Offer in Compromise
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:
- Ability to pay;
- Expenses; and
- Asset equity.
The IRS will generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before submitting an offer in compromise. The Offer in Compromise program is not for everyone. If you hire a tax professional to help you file an offer, be sure to check his or her qualifications.
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Offers in compromise (OICs) allow taxpayers to settle their tax debt with the IRS for less than they owe. OICs are rare; they’re meant for people experiencing severe financial hardship.
If you’re considering an OIC, you should make sure that it’s the right option for you. OICs are widely advertised, but often misunderstood. A tax expert can advise you on whether you qualify, and, if so, the amount the IRS would accept to settle your debt.
Keep in mind that OICs usually come with a fee and a down payment to the IRS. You should be reasonably sure that you qualify and know the amount you would have to pay before submitting a request. If not, you could spend a lot of money and not be any better off.
There are three types of offers in compromise (OIC):
OIC – Doubt as to Collectibility: This is the most common type of OIC. You may qualify for this OIC if you owe the IRS back taxes and can’t pay them even if you sell your assets and/or pay in installments before the time period to collect expires (generally 10 years from the time the tax is assessed). You calculate your ability to pay the IRS and offer this amount to the IRS as a “settlement” of the back taxes you owe.
OIC – Doubt as to Liability: This OIC allows you to dispute your tax liability with the IRS. You must have a legitimate disagreement, either in facts, law or argument, that disputes the tax debt you owe. Also, you must submit documentation supporting your position. IRS auditors will decide whether the IRS should accept or reject the offer. Often, this OIC results in a “mini-audit” by the IRS. If your tax debt is from a past audit, requesting audit reconsideration or appealing to the IRS or courts can be another option.
OIC – Effective Tax Administration: If you can pay the taxes and don’t dispute the amount you owe, the IRS has the discretion to settle the tax bill if you have exceptional circumstances. Sometimes, this happens when the collection of the tax would create an economic hardship for you. For example, if you had a long-term illness that required you to slowly sell off your assets to pay future medical bills, the IRS may consider this option.
Learn what options you may have if you can’t pay your taxes.
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Related tax terms
Collection Statute Expiration Date
Collection Information Statement