IRS Offer in Compromise: Who Qualifies

An Offer in Compromise (OIC) lets a taxpayer settle federal tax debt for less than the full balance when the IRS accepts that it is unlikely to collect more. Most offers are made on Doubt as to Collectibility using Form 656 with Form 433-A (OIC) or 433-B (OIC). To be considered you must have filed all required returns, be current on estimated payments and federal tax deposits, and not be in an open bankruptcy. The IRS rejects far more offers than it accepts, and no one can promise acceptance.

What an Offer in Compromise is

An OIC is a binding agreement that settles a liability for a reduced payment. The IRS considers three grounds:

• Doubt as to Collectibility. Your assets and future income will not cover the debt before the collection statute expires. This is the basis for most business owner offers.
• Doubt as to Liability. There is a genuine dispute that the assessed amount is correct.
• Effective Tax Administration. The debt is collectible, but collecting it would create economic hardship or be unfair in the circumstances.

Eligibility checklist

You are generally not eligible until all of the following are true:

1. Every required federal return is filed.
2. Current year estimated tax payments are up to date.
3. If you have employees, federal tax deposits are current for the two most recent quarters.
4. You are not in an open bankruptcy proceeding.
5. You have received a bill for at least one tax debt included in the offer.

The IRS returns applications that fail these gates without considering the amount offered, so fixing filing compliance first is not optional.

How the IRS calculates the minimum offer

The IRS compares your offer to your Reasonable Collection Potential, which is net realisable equity in assets plus future income.

1. Asset equity. Cash, bank balances, receivables, vehicles, real estate and business equipment. The IRS typically values assets at quick sale value, commonly around 80 percent of fair market value, less any loan secured on them.
2. Future income. Monthly gross income less allowable living or business expenses, multiplied by 12 for a lump sum cash offer or 24 for a periodic payment offer.
3. Allowable expenses. National and Local Standards cap housing, utilities, food and transport. Spending above the standard is usually disregarded unless you can show it is necessary for health, welfare or producing income.

An offer below your calculated RCP is rejected unless special circumstances are documented and argued.

The application, step by step

1. Complete Form 433-A (OIC) for individuals, or Form 433-B (OIC) for a business, with supporting statements.
2. Complete Form 656 for each liability type and taxpayer entity.
3. Include the application fee and the required initial payment: 20 percent of a lump sum cash offer, or the first instalment of a periodic offer. Low income applicants can request a waiver of both on Form 656.
4. Mail the package to the address in the current Form 656 booklet.
5. The IRS acknowledges receipt, assigns an examiner, and usually asks for updated financial documents.
6. If the offer is rejected you have 30 days to appeal on Form 13711.
7. If it is accepted you must stay filed and paid for the next five years or the agreement defaults and the full balance, less payments made, is reinstated.

Always check the current Form 656 booklet for fee amounts and payment rules before filing, since they change.

Documents you will usually need

• Three months of bank statements for every personal and business account
• Recent profit and loss statement and current balance sheet
• Pay stubs or drawings records, and proof of other income
• Loan statements and vehicle or property valuations
• Proof of living expenses that exceed the standards
• Copies of the most recent filed returns and account transcripts

Alternatives when an OIC does not fit

For many owners, a payment plan plus penalty abatement delivers more relief, faster, than an offer that was never going to be accepted. First Time Abate is available where you had no significant penalties in the three prior years and are otherwise compliant; otherwise you argue reasonable cause with documentation.

Common mistakes

• Applying while returns or estimated payments are outstanding
• Understating assets, especially receivables and vehicle equity
• Claiming expenses well above the collection standards without proof
• Forgetting that interest and penalties keep running while the offer is pending
• Missing the 30 day appeal window after a rejection
• Defaulting the five year compliance condition after acceptance
• Paying a firm that guarantees a settlement figure before reviewing your finances

Also check your Collection Statute Expiration Date. The IRS generally has 10 years from assessment to collect, and a pending offer suspends that clock, which can work against you if the statute was close to expiring.

How Gullia Filing helps

Our IRS Enrolled Agents pull your transcripts, bring filings current, calculate your reasonable collection potential honestly, and recommend the resolution the numbers support, whether that is an offer, an installment agreement, Currently Not Collectible status or penalty relief. We do not promise acceptance or a settlement amount. See IRS Offer in Compromise, the full range of Tax Resolution services, or schedule a call for a review.

Related resources

• Can the IRS freeze a business bank account?
• IRS installment agreements
• Currently Not Collectible status
• Tax and Accounting
• More articles on the Gullia Filing blog