IRS Offer in Compromise

One of the most powerful tools available to taxpayers with exceptional circumstances facing federal tax debt with the Internal Revenue Service (IRS) is the IRS offer in compromise program (“OIC”). An OIC allows qualifying taxpayers facing financial hardship to settle federal tax debt (including income tax, back taxes, and current year taxes) with the IRS for less than the full amount. To qualify for an OIC, a taxpayer must demonstrate economic hardship by proving that the reasonable collection potential must be less than the total tax liability. The IRS determines reasonable collection potential by combining the taxpayer’s future income (a multiple of net monthly income) with the taxpayer’s net equity in assets. The taxpayer must also file all required tax returns to qualify for an OIC.

The OIC process begins by submitting an offer in compromise application, which generally includes the following:

• IRS form 656-B (compromise booklet)
• Collection information statement (IRS form 433-A and/or form 433-B)
• Supporting documentation (typically financial information for living expenses such as bank account statements)
• Application fee (waived for qualifying taxpayers under the low-income certification)
• Initial payment (can be made by lump sum or by period monthly payments)

When a processable OIC is submitted, the IRS must suspend most collection activity. However, the IRS may still file a tax lien while an OIC is pending. Once the OIC is processed and reviewed, the IRS will either accept the OIC, submit a counteroffer, or reject the OIC. If the IRS accepts an OIC, the tax debt is settled once the offer amount is paid full. If the IRS submits a counteroffer, the taxpayer can either accept the counteroffer or file an administrative appeal with the IRS to challenge the amount of the counteroffer.

If the IRS rejects an OIC, the taxpayer can file an administrative appeal with the IRS to challenge the rejection. If an appeal is not timely filed, the IRS will resume collection action unless the taxpayer enters into an installment agreement (payment plan) or other collections alternative. The IRS allows taxpayers to utilize an online offer in compromise pre-qualifier to determine eligibility for an OIC.

Successfully settling tax debt through the OIC process requires a thorough understanding of complex legal and regulatory rules, highlighted by the roughly 30% IRS OIC acceptance rate. We invite you to request a consultation with an experienced tax attorney if you need help navigating the OIC process.