How to Apply for an Offer In Compromise | One Way To Save
An Offer in Compromise (OIC) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. This applies to all taxes, including any interest, penalties, or additional amounts arising under the Internal Revenue Code. It is one of many tax resolution options that may be applicable to you.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe if the IRS offer is accepted. It provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interests of both the taxpayer and the IRS.
Generally, you must propose an appropriate offer amount based on what the IRS considers your true ability to pay. It may be a legitimate option if you can’t pay your full tax liability. Or, doing so creates a financial hardship.
How Does the IRS Decide to Accept My Offer?
You’ve probably seen ads promising to settle tax debts for pennies on the dollar. While it’s possible to settle for significantly less than you owe, these claims often create unrealistic expectations. The IRS considers your unique set of facts and circumstances.
Taxpayers who owe back taxes can take advantage of the Offer-in-Compromise program, but YOU MUST QUALIFY. So it is important that you have representation from an experienced tax professional, such as Tax Samaritan, so that your interests are protected and that an appropriate offer is made based on your:
- Ability to pay
- Income
- Expenses and
- Asset equity
The OIC application requires you to describe your financial situation in detail. So, before you proceed, you must be willing to make a full and complete disclosure in the above areas and to pay the required application fee and down payment (as applicable). It all comes down to a formula. The IRS utilizes a formula known as “Reasonable Collection Potential” or “RCP” for short, to determine qualification and, if the taxpayer qualifies, what the correct amount is to offer the IRS.
What Is Reasonable Collection Potential (RCP)?
It’s the IRS’s estimate of the maximum amount they can realistically collect from you. In most cases, the IRS will only accept an Offer in Compromise if your offer meets or exceeds this amount.
The Basic RCP Formula:
RCP = Net Realizable Equity in Assets + Future Disposable Income
- Net Realizable Equity in Assets: Quick-sale value of your assets (often ~80% of fair market value) minus any secured debts.
- Future Disposable Income: Monthly income minus IRS-allowed living expenses, multiplied by 12 months (lump sum offer) or 24 months (periodic payment offer).
For example:
Let’s say you owe $80,000 in back taxes. You have $10,000 in net equity and a monthly disposable income of $700.
- Lump Sum RCP: $10,000 + (12 × $700) = $18,400
- Periodic RCP: $10,000 + (24 × $700) = $26,800
In this case, you would need to offer at least $18,400 (lump sum) or $26,800 (periodic) for the IRS to seriously consider it. If your tax debt is $80,000, this could mean settling for roughly 23–34% of what you owe. Note that real calculations are more detailed, but this shows how RCP works.
Who Is Eligible for an Offer in Compromise?
The OIC program is not for everyone. Before the IRS considers your offer, you must meet these basic requirements:
- You have filed all required tax returns.
- You have made all required estimated tax payments for the current year.
- If you own a business with employees, you have made federal tax deposits for the current quarter and the two preceding quarters.
- You are not currently in an open bankruptcy proceeding.
The program is available to taxpayers who are unable to pay their tax amounts in a lump sum or through an installment agreement. You must exhaust your search for other payment options. To qualify for the OIC program, taxpayers must demonstrate that a lump-sum or installment agreement is not possible.
Reasons the IRS May Accept an OIC
The IRS may legally compromise a tax liability for one of the following reasons:
- Doubt As To Liability: There is doubt as to whether or not the assessed tax is correct.
- Doubt As To Collectability: There is doubt that you could ever pay the full amount of the tax owed. In these cases, the total amount you owe must be greater than the sum of your assets and future income.
- Promote Effective Tax Administration: There is no doubt that the tax is correct and no doubt about the collectability of the amount owed, but you have an economic hardship or other special circumstances that may allow the IRS to accept less than the balance due.
- Lump Sum Cash: Paid within 5 or fewer installments within 5 or fewer months from notice of acceptance.
- Short Term Periodic Payment Plan: Paid within 24 months (2 years) from the date the IRS receives the OIC.
Generally, the IRS will not accept an offer if you can pay your tax debt in full through an installment agreement or a lump sum.
It is important to note that penalties and interest will continue to accrue during the offer evaluation process.
What Does It Cost to Apply?
There is a $205 non-refundable application fee plus an initial payment to apply for an Offer in Compromise.
- For a lump-sum offer, you submit 20% of the total offer amount with the application.
- For a periodic payment offer, you submit the first month’s payment with the application.
If your income is low enough, you may qualify for a low-income waiver that eliminates both the application fee and the initial payment requirement. The IRS provides a simple chart on Form 656 to check eligibility.
How Do I Apply for an Offer in Compromise?
The process requires full financial disclosure. You will need to submit:
- Form 656 (Offer in Compromise)
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses
- Supporting documentation (recent bank statements, pay stubs, asset valuations, etc.)
You can file online through your IRS Individual Online Account or mail the package to the address listed in the Form 656 instructions. Incomplete applications are among the most common reasons offers are returned without review.
What Happens After You Submit Your Offer?
Once the IRS receives your offer, collection actions are generally suspended while they review it. However, interest and penalties still continue to accrue. The review process often takes 6 to 24 months or longer.
If the IRS has not made a decision within 24 months of the date they received your offer, the offer is automatically accepted. If your offer is rejected, you have 30 days to appeal using Form 13711. If accepted, you must remain fully tax compliant (file and pay on time) for the next 5 years, or the agreement can be canceled and the full debt reinstated.
Check If You Might Qualify For An OIC
The IRS offers a free Offer in Compromise Pre-Qualifier Tool on its website. It’s a quick, anonymous way to get a preliminary idea of whether you may qualify and what a realistic offer amount might look like. It’s a great starting point, though the final decision always rests with the IRS after full review.
Frequently Asked Questions
The initial payment or application fee for an offer in compromise is not refundable. However, if the IRS rejects your offer, these amounts are applied directly to your existing tax debt. Collection activities may resume after the rejection process.
No, you can’t apply for an Offer in Compromise if you have unfiled tax returns. The IRS requires that all required returns be filed before it will review your application. Many taxpayers, especially expats, first use the Streamlined Filing Compliance Procedures to quickly file the last three years of returns and six years of FBARs with reduced or no penalties, then apply for an OIC once they are compliant.
You will receive a letter explaining the reason for rejection. You have 30 days to file an appeal using Form 13711. Many offers are successfully modified or accepted during the appeal process.
You must pay the offered amount in accordance with the agreed terms and remain fully tax-compliant for the next five years. This means filing all returns and paying taxes on time. If you fail to meet these conditions, the IRS can cancel the agreement and reinstate the original tax debt, along with additional penalties and interest.
The main form is Form 656, which states the tax periods, offer amount, payment type, and reason for the offer. Most applicants also need to include Form 433-A (OIC) for individuals or self-employed taxpayers and Form 433-B (OIC) for businesses, along with supporting financial documents. For offers based on doubt as to liability, use Form 656-L instead of Form 656. All forms and instructions are included in the Form 656-B booklet.
It’s technically possible to apply for an Offer in Compromise on your own. However, we do not recommend it because the process is highly complex, and small errors in documentation or RCP calculations can easily lead to rejection. Working with a qualified tax professional greatly improves your chances of getting approved.
Should You Try an Offer in Compromise?
If you have a large tax debt and other payment options aren’t feasible, an Offer in Compromise may be worth exploring. Working with a qualified tax resolution professional, like Tax Samaritan, can help you prepare a strong OIC application.
Contact us today to discuss your situation and see if an Offer in Compromise is the right solution for you.
