If you owe the IRS a large tax balance, you’ve probably seen ads promising to “settle for pennies on the dollar.” While exaggerated in most cases, settling for less than you owe is very real — through the IRS’s Offer in Compromise (OIC) program. An Offer in Compromise allows qualified taxpayers to negotiate a legally binding settlement for less than the full amount owed — if they can prove paying the full debt would create genuine financial hardship.
📘 Official IRS References: Offer in Compromise — IRS Program Overview
What Is an Offer in Compromise (OIC)?
The IRS Offer in Compromise program is designed for taxpayers who can’t pay their full tax liability — even over time — without causing financial hardship. When approved, the OIC allows you to pay a reduced lump sum or short-term installment amount, and the IRS forgives the rest of the tax debt.
📘 Reference: IRS Offer in Compromise FAQs
Who Qualifies to Settle With the IRS?
To qualify, you must show that:
- You cannot pay the full amount through assets or income;
- Your offer equals or exceeds your “reasonable collection potential” (RCP); and
- You’re in current tax compliance (all returns filed, estimated payments current).
Three Types of Offers
| Type of OIC | When Used |
|---|---|
| Doubt as to Collectibility | You agree that you owe the tax debt but have little or no ability to pay the full amount |
| Doubt as to Liability | You are disputing the amount of tax the IRS claims you owe and have a genuine reason to believe the amount is incorrect. |
| Effective Tax Administration (ETA) | You could technically pay the full tax debt, but doing so would cause you significant economic hardship or be unfair and inequitable due to exceptional circumstances. |
📘 Reference: Offer in Compromise (Doubt as to Liability)
Understanding Reasonable Collection Potential (RCP)
Your RCP determines whether your offer is acceptable. It equals:
- RCP = Net Realizable Equity (Assets) + Future Disposable Income (12–24 months)
💡 Strategy: Attorneys adjust the RCP calculation by ensuring only allowable living expenses are included.
📘 Reference: Collection Financial Standards
Offer Payment Options
When submitting Form 656, you choose between two structures:
| Option | Payment Plan | Initial Payment Due | Remaining Balance |
|---|---|---|---|
| Lump-Sum Cash Offer | Pay full offer within 5 months of acceptance. | 20% of total offer with submission. | The rest of the offer amount must be paid within five months of acceptance. |
| Periodic Payment Offer | Pay in monthly installments over 6–24 months. | First month’s payment due with submission. | The remaining balance is paid in monthly installments for a period of 6 to 24 months. |
📘 Reference: Form 656 Booklet
Alternatives to an Offer in Compromise
Not everyone qualifies for an OIC — but the IRS offers other relief options:
| Option | Description |
|---|---|
| Installment Agreement | Pay full balance monthly over time. |
| Partial Payment Installment Agreement (PPIA) | Pay affordable monthly amount; remainder expires with CSED. |
| Currently Not Collectible (CNC) | Temporarily halts collection due to hardship. |
| Penalty Abatement | Remove penalties for reasonable cause or first-time offense. |
Why Legal Representation Matters?
The OIC process is more than filling out forms — it’s a legal negotiation based on precise financial formulas and procedural rights.
A tax attorney can:
- Accurately calculate your reasonable collection potential (RCP);
- Ensure your Form 433-A(OIC) and supporting evidence are airtight;
- Negotiate directly with OIC examiners and Appeals Officers;
- Prepare hardship arguments for Equitable Offers;
- Prevent IRS levies during review via legal protection.
💡Advantage: Once your attorney files Form 2848 (Power of Attorney), the IRS must communicate only through counsel — allowing strategic control of timing, negotiations, and appeal rights.
📘 Reference: Form 2848 — Power of Attorney and Declaration of Representative
Need help with a similar issue? Contact our firm today for a consultation.
Settling with the IRS is possible — but it’s a legal process, not a loophole. The IRS only accepts offers that make sense based on your verified financial situation. A skilled tax attorney can transform your financial facts into a persuasive legal case for compromise, negotiate directly with the IRS, and protect your rights from start to finish.
Contact Pelham PLLC today for a confidential Offer in Compromise evaluation. Our attorneys help individuals and business owners nationwide settle IRS debts legally, strategically, and permanently.
FAQs
Can anyone apply for an Offer in Compromise?
Yes, but you must be current with filings and estimated payments. Incomplete compliance automatically disqualifies your application.
Does the IRS really accept less than you owe?
Yes — if your offer equals or exceeds what the IRS believes it can reasonably collect before the debt expires (the CSED).
What happens if my offer is rejected?
You can appeal within 30 days using Form 13711, or propose a modified offer with adjusted RCP.
