Offer in Compromise: Can You Settle Your IRS Tax Debt for Less?

A Guide to the IRS Offer in Compromise Program and Who May Qualify

If you owe money to the IRS and don't have the financial ability to pay your full tax debt, you may be wondering if there is a way to settle your IRS tax debt for less than you owe. In some situations, an Offer in Compromise (OIC) may allow eligible taxpayers to settle their tax debt for less than the full amount.

However, an Offer in Compromise isn't available to everyone, and submitting an application doesn't guarantee that the IRS will accept your offer. The IRS evaluates each taxpayer's individual circumstances, including their ability to pay, income, expenses, and assets. Understanding how the Offer in Compromise program works can help you determine whether it may be an option for your tax situation.

Important: An Offer in Compromise is a specific IRS program with strict eligibility requirements. This article is for educational purposes and should not be considered legal or tax advice. Always verify current IRS requirements or consult a qualified tax professional.

What Is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the IRS that may allow the taxpayer to settle eligible tax debt for less than the total amount owed. The IRS may consider accepting an offer when it determines that the amount offered represents the most it can reasonably expect to collect within an appropriate period.

This means the IRS doesn't simply reduce tax debt because someone asks. Instead, it evaluates the taxpayer's financial situation and determines whether collecting the full amount is realistic. The IRS generally considers factors such as:

• Ability to pay
• Income
• Monthly expenses
• Asset equity
• Overall financial circumstances

For taxpayers facing significant financial hardship, an Offer in Compromise may be one potential option to explore.

Who May Qualify for an Offer in Compromise?

Not every taxpayer with IRS debt qualifies for an Offer in Compromise. Generally, taxpayers must meet certain requirements before the IRS will consider their application. You may be eligible to apply if you:

• Have filed all required tax returns
• Have made all required estimated tax payments
• Are not currently involved in an open bankruptcy proceeding
• Have a valid extension for a current-year tax return, when applicable

Businesses may have additional requirements. For example, employers generally need to have made required federal tax deposits for the current and previous two quarters before submitting an Offer in Compromise application. Because eligibility requirements can vary depending on your circumstances, it's important to review the current IRS guidelines before applying.

How Does the IRS Decide Whether to Accept an Offer?

The IRS considers your individual financial circumstances when evaluating an Offer in Compromise. The agency may look at:

Your Income

The IRS reviews your income to determine how much you may realistically be able to pay toward your tax debt. This can include income from:

• Employment
• Self-employment
• Business activities
• Investments
• Other sources

Your Expenses

The IRS may evaluate your necessary living expenses to determine how much disposable income you have available to pay your tax liability.

Your Assets

The value of your assets and available equity may also play an important role. Assets may include:

• Real estate
• Vehicles
• Bank accounts
• Investments
• Business assets
• Other valuable property

Your Ability to Pay

Ultimately, the IRS generally wants to determine how much it can reasonably collect from you. If the IRS believes you can pay the full amount through an installment agreement or another payment option, an Offer in Compromise may not be the best solution.

The IRS Offer in Compromise Pre-Qualifier Tool

Before submitting an application, taxpayers can use the IRS Offer in Compromise Pre-Qualifier Tool to get an initial indication of whether they may qualify. The tool can help taxpayers:

• Review basic eligibility
• Understand potential offer amounts
• Prepare for the application process

However, the pre-qualifier is not a guarantee that the IRS will accept your offer. Your complete financial situation will still be evaluated as part of the formal application process.

What Do You Need to Apply for an Offer in Compromise?

Applying for an Offer in Compromise generally requires a detailed application package. Depending on whether you are an individual or a business, you may need to submit:

• Form 433-A (OIC) for individuals
• Form 433-B (OIC) for businesses
• Form 656
• Supporting financial documentation
• Required application fees
• An initial payment, when applicable

Taxpayers with both individual and business tax debt may need to submit separate Forms 656 for each type of liability. The IRS provides instructions and application requirements through the Form 656-B, Offer in Compromise Booklet. Because the application process involves detailed financial information, mistakes or missing documentation may delay processing or result in the application being returned.

How Much Does an Offer in Compromise Cost?

According to the IRS information provided, the standard application process includes a $205 application fee and an initial payment. However, taxpayers who meet the IRS's low-income certification guidelines may not have to pay the application fee or make certain initial payments. The exact payment requirements depend on the offer amount and the payment option selected. Always check the latest IRS requirements before submitting your application.

Offer in Compromise Payment Options

Taxpayers generally have different ways to pay an accepted Offer in Compromise.

Lump-Sum Cash Payment

Under the lump-sum payment option, the taxpayer generally submits an initial payment equal to 20% of the total offer amount with the application. If the IRS accepts the offer, the remaining balance must generally be paid in five or fewer payments.

Periodic Payment Option

Under the periodic payment option, the taxpayer submits an initial payment with the application and continues making monthly payments while the IRS evaluates the offer. If the IRS accepts the offer, the taxpayer continues making monthly payments until the agreed amount is paid in full. The payment structure you choose can have a significant impact on your financial situation, so it's important to understand the requirements before applying.

What Happens While the IRS Reviews Your Offer?

Once your Offer in Compromise application is submitted, the IRS will review the application to determine whether it can be processed. The IRS may request additional information or documentation.

During the review process:

• Payments and fees may be applied to your tax liability
• The IRS may file a federal tax lien
• Certain collection activities may be suspended
• The legal collection period may be extended
• You may need to continue making required payments under your offer

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The IRS may also take other actions depending on your specific circumstances.It's important to understand that submitting an Offer in Compromise does not automatically eliminate your tax debt.

What Happens If the IRS Accepts Your Offer?

If the IRS accepts your Offer in Compromise, you must follow all of the terms included in the agreement. This generally includes:

• Filing all required tax returns
• Paying all required taxes on time
• Completing the agreed payment schedule
• Meeting all other terms of the agreement

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Failing to comply with the terms of the agreement can have serious consequences and may cause the IRS to revoke the agreement. Taxpayers should carefully review the terms of an accepted Offer in Compromise and maintain compliance with their federal tax obligations.

What Happens If the IRS Rejects Your Offer?

The IRS may reject an Offer in Compromise if it determines that the taxpayer can pay more than the amount offered or if the taxpayer doesn't meet the program requirements. A rejected offer doesn't necessarily mean you have no options.

Depending on the circumstances, you may be able to appeal the IRS decision. According to the IRS process described in the source information, taxpayers generally have 30 days to appeal a rejected Offer in Compromise using Form 13711, Request for Appeal of Offer in Compromise. An appeal gives the taxpayer an opportunity to present additional information or challenge the IRS's determination.

Is an Offer in Compromise the Best Option for You?

An Offer in Compromise can be helpful in certain circumstances, but it isn't the right solution for every taxpayer. Before applying, you may want to explore other options, such as:

• IRS installment agreements
• Payment plans
• Temporary collection delay
• Other IRS tax resolution options

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The right solution depends on your financial situation, including your income, expenses, assets, and total tax liability. A tax professional can help you compare potential options before you commit to an application.

Be Careful When Choosing a Tax Relief Company

Taxpayers struggling with IRS debt may encounter companies promising to settle tax debt for pennies on the dollar. Be cautious. An Offer in Compromise is a legitimate IRS program, but not everyone qualifies. Before hiring a tax professional or tax relief company, consider:

• Their qualifications
• Their experience with IRS tax debt
• Their fee structure
• What services are included
• Whether they clearly explain your options
• Whether they make unrealistic promises

No reputable professional should guarantee that the IRS will accept your Offer in Compromise before reviewing your financial situation.

Can the IRS Really Settle Tax Debt for Less?

Yes, in some cases. An Offer in Compromise may allow an eligible taxpayer to settle their IRS tax debt for less than the total amount owed. However, the IRS evaluates each case individually. Your offer must generally reflect what the IRS believes it can reasonably expect to collect based on your financial circumstances.

That means an Offer in Compromise isn't simply a way to negotiate a lower tax bill. It is a structured IRS program with specific eligibility requirements, financial disclosures, and compliance obligations.

Final Thoughts: Should You Consider an Offer in Compromise?

If you're struggling with IRS tax debt and don't believe you can afford to pay the full amount, an Offer in Compromise may be worth exploring. However, it's important to understand that the program is not available to everyone, and the IRS carefully evaluates each application.

Before applying, consider reviewing your eligibility, gathering your financial information, and exploring other tax resolution options. If you believe an Offer in Compromise may be right for you, getting professional guidance can help you better understand the process and avoid costly mistakes.

Need Help With IRS Tax Debt?

At Resoly, we help taxpayers understand their options when facing IRS tax debt and collection issues. Our team can help you evaluate your situation, understand potential tax relief solutions, and navigate the tax resolution process. Don't let IRS tax debt overwhelm you. Contact Resoly today to explore your tax relief options and take the next step toward resolving your tax debt.