Offers In Compromise: A Guide for Taxpayers

An Offer in Compromise (OIC) is an agreement between you and the Internal Revenue Service (IRS) to settle your tax debt for less than the full amount you owe. This option may be available if you cannot pay your full tax liability or if paying it would cause financial hardship. The OIC program allows taxpayers to resolve their tax debt while avoiding more severe collection actions such as wage garnishments or asset levies.

The IRS will generally accept an OIC when the amount offered represents the most the IRS can expect to collect within a reasonable time period. The IRS considers several factors when evaluating your offer, including your ability to pay, current income, necessary living expenses, and the equity you have in assets. The goal is to determine what the IRS could reasonably collect through its collection procedures, and an acceptable offer typically matches or exceeds that amount.

When Is an Offer in Compromise Appropriate?

An OIC may be appropriate if you can demonstrate one of three circumstances: doubt as to liability (you don't actually owe the tax), doubt as to collectibility (you cannot pay the full amount), or effective tax administration (paying the tax would create an economic hardship or would be unfair). Most OIC applications are based on doubt as to collectibility, where the taxpayer cannot pay the full amount owed within the statutory collection period.

To qualify, you must be current with all tax return filing requirements and cannot be in an open bankruptcy proceeding. The IRS will also consider whether you have the ability to pay the tax debt through other means, such as an installment agreement, before accepting an OIC.

The Application Process

To apply for an OIC, you must complete Form 656, Offer in Compromise, along with the appropriate collection information statement. For individuals, this is Form 433-A (OIC), and for businesses, it's Form 433-B (OIC). These forms require detailed financial information including income, expenses, assets, and liabilities.

You must also pay the required application fee (currently $205, though this may be waived in certain circumstances) and make an initial payment. The initial payment depends on the payment option you choose: lump sum cash (20% of the offer amount) or periodic payment (first payment plus monthly payments while the offer is under consideration). The required forms can be found on the IRS website: Form 656 and Form 433-A (OIC).

What to Expect

The IRS typically takes several months to evaluate an OIC application, often six months or more. During this time, the statute of limitations for collection is extended, and while collection activity is generally suspended, the IRS may still file a Notice of Federal Tax Lien to protect its interests.

If your offer is accepted, you must comply with all tax filing and payment requirements for five years after acceptance, including making all required payments and filing all returns on time. Failure to comply can result in the offer being revoked and the full amount becoming due again.

If your offer is rejected, you have the right to appeal within 30 days. It's important to understand that most OIC applications are rejected, so it's wise to ensure your offer accurately reflects your financial situation and represents a reasonable amount based on IRS collection potential calculations.