Settling Tax Debt with the IRS: What You Need to Know About an Offer in Compromise

If you owe a significant amount in back taxes and can't afford to pay it all, the IRS may be willing to settle for less—legally. This is done through a program called an Offer in Compromise (OIC). It’s a powerful tool that allows eligible taxpayers to resolve their tax debt for less than the full amount owed, potentially saving thousands of dollars.

What Is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS generally approves an OIC when it believes that the offered amount is the most it can reasonably expect to collect within a reasonable period of time.

The IRS takes into account your ability to pay, income, expenses, and asset equity. If these factors show that you can’t pay the full amount, and paying in full would create a financial hardship, you might be a good candidate.

Who Qualifies for an Offer in Compromise?

Not everyone is eligible. To qualify, you must:

• Have filed all required tax returns

• Have made any required estimated payments

• Not be in an open bankruptcy proceeding

• Be current on your tax filings and compliance

The IRS will evaluate your reasonable collection potential (RCP), which includes your assets and future income. If your offer equals or exceeds what the IRS determines they could collect through enforced collection actions, it may be accepted.

Types of Offers

There are generally three grounds on which an OIC may be submitted:

1. Doubt as to Collectibility – You can’t pay the full amount.

2. Doubt as to Liability – You believe the tax debt is incorrect.

3. Effective Tax Administration – You can pay, but doing so would cause economic hardship or be unfair due to exceptional circumstances.

How to Apply

To submit an OIC, you must:

1. Complete IRS Form 656 (Offer in Compromise) and Form 433-A (OIC) for individuals or 433-B (OIC) for businesses.

2. Pay a $205 application fee (unless you qualify for the Low-Income Certification).

3. Submit an initial payment with your offer unless you meet low-income guidelines.

You can choose between two payment options:

• Lump Sum: 20% of the total offer amount paid upfront, with the rest paid in five or fewer payments.

• Periodic Payment: Initial payment submitted with the application, then monthly payments while the IRS reviews your offer.

What Happens Next?

The IRS usually takes several months to review the offer. While your OIC is under consideration, collection efforts are typically paused. If the offer is accepted, and you fulfill its terms, your tax debt is considered settled.

If the offer is rejected, you have 30 days to request an appeal through the IRS Office of Appeals.

Should You Hire a Professional?

The OIC process is complex and requires detailed financial disclosures. Mistakes can result in delays or denials. A tax professional can help you determine if you qualify, prepare a realistic offer, and represent you before the IRS to increase your chances of success. Contact our office at 601-944-4290 today or visit our website at www.dajtaxlaw.com to get this process started.