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An Offer in Compromise (OIC) is offered to some taxpayers to resolve federal tax debts. An OIC is not just a request for the IRS to lessen a tax bill, however. The IRS reviews circumstances, including income, expenses, assets, ability to pay, compliance with filing requirements, among others, to determine whether an offer is acceptable.

There are four key questions taxpayers should ask if they are thinking about applying for an OIC: Who is eligible? What’s the formula for determining the offer? What are the reasons for applications being rejected? How much time is required for this to happen?

An OIC is an agreement with the IRS between a taxpayer and the IRS that resolves tax debts for less than the amount actually due.

The IRS will accept an offer if it believes the proposed compensation is the best amount it is likely to be able to collect within a reasonable time.

The agency takes into account:

• Ability to pay
• Income
• Monthly expenses
• Asset equity
• Overall financial circumstances

If a taxpayer has the means to pay their back taxes in full, whether through an installment agreement or another method, the IRS generally will expect that the taxpayer take advantage of the payment options rather than opt for an OIC.

Having a large tax balance is not enough to be eligible.

In general, a person filing as an individual taxpayer will be required to:

• File all necessary tax returns.
• Have been issued a bill with a tax debt or debts of at least one of the debts included in the offer.
• Make estimated tax payments for the current year.
• Not be engaged in a bankruptcy with a court order.

There are extra federal tax-deposit obligations for businesses that employ workers.

There is also an IRS Offer in Compromise Pre-Qualifier Tool that may also be helpful for taxpayers in figuring out if they may be qualified and what their initial offer in compromise proposal might look like. But there’s no guarantee of acceptance if you use the tool.

There are basically three types of offers:

1. Genuine dispute with respect to the liability: A genuine dispute regarding whether the tax debt actually exists or the tax assessment is correct.
2. The asset or income of the taxpayer is not enough to cover the liability (doubt about collectability).
3. Effective tax administration: The obligation to pay the tax is legally incumbent and can be enforced, but doing so would be economically burdensome or unfair/unequitable due to special factors.

Many cases that are brought before the OIC involve the concept of Reasonable Collection Potential (RCP).

RCP is the amount of revenue the IRS expects to receive. It simply takes into account a taxpayer’s asset value and expected future income, minus any allowable expenses.

1. Assets

The IRS will look at assets like:

• Bank accounts
• Real estate
• Vehicles
• Investments
• Retirement accounts
• Business assets
• Other valuable property

The amount is not necessarily the original cost of an asset. The IRS determines its fairness and the amount it thinks it is reasonable that it can expect to be able to collect.

2. Future Income

The IRS also looks at income and the expenses you can afford.

This may be salaries, self-employment income, pensions, income from the Social Security system, interest and dividends, rent, and other forms of income for a particular person.

When deciding what disposable income will be available to cover tax liability, financial resources are compared with allowable expenses by the IRS.

3. Future Earning Capacity

The IRS does not have to consider only one month’s income. Financial information is analyzed and considered in order to decide if the taxpayer can afford to pay over the collection period.

That is why it is advisable to provide false or exaggerated income or expenses during an OIC investigation.

The structures of how to pay taxes vary among taxpayers in general.

The IRS needs an upfront payment of 20% of the cash offer when the application is submitted for a lump-sum cash offer. If accepted, the balance outstanding will typically be paid in five or fewer payments.

The periodic-payment offer requires the taxpayer to pay up front and then pay monthly payments while the IRS reviews the offer.

If you’re a qualified low-income taxpayer, you might not have to pay the monthly payments during the IRS’s review period, and you may not need to pay an application fee or pay the initial payment if you’re exempt.

In most OIC cases, the application package is accompanied by Form 656 and financial details.

An individual typically uses Form 433-A (OIC), and Form 433-B (OIC) is typically used by a business. The necessary Form 656-B Offer in Compromise forms and instructions are included in the current Form 656-B Offer in Compromise Booklet.

Financial statements should include detailed information on income, expenses, assets, liabilities, and other financial circumstances.

Some supporting evidence that can be included will be:

• Bank statements
• Pay stubs
• Investment statements
• Mortgage information
• Vehicle loan information
• Business financial records
• Retirement account statements
• Evidence of current expenses for daily life.

A rejection is when the IRS reviews the offer but decides it should be rejected.

A frequent problem is that the proposed offer is less than what the IRS considers to be reasonable collection. The IRS may believe the taxpayer can afford more than what they are being offered.

Other possible factors are:

• Understated income
• Unreported assets
• Unsupported expenses
• Incorrect asset valuations
• Failure to adequately document special circumstances.
• The IRS decides the taxpayer is able to pay completely via other means
• The proposed offer is not sufficiently reflective of the taxpayer’s ability to pay.

In addition to rejecting an offer, the IRS might choose to return one. A returned offer is not a rejection and does not normally come with the same appeal rights. If necessary returns are not received, if information is not complete, if something goes wrong during the process of bankruptcy, or if required fees or payments are not paid, the offer will be returned.

This distinction matters.

If the offer is rejected by the IRS, it has already reviewed the offer and determined that it does not accept it.

If a return is returned, the IRS has most likely not been able to process or investigate it due to a procedural or eligibility problem.

The offers could be returned, for instance, if necessary information is not included or the necessary tax returns are not filed.

The taxpayer must file an appeal within 30 days of the date on the offer rejection letter.

An OIC will not typically be a fast resolution of tax problems.

The entire offer investigation process may take as long as 24 months, depending on inventory levels and the complexity of the case, according to the IRS.

As part of the process, the offer examiner or offer specialist might ask for more information or documents.

Furthermore, the IRS says that if a determination is not made within two years from receiving the offer, the offer will be accepted without any action.

It is therefore likely that the process will take a lot longer than just completing the application.

The proper pending of an offer suspends specific collection activities, with the exception of a few. The collection statute is also usually postponed or prolonged during the OIC process.

While the OIC is pending, the IRS could file a Notice of Federal Tax Lien.

Taxpayers should also be continuing to fulfill their existing tax responsibilities. An OIC does not give permission to create new tax debt.

There are continuing obligations when it comes to acceptance.

The taxpayer must:

• Make the agreed offer amount as per the terms agreed.
• Make timely file returns.
• Pay required taxes on time.
• Adhere to the terms and conditions stipulated in the OIC agreement.

The IRS will usually require a taxpayer to be compliant with filing and payment obligations for five years after an offer of compromise for doubt-as-to-collectability and effective tax administration. Failure to comply with the terms may lead to default, and the IRS may seek the original liability, minus payments, plus interest and penalties.

If the taxpayer’s application for reimbursement is denied, it does not mean that there are no further options available.

You can appeal the IRS determination to the IRS Independent Office of Appeals if you disagree with it, generally within 30 days of the rejection letter. This can be done using Form 13711, Request for Appeal of Offer in Compromise.

In crafting a strong appeal, the areas of disagreement must be clearly outlined and substantiated with evidence for income, expenses, asset valuation, and/or special circumstances.

Boiling it down to the fact that you don’t have the money to pay the IRS calculation is not usually sufficient. The Appeals process requires taxpayers to point to the specific calculations they challenge and to state why.

Here are some practical steps to take before you put in an offer:

1. Tax filings: Get current with tax filings

In order to consider an OIC, returns are typically required to be filed first.

2. Check your financial details

Carefully review bank accounts, investments, property, retirement accounts, vehicles, and business interests.

3. Document expenses

Don’t simply estimate expenses. Keep records of legitimate, necessary expenses.

1. Use realistic asset values

It’s possible to artificially inflate debts or deflate the value of assets, which can damage the credibility and result in a higher IRS calculation.

2. Prior to selecting an amount to offer, make sure you read and comprehend your RCP.

An offer is to be based on a realistic evaluation of the IRS’ collection analysis—not an arbitrary percentage of the tax debt.

3. Consider alternatives

OIC is not a ‘one-size-fits-all’ approach. An installment agreement, temporary collection relief, or other method may be more suitable depending on the taxpayer’s situation. Actually, the IRS recommends that you explore other payment options before filing an OIC.

4. Watch out for OIC promises

Taxpayers can expect to see the IRS sounding alarms about “OIC mills” aggressively promoting settlements to those who may not be eligible. Before paying a service to assess an offer, there are free IRS eligibility tools that are available.

An Offer in Compromise may be able to help resolve IRS tax debt for less than the amount actually owed, but this depends on a thorough financial analysis and acceptance.

The IRS takes into account assets, income, expenses that can be allowed, ability to pay, compliance with filing requirements, and the situations that back the offer. Many times the number that is important is reasonable collection potential.

An offer that is rejected may be due to an inadequate offer amount based on the collection analysis of the IRS, inaccurate financial information, inadequate documentation, or not creating special circumstances.

It may be a lengthy process that can last up to 24 months, so taxpayers should not expect it to be a last-minute settlement request, but rather a thorough financial case. The key to navigating the process of filing an OIC is having accurate records, complete tax filings, realistic financial disclosures, and understanding the IRS’s collection calculation.

What is an IRS Offer in Compromise?

An Offer in Compromise allows qualifying taxpayers to settle their federal tax debts for an amount lower than the total tax debt they owe to the federal government.

How does the IRS determine an OIC amount?

The IRS will analyze your income, expenses, assets, and equity as a way to see what you can afford to pay and decide if your offer is within range.

Why should the IRS reject an Offer in Compromise?

An OIC can be denied if the amount offered is too low, you do not qualify, you have not filed required tax returns, or you are not current on other tax payments.