How Much Will the IRS Usually Settle For?

An Offer in Compromise (OIC) provides a pathway for taxpayers to resolve their tax liability with the Internal Revenue Service (IRS) for a lower amount than what they originally owe. It represents a potential solution for individuals and businesses facing significant tax debt they cannot realistically pay in full. The OIC program is designed to offer a fresh start to those experiencing financial hardship, allowing them to settle their tax obligations and move forward. This program is not suitable for everyone, as specific criteria and a detailed financial assessment are involved in determining eligibility and the acceptable settlement amount.

Eligibility and Types of Offers

The IRS considers an Offer in Compromise under specific conditions, primarily when a taxpayer demonstrates an inability to pay their full tax debt. To qualify, taxpayers must generally be current with all tax filing requirements. They also need to have made all required estimated tax payments for the current year, and businesses with employees must have made all federal tax deposits for the current and two preceding quarters. Additionally, a taxpayer cannot be in an open bankruptcy proceeding when applying for an OIC.

There are three primary grounds on which the IRS may accept an OIC. The most common is “Doubt as to Collectibility,” which applies when the taxpayer’s assets and income are less than the full amount of the tax liability.

Another ground is “Doubt as to Liability,” which arises when there is a genuine dispute regarding the accuracy or existence of the assessed tax debt itself. This type of OIC typically involves challenging the original tax assessment.

Finally, an OIC may be considered under “Effective Tax Administration (ETA).” This applies when there is no doubt about the liability or collectibility, but collecting the full amount would cause significant economic hardship for the taxpayer or would be unfair due to exceptional circumstances. Economic hardship might include situations where paying the full amount would prevent the taxpayer from meeting basic living expenses.

Calculating Your Offer Amount

The IRS determines your “Reasonable Collection Potential” (RCP), which is the minimum amount the IRS will generally accept to settle a tax debt. This amount is calculated by evaluating your ability to pay, considering both your current income and the equity in your assets. Your offer must typically be equal to or greater than this calculated RCP.

The ability to pay is assessed by analyzing all sources of your income, including wages, self-employment earnings, rental income, and investment income. From your total income, the IRS subtracts allowable living expenses, which are determined using national and local standards. National Standards cover categories such as food, clothing, housekeeping supplies, personal care, and miscellaneous items, and are applied uniformly across the country. Local Standards, on the other hand, vary by geographic area and cover housing, utilities, and transportation costs. The difference between your income and these allowable expenses determines your monthly disposable income. This monthly disposable income is then projected over a specific period to estimate your future income potential available for collection.

In addition to future income, the IRS considers the equity in your assets. This includes liquid assets like cash, bank accounts, and investments, as well as non-liquid assets such as real estate, vehicles, and retirement accounts. The IRS assesses the “quick sale value” of these assets, which is generally considered to be 80% of their fair market value, minus any secured debt or costs of sale. The total RCP is then derived by adding the net realizable equity from your assets to your projected future income potential. This calculation aims to determine the maximum amount the IRS can reasonably expect to collect from you, forming the basis of the acceptable OIC amount.

Preparing Your Offer Package

Assembling a complete and accurate Offer in Compromise package is a key step in the application process. The primary form required is Form 656, Offer in Compromise, which outlines your proposed settlement amount and payment terms. Alongside this, you must complete collection information statements: Form 433-A for individuals and self-employed individuals, or Form 433-B for businesses. These forms require detailed financial information that substantiates your inability to pay the full tax debt.

Supporting documentation is essential to verify the information provided on Forms 656 and 433-A/B. You will need:
Proof of income, such as recent pay stubs, W-2s, 1099s, and past tax returns.
Bank and investment statements for all accounts.
Documentation for non-liquid assets, like real estate appraisals, vehicle titles, and statements for retirement accounts.
Proof of expenses, including utility bills, mortgage or rent statements, and medical records if claiming economic hardship.

A non-refundable application fee must accompany your offer package. However, this fee may be waived for taxpayers who meet low-income certification requirements. Depending on the chosen payment option (lump sum or periodic payments), an initial payment may also be required. Accuracy and completeness are important when transferring financial information to the forms and assembling the package, as any missing details or inaccuracies can lead to delays or rejection.

Submitting and Processing Your Offer

Once your Offer in Compromise package is prepared, you will submit it to the IRS, typically by mail. It is important to ensure all required forms, supporting documentation, the application fee, and any initial payment are included in the submission. Failure to provide a complete package can result in the offer being returned without consideration.

Upon receipt, the IRS assigns the offer to an IRS Offer Specialist. This specialist will verify the financial information provided. During this review period, taxpayers are generally required to stay current with their tax filing obligations and make any required estimated tax payments. The IRS may also request additional information or clarification.

There are several possible outcomes for an OIC. If accepted, the IRS will send written confirmation, and the taxpayer must adhere to the agreed-upon payment terms, which could be a lump sum or periodic payments. Compliance with all tax filings and payments is typically required for a period of five years after acceptance. An OIC may be rejected if the IRS determines the offer is insufficient, if the taxpayer is not in compliance, or if information cannot be verified. If an offer is rejected, the taxpayer generally has 30 days from the date of the rejection letter to appeal the decision to the IRS Office of Appeals, using Form 13711. Taxpayers can also withdraw an offer at any point during the review process.