Offers in Compromise

You may be eligible to Settle your Tax Debt for Less Than You Owe

Offer In-Compromise (OIC) is a program offered by the Internal Revenue Service that permits the government to accept less than what is owed on a tax liability. Here are our top 10 IRS OIC tips:

  1. Don’t Submit a “Frivolous” Offer

The acceptance or denial of an IRS Offer in Compromise is based upon an analysis of your current assets and your cash flow (disposable income). Your cash flow consists of your income versus your allowable expenses.

The IRS will consider your monthly disposable income multiplied by twelve months or twenty four months depending upon the type of offer being submitted.

You must have documentation that supports the “numbers” that are submitted on your IRS Offer in Compromise. The IRS requires 3 months of documentation. You are also required to provide 20% of the Offer amount with your application.

Once you have submitted the above documentation, the Offer is considered processed by the IRS. Now the fun begins. The negotiation phase of the Offer in Compromise approval phase begins when the Offer specialist contacts you or your tax attorney.  If you fail to do all that is required, your offer will be rejected. You will be required to begin the process all over again.

2.  Don’t Wait Until You Have More Money

The best offer in compromise you will be able to submit to the IRS will be when you have the LEAST amount of assets and income.  If you need to borrow money from a family member or friend, it may be something worth thinking about to get your tax debt, including penalties and interest, reduced.

The IRS will look at one year of disposable income if you can off the tax debt in 5 months and two years of disposable income if you can pay the offer in 24 months. It is important that a professional help you determine your disposable income. If you make a mistake on your 433-A or 433-B IRS form, it can cost you thousands of dollars.

It can take 6-12 months to have an Offer Specialist assigned to your case. If all of a sudden, you get an increase in income or inherit some money, the terms of the Offer may change upon review by the IRS.

Also, the IRS changed the offer in compromise rules in 2012 to benefit taxpayers. However, no one know if future changes on the horizon will be as beneficial. Therefore, submit your OIC sooner vs. later.

3.  File and Pay Your Taxes for Five Years After Acceptance 

The IRS requires that you file and pay your taxes for five years following the acceptance of your Offer. Failure to do so will void the agreement and you will be back to square one again, with the same tax debt, penalties and interest.

4.  File and Pay Your Quarterly Estimated Taxes

As discussed above, it can take up to 12 months for the IRS to review your Offer in Compromise application. If you are self employed or work on commission, you need to stay current with your estimated taxes, paying them every 3 months, while your offer is pending.

When your offer is reviewed, you will need to be current in your filings as well as quarterly payments. Failure to do so will sink your chances of acceptance.

5.  Make Sure Your “Numbers” Are Correct

You have to make sure that the Collection Information Statement is prepared correctly. The IRS may accept certain expenses that you are not aware of. A tax attorney can explore with you specific strategies to get the best tax debt settlement.

The IRS will do a comprehensive investigation of your finances before settling, requiring completion of their Form 433A or 433B to disclose your income, expenses and assets. You will have to tell the IRS where you work and bank, and list your assets, including your house, cars, valuables and retirement accounts. Verification will be required, including an IRS review of your paystubs, tax returns, bank statements, business profit and loss, and proof of payment of your monthly bills.  As such, it is important that a tax attorney review your assets, income, and expenses to determine the most optimal resolution option based upon the specifics of your finances.

Before you speak to the IRS, “know your numbers” or hire a tax attorney that will advocate for your offer or other tax debt reduction strategy.

  1. Appeal the Denial of an IRS Offer in Compromise

IRS Offer specialists are not always right. If you know your numbers and you think that the IRS is incorrect, your tax attorney can advise you if an appeal is worthwhile. The collection appeals program may the right strategy for you.

7.  Consider All Of Your Tax Settlement Options. You may not qualify for an offer in compromise.

However, you may qualify for a partial pay installment agreement, where you pay less than you owe until the collection statute runs out or a properly structured installment agreement. You may also qualify for a reduction of penalties.

If you call the IRS, it is rare that anyone will suggest that you submit an Offer in Compromise, penalty abatement, or any other strategy to reduce or eliminate your tax debt. In fact, the IRS wants you to enter into the highest payment plan possible.  Unfortunately, many of our clients come to us after they have defaulted on payment plans with the IRS and are in a worse off position. However, there is hope.

  1. An OIC can be as advertised – a fresh start from your IRS debt.

No more looking over your shoulder with fear of an IRS seizure of your wages or bank accounts. Improved credit score – after an offer in compromise is complete, the IRS will release all tax liens filed against you. IRS collections are put on hold while the compromise is investigated. After acceptance, you will have peace from IRS certified mail letters, visits from IRS Revenue Officers and wondering what’s around the corner.

  1. Most OIC Applications are initially rejected.

The IRS most recently rejected 60% of the offers it received, consisting of 41,000 rejections out of 68,000 submissions.

  1. Consider Hiring a Tax Attorney to Help You.

As you can see from the previous tips, there are a lot of pitfalls in dealing with the IRS. Mistakes can cost you thousands of dollars as well as quite a few sleepless nights. Contact us today to resolve your tax matter.


An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won’t qualify for an OIC in most cases. For information concerning tax payment options including installment agreements, refer to Topic 202. To qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

In most cases, the IRS won’t accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

Reasons for the Offer

The IRS may accept an OIC based on three grounds:

  • First, the IRS can accept a compromise if there’s doubt as to liability. A compromise meets this only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.
  • Second, the IRS can accept a compromise if there’s doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
  • Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there’s no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Forms to Use

When submitting an OIC based on doubt as to collectibility or effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 and referenced collection information statements are available in the Offer in Compromise Booklet, Form 656-B (PDF).

Application Fee

In general, a taxpayer must submit a $186 application fee with the Form 656. Don’t combine this fee with any other tax payments. However, there are two exceptions to this requirement:

  • First, no application fee is required if the OIC is based on doubt as to liability.
  • Second, the fee isn’t required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. This exception applies if the taxpayer’s total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. Section 1 of Form 656 contains the Low Income Certification guidelines to assist taxpayers in determining whether they qualify for the low-income exception. A taxpayer who claims the low-income exception must complete section 1 of Form 656 and check the certification box.

Payment Options

Lump Sum Cash Offer – Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A “lump sum cash offer” is defined as an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted. If a taxpayer submits a lump sum cash offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the $186 application fee. The 20 percent payment is nonrefundable, meaning it won’t be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the 20 percent payment will be applied to the taxpayer’s tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent payment.

Periodic Payment Offer – An offer is called a “periodic payment offer” under the tax law if it’s payable in 6 or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment is required in addition to the $186 application fee. This amount is nonrefundable, just like the 20 percent payment required for a lump sum cash offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.

Upon acceptance of an OIC, the taxpayer may no longer designate offer payments to any tax liability specifically covered in the offer agreement.

Suspension of Collection

Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration, and is further suspended if the OIC is rejected by the IRS and where the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.

Offer Terms

If the IRS accepts the taxpayer’s offer, the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer doesn’t abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default. For doubt as to collectibility and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties. Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt.

Right to Appeal

If the IRS rejects an OIC, the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter.

Return of an Offer

In some cases, an OIC is returned to the taxpayer rather than rejected, because the taxpayer didn’t submit necessary information, filed for bankruptcy, failed to include a required application fee or nonrefundable payment with the offer, hasn’t filed required tax returns, or hasn’t paid current tax liabilities at the time the IRS is considering the offer. A returned offer is different from a rejection because there’s no right to appeal when the IRS returns the offer. However, once current, the offer may be submitted again.

Consider Hiring a Tax Attorney to Help You.

As you can see from the previous tips, there are a lot of pitfalls in dealing with the IRS. Mistakes can cost you thousands of dollars as well as quite a few sleepless nights. Contact us today to resolve your tax matter.