Owing tax debt to the IRS can be stressful, especially when the tax bill is more than you can reasonably afford. The IRS sometimes agrees that collecting the full amount is not in the best interest of the government or the taxpayer. For those cases, the IRS offers the Offer in Compromise program. This compromise program allows eligible taxpayers and businesses to settle their tax debt for less than the total amount owed. It’s intended for individuals facing financial hardship or those who may not legally owe the full tax liability.
This is a formal government program, unlike the options a tax relief company promotes. However, the process requires preparation. Applicants must file all the necessary tax returns, be current with tax payments, and submit detailed supporting documentation about their income, expenses, and assets. The program isn’t right for everyone. To qualify, taxpayers must show they cannot pay the full amount and are in compliance with tax laws. Understanding your financial condition and how the IRS reviews each application is critical. This guide will help you determine whether you qualify for the Offer in Compromise and how to use it to resolve your tax debt responsibly.
The IRS Offer in Compromise (OIC) program allows eligible taxpayers to settle their tax debt for less than the total amount owed. This compromise program is intended for individuals and businesses that cannot afford to pay their full tax liability or for whom paying would create significant financial hardship.
The OIC program aims to help taxpayers resolve their debt while enabling the IRS to collect what it reasonably can. Rather than aggressively pursuing the full amount, the IRS may accept a reduced offer when it reflects the taxpayer’s actual financial condition. The decision is based on a detailed review of income, assets, basic living expenses, and other economic factors.
This program may be a good fit if:
Taxpayers who wish to apply must file all required tax returns, comply with tax laws, and provide supporting documentation. The formal application process involves the IRS reviewing personal and financial information to determine eligibility and payment potential.
It is important to note that not all offers are accepted. The IRS only approves offers that are in its best interest and supported by complete documentation. Additionally, the program is unavailable to taxpayers involved in an open bankruptcy proceeding.
By understanding the program’s requirements and preparing accurate information, taxpayers may be able to settle their tax debt and gain relief from collection actions. The Offer in Compromise can be a powerful tool to resolve tax issues, provided the application is handled correctly and reflects the taxpayers' ability to pay.
The IRS Offer in Compromise (OIC) program requires taxpayers to meet strict eligibility requirements. The IRS uses these rules to ensure the compromise program is reserved for individuals and businesses that cannot pay their full tax liability due to financial hardship or other qualifying factors.
The first step is to meet the basic eligibility criteria. Taxpayers not complying with IRS requirements may have their application returned without consideration. While submitting an offer does not guarantee acceptance, failing to meet the qualifications will immediately disqualify an applicant.
Minimum Eligibility Requirements
Applicants must:
Additional Considerations
The IRS also evaluates the applicant’s overall financial condition, including income, assets, basic living expenses, and payment potential. These factors determine whether the offer reflects the most the IRS can expect to collect.
You may apply if you can't pay your tax bill and meet the above requirements. A complete application with accurate financial information and supporting documentation is essential for a successful review.
The IRS will only accept an Offer in Compromise (OIC) if the taxpayer’s case fits one of three legal grounds established under federal tax laws. These grounds are designed to ensure that the compromise program is used appropriately and fairly. Understanding these categories helps taxpayers determine whether their situation may qualify for relief.
This applies when there is a legitimate dispute about whether the taxpayer owes the full tax liability. This ground may be used if the assessed amount is wrong or the IRS mistakenly evaluates the taxpayer's tax bill. Taxpayers must submit supporting documentation to substantiate their claim.
This is the most common basis for acceptance. It applies when the taxpayer’s financial condition makes full payment unlikely. The IRS may consider your offer if your income, assets, and basic living expenses show you cannot pay the total amount owed. The offer must reflect the most the IRS can expect to collect.
Even if the tax debt is accurate and collectible, the IRS may accept an offer if collecting the full amount would cause undue financial hardship or be unfair under extraordinary circumstances. This category includes situations where payment would prevent the taxpayer from meeting essential living needs or where special considerations apply.
Each offer must be based on one and only one of these legal grounds. Taxpayers must indicate the basis of their offer and provide relevant financial records or legal documents to support their position. Choosing the correct category ensures proper consideration of the offer and improves the chances of IRS acceptance.
The IRS uses a formula called Reasonable Collection Potential (RCP) to evaluate an Offer in Compromise. This determines how much the IRS can expect to collect from the taxpayer based on income, assets, and allowable expenses. To be considered, your offer must equal or exceed this amount.
The IRS scrutinizes your financial condition, including your earnings, assets, and debts. RCP is calculated by adding the net value of your assets to a projection of your future disposable income.
The IRS assesses the net equity of all personal and business assets.
The IRS considers your current and expected monthly income. It subtracts standard basic living expenses based on IRS guidelines. What’s left is your disposable income.
Offer amount = Net asset equity + (Monthly disposable income × multiplier)
The multiplier depends on your payment plan:
Taxpayers must submit supporting documentation for all reported assets and income. Offers that fall below your calculated RCP are generally rejected.
Understanding how the IRS determines your offer amount is essential. Submitting a proposal based on accurate figures and acceptable payment plans improves your chances of settling your tax debt and avoiding further penalties and interest.
Applying for an Offer in Compromise requires careful attention to IRS guidelines, detailed financial records, and full compliance with current tax laws. If you cannot pay your full tax liability and meet eligibility requirements, the IRS allows you to request a reduction through its compromise program.
Review IRS Form 656-B, which contains instructions, eligibility rules, and all required forms. Always verify that you are using the last reviewed or updated version. The IRS frequently revises documentation and procedures.
You can also use the Offer in Compromise Pre-Qualifier Tool, available through your online account. This tool helps you determine whether you qualify and what you must submit. It’s a helpful step before gathering paperwork or deciding how to proceed.
There are two main types of offers:
If you owe personal and business tax debt, you must submit separate applications for each account, including its form, application fee, and payment.
You must submit accurate supporting documentation that reflects your financial condition. This includes:
The IRS may request additional information. Missing or incomplete records can result in rejection or delayed review.
Most applicants must pay a $205 application fee. You must also include an initial payment unless you meet the IRS low-income certification guidelines.
Two payment options are available:
These payments are nonrefundable. However, you may eliminate the upfront fee and payment requirement if you meet low-income thresholds.
You can mail your completed application to the IRS address on Form 656. Submission addresses vary depending on your state and whether you include a payment.
Some taxpayers can apply online through their accounts. While this option is inaccessible to everyone, it may simplify the process if their case qualifies.
Please ensure your packet includes the following:
Once it receives your application, the IRS will begin evaluating it. Review times can vary, but they often take several months. The IRS may contact you for clarification, verification, or additional information.
Most communication will arrive by mail, so check regularly. You can also log in to your online account to view updates and letters.
Once they make a final decision, the IRS will notify you. If your offer is accepted, you must meet the terms to settle your tax debt and comply with future tax obligations. If rejected, you may contact the IRS, appeal the decision, or work with the taxpayer advocate service to explore next steps. If the IRS rejects your offer, they may suggest an installment agreement or another payment option. You cannot submit an offer in an open bankruptcy proceeding.
After you submit your Offer in Compromise, the IRS formally reviews your application, financial condition, and tax debt. The review process takes time and involves several necessary steps.
The IRS first checks whether your application is complete. If required forms, fees, or supporting documentation are missing, they will return your application. You will receive a notice by mail outlining the issue. Returned offers are not evaluated and do not qualify for appeal.
If your packet is complete, the IRS will review your tax bill, income, assets, expenses, and any additional information needed to assess your eligibility.
Your case is assigned to an IRS offer examiner. During this stage, the IRS may contact you directly or contact your authorized representative. They may request updated records or ask for clarification on the provided information.
Most communication will occur by mail, but the IRS may call if urgent. The IRS may reject your offer if you fail to respond or submit documents promptly.
While the IRS reviews your offer, most collection actions are suspended. However, interest and penalties continue to apply. If you selected a periodic payment option, you must continue making monthly payments as agreed. Missing payments may lead to automatic rejection.
Once the review is complete, the IRS will issue a final decision by mail. You must follow the terms to eliminate your remaining tax debt if accepted. If rejected, you may contact the IRS, file an appeal, or seek help from the taxpayer advocate service. Sometimes, the IRS may offer an installment agreement as an alternative resolution.
After reviewing your offer in compromise, the IRS will issue a final decision. The outcome may be an acceptance, a rejection, or a return if the application was incomplete or ineligible for consideration. Each outcome has different implications and next steps.
An acceptance means the IRS agrees to settle your tax liability under the terms you proposed or modified during review. You must:
Failure to comply can eliminate the agreement's benefits and restart collection activities.
A rejection occurs when the IRS decides your offer does not meet the criteria. Common reasons include:
If rejected, you will receive a letter by mail explaining the reason.
You have 30 days from the rejection letter date to file an appeal using IRS Form 13711. You may:
The appeal process allows the IRS to reconsider its decision before moving to enforced collection or referring you to another resolution option like an installment agreement.
Timely responses and accurate records improve your chances of success at this stage.
If you do not qualify for an Offer in Compromise, there are other IRS-approved methods to help you resolve your tax debt. These alternatives are often more accessible and can prevent further penalties or enforcement actions.
This option allows you to pay your tax bill in fixed monthly payments. The IRS continues to charge interest and penalties, but collections are generally suspended while the agreement remains active. You must stay current on all tax filings and payments.
If paying any amount would create financial hardship, you may request CNC status. This temporarily suspends IRS collection activity. While interest and penalties still accrue, the IRS will not enforce collections while your account is in this status.
You may qualify for penalties to be removed if you experienced reasonable cause, such as a medical emergency or natural disaster. While this does not eliminate the underlying tax liability, it can reduce the total amount you owe.
This applies when your spouse or former spouse is solely responsible for an incorrect tax return. If approved, you may be relieved of part or all of the joint tax liability.
Before making a decision, consider speaking with the taxpayer advocate service. This independent organization can provide additional information and help you choose the resolution option that best suits your financial condition and circumstances.
Applying for an offer in compromise requires accuracy and complete financial disclosure. Many applications are delayed or rejected due to preventable mistakes. Avoid the following errors to improve your chances of approval.
Applying without the correct form, supporting documentation, or the $205 fee may result in immediate rejection. Always double-check that your packet is complete before you mail it.
Your offer will not be considered if you haven’t filed all required tax returns. The IRS requires full compliance with filing obligations before reviewing your request.
Underreporting your income, assets, or basic living expenses can damage your case. The IRS carefully examines your financial situation, so please provide accurate records.
If the IRS contacts you by mail for clarification or additional details, please respond promptly. Failing to comply may result in a denied offer.
The IRS does not accept offers from taxpayers in open bankruptcy. Wait until the proceeding is closed before submitting your application.
Avoiding these mistakes can help ensure your application is complete, accurate, and eligible for consideration.
Not all taxpayers need assistance applying for an Offer in Compromise, but professional help can make the process more effective. Knowing when to seek guidance can improve your outcome and reduce errors.
Your Financial Situation Is Complex
If you have multiple income sources, significant assets, or irregular expenses, a tax professional can help prepare accurate forms and supporting documentation that reflect your financial condition.
You Are Unsure Which Relief Option Fits
A professional can help you decide whether the Offer in Compromise is your best option or if another route—such as an installment agreement—better suits your financial hardship and goals.
You Need Representation
Tax professionals can act on your behalf, submit forms, respond to IRS mail, and communicate directly with the IRS. These services can alleviate stress and guarantee the fulfillment of deadlines and requirements.
You Want Free or Low-Cost Support
The taxpayer advocate service is an independent organization that provides free help to taxpayers experiencing hardship or unresolved issues. They can offer additional information and guidance based on your case.
If you're uncertain about the process, professional assistance can ensure your offer is complete, accurate, and fully compliant with tax laws.
Find answers to standard Offer in Compromise questions for taxpayers unable to pay their full tax bill. Learn about eligibility, payment terms, application fees, timelines, individual online account use, and how the taxpayer advocate service can help.
Your offer should reflect your reasonable collection potential, which includes your income, assets, and allowable expenses. The IRS will not accept a significantly less offer than it believes it can collect. Using the Offer in Compromise Pre-Qualifier Tool can help you calculate a realistic offer amount based on your financial condition.
No. The IRS requires that all required tax returns be filed before it will consider your offer. If you apply with missing returns, your application may be returned without review. To be eligible, you must be in full tax filing compliance and meet all current payment requirements, if applicable.
Missing a payment after accepting your offer may result in your agreement defaulting. If you default, the IRS may reinstate the original tax bill, interest, and penalties. To avoid this, make all timely payments and comply with future tax filing and payment obligations for the next five years.
The IRS typically takes between 6 and 12 months to issue a decision, but complex cases may take up to 24 months. During this time, the IRS may contact you for clarification or additional documentation. Please ensure your contact information is current and respond promptly to help prevent any delays.
No, the $205 application fee is nonrefundable, even if your offer is returned, withdrawn, or rejected. However, taxpayers who meet low-income certification guidelines are not required to pay the fee. Check IRS Form 656 instructions to determine whether you qualify for this exemption.
Yes, businesses that owe payroll or income taxes may apply for an Offer in Compromise using Form 433-B (OIC) and Form 656. Each company must file separately, even if the owner owes personal taxes. The business must also be current with federal tax deposits and employment filings.
A public inspection file containing basic taxpayer information, such as name, address, and settlement terms, includes accepted offers in compromise cases. Additionally, the taxpayer advocate service can help you resolve OIC delays or problems if you're experiencing economic hardship or administrative issues with the process.
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