If you’re facing a large tax debt and struggling to pay it in full, you may have heard of something called an Offer in Compromise (OIC). This IRS program is designed to help qualifying taxpayers settle their tax liabilities for less than the full amount owed. While it might sound too good to be true, the Offer in Compromise is a legitimate, government-backed form of tax relief. However, it comes with strict eligibility requirements and a thorough application process.
What Is an Offer in Compromise?
An Offer in Compromise is a tax resolution program offered by the Internal Revenue Service (IRS) that allows eligible taxpayers to resolve their tax debt by paying a reduced amount. The IRS only approves offers when it believes the taxpayer cannot pay the full debt through a lump sum or installment payments without causing financial hardship.
The legal authority for the Offer in Compromise is found in Section 7122 of the Internal Revenue Code. This provision gives the IRS the discretion to settle tax debts for less than the full amount if it is in the best interest of both the government and the taxpayer.
Types of Offers in Compromise
There are three main grounds on which an Offer in Compromise can be submitted:
- Doubt as to Collectibility: You don’t have enough income or assets to pay your full tax liability.
- Doubt as to Liability: There is a genuine dispute about whether you actually owe the tax.
- Effective Tax Administration: You can technically pay your debt, but doing so would create a financial hardship or would be unfair due to exceptional circumstances (often used for disabled or elderly taxpayers).
Most Offers in Compromise are submitted under the first category—Doubt as to Collectibility.
How the IRS Evaluates OIC Applications
When reviewing an Offer in Compromise, the IRS considers your:
- Income
- Expenses
- Asset equity
- Ability to pay
They use a formula called Reasonable Collection Potential (RCP) to calculate how much you can realistically pay. If your offer equals or exceeds your RCP, the IRS may accept it.
Application Process
To apply for an Offer in Compromise, you’ll need to complete:
- Form 656 – Offer in Compromise
- Form 433-A (OIC) or 433-B (OIC) – Collection Information Statement for individuals or businesses
You’ll also need to submit a non-refundable application fee (currently $205) and an initial payment, unless you qualify for a low-income waiver.
Once submitted, the IRS will suspend collection efforts while your offer is under review, which can take several months.
Pros and Cons
Pros:
- Settle tax debt for less than owed
- Avoid aggressive collection actions
- Start fresh financially
Cons:
- Tough eligibility requirements
- Extensive documentation needed
- Not all offers are accepted
Final Thoughts
An Offer in Compromise can be a powerful tax relief option, but it’s not a quick fix. The IRS accepts only a small percentage of offers each year, typically from those who truly cannot pay their full tax debt. If you think you may qualify, consider contacting Tax Relief Advisers to guide you through the process. Settling with the IRS may be possible—but only with the right preparation and approach.
For more Offer in Compromise (OIC) tips, contact the experts at Tax Relief Advisers today.