IRS Offer in Compromise: Basics and Who Qualifies

Advertisements about "settling your tax debt for pennies on the dollar" typically refer to the process of applying for an IRS offer in compromise, or OIC, which is an IRS program designed to help people pay at least some of their tax debt. But statistically, the odds of getting an IRS offer in compromise are pretty low. In fact, the IRS accepted only 15,154 offers out of 49,285 in 2021.^[0]

It’s not impossible, though. Here’s how an IRS offer in compromise works, what it takes to qualify and what to know about the program.

What is an IRS offer in compromise?

An offer in compromise is an IRS program that allows certain taxpayers to settle IRS tax debt for less than they owe.^[0]

How to apply for an IRS offer in compromise

An application for an IRS offer in compromise has three parts:

1. Completed IRS forms 433-A and 656. If you believe the tax debt isn’t yours or doesn’t actually exist, you can also file Form 656-L.

2. A $205 application fee, which is nonrefundable, but may be waived if you meet the IRS low-income guidelines.

3. A payment toward your proposed new balance due.

You’ll have to provide a lot of information about your monthly income, assets, cash and other debt, as well as your rent, utilities, groceries and other expenses when you apply for an IRS offer in compromise.^[0]

You can hire a qualified tax professional or tax relief company to help you do the paperwork, but it’s not required, and the money you pay them might be more than the money you’re hoping to save on your taxes.

Who qualifies for an IRS offer in compromise?

There are two hurdles in the offer in compromise process: qualifying to apply and getting the IRS to accept your offer. The IRS has an online tool to help you determine if you might be eligible.

Note that the agency will send back your application if any of these are true:

• You forget to provide necessary information on the application.

• You’re behind on filing your tax returns.

• You haven’t received a bill for at least one tax debt included on your offer.

• You haven’t made all required estimated tax payments for the current year.

• You are in an open bankruptcy proceeding.

• You stop paying your taxes or filing your tax returns while you’re waiting for an answer.

• The IRS has sent your case to the Justice Department.

• You forget to include the application fee ($205 for most people; waived for low-income applicants).

If the agency sends back your application, you can reapply after you’ve fixed the issues.

How the IRS decides whether to accept an offer in compromise

The IRS uses financial information about you to calculate your “reasonable collection potential,” or RCP — the amount it thinks it can get from you now and in the future.^[0]

Math aside, there are three reasons the IRS may grant an offer in compromise:

1. There’s a genuine legal dispute about whether your tax debt actually exists or about how much it is.

2. Paying in full would create an economic hardship for you or be “unfair and inequitable because of exceptional circumstances.”

3. The IRS doubts it can ever fully collect from you.

What you pay

An IRS offer in compromise comes with two options for paying your new and improved tax bill.

1. Lump sum

• Pay within five months.

• You must include 20% of your offer amount with your application (in addition to the application fee). This money is nonrefundable, even if the IRS rejects your offer (the IRS will just apply it toward your tax bill).

2. Payment plan

• Pay within 24 months.

• You must send the first payment with your application (in addition to the application fee). This money is nonrefundable, even if the IRS rejects your offer (the IRS will just apply it toward your tax bill).

• You can make payments while you wait for the IRS to decide whether to grant you an offer in compromise.

Other things to know about IRS offers in compromise

The process can be complex, but there are some key things to keep in mind:

• There’s a $205 fee for most applicants, and it's nonrefundable (low-income taxpayers can get a waiver).

• You’ll also need to make an initial payment, and it’s nonrefundable as well. Your initial payment has to be either 20% of what you’re offering to pay (if you're paying in five or fewer installments) or your first monthly installment (if you're paying in six or more monthly installments).

• Once you file your application, the IRS suspends collection activities. The IRS can file or keep tax liens in place until it accepts your offer and you’ve fulfilled your end of the deal.

• Previously, the IRS could keep your tax refund and apply it to your tax debt. However, for offers in compromise accepted on and after Nov. 1, 2021, the IRS announced that it would no longer recoup refunds for the calendar year in which the OIC was accepted. There is a caveat here, though. If you receive a refund via an amended return after having accepted an OIC, you may need to turn it back over to the IRS.^[0]

  Department of the Treasury. Memorandum for Director, Specialty Collection Offer in Compromise. Accessed Mar 17, 2022.

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• If you're waiting on a pending OIC agreement from the IRS, you may be able to prevent your refund from being garnished by seeking an offset bypass refund (OBR). You must work with the IRS to prove economic hardship in order to qualify and you may not receive the full refund. The IRS has more details here.

• Some of the information about your offer in compromise could be made public. The IRS’s public inspection files on offers in compromise include the taxpayer's name, city, state, ZIP code, liability amount and offer terms.

• If the IRS rejects your offer, you can appeal within 30 days. The IRS has an online resource to walk you through that.

Other options

If an offer in compromise isn’t for you, or the IRS rejects your offer in compromise, you may still have other options through the IRS for finding tax relief, including getting on an installment plan or requesting “currently not collectible” status.

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