An Offer in Compromise (OIC) is a program the IRS uses to settle tax debts for less than the full amount owed when taxpayers genuinely cannot pay. Qualifying for an OIC involves meeting specific IRS criteria that assess your ability to pay, your tax liability, and your financial hardship. Understanding these qualifications can provide a practical way to resolve overwhelming tax debt and avoid aggressive IRS collection actions.
Why Does the IRS Offer an Offer in Compromise?
The IRS’s primary goal is to collect all taxes owed. However, collecting every dollar isn’t always possible or practical. When a taxpayer’s financial situation clearly shows they cannot fully pay, the IRS may prefer a negotiated settlement that recovers some funds rather than pursuing costly or uncollectible debts. The OIC program was modernized in 2007 to tighten eligibility requirements and reduce misuse.
The IRS Qualification Criteria for an OIC
To determine if you qualify, the IRS examines:
- Ability to Pay: They review your income, allowable expenses, asset equity, and future income potential.
- Tax Liability: There must be either a dispute about the tax owed, or you must demonstrate an inability to pay the amount.
- Economic Hardship: Even if the tax is owed, paying the full debt would cause significant financial hardship.
The IRS evaluates offers under three categories:
- Doubt as to Collectibility: You can’t realistically pay the full debt now or in the future.
- Doubt as to Liability: There is a genuine disagreement about the tax amount or liability.
- Effective Tax Administration: Paying the full amount would be unfair or cause economic hardship.
Most accepted offers fall under doubt as to collectibility.
Eligibility Requirements
You can apply for an OIC if:
- All required tax returns have been filed.
- You are current with estimated tax payments for the current tax year.
- You are not in an open bankruptcy case.
- You do not have a previous unpaid Offer in Compromise.
The Application Process
Applying involves submitting:
- Form 656, Offer in Compromise: The formal offer document.
- Form 433-A (individual) or 433-B (business): Detailed financial statements.
- An application fee of $205 (waived for certain low-income taxpayers).
- An initial payment equal to either 20% of the offer amount (for lump-sum offers) or the first installment (for periodic payment offers).
During the review process, which typically takes six months or longer, the IRS suspends most collection activities like levies or liens. However, if the offer is rejected, collection actions can resume.
Improving Your Chances of Approval
- Provide complete, accurate financial information.
- Include all income sources and allowable expenses.
- Avoid hiding assets or underreporting income.
- Consider consulting a tax professional experienced in OICs.
- If rejected, utilize the appeals process within 30 days or explore installment agreements.
Common Misunderstandings
- You don’t have to be completely broke; you must demonstrate inability to pay the full amount.
- The IRS only accepts offers that reflect what you can reasonably afford.
- Filing an OIC pauses collection temporarily but does not guarantee permanent relief.
- You must stay current with ongoing tax obligations while your offer is pending.
Example Scenario
Imagine owing $25,000 in back taxes but having limited resources: no savings, no job, and only a $5,000 car. You might offer $6,000 as a compromise, which the IRS could accept if it reflects your reasonable ability to pay.
Summary Table of Qualification Essentials
| Factor | Requirement/Note |
|---|---|
| Tax Returns | All required returns must be filed |
| Current Tax Payments | Must be current on all estimated payments |
| Previous Offers | No prior unpaid OIC agreements |
| Bankruptcy Status | Cannot be in open bankruptcy |
| Financial Documentation | Full and honest disclosure of income, expenses, and assets |
| Application Fee | Currently $205; waived for qualifying low-income applicants |
| Offer Amount | Close to IRS’s reasonable collection potential |
Frequently Asked Questions
Q: How long does the IRS take to decide on an OIC?
A: Typically 6 months or more depending on complexity and IRS workload.
Q: Can I negotiate a payment plan if my OIC is rejected?
A: Yes, installment agreements remain an option.
Q: Does an accepted OIC affect my credit?
A: The IRS does not report directly to credit bureaus, but liens filed can impact credit until released.
Q: Can I withdraw an OIC application?
A: Yes, any time before acceptance, but the application fee is non-refundable.
For more detailed IRS guidance, visit the official IRS Offer in Compromise page.