If you owe money to the IRS and are struggling to pay, you may have options beyond a standard installment plan. One such option is an IRS Offer in Compromise —a program that allows eligible taxpayers to settle their debt for less than the total amount owed. However, qualifying for this relief can be challenging.
What Is an IRS Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the IRS to settle tax debt for a reduced amount. There are three main types of OICs:
- Doubt as to Collectibility – The most common type, used when a taxpayer proves they cannot afford to pay the full amount owed.
- Doubt as to Liability – Used when a taxpayer disputes the IRS’s assessment and believes they owe less than what is claimed.
- Effective Tax Administration – Applied in cases where paying the full tax liability would cause significant hardship, even though the taxpayer technically can afford it.
The Doubt as to Collectibility option is the one most people consider when looking to reduce their tax burden.
State Tax Debt and Offers in Compromise
While OICs are typically associated with federal taxes, some states also offer similar programs. However, qualifying for a state-level OIC can be even more difficult since states often have stricter guidelines and longer collection windows.
Who Qualifies for an Offer in Compromise?
Qualifying for an OIC requires meeting strict eligibility criteria, including:
- Not being in active bankruptcy.
- Being current on past tax returns and estimated payments (if self-employed).
- Demonstrating financial hardship or the inability to fully pay the debt.
- Showing that assets and income are insufficient to cover the tax bill.
The IRS assesses an applicant’s financial situation, including income, expenses, and assets, before deciding whether to accept the offer.
How to Apply for an Offer in Compromise
Applying for an OIC involves detailed paperwork and financial disclosures. The IRS requires applicants to submit:
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
- Form 656, detailing the specific offer.
- A $205 application fee (which may be waived for low-income applicants).
- An initial payment, which varies based on the type of offer submitted.
Supporting documentation such as bank statements, pay stubs, and asset valuations must be included. Given the complexity, consulting a tax professional can improve the chances of approval.
What Happens After You Apply?
The IRS review process can take up to a year or more. If the offer is accepted, the taxpayer must adhere to one of the following payment structures:
- Lump Sum Offer – Requires a 20% initial payment, with the remainder paid in five or fewer installments.
- Periodic Payment Offer – Requires continued payments while the IRS reviews the application, followed by ongoing installment payments until the agreed amount is fully paid.
If the IRS rejects the offer, applicants still have other options, including setting up an installment agreement or seeking penalty reductions.
Is an Offer in Compromise Right for You?
While an OIC can provide significant tax relief, it’s not suitable for everyone. The application process is rigorous, and the IRS expects taxpayers to exhaust all available financial resources before granting approval. For those who qualify, however, an accepted OIC can provide a fresh financial start by resolving tax debt permanently.
If you’re considering an Offer in Compromise, consult a tax expert to assess your eligibility and navigate the application process effectively.
