Offer in Compromise Pre-Qualification Review Checklist Checklist

Offer in Compromise Pre-Qualification Reference Guide

Understanding Pre-Qualification

An Offer in Compromise allows you to settle your federal tax debt for less than the full amount owed. Before you can submit an offer, the IRS requires you to meet specific eligibility rules and provide proof of your financial situation. This pre-qualification phase is a screening process in which the IRS determines whether you qualify to proceed with the application.

Despite the IRS's strict income and asset thresholds, many taxpayers mistakenly believe that owing money automatically qualifies them for an offer in compromise. Failing to be eligible during pre-qualification can harm your case later because the IRS sees incomplete or inaccurate financial disclosure as a reason to deny future attempts.

Who Should Use This Guide

You should use this guide if you owe back federal income tax, employment tax, or excise tax, and the IRS has sent you a notice of a federal tax lien or levy. This guide applies when you cannot pay your full tax debt within a reasonable timeframe, when your financial situation has changed due to job loss, health crisis, or business failure, and when you are exploring settlement options before the IRS takes enforcement action.

This guide does not apply in certain situations. You cannot use an Offer in Compromise (OIC) while you are in an open bankruptcy proceeding. Once your bankruptcy case is closed, you may apply for an offer. You must have filed all legally required federal tax returns before applying. The IRS requires that you have made all necessary estimated tax payments for the current year. You cannot use it if you have open audit examinations on the tax years in question. If you are disputing the tax liability itself, you may need to pursue an appeals process instead.

Corporations, partnerships, and LLCs may apply for an Offer in Compromise using Form 656 and must submit Form 433-B (OIC) for business entities. These entities are not excluded from the program.

What does the IRS evaluate?

The IRS focuses first on whether you meet the income and asset thresholds, then on whether you have unfiled returns or open compliance issues. The IRS uses standardized expense allowances and formulas based on your reported income compared to IRS records, your monthly living expenses calculated using IRS National Standards and Local Standards, equity in real estate, vehicles, and non-exempt assets, and your willingness to pay based on reasonable collection potential.

Essential Pre-Qualification Steps

1. Confirm you owe federal tax by downloading your IRS tax transcript or account transcript at IRS.gov under Get Transcript to verify the exact federal tax year, amount owed, and status.
2. Verify you have no open tax examinations or disputes by contacting the IRS or checking your online account to confirm all exam activity has closed.
3. Confirm all required tax returns are filed by gathering copies of all filed returns and verifying filing dates through your tax preparer, tax software records, or the IRS.
4. Collect evidence of your current income, such as recent pay stubs, W-2s or 1099s from the current year, bank statements displaying deposits, and business profit-and-loss statements if you are self-employed.
5. List all monthly living expenses using the IRS National Standards for food, utilities, and transportation, and the Local Standards for rent or mortgage and vehicle ownership, which are published on IRS.gov.
6. Inventory all assets with equity by listing the current fair market value of your home, vehicles, savings accounts, retirement accounts, life insurance, and any rental property or business assets. Calculations of Reasonable Collection Potential include the balances of your retirement accounts. Tax-deferred accounts such as 401(k) plans and traditional IRAs are valued at their quick sale value, typically 80 percent of the current balance, minus estimated early withdrawal penalties and taxes. Consult the Form 433-A (OIC) or Form 433-B (OIC) instructions for specific guidance on reporting retirement assets.
7. Calculate your Reasonable Collection Potential by determining the net realizable value of your assets, plus your future income. For lump sum offers, future income equals monthly disposable income multiplied by 12. For periodic payment offers, multiply the monthly disposable income by 24 months or the number of months remaining on the statute of limitations, if fewer. The IRS compares your offer amount with your reasonable collection potential.
8. Review your payment history for the past five years by gathering bank statements or payment records showing whether you made partial payments, set up prior installment agreements, or did not pay.
9. Document significant life changes that affected your ability to pay, such as job loss or medical emergencies, using bills, hospital records, termination letters, or court documents.
10. Check for tax liens or levies already filed by reviewing your credit report and searching your county recorder’s office online to see if a federal tax lien has been recorded.
11. Confirm your compliance going forward by verifying that all current-year tax payments are being made through employer withholding or estimated payments and all returns are filed on time.
12. Choose between lump-sum and periodic-payment offers. Lump-sum offers require you to pay the offer amount in 5 or fewer payments within 5 months after the IRS accepts your offer. Periodic payment offers require payment over 6 to 24 months from the date of acceptance, with the first payment due upon submission of the offer and subsequent monthly payments continuing during the IRS review.
13. Prepare a short written statement of hardship that explains why you cannot pay the debt in full, focusing on factual circumstances.

Errores comunes que hay que evitar

● Submitting financial documents that do not match IRS records will result in denial and may flag you for inconsistency. The IRS cross-checks your submissions against wage transcripts and third-party reporting.

● Hiding assets or underreporting equity can lead to rejection because the IRS often discovers undisclosed assets through property records and bank account verification.

● Claiming expenses higher than IRS National Standards signals dishonesty because the IRS uses the standard, not your claimed amount.

● Failing to file missing or late tax returns before applying causes the IRS to hold your offer in suspense or reject it outright. Making voluntary payments on your tax debt does not restart or extend the Collection Statute Expiration Date.

● The 10-year collection period is tolled during specific events, such as bankruptcy, offer-in-compromise processing and appeals, collection due process hearings, and installment agreement requests.

● Submitting an Offer in Compromise (OIC) does not automatically halt enforcement actions, such as wage or bank levies. The IRS generally suspends levy actions during the offer processing period, but the outcome is not guaranteed. To request release or suspension of a levy, contact the IRS directly or request a Collection Appeals Program review. Collection Due Process hearings are separate procedures triggered by specific IRS levy or lien notices, not a prerequisite for offer applications.

● If you overstate future income or assume a job offer that has not yet materialized, it could weaken your pre-qualification status. Income projections must be realistic and supported by signed offers, contracts, or verifiable commitments. Failing to disclose retirement account contributions or recent transfers of funds may lead the IRS to view you as prioritizing retirement over tax debt.

What Happens After Rejection

If your Offer in Compromise is rejected and you do not appeal within 30 days, or if your appeal is denied, the IRS may resume collection activity. There is no fixed grace period. Collection enforcement may begin once your administrative remedies are exhausted.

The Collection Statute Expiration Date is tolled during offer processing, appeals, and for 30 days after rejection. If you receive a rejection letter, you have 30 days from the date of the letter to file Form 13711 to request an appeal.

Cuándo acudir a un profesional

Get professional help if your pre-qualification calculation shows that your reasonable collection potential is much higher than your debt, if you have valuable assets that complicate the financial situation, if you haven't filed tax returns or have unresolved tax issues from previous years, if your income comes from complex sources, or if the IRS has already formally rejected your case.

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Esta lista de verificación tiene fines meramente informativos y no constituye asesoramiento fiscal ni jurídico. Revise siempre las instrucciones oficiales del IRS y consulte a un profesional cualificado para obtener orientación.