What Is the OIC Pre-Qualifier and How Does It Work?

The Offer in Compromise (OIC) Pre-Qualifier is an online tool provided by the IRS to help taxpayers determine if they might be eligible to settle their tax debt for less than the full amount owed. For those struggling with unpaid taxes, this can be a useful first step before formally applying for an OIC.

While the tool provides an initial assessment, it does not guarantee acceptance. Several financial factors influence eligibility, and understanding these elements is essential.

Purpose of the Pre-Qualifier

The IRS designed the OIC Pre-Qualifier to help taxpayers gauge whether they have a realistic chance of settling their tax debt before investing time and money in the formal application process. By entering financial details, users receive an estimate of their potential qualification status, allowing them to decide if pursuing an Offer in Compromise is worthwhile. This tool helps prevent unnecessary application rejections by identifying disqualifying factors early.

A key function of the Pre-Qualifier is assessing compliance with IRS filing and payment requirements. Taxpayers must have filed all required tax returns and made any necessary estimated payments for the current year. If these obligations are not met, the IRS will automatically reject an OIC application. The tool flags these issues so users can address them before applying.

The IRS does not consider OIC applications from individuals or businesses in active bankruptcy, as tax debts are typically handled through that process. The Pre-Qualifier helps taxpayers identify this restriction early, preventing ineligible submissions.

Income Requirements

The IRS evaluates income when determining OIC eligibility because it directly affects a taxpayer’s ability to pay. The Pre-Qualifier tool requires users to enter various income sources, including wages, self-employment earnings, rental income, pensions, and Social Security benefits. Both gross and net income are considered, meaning deductions such as business expenses for self-employed individuals can influence the final calculation.

The IRS looks at monthly income trends rather than isolated figures to account for seasonal variations. For example, a construction worker earning more in summer than winter may need to provide an average income over several months for a more accurate financial picture.

Household income also plays a role. Even if only one person owes taxes, the IRS may consider a spouse’s earnings if they contribute to shared expenses. A higher combined household income can reduce the likelihood of qualifying for an OIC. However, adjustments are made based on each person’s financial contribution, ensuring only the portion of income available for tax repayment is factored into the decision.

Expense Considerations

The IRS determines a taxpayer’s ability to pay by comparing income to allowable expenses. Only expenses deemed “necessary” under IRS guidelines are considered, including housing, utilities, transportation, and healthcare. The IRS relies on Collection Financial Standards, which set limits on certain expenses based on geographic location and household size. If actual spending exceeds these limits, the IRS may only allow the standard amount unless the taxpayer can justify the higher costs.

Housing and utility expenses vary significantly by location. A taxpayer in New York City or San Francisco may have higher allowable limits than someone in a lower-cost area. The same applies to vehicle ownership. The IRS sets a national standard for operating costs but allows additional amounts for car loan or lease payments if they are reasonable. If a car payment is considered excessive, the IRS may disallow the portion above the standard.

Medical expenses beyond insurance premiums can also impact OIC eligibility. The IRS allows necessary out-of-pocket healthcare costs, including prescription medications and treatments for chronic conditions. However, elective procedures such as cosmetic surgery are generally excluded. Taxpayers with ongoing medical issues may need to provide documentation proving that their expenses are both necessary and recurring.

Household Size and Dependents

The number of individuals in a household affects the IRS’s evaluation of a taxpayer’s ability to pay. A larger household typically has higher necessary living expenses, which can reduce the amount of disposable income available for tax repayment. The IRS defines household size based on dependents claimed on a tax return, which can include children, elderly parents, or other relatives receiving financial support. Accuracy in reporting household size is important, as it affects allowable expense calculations.

Beyond just the number of dependents, financial responsibilities associated with them can influence eligibility. Childcare costs, educational expenses, and necessary medical care for dependents can significantly impact a household’s financial situation. While not all these expenses are included in standard IRS calculations, taxpayers can sometimes justify higher expenditures by providing documentation. For example, if a dependent requires specialized medical treatment or therapy, these costs may be factored into the financial analysis.

Documentation Needed

Before submitting an Offer in Compromise application, taxpayers must gather detailed financial records to substantiate their claims. The IRS requires documentation verifying income, expenses, and assets to ensure the information provided is accurate. While the Pre-Qualifier tool does not require document uploads, having these records available helps ensure accuracy when entering financial details.

Pay stubs, bank statements, and tax returns are commonly requested. Wage earners should provide recent pay statements covering at least the past three months, while self-employed individuals must submit profit and loss statements detailing business revenue and expenses. Bank statements confirm cash flow and spending patterns, while tax returns from the past two years establish income history and compliance with filing requirements.

Asset documentation is also important. The IRS evaluates property ownership, vehicle equity, retirement accounts, and investment holdings to determine if liquidating assets could cover the tax liability. Mortgage statements, vehicle loan balances, and brokerage account summaries help establish the value of these holdings. If a taxpayer claims significant medical or childcare expenses, receipts and billing statements should be included to justify these costs.

Steps After Using the Tool

Once the Pre-Qualifier tool provides an estimate of eligibility, taxpayers must decide whether to proceed with a formal Offer in Compromise application. If the tool indicates potential qualification, the next step is completing Form 656, Offer in Compromise, along with Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. These forms require a detailed breakdown of financial information, mirroring what was entered into the Pre-Qualifier but with supporting documentation attached.

Submitting an application requires an initial payment, which varies depending on the offer’s terms. Taxpayers can choose between a lump sum cash offer, requiring 20% of the proposed settlement upfront, or a periodic payment plan, which necessitates the first installment with the application. The IRS application fee, currently $205, must also be included unless the applicant qualifies for a low-income waiver.

After submission, the IRS reviews the application, which can take several months. During this period, collection efforts are typically paused. If the IRS rejects the offer, taxpayers can appeal the decision within 30 days. If accepted, the agreed-upon amount must be paid according to the approved terms, and compliance with future tax obligations is required to avoid defaulting on the agreement.