If you owe the IRS more than you can possibly pay, there’s a program designed for exactly that situation — the Offer in Compromise (OIC). An IRS Offer in Compromise allows you to settle your tax debt for less than the total amount owed if paying in full would cause financial hardship. It’s one of the most powerful tax relief tools available, but it’s also one of the most misunderstood.
Understanding the Offer in Compromise
The Offer in Compromise is based on the principle of collectibility. The IRS would rather receive part of what you owe than spend years chasing a debt you’ll never fully pay. If approved, the IRS agrees to forgive the remaining balance once you pay the negotiated settlement amount. In return, you must stay compliant with all future tax filings and payments for the next five years.
📘 Official Resource: IRS Offer in Compromise Program
Who Qualifies for an Offer in Compromise?
The IRS only grants an Offer in Compromise if one or more of the following apply:
- Doubt as to Collectibility: You can’t afford to pay the full balance through income or assets.
- Doubt as to Liability: You genuinely believe the tax amount assessed is incorrect.
- Effective Tax Administration: Paying the full amount would cause severe economic hardship or would be unfair due to exceptional circumstances (for example, chronic illness or disability).
You’re not eligible if you:
- Are in an open bankruptcy proceeding
- Haven’t filed all required tax returns
- Haven’t made estimated payments for the current year (if self-employed)
How the IRS Calculates Your Offer Amount?
The IRS doesn’t negotiate blindly — it uses a formula based on your Reasonable Collection Potential (RCP), which represents what the IRS believes it can collect from you now or in the future. Here’s the formula:
RCP = Net Realizable Equity in Assets + (Disposable Income × 12 or 24 months)
- Net Realizable Equity: Value of your assets (bank accounts, property, vehicles) minus what you owe on them and a small exemption.
- Disposable Income: What’s left after subtracting allowable living expenses from your monthly income.
Depending on whether you pay in a lump sum or periodic installments, the IRS multiplies your disposable income by 12 or 24 months.
📘 Reference: IRS Form 656 Booklet — Offer in Compromise
The Offer in Compromise Process — Step-by-Step
1️⃣ Step 1: Confirm Eligibility
Use the IRS Offer in Compromise Pre-Qualifier Tool to see if you meet the financial criteria. This tool helps estimate your potential offer range.
2️⃣ Step 2: Complete the Forms
You’ll need to prepare and submit:
- Form 656: The Offer in Compromise application itself
- Form 433-A (OIC): For individuals, detailing income, expenses, and assets
- Form 433-B (OIC): For businesses (if applicable)
You must also include:
- A $205 application fee (unless you qualify for low-income certification)
- An initial payment, either:
- 20% of the offer amount (for lump-sum offers), or
- The first monthly payment (for periodic payment offers)
📘 Official Form Instructions: IRS Form 656-B Booklet
3️⃣ Step 3: Submit and Wait for Review
The IRS typically takes 6–9 months to review your offer, sometimes longer. During this period:
- Collection activity is paused (“collection hold”)
- You must stay current on all future tax filings and payments
- The IRS may request additional documents or clarifications
4️⃣ Step 4: Negotiate (If Necessary)
If the IRS believes you can pay more than you offered, they may counter with a higher amount. Your representative can present supporting evidence to justify the original offer or negotiate a compromise amount.
5️⃣ Step 5: Final Decision
- Accepted: You’ll receive a written acceptance letter outlining your payment terms.
- Returned: The IRS may return your offer if it’s incomplete or ineligible.
- Rejected: You’ll receive a formal rejection letter, which can be appealed within 30 days using Form 13711 (Request for Appeal of Offer in Compromise).
Lump-Sum vs. Periodic Payment Offers
| Type | Payment Schedule | When to Pay | IRS Multiplier Used |
|---|---|---|---|
| Lump-Sum Offer | 5 or fewer payments within 5 months of acceptance | 20% upfront with application | 12 months of future income |
| Periodic Payment Offer | Payments over 6–24 months | First payment with application, continue during review | 24 months of future income |
💡Tip: Lump-sum offers often get approved faster because they require fewer administrative steps.
Strengthening Your Offer — Proven Strategies
The difference between acceptance and rejection often comes down to preparation and presentation. Here’s how to make your offer stronger:
- Document Every Expense: Provide receipts or statements for all living expenses (rent, utilities, transportation). Unsupported costs are usually disallowed.
- Use IRS Standard Allowances Wisely: The IRS publishes Collection Financial Standards that cap what you can claim for living costs. Use them strategically.
- Explain Your Circumstances: If you’ve faced illness, job loss, or other hardship, include a letter explaining your situation clearly and respectfully.
- Avoid Inflating or Omitting Assets: Transparency builds credibility. The IRS will verify all financial information.
- Get Professional Help: A tax attorney or enrolled agent can calculate your Reasonable Collection Potential accurately and handle all negotiations.
Common Reasons Offers Are Rejected
Even well-intentioned taxpayers get rejected if they overlook details. The most frequent causes include:
- Missing documentation (bank statements, pay stubs, asset valuations)
- Understated income or overstated expenses
- Failure to stay current on new taxes during review
- Unrealistically low offers with no justification
- Outstanding bankruptcy cases
If your offer is rejected, don’t give up — you can appeal or submit a new, stronger offer after addressing the IRS’s concerns.
📘 Resource: IRS Form 13711 — Appeal of Offer in Compromise
Benefits of an Offer in Compromise
When approved, an Offer in Compromise offers powerful, long-term benefits:
✅ Settle for Less: Pay only what the IRS believes you can afford — sometimes pennies on the dollar.
✅ Stop Collections: The IRS halts liens, levies, and garnishments during evaluation and after acceptance.
✅ Eliminate Tax Debt Permanently: Once payments are complete, the IRS releases all liens and clears your account.
✅ Restore Financial Stability: Rebuild credit, qualify for loans, and regain peace of mind.
✅ Fresh Start: After five years of compliance, your record is considered fully rehabilitated.
Alternatives if You Don’t Qualify
If the IRS rejects your Offer in Compromise or determines you can afford to pay more, consider these alternatives:
- Installment Agreement: Pay the full balance in affordable monthly installments.
- Partial Payment Installment Agreement: Pay less than the full amount through extended payments.
- Currently Not Collectible (CNC): Temporarily suspend collection due to financial hardship.
- Penalty Abatement: Request removal of certain penalties if you’ve had a good compliance history.
📘 Learn More: IRS Payment Plans Overview
Why Work with a Tax Attorney?
An Offer in Compromise is a negotiation — not a simple form submission. A tax attorney brings expertise, strategy, and credibility to your case.
A tax attorney can:
- Analyze your IRS account transcripts to determine eligibility and timing
- Calculate your Reasonable Collection Potential accurately
- Prepare detailed financial statements and supporting documentation
- Negotiate directly with the IRS on your behalf
- Handle appeals or alternative resolutions if your offer is rejected
⚖️ Pro Tip: Representation matters. Offers submitted by professionals are statistically far more likely to be accepted because they meet every IRS requirement the first time.
Need help with a similar issue? Contact our firm today for a consultation.
If you’re drowning in tax debt, an Offer in Compromise may be your lifeline. It’s the IRS’s way of giving taxpayers a second chance — but only to those who approach it with honesty, preparation, and the right guidance. By understanding how the process works and presenting a realistic, well-documented offer, you can significantly improve your odds of success.
If you’re unsure whether you qualify, contact Pelham PLLC today. Our experienced tax attorneys will evaluate your financial situation, determine your best settlement options, and handle every step of the negotiation process with the IRS.
📘 Official Resource: IRS Offer in Compromise Program
FAQs
Can anyone apply for an Offer in Compromise?
Yes, but you must have filed all required tax returns and cannot be in bankruptcy.
How long does the IRS take to decide?
Most offers take between 6 and 12 months to review, depending on complexity.
Will the IRS stop collections while reviewing my offer?
Yes. The IRS generally suspends collection activity during evaluation.
What happens if my offer is rejected?
You can appeal within 30 days or reapply later with updated financial information.
