What Is an Offer in Compromise?
If you cannot pay your full income tax bill, you may try to negotiate a lower payment by making an offer in compromise (OIC). If the Internal Revenue Service accepts your OIC, you may be able to make a reduced payment that eliminates your tax bill and stops IRS collection activities.
While a steady stream of radio and TV advertising may make it seem like getting tax relief is a simple solution for anyone unable to pay the total amount of their tax bill, the reality is often quite different. The IRS has strict requirements for OICs, and the taxpayer must generally show that the offer represents the agency's best shot at getting paid within a reasonable amount of time. In most years, the IRS only accepts about 40% of OICs.
The low acceptance rate for OIC is because the IRS often finds that the taxpayer has the resources to pay their full tax bill under a payment plan or owns assets they can sell to cover their tax bill. If you truly have no financial resources, contact the IRS and ask to be placed on currently not collectible status. The agency will stop trying to collect your tax bill until your financial situation improves.
If you believe you are a good candidate for an OIC but are concerned the IRS will not consider your offer, you can use the agency's Offer in Compromise Pre-Qualifier Tool to see if you may be eligible.
When Are OICs Accepted
The IRS generally accepts OICs in three situations. These generally involve:
- Doubt as to Whether the Tax Debt Is Collectible: This applies to situations where the taxpayer's assets and monthly income are inadequate to cover the tax debt. If you are applying for an OIC based on doubt about collectability, you must base your offer on what the IRS considers to be your ability to pay.
- Doubt as to Whether the Taxpayer Is Liable: This is when you believe there is a legitimate doubt as to whether you owe the tax due. To request a claim based on doubt as to liability, you must explain why you don't owe the tax and any documentation supporting your position.
- Effective Tax Administration: When there is no doubt you owe the tax due or can pay it, you can claim that requiring the payment would either subject you to undue financial hardship or that forcing you to pay the bill would be unfair due to special circumstances.
Reasonable Collection Potential
The IRS accepts or rejects an OIC based on the taxpayer's reasonable collection potential (RCP). The IRS calculates your RCP based on the amount you could earn by selling your assets and your future income. Generally, the IRS won't accept an OIC unless the amount offered is more than your RCP.
The IRS usually calculates your RCP based on the information you provide on Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, that must accompany any offers not based on doubt as to liability.
How To Request an OIC
Before requesting an OIC, you must have filed all of your required tax returns and received a bill for at least one of the tax debts included in the offer. You are not eligible for an OIC if you are in an open bankruptcy proceeding.
To apply for an OIC based on doubt as to collectability or effective tax administration, download Form 656-B, Booklet Offer in Compromise. The offer in compromise booklet includes the following forms for wage earners and self-employed individuals you must fill out and submit to the IRS:
- Form 656, Offer in Compromise
- Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals
For OICs related to business taxes, use the included Form 433-B (OIC), Collection Information Statement for Businesses.
If you are seeking an OIC based on doubt as to liability, fill out and submit Form 656-L, Offer in Compromise (Doubt as to Liability).
You must submit a $205 application fee with any OIC request and a nonrefundable payment based on the amount of your offer. The offer payment can either be a lump sum of at least 20% of the offer amount or, if proposing an installment agreement, the amount of your first payment. Taxpayers who make a lump-sum payment must pay the remaining balance within five years. The IRS won't refund the initial payment if your OIC is rejected.
After Your OIC Is Filed
While the IRS is considering your OIC, the agency will stop the collection process, but the agency can still place a tax lien on your property. You will be required to make all payments in your offer, but you will not be required to make payments under any prior installment agreements with the IRS. If the IRS does not decide on your OIC within two years, it will be considered to have been accepted.
What Happens When an OIC Is Accepted?
If the IRS accepts your OIC, your full tax liability will be settled based on the terms of your offer. The OIC is a legally binding agreement. If you fail to make the agreed-upon payments, you will be in default, and the full amount will become due immediately, less any payments you have made. If you comply with the terms of the OIC, the IRS will forgive any balance due.
What Happens When OICs Are Rejected?
If the IRS rejects your OIC, your options depend on the reason the IRS rejected your offer. The IRS will not reconsider offers that are rejected for the following reasons:
- The taxpayer is in a bankruptcy proceeding
- The taxpayer has not complied with the filing requirements
- The taxpayer has not made the payments proposed in the offer
- The offer was made solely to delay tax collection
- The IRS has determined that its ability to collect is in jeopardy
- There are other IRS investigations pending
- The tax assessment has been abated
When the IRS rejects an OIC for other reasons, you can call the IRS and ask for reconsideration at the number listed on the rejection letter within 30 days. Suppose the IRS agrees that your OIC should be reconsidered. In that case, you will be asked to resubmit the information in your original application, and the agency will consider it a new offer.
Have Questions? Talk to a Tax Lawyer
Submitting an OIC is complicated, and the consequences of any mistakes can be severe. Fortunately, a local tax lawyer can help. A tax lawyer understands the OIC process and can help you put together an application that the IRS will view favorably. If you have already submitted an OIC that was rejected, a tax attorney can help you appeal the IRS' decision.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.