Offer in Compromise Process

The Offer in Compromise (OIC) process provides a lifeline for taxpayers facing unmanageable tax debt by allowing them to settle for a reduced amount. The IRS offers this option when collecting the full debt is unlikely or would cause undue financial hardship. This negotiated settlement helps taxpayers regain financial stability while allowing the IRS to efficiently allocate resources.

Why Does the IRS Accept Offers in Compromise?

The IRS agrees to OICs mainly for practical reasons. It aims to collect all taxes due but recognizes that some taxpayers simply cannot pay their full liability due to financial hardships like job loss, medical emergencies, or business failures. Accepting a reasonable settlement is often more beneficial than costly, prolonged collection efforts.

Grounds for IRS Acceptance of an Offer in Compromise

The IRS considers offers under three primary grounds, each addressing different taxpayer situations:

• Doubt as to Collectibility: This common ground means the IRS believes the taxpayer cannot pay the full tax debt now or in the foreseeable future based on assets and income versus reasonable expenses.
• Doubt as to Liability: This applies if the taxpayer disputes the accuracy or validity of the tax debt, supported by evidence suggesting the IRS’s calculation is incorrect.
• Effective Tax Administration: Used when paying the full debt would cause economic hardship or be unfair or inequitable, even if the taxpayer technically can pay.

For more detailed descriptions of these grounds, see our glossary on Offer in Compromise: Doubt as to Collectibility and Effective Tax Administration OIC.

Step-by-Step Offer in Compromise Process

1. Ensure Eligibility: You must be current with all required tax filings and payments, including estimated payments for the current year, and not be in an active bankruptcy proceeding. This compliance is essential before the IRS reviews your OIC application.

2. Calculate Reasonable Collection Potential (RCP): The IRS estimates your maximum ability to pay by evaluating your assets (home equity, vehicles, bank accounts) and future income minus allowable living expenses based on IRS financial standards. This calculation determines your offer amount. For this, you’ll complete Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.

3. Select Payment Option: You may submit your offer as a lump sum (20% upfront with remaining balance in up to 5 payments) or periodic payments over 6 to 24 months, with the first payment submitted upon application.

4. Submit Your Application: Include Form 656 (Offer in Compromise), Form 433-A or 433-B (financial disclosure), the non-refundable application fee (waived for qualifying low-income taxpayers), and the initial payment. Sending the package via certified mail with return receipt is advised to confirm IRS receipt.

5. IRS Review: An assigned IRS examiner or revenue officer reviews your financial documents, may request additional information, and could negotiate a counteroffer if your initial offer is deemed too low.

6. IRS Decision: The IRS will accept, reject, or make a counteroffer. If accepted, you’ll follow the agreed payment plan and remain compliant with tax obligations for five years. Rejected offers can be appealed within 30 days, and counteroffers can be negotiated or declined.

When Is an Offer in Compromise a Good Option?

OICs are particularly useful for taxpayers experiencing severe financial hardship, such as long-term unemployment, disability, overwhelming medical debt, or business closure. These circumstances often reduce the ability to fully pay tax liabilities, making a structured compromise a viable solution.

Common Mistakes to Avoid

• Failing to file all required tax returns or remain compliant with current tax payments.
• Underestimating your Reasonable Collection Potential with an unrealistically low offer.
• Delaying or ignoring requests for documentation from the IRS.
• Failing to respond promptly to IRS communications.

Avoiding these pitfalls increases your chances for a successful OIC.

Important Considerations

• The OIC process can take six months to over a year, so patience is necessary.
• Application fees and initial payments apply, with possible exceptions for low-income taxpayers.
• Federal tax liens generally remain until the offer is fully paid, potentially affecting credit and asset sales.
• Post-acceptance, you must comply with all tax obligations for at least five years.

Frequently Asked Questions

• Can I apply without filing all tax returns? No. Full compliance with filing and tax payments is mandatory.
• How long does the process take? Typically 6 months to over a year.
• What if my offer is rejected? You can appeal within 30 days or consider other payment plans.
• Will the tax lien be removed after the OIC? Only after full payment of the accepted offer.

For official details, refer to the IRS’s Offer in Compromise page and the Consumer Financial Protection Bureau’s explanation.

By understanding the Offer in Compromise process clearly, taxpayers with unmanageable tax debts can explore this option for relief while avoiding common errors that delay or derail their application. For related topics such as IRS payment plans, the role of revenue officers, or appealing rejected OICs, visit our comprehensive glossary.