IRS Offer in Compromise (OIC)

An offer in Compromise can settle your tax debt for less than you owe, giving you an IRS fresh start.

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What is an IRS Offer in Compromise (OIC)?

An IRS Offer in Compromise (OIC) can settle your tax debt with the IRS for less than the total balance. You’re probably wondering “Why would the IRS take less than what I pay them? Can’t they come after me forever and make my life miserable?” Yes, the IRS can make your life miserable. But, no, they can’t chase you down until you die. The IRS can typically only pursue the tax debt until the end of the Collections Statutory Expiration Date, commonly known as the CSED. The CSED date is normally 10 years from when you filed the return, or the return was due (including extensions.) If you can prove to the IRS that you can’t pay the entire debt before the expiration of the CSED, the IRS could approve an Offer in Compromise (OIC) because there is “doubt as to collectability.” Hence, the adage that something is better than nothing.

Offer in Compromise (What you NEED to know!)

An Offer in Compromise (OIC) is like making a deal with the IRS to pay less tax debt than you owe. It can give you a fresh start and stop the IRS from taking your belongings, like your house or car.

Benefits of An Offer-In-Compromise OIC

Who can apply for an Offer In Compromise OIC?

To apply for an OIC, you must Meet one of the following criteria :

How do I apply for an Offer in Compromise OIC with the IRS?

To apply for OIC:

Fill Out Form 656: Complete the Offer in Compromise application form.
Fill out Form 433-OIC: This gives the IRS detailed information about your finances and net worth.
Provide Financial Information: Submit detailed information about your finances.
Await IRS Decision: Pay the application fee. The IRS requires a $205 application fee, unless there is doubt as to liability.

Tips to make your Offer IN Compromise Successful

Here are some tips to help you succeed with your OIC:

Mistake to Avoid when Submitting an Offer in Compromise OIC

After submitting your offer, avoid these common mistakes:

File all Tax Returns on Time: Failing to file timely tax returns result in your offer being returned or rejected.
Pay all Tax Liabilities on Time: Failing to pay the IRS timely can result in your offer being returned or rejected. Increase payroll withholdings if necessary.
Respond Quickly to the Offer Examiner: Failing to timely respond to examiners requests will result in a returned or rejected offer.
Negotiate the Settlement: Just like a used car salesman, the IRS could negotiate the amount you are offering, and instead suggest another amount.
Appeal: If your offer is rejected, consider appealing the rejection.

An Offer In Compromise is a valuable option for those struggling with tax debt. It’s a way to resolve tax issues without the stress of full repayment. If you’re facing tax troubles, exploring an OIC could be the right move.

Can I still file an IRS Offer in Compromise (OIC) if I can fully pay the IRS?

There are two areas in which the IRS would accept an Offer in Compromise even when there is no doubt that the IRS can fully collect the entire tax debt over the CSED. They are “Doubt as to Liability” and “Effective Tax Administration.”

What is an IRS Offer in Compromise Doubt as to Liability?

Doubt as to Liability occurs when the IRS asserts that you owe money, but you believe that you either owe less than what the IRS asserts, or no money at all. There are multiple scenarios where an IRS OIC Doubt as to Liability could occur. Some examples are a tax document being issued incorrectly claiming that you had more income than you did, a fraudulent return filed on your behalf, or a dispute over accounting methods used for income or expenses that increases your tax liability. In this situation, an IRS Offer in Compromise Doubt as to Liability could be an option.

What is an IRS Offer in Compromise Effective Tax Administration (ETA)?

An IRS Offer in Compromise filed under Effective Tax Administration (ETA) applies if you owe the tax debt and have the ability to pay it fully over the CSED, but paying the tax debt would not be in the best interest of both you and the government. The caveat here is the phrase “not in the best interest.” One can easily argue that it’s never in the taxpayer’s best interest to pay the IRS what the taxpayer owes. But when would it not be in the government’s best interest? A significant example is if the taxpayer is a business or business owner and paying the tax debt would cause employees to be laid off and the company to cease operations. The government would then face paying unemployment, no longer collecting employment taxes, and no longer collecting income taxes that the business was paying. An IRS Offer in Compromise Effective Tax Administration (ETA) could be an option in this situation.

Do I need a tax attorney to file an IRS OIC Offer in Compromise?

No, you do not need a tax attorney to file an Offer In Compromise. When dealing with the IRS, there are very few situations when a tax attorney is required. Even if your case were to be elevated to tax court, a Certified Public Accountant (CPA) or an Enrolled Agent (EA) who is a United States Tax Court Practitioner (USTCP) can fully represent you in tax court. Since the vast majority of Offer in Compromise (OIC) situations rarely necessitate filing a tax court petition, a tax attorney is unnecessary. Even if your Offer in Compromise eventually needed a tax court petition and your CPA or EA was not a USTCP, you can file the tax court petition yourself or hire a tax attorney later.

Fun fact: The IRS does not require special qualifications for an attorney to represent you. If an attorney presents themselves as a "tax attorney," you should inquire whether the attorney has any specific accreditations issued by their licensing authority.

Why should I use a CPA to file an IRS OIC Offer in Compromise?

The IRS permits only three classifications of people to represent you for an OIC. They are:

CPAs are regarded in many areas, among them being:

Will the IRS really accept "pennies on the dollar"?

One of the worst areas ethical tax representation specialists must endure daily is misleading ads by unscrupulous companies, making it seem like the IRS will accept pennies on the dollar to satisfy the tax liability. While this happens in some instances, most IRS OICs still require a reasonable payment. If you can pay more, you owe the tax and there is no ETA, you will pay more than pennies. Every taxpayer’s “ability to pay” the tax is different. That’s why 10 accepted IRS OICs that had the exact same tax liability could have 10 different outcomes.

Is there a State OIC Offer in Compromise?

Maybe yes, maybe no. There are 50 States, and 50 different sets of standards that a State uses to determine if the State will negotiate the tax debt you owe. In many cases, States can be more aggressive in collecting tax debt and have a longer period to collect the tax debt. Unlike the IRS, States might have much less stringent requirements on who they permit to represent you in tax debt negotiations. These reasons are why you should thoroughly vet any tax representation practitioner before engaging with them to represent you before the State.

What if I don’t qualify for an IRS Offer in Compromise OIC?

If you don’t qualify for an IRS Offer in Compromise OIC, there are many other alternatives other than paying the IRS all-at-once or ever. They include a Full Pay Installment Plan, Partial Pay Installment Plan, Innocent Spouse Relief, Injured Spouse Relief, Penalty and Interest Abatement, and Currently Not Collectible Status (CNC).

What forms must I complete to file an Offer in Compromise (OIC) with the IRS?

The three major forms that you need to complete to file an Offer In Compromise with the IRS are:

These forms are very complex. Pink Harbor, CPA, is very experienced in completing them. They also require that substantiating documentation, such as pay stubs and bank records, be attached. Preparing these forms accurately and thoroughly speeds up the time it takes for a determination to be made on your offer and enhances the chances of a successful OIC Offer in Compromise.

What happens if my IRS OIC Offer in Compromise is rejected?

Sometimes this happens. The IRS will send you a written explanation as to why the OIC was rejected. Chin up. All hope is not lost. You can appeal the decision using Form 13711, Request for Appeal of Offer in Compromise. When sending in your appeal, provide additional information supporting the reasoning for your appeal.