An offer in compromise allows you to pay less than the full amount that you owe in taxes without owing anything else in the future.
Who is eligible for an offer in compromise?
OICs are often marketed as settlements for “pennies on the dollar,” but there is actually a rigid set of rules that determine if you’re eligible and how much you need to pay.
An offer in compromise is only available when the IRS believes you cannot pay the full amount owed within a reasonable period of time. It is not a settlement in the sense that you can negotiate the amount down as you might with delinquent consumer debt.
The only way that the IRS will change what you owe is if there’s a doubt as to liability. Doubt as to liability means the IRS thinks they might lose if you take them to court.
To qualify for an offer in compromise, you must be current on your filing requirements and have no open bankruptcy proceedings. The IRS performs an offer in compromise compliance review to check this before they will accept your offer.
You can check your eligibility for an offer in compromise by using the IRS OIC Pre-Qualifier Tool. This tool checks whether you meet the basic requirements. It does not guarantee the IRS will accept your offer.
How is an offer in compromise calculated?
While you technically propose the offer amount, the IRS will only approve it if it is the most they can expect to collect within a reasonable period of time based on your ability to pay including:
- Income (current and potential).
- Expenses (the IRS will allow a bare minimum budget for essentials).
- Assets (including retirement accounts).
When you apply, the IRS will ask you to complete a Collection Information Statement which will usually be Form 433-A. IRS Form 433-A asks for details about who’s living in your household, your income, and your assets.
The IRS uses Form 433-A to determine what you’re able to pay. If you follow the instructions on the form to calculate your offer amount, the IRS will usually accept it.
You can make an offer for either a lump sum payment or payments over time.
Unless you meet IRS Low Income Certification guidelines, you must include an initial payment with your application. The IRS keeps this payment and applies it to your tax debt even if you aren’t approved for the offer.
How much does an offer in compromise cost?
The IRS charges a $186 application fee for each offer in compromise. The fee is non-refundable even if you aren’t approved.
Taxpayers meeting Low Income Certification guidelines do not need to pay the application fee.
How long does an offer in compromise take?
Taxpayers with simple tax situations can expect an offer in compromise processing time of about six months on average.
If you’re self-employed or it’s otherwise difficult for the IRS to determine your income and/or tax liability, your offer in compromise could take up to a year.
Does an offer in compromise affect your credit?
An offer in compromise doesn’t show up on your credit report.
Tax debt in general no longer affects your credit, either. The major credit bureaus stopped reporting tax liens several years ago.
How does an offer in compromise affect your tax refund?
When you have a tax debt, the IRS will normally take any tax refunds you have from other years until your debt is paid off.
If you don’t want the IRS to take your tax refund, you’ll want to adjust your tax withholding to as close to a $0 refund or amount owed as you can.
Making an offer in compromise won’t stop the IRS from taking your refund. The IRS will continue to take your refunds until your offer in compromise is accepted and your tax debt is wiped out.
In future years, you will typically be able to keep your tax refunds since you’ll no longer have a tax debt.
Can you handle this on your own?
Even though offers are formulaic, the IRS requires you to do all the work for them. This is a complicated process, and the IRS refuses many offers due to errors or miscalculations.
You may face further financial hardship if the IRS keeps your initial payment without approving the offer. Finally, you may need help in other areas such as getting current on your returns, requesting penalty relief, or challenging a tax assessment.
It’s probably a good idea to at least schedule an initial consultation with a tax professional before you proceed.