. An initial payment is also required, either 20% of the lump sum or the first installment for periodic payments.
The IRS calculates your reasonable collection potential (RCP) based on your monthly disposable income, asset equity, and allowable expenses. They assess your full financial picture, including income, expenses, assets, and future earning potential, to decide if your offer is acceptable.
Yes, low-income taxpayers may qualify for a fee waiver when submitting an Offer in Compromise. You can use the IRS Offer in Compromise Pre-Qualifier Tool to check your preliminary eligibility for this waiver.
After submission, the IRS suspends collection efforts during the review but may still file a tax lien. The process can take several months, and if the IRS does not make a decision within 24 months (excluding appeals), your offer is automatically accepted.
