Effective Strategies for the District of Columbia Offer in Compromise

Owing taxes to the District of Columbia can quickly become overwhelming, especially when penalties, interest, and enforcement actions from the DC Office of Tax and Revenue (OTR) begin to mount. Whether dealing with unpaid income taxes, business-related liabilities, or overdue real property taxes, unresolved tax debt can disrupt your financial stability and create long-term hardship.

Fortunately, the district offers a tax relief option called the Offer in Compromise (OIC) program. This initiative allows eligible taxpayers to settle their tax liability for less than the full amount owed, depending on their ability to pay and overall financial situation. The compromise program is available to individuals, businesses, homeowners, and joint filers who meet specific criteria, such as experiencing economic hardship or lacking sufficient income or assets to pay the full tax liability.

This guide will explain how the DC Offer in Compromise program works, who qualifies, and how to file a successful OIC application. You'll learn about key eligibility factors, required forms, payment options, and common mistakes to avoid. Whether you're new to the process or evaluating your options, this resource is designed to help you move forward confidently and clearly understand what to expect.

What is the DC Offer in Compromise Program? 

The program allows qualifying taxpayers to settle their tax debt for less than the full amount owed. Administered by the DC Office of Tax and Revenue, it is available to individuals and businesses facing financial hardship or lacking the ability to pay their full tax liability. Unlike an appeal or payment plan, this program focuses on your ability to pay rather than disputing the amount owed. It applies to various types of taxes, including income, business, and real property taxes, and aims to reach a fair settlement based on your financial situation.

Eligibility Requirements

Not all taxpayers will qualify for the district’s Offer in Compromise program. You must meet the DC Office of Tax and Revenue requirements to be eligible, including proof of financial hardship and limited ability to pay. Eligibility also depends on your filing history, payment status, and whether you’ve already tried other resolution options. Specific legal or administrative issues may make you ineligible to apply.

Basic Criteria for Qualification

• You must have a tax liability that the DC Office of Tax and Revenue has officially assessed. This means the agency has finalized and recorded the amount you owe.
  
  
• Before applying, you must attempt other resolution options, such as appealing the tax assessment or requesting an installment agreement.
  
  
• Your tax filings must be current. The Offer in Compromise program is only available to taxpayers who have filed all required returns for the tax years, including income, business, or real property taxes.
  
  
• You must demonstrate that you cannot pay the full tax liability now or in the foreseeable future. This involves showing that your income, assets, and available financial resources cannot cover your debts.
  
  
• The DC Office of Tax and Revenue will review your financial condition to determine whether your offer reflects the most it could reasonably collect from you.
  
  
• Suppose you are applying on behalf of a business. In that case, all responsible individuals must submit financial statements, and the company must fully comply with DC tax filing and payment obligations.

Disqualifying Factors

• You are not eligible to apply if you are currently in an open bankruptcy proceeding. In these cases, tax debts must be addressed through the bankruptcy court.
  
  
• You cannot apply if unresolved appeals or disputes relate to your tax assessments. The DC Office of Tax and Revenue will not review your offer until all legal or administrative matters have been resolved.
  
  
• Applicants who have not filed all required tax returns will be automatically disqualified. The OTR requires a complete filing history for all relevant tax years, and it will not evaluate your offer until all outstanding returns have been submitted and processed.
  
  
• Failing to meet these basic requirements will result in delays and potential rejection of your offer. Reviewing eligibility in advance helps ensure your application is complete and ready for consideration.

Accepted Grounds for an Offer in Compromise 

To qualify for the Offer in Compromise program in the District of Columbia, applicants must present a valid reason why they cannot pay the full tax debt they owe. 

There are three main categories under which a taxpayer may request a compromise: liability, doubt as to collectibility, and economic or other hardship. Each ground has its own criteria and documentation requirements, and applicants must explain why their situation meets one or more of these conditions.

Doubt as to Liability

You may qualify based on doubt as to liability if you believe the assessed tax is incorrect. This applies when there is a legitimate dispute about whether you owe the amount claimed. You must include a clear explanation and supporting documents that show why the liability may be inaccurate.

Doubt as to Collectibility

You may be eligible under doubt as to collectibility if you agree you owe the debt but lack the financial ability to pay it in full. This is the most common reason for applying and requires you to submit financial forms (Form PA-1 or PA-2) showing that your income and assets are insufficient.

Economic or Other Hardship

You can apply based on economic or other hardship if paying the full tax would cause unfair financial difficulty. This applies even if you technically have the resources to pay, but doing so would harm your ability to cover basic living costs. Documentation of medical issues, caregiving duties, or other exceptional circumstances is required.

Understanding which ground applies to your case is essential to the OIC filing process. A well-supported application that meets one of these conditions will have a better chance of acceptance by the district.

DC Offer in Compromise vs. IRS Offer in Compromise 

Understanding the differences between the District of Columbia and IRS Offer in Compromise programs can help you make informed decisions when managing tax debt at the state and federal levels. While both programs aim to settle tax liabilities for less than the full amount owed, they have essential cost, process, and appeal rights distinctions.

1. Application Fee

• IRS: Charges a $205 application fee unless the taxpayer qualifies for a low-income waiver.
• District of Columbia (DC): No application fee is charged.

2. Initial Payment Requirements

• Lump Sum Offers:
  • IRS: Requires 20% of the total offer amount to be submitted with the application.
  • DC: Requires 100% of the total offer amount to be submitted upfront with the application.
• Periodic Payment Plans:
  • IRS: Taxpayers submit 20% of the total offer amount with the application and pay the remaining balance over time.
  • DC: Taxpayers must submit 20% initially and complete full payment within 12 months.

3. Payment Timeline

• IRS: Allows payments to be spread out over a period of up to 24 months.
• DC: Limits payments to five or fewer installments within one year.

4. Appeal Process

• IRS: If the offer is denied, taxpayers may appeal to the Independent Office of Appeals.
• DC: No appeal process is available; the decision is final.

5. Collection Activity During Review

• IRS: Typically suspends collection efforts while the offer is under review.
• DC: May continue collection efforts if the offer is not made in good faith.

6. Automatic Acceptance Rule

• IRS: Offers are automatically accepted if no decision is made within two years.
• DC: There is no automatic acceptance rule; offers can remain under review beyond two years.

This comparison helps taxpayers evaluate the requirements of each program and choose the most appropriate path depending on their financial circumstances and the agencies involved.

Step-by-Step Application Process

Applying for an Offer in Compromise with the District of Columbia involves careful preparation and detailed documentation. The process is structured to help the DC Office of Tax and Revenue assess your financial condition and determine whether your offer is acceptable. Following each step thoroughly will improve your chances of having your offer reviewed and accepted.

Step 1: Review Your Tax Liability

Verify What You Owe

Please verify your tax liability by reviewing the amount you owe on MyTax.DC.gov or by contacting the DC Office of Tax and Revenue for assistance. Be sure you know which tax years and types of taxes you plan to include in your offer.

Step 2: Gather Financial Information

Collect Recent Financial Records

Gather your financial documents, including recent pay stubs, bank statements, tax returns, mortgage or rent records, and details about assets and debts. This information helps support your claim of financial hardship or inability to pay.

Step 3: Complete Financial Forms

Choose the Correct Form

Complete the required financial form: use Form PA-1 if you’re applying as an individual or Form PA-2 if you’re applying on behalf of a business. These forms provide a detailed snapshot of your financial situation.

Step 4: Prepare and Submit Form OTR-10

Fill Out the Application Form

Fill out Form OTR-10, the official Offer in Compromise application. This form includes your taxpayer information, the total offer amount, tax years covered, and your proposed payment terms. It must be signed and dated to be valid.

Step 5: Attach Required Documentation

Submit Supporting Evidence

Attach all supporting documentation to verify the information on your financial forms. Include only copies, not original documents, and make sure everything reflects current economic activity, typically within the past six months.

Step 6: Submit Initial Payment

Include Required Funds

Submit your initial payment with the application. For lump-sum offers, you must pay 100 percent of the offer amount. For periodic payment offers, submit at least 20 percent. Payments must be made using certified funds or a money order and are non-refundable.

Step 7: Send the Complete Application

Submit by Mail or In-Person

Send the completed application package to the DC Office of Tax and Revenue at the address listed on Form OTR-10. If you are working with a tax office representative, confirm whether to submit in person or through an alternative delivery method.

Retain a Copy

Keep a full copy of your submission for your records. A well-organized and complete package reduces the chance of delays or rejection.

Common Mistakes That Lead to OIC Rejection 

Many Offers in Compromise are rejected due to avoidable errors. Awareness of common mistakes can help you submit a complete and accurate application, increasing the likelihood that the DC Office of Tax and Revenue will accept your offer.

• Technical errors such as missing signatures, taxpayer ID numbers, or altering official forms can lead to automatic rejection. All forms, including PA-1 or PA-2, must be completed, and the offer amount, payment terms, and tax years involved must be listed.
  
  
• Incomplete or outdated financial documents may cause your offer to be denied. The OTR must be able to verify all reported income, assets, and expenses with recent supporting records, typically from the last six months.
  
  
• Unrealistically low offer amounts can disqualify you. Your proposed amount must reflect your ability to pay based on your income, assets, and allowable expenses. If the OTR believes you can pay more, your offer will likely be rejected.
  
  

Reviewing your application thoroughly and providing accurate, current information can prevent delays and improve your chances of approval.

Payment Options Explained

When applying for an Offer in Compromise, you must choose a payment method that reflects how you plan to pay your proposed offer amount. Each option has specific rules that impact how your application is evaluated.

Lump Sum Option

• You pay 100% of your total offer amount when submitting your application.
• This shows a strong commitment and may increase your chances of approval.
• If your offer is denied, the payment is non-refundable but will be applied to your tax debt.

Periodic Payment Option

• When applying, you pay 20% of your offer, then make up to five payments within 12 months.
• You must continue making payments during the review process, or your offer may be rejected.
• This option offers flexibility but requires reliable cash flow and planning.
  
  

Non-Refundable Payments

• Any payments you submit—regardless of the option—are non-refundable.
• If the offer is denied, your payment will reduce your existing tax debt but will not be returned.
• Choose a payment structure that fits your financial situation and ensures you can follow through.
  
  

Selecting the right option can improve your chances of success and help you manage your tax liability more effectively.

What Happens After You Submit Your Offer 

Once your Offer in Compromise is submitted, the DC Office of Tax and Revenue reviews it. Depending on the complexity of your case and the completeness of your application, the process can take weeks or months.

Initial Review and Completeness Check

• The tax office ensures the inclusion of all necessary forms, signatures, documentation, and payments.
• Incomplete applications may be rejected without further review.
• Penalties and interest continue to accrue during this stage.
• If you’re on an installment plan, you may suspend payments while the offer is under review, but confirm with the OTR first.

Investigation by Revenue Officer

• If your application is complete, a revenue officer will verify your financial details and assess your ability to pay.
• You may be asked to provide additional documentation; timely responses help keep the process moving.
• The officer also checks whether you meet eligibility requirements, such as filing all tax returns and not being in bankruptcy.

Possible Outcomes

• If your offer is accepted, you must follow the agreed payment terms—usually within 30 days for lump sum offers or 12 months for periodic plans.
• If your offer is denied, you will receive a written explanation. DC does not allow appeals, but you can reapply with new terms or updated financials.
• Sometimes, the OTR responds with a counteroffer. You can accept it or negotiate further by submitting a revised offer.
  
  

Preparing a complete, well-documented application and staying responsive throughout the process can improve your chances of approval.

Five-Year Compliance Requirement 

The five-year compliance requirement is one of the most essential conditions for an accepted Offer in Compromise. This rule is non-negotiable for all taxpayers who successfully settle their tax debt through the DC Office of Tax and Revenue. Understanding this requirement is essential, as failure to comply can undo the benefits of your accepted offer and reinstate your full tax liability.

Once your offer is accepted, you must fully comply with all tax obligations for the next five years. This includes filing all required tax returns on time and paying any new taxes owed in full by the due date. Compliance is not limited to the types of taxes covered by your original offer. It applies to any income tax, business tax, property tax, or additional taxes you may have considered insurable during the five years.

If you fail to meet these requirements, your Offer in Compromise will be considered invalid. This means the original tax liability, including penalties and interest, will be fully reinstated. Any tax liens released as part of the settlement can also be refiled, and the DC Office of Tax and Revenue will resume collection efforts as if the compromise had never occurred. In short, noncompliance reverses the agreement and puts you back at risk of enforcement actions.

To protect the benefits of your accepted offer, you must stay current with all filing and payment obligations moving forward. Many taxpayers work with a tax professional during this period to ensure they do not miss a deadline or make a filing error that could jeopardize their compromise.

Special Filing Considerations 

When applying for an Offer in Compromise with the District of Columbia, your filing situation—whether individual, business, or a mix of joint and separate debts—affects how your application should be prepared. The DC Office of Tax and Revenue requires specific forms and financial disclosures based on your status. Submitting the correct documents ensures your offer is evaluated without unnecessary delays.

Individual Filers

Individuals must submit one Form OTR-10 covering all relevant tax years and Form PA-1 to detail income, expenses, and assets. If only one spouse is liable but both share financial resources, the DC Office of Tax and Revenue may still request financial details from the non-liable spouse to assess household income. For debts owed solely by one spouse, only that individual’s financial information should be reported.

Business Filers

Businesses must file Form OTR-10 on behalf of the entity and complete Form PA-2 to outline the business’s financial standing. All responsible parties—business owners or officers—must also submit a separate Form PA-1. Supporting documents like bank statements, profit and loss reports, and payroll records help the district determine whether the business qualifies for a compromise.

Mixed Debts (Joint and Separate)

If you and your spouse or former spouse owe joint and individual tax debts, separate Form OTR-10 applications must be submitted. Even if one party declines to participate, the DC Office of Tax and Revenue may evaluate the household's financial picture before deciding on your offer. This ensures each portion of the debt is adequately addressed.

When to Work with a Tax Professional 

While you can apply for an Offer in Compromise independently, working with a tax professional can improve your chances of success—especially if your financial situation is complex or you're unsure about the process.

How a Tax Professional Can Help

• Determine your eligibility for the program based on your income, assets, and debt.
• Identify the most appropriate reason for your offer, such as doubt about collectibility or economic hardship.
• Accurately complete Form OTR-10, PA-1, or PA-2, and organize your supporting documents.

What to Look for

• Choose someone experienced in handling DC-specific Offers in Compromise.
• Avoid professionals who guarantee results or request full payment upfront without clear terms.
• Ask for references and credentials, and request an initial consultation to understand what services they will provide.
  
  

For many taxpayers, the guidance of a qualified professional is a worthwhile investment that can reduce errors and improve the quality of their submission.

Final Checklist Before Submitting Your Offer

• Ensure you have completed all required forms, including Form OTR-10 and either Form PA-1 (for individuals) or Form PA-2 (for businesses), with all sections filled in and properly signed and dated.
  
  
• List the tax years and types covered by your offer, and include your taxpayer identification number on all forms.
  
  
• Gather and attach supporting documents such as recent tax returns, pay stubs, bank statements, and other financial records showing activity within the past six months.
  
  
• Only submit copies of documents, not originals, and ensure that all records support the financial information in your forms.
  
  
• Include your initial payment based on your selected payment method—either 100 percent of your offer amount for lump sum offers or 20 percent for periodic payment plans.
  
  
• Use certified funds, a money order, or another accepted method for your initial payment, clearly labeling it with your identifying information.
  
  
• Confirm that all required tax returns have been filed and that you are not involved in an open bankruptcy proceeding or unresolved appeal.
  
  
• Organize your application neatly and make a complete copy of the entire package for your records before mailing or delivering it to the DC Office of Tax and Revenue.

Frequently Asked Questions (FAQs) 

How long does the DC Offer in Compromise process take?

The process can take several months. Simple offers may be resolved in three to six months, while complex cases involving business assets or detailed financial documentation can take longer. Delays often occur if required documents are missing or the DC Office of Tax and Revenue requests additional information during the review.

Can I apply for both the DC and IRS Offer in Compromise programs?

You can apply to both programs separately if you owe taxes to the IRS and the district. Each jurisdiction reviews its offer independently, and approval by one does not influence the outcome of the other. Be sure to follow the specific requirements for each agency to avoid delays or confusion.

What happens if my offer is denied?

If your offer is denied, the decision is final and cannot be appealed. However, you may submit a new offer with revised terms or updated financial information. You can also explore alternative options such as entering into an installment agreement or waiting until your financial situation improves before reapplying.

Do penalties and interest stop while my offer is reviewed?

No, penalties and interest continue to accrue while your offer is under review. This means your total tax liability may increase during the process. If your offer is accepted, any payments you made—including interest and penalties—will be applied to your overall balance.

What are the risks if I default after my offer is accepted?

If you fail to meet the five-year compliance requirement, your offer will be considered in default. This results in reinstating the original tax debt, including all accrued interest and penalties. The District may also refile any previously released tax liens and resume active collection efforts.

Can I use retirement savings to fund my offer payment?

Yes, but proceed with caution. Withdrawing funds from retirement accounts such as IRAs or 401(k)s may result in additional income taxes and early withdrawal penalties. It’s best to consult a tax professional before using retirement savings to ensure you understand the financial consequences and reporting obligations.

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