Tax debt can feel overwhelming, especially as penalties and interest grow. For some taxpayers, the IRS provides a way to settle for less than the full amount owed through an Offer in Compromise.
While it can be life-changing for those who qualify. It’s also one of the IRS’s strictest programs. Here’s what you need to know.
What Is an Offer in Compromise?
An Offer in Compromise is a formal agreement where the IRS accepts a reduced amount as full payment of your tax debt.
According to the IRS, it may be considered when:
- The IRS doubts it can collect the full balance before the statute of limitations expires.
- The taxpayer cannot pay in full due to financial hardship.
- Collecting the full debt would create unfair or inequitable circumstances.
Applications require Form 656 and detailed financial disclosures using Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
The IRS calculates your “reasonable collection potential” (income, assets, expenses, and future earning ability) to decide whether to accept your offer.
Key Benefits of an OIC
- Debt Reduction: Potential to resolve tax debt for less than the total owed.
- Final Settlement: Once terms are met, the IRS considers your account closed.
- Relief from Collection Actions: An accepted OIC can stop enforcement measures such as levies and garnishments.
Who Qualifies?
Eligibility for an Offer In Compromise is strict. You must:
- File all required tax returns.
- Pay estimated taxes and make federal deposits if self-employed.
- Not be in active bankruptcy.
- Demonstrate through financial disclosures that you cannot pay the full balance.
For example, a taxpayer who owes $40,000 but shows only $8,000 in “reasonable collection potential” may be able to settle for that reduced amount. On the other hand, a taxpayer with home equity or higher income may not qualify.
Limitations to Keep in Mind
- Approval is rare: Historically, fewer than 40% of OIC applications are accepted each year.
- Non-refundable fees and payments: Applicants must include a $205 fee and an initial payment (unless low-income certification applies).
- Ongoing compliance required: You must stay current on all future filings and payments for five years, or the IRS can revoke the agreement.
Interest continues: Interest accrues until the IRS officially accepts your offer and terms are fulfilled.
The Role of the IRS Fresh Start Program
The IRS Fresh Start Program expanded access to Offer In Compromises by changing how the IRS calculates allowable expenses and future income. This has made it possible for more middle-income taxpayers to qualify, though the program remains highly selective.
Why Professional Guidance Matters
OIC applications require meticulous documentation. A professional can help organize financial records, strengthen your case, and explore alternatives if your offer is unlikely to be accepted. Relief strategies like Tax Relief or temporary Wage Garnishment and Levy Release may also help if an OIC isn’t approved.
OIC Tax Debt Settlement Conclusion
An Offer in Compromise can provide significant relief for taxpayers facing unmanageable IRS debt. But it isn’t for everyone, and approval depends heavily on your financial situation. Eligibility and acceptance are determined by the IRS on a case-by-case basis. Results cannot be guaranteed.
With professional guidance, you can determine if an Offer In Compromise is the best path forward.
If you’d like a broader overview of IRS debt resolution programs before diving deeper into settlement options, take a look at our guide on Tax Relief: Beginner’s Guide to Reducing IRS Debt.
Wondering whether an Offer in Compromise is the right choice compared to other relief options? Check out our article on Offer in Compromise vs. IRS Payment Plan: Which Tax Debt Solution Is Better? for a side-by-side comparison.