Marketing disclosure: I may receive a fee if you use products and services linked on this page.
An offer in compromise allows you to pay less than the full amount that you owe in satisfaction of a tax debt. 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.
Who is Eligible for an Offer in Compromise?
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. If you don’t qualify, you may be able to use alternative solutions like an installment agreement to pay your taxes over time or currently not collectible status to pause collections.
You can check your eligibility 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).
You can make an offer for either a lump sum payment or payments over time.
Unless you meet 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.
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 will probably be a good idea to at least schedule an initial consultation with a tax professional before you proceed.