How to Get an Offer in Compromise Approved by the IRS

An Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves a tax liability for less than the full amount owed. This program is designed for taxpayers who genuinely cannot pay their entire tax debt or for whom full payment would cause significant financial hardship. An OIC aims to achieve a resolution that is in the best interest of both the government and the taxpayer, promoting future compliance with tax laws.

Meeting Initial Conditions

Before the IRS will consider an Offer in Compromise, a taxpayer must meet specific preliminary requirements. The IRS will not process an OIC application if the taxpayer is not fully compliant with all filing and payment obligations.

All required federal tax returns must be filed, including income tax and employment tax. For businesses, all federal tax deposits must be current for the present quarter and the two preceding quarters. Taxpayers must also make all required estimated tax payments for the current year or ensure adequate tax withholding.

A taxpayer cannot be in an open bankruptcy proceeding when submitting an OIC, as tax liabilities are addressed through the bankruptcy process. If a previous OIC was withdrawn or rejected, the taxpayer should address the reasons for that outcome before re-applying. An OIC can generally be submitted during or after an audit or appeal process.

Calculating an Acceptable Offer

The core of an acceptable Offer in Compromise hinges on the IRS’s calculation of the taxpayer’s “Reasonable Collection Potential” (RCP). This amount represents what the IRS believes it can realistically collect from the taxpayer. The offer amount must be equal to or greater than this RCP. The RCP considers the taxpayer’s ability to pay, encompassing both the value of their assets and their future income.

To determine asset equity, the IRS assesses the fair market value of all assets, including real estate, vehicles, bank accounts, and investments. From this fair market value, any secured debt (like a mortgage or car loan) is subtracted to arrive at the net realizable equity. The IRS may also apply a “quick sale discount” to the asset’s value, typically around 80% of its fair market value, to reflect what could be obtained in a forced sale.

Future income is evaluated over a 12-month period for a lump-sum offer or a 24-month period for periodic payments. This calculation involves determining the taxpayer’s “disposable income,” which is gross income minus allowable living expenses. The IRS uses standardized National Standards and Local Standards for living expenses, covering categories like food, housing, transportation, and out-of-pocket healthcare. These standards are generally applied without requiring proof of exact spending.

Net disposable income is calculated by subtracting these allowable expenses from the taxpayer’s gross monthly income. The RCP is then derived by combining the net realizable equity from assets with the total future disposable income over the applicable period (12 or 24 months). For a lump sum offer, the RCP calculation would be asset equity plus 12 months of disposable income, while a periodic payment offer would use 24 months.

Two main payment options exist for an OIC: a lump sum cash offer or periodic payments. A lump sum offer typically involves five or fewer payments made within five months of acceptance, requiring a 20% initial payment with the application. The periodic payment option allows for monthly installments over a period of up to 24 months, with the first payment submitted alongside the application.

Preparing Your Application Forms and Documents

Once the financial analysis for a potential Offer in Compromise is complete, the next step involves preparing the application forms and gathering supporting documentation. The primary form for initiating an OIC is Form 656, Offer in Compromise, where the taxpayer proposes their offer amount and terms. This form also specifies the tax periods and types of tax debt being compromised.

Accompanying Form 656 are detailed financial statements: Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses. These forms require a comprehensive disclosure of income, expenses, assets, and liabilities, directly reflecting the financial data used to calculate the Reasonable Collection Potential. Accuracy and consistency across all forms are important, as discrepancies can lead to rejection.

These official IRS forms can be obtained directly from the IRS website or by mail. When completing the forms, every section must be filled out thoroughly, providing a clear and honest picture of the taxpayer’s financial situation. Supporting documentation is needed to verify the information reported on Forms 433-A (OIC) or 433-B (OIC). These documents demonstrate the taxpayer’s inability to pay the full tax debt. This includes:
Recent pay stubs
Bank statements
Asset valuation reports (for real estate or vehicles)
Loan statements
Proof of allowable expenses

An application fee, typically $205, is generally required with the submission of the OIC. However, taxpayers who meet low-income certification guidelines may be exempt from this fee. An initial payment towards the proposed offer amount is also required, depending on the chosen payment option (lump sum or periodic payments). The complete application package should include all forms, supporting documents, and required payment.

Sending Your Application

After preparing all forms and documentation, the final step is sending the Offer in Compromise to the Internal Revenue Service. The correct mailing address for OIC applications is specified in the Form 656 booklet or on the IRS website. Send the application to the appropriate IRS centralized offer unit based on your state or region.

For proof of delivery, send the complete OIC package via certified mail with a return receipt requested. This provides a legal record that the application was sent and received by the IRS, which can be important for tracking the submission and in case of any future disputes.

While postal mail is the primary method, the IRS has introduced online options. Taxpayers can use their Individual Online Account to check eligibility and, in some cases, file their OIC online. If using an online portal, ensure all attachments are correctly uploaded and the submission process is completed. Maintain a complete copy of the entire application package for personal records.

The IRS Review Process

Once an Offer in Compromise application is submitted, it enters a multi-stage review process by the IRS. The IRS will first acknowledge receipt of the application and conduct an initial review to ensure it is complete and processable. An incomplete application may be returned without further consideration.

Following this initial check, the OIC will be assigned to an IRS offer specialist or examiner. This examiner verifies all information provided in the application. They may request additional documentation, conduct interviews with the taxpayer, and perform their own assessment of the taxpayer’s financial situation against the Reasonable Collection Potential. This evaluation determines if the proposed offer amount is acceptable based on the taxpayer’s ability to pay.

During this review, the IRS may propose a counter-offer if the initial offer does not adequately reflect the taxpayer’s ability to pay. Taxpayers can respond to such counter-offers by accepting them or by providing further justification for their original proposal. An OIC might be withdrawn by the taxpayer if their financial circumstances improve. It can also be rejected by the IRS if the offer is too low, or if the taxpayer fails to provide requested information.

If an OIC is rejected, taxpayers have the right to appeal the decision. An appeal must be requested within 30 days of the rejection letter. If the OIC is accepted, the taxpayer enters into a formal agreement with the IRS, which includes terms such as future tax compliance for a specified period. During the review period, collection activity by the IRS is suspended.