An Offer in Compromise (OIC) is a tool the IRS offers to taxpayers who cannot pay their full tax debt or if doing so would cause significant financial hardship. It allows you to settle your liabilities for less than what you owe, providing a fresh financial start when paying in full is not feasible.
Understanding an Offer in Compromise
An OIC is essentially an agreement to resolve your tax debt for a lesser sum if the IRS determines that full collection is unlikely. The IRS evaluates your “reasonable collection potential” (RCP) — the amount they believe can be collected from your assets, income, and ability to pay over time. Understanding RCP is key to making a realistic offer.
Why Negotiate an OIC?
Life events like job loss, medical emergencies, or business downturns can impair your ability to pay taxes. Negotiating an OIC helps you avoid prolonged IRS collection actions such as wage garnishments or liens. It enables you to settle your tax debt affordably and avoid further penalties.
Types of Offers in Compromise
The IRS accepts three main types:
- Doubt as to Collectibility: You cannot pay full liability based on your financial situation. Learn more.
- Doubt as to Liability: You dispute the tax owed and believe it is incorrect. This requires strong evidence. Learn more.
- Effective Tax Administration: You owe the debt but paying would cause economic hardship or be unfair to collect. Learn more.
How to Prepare Your Offer in Compromise
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File all required tax returns: The IRS requires all past tax returns filed before considering an OIC.
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Gather detailed financial information: Collect bank statements, pay stubs, property details, debts, monthly expenses, and other documents demonstrating your financial situation.
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Calculate Reasonable Collection Potential (RCP): Estimate your income, allowable expenses based on IRS limits, and the equity in your assets to determine what you can realistically pay.
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Select a payment option:
- Lump Sum Cash Offer: Pay the full offer amount within 120 days of acceptance.
- Periodic Payment Offer: Pay over 24 months with IRS processing time; initial payment at submission is required.
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Complete Form 656: The official IRS Offer in Compromise application detailing your offer and financial disclosures. See Instructions for Form 656.
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Complete Form 433-A (Individuals) or 433-B (Businesses): Provide detailed collection information forms required by the IRS.
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Pay the non-refundable application fee and initial payment if applicable: The fee is $205 for most taxpayers as of 2025. See Offer in Compromise Application Fee.
The Negotiation Process
After submitting your OIC, the IRS reviews your offer. The outcome can be:
- Acceptance: Your offer meets IRS criteria, and you must comply with terms including timely payments and staying current on taxes.
- Counteroffer: The IRS may propose a higher amount or different payment terms. You can accept, reject, or negotiate further.
- Rejection: If denied, your original tax debt remains, though periodic payment submitted with your offer is refundable (minus the fee). You may appeal. See Appealing a Rejected OIC.
Tips for Successful Negotiation
- Be thorough and accurate reporting financial information.
- Use realistic numbers based on IRS expense guidelines.
- Maintain up-to-date tax filings and payments.
- Disclose all assets; hiding information leads to denial.
- Consider professional help from tax attorneys or enrolled agents experienced in OICs.
Common Mistakes to Avoid
- Not filing required returns beforehand.
- Omitting financial information or documentation.
- Submitting unreasonable offers.
- Missing payments if on periodic plan.
- Misunderstanding terms after acceptance or rejection.
Frequently Asked Questions
Q: How long does the OIC process usually take?
A: It often takes 6 months to over a year from submission to resolution.
Q: Is the application fee refundable?
A: The $205 fee is non-refundable. However, the initial periodic payment is returned if your offer is rejected.
Q: What happens to penalties and interest during the OIC process?
A: Collection actions typically pause, but penalties and interest continue to accrue until resolution.
Q: Should I hire a tax professional?
A: While not required, experienced professionals improve your chances of a successful negotiation.
Q: What if my financial situation changes after applying?
A: You must notify the IRS promptly as it can affect your offer’s evaluation.
Additional Resources
For detailed official guidance, visit the IRS Offer in Compromise page.
Explore related FinHelp articles:
- Offer in Compromise: Doubt as to Collectibility
- Form 656 – Offer in Compromise
- Offer in Compromise Application Fee
This comprehensive approach helps taxpayers navigate successfully through the OIC process and negotiate effectively with the IRS to reduce their tax burdens.