The IRS expects taxpayers to pay their tax bills in full and on time. Those who don't may owe penalties and interest on top of the unpaid taxes. Under certain circumstances, however, you may be able to take advantage of its Offer in Compromise (OIC) program to resolve tax debts.
As the name implies, the OIC program lets you negotiate a tax debt with the IRS and potentially settle it for less than the full amount owed. If your offer is accepted and you fulfill all its terms, the remaining balance of the compromised tax debt generally will be forgiven. However, taxpayers who receive OIC approval usually must remain current on their filing and payment obligations for several years after acceptance.
The IRS may accept an OIC on one of three grounds:
1. There's legitimate doubt as to the liability itself. An OIC meets this requirement only when there's a genuine dispute as to the existence or amount of the tax debt under federal law.
2. The debt is unlikely to be fully collectible. This typically occurs when the taxpayer's assets and anticipated future income are insufficient to pay the full tax liability.
3. The requirements for "effective tax administration" are met. Essentially, this means requiring payment in full would either create an economic hardship or would be unfair and inequitable for some other reason.
Not everyone qualifies for the OIC program. The IRS may return your application without considering your offer if you haven't:
Your application also may not be considered if you're currently in a bankruptcy proceeding or your case has been referred to the U.S. Department of Justice.
And the potential for rejection doesn't end there. For offers based on doubt as to collectability, the IRS won't accept less than your reasonable collection potential (RCP), unless special circumstances justify a lower amount. RCP generally includes the realizable value of your assets — such as real estate, vehicles and financial accounts — plus the amount of anticipated future income available for collection after accounting for allowable living expenses. The IRS uses a special formula to calculate RCP.
Important: An initial rejection isn't necessarily the end of the process. You typically have 30 days from the date of the rejection letter to appeal the IRS's decision. Alternatively, you may be able to submit a new offer after addressing the reasons for rejection.
If you're applying for an OIC because you can't afford to pay your full tax debt, you'll generally need to complete Form 656, "Offer in Compromise." However, if you're applying because you dispute the amount of tax owed, you'll instead submit Form 656-L, "Offer in Compromise (Doubt as to Liability)." Eligible individuals may also apply online through their IRS Individual Online Account.
In addition, you'll generally need to submit one or more collection information statements. Individual taxpayers typically use Form 433-A (OIC), "Collection Information Statement for Wage Earners and Self-Employed Individuals." Businesses, such as corporations and partnerships, typically use Form 433-B (OIC), "Collection Information Statement for Businesses." In some situations, the IRS may require information from both individuals and related business entities.
Completing these statements is usually the most difficult part of the application process. Individual taxpayers must provide extensive information about monthly income, assets, debts, rent, utilities, groceries and other regular expenses. This will likely take considerable time and research — and accuracy is critical. Businesses must provide similar financial information, but they often have detailed accounting records that can help substantiate revenue, expenses, assets and liabilities.
Most taxpayers are also required to pay a $205 application fee, plus an initial payment based on their proposed settlement terms. Qualifying low-income taxpayers may be exempt from both requirements, and neither applies to offers based on doubt as to liability. Your tax advisor can help you gather the required financial information, prepare the necessary forms and evaluate whether the IRS is likely to accept an OIC before you apply.
Important: The IRS has warned taxpayers about "OIC mills" that charge high up-front fees for assistance with the application process but deliver little or no meaningful service. These fraudsters have even appeared on the agency's annual "Dirty Dozen" list of tax scams. Avoid any provider who isn't a legitimate, reputable tax professional.
The OIC program may provide tax relief under the right circumstances, but acceptance is far from guaranteed. In fiscal year 2025, the IRS accepted about 5,500 offers while receiving nearly 39,000 applications. So, you'll need a strong case to succeed. The good news is there may be alternative options. (See "Setting Up a Payment Plan" below.) Work closely with your tax advisor to determine how to address existing or impending tax obligations.
If you're facing mounting tax debt, the OIC program isn't your only option for relief. You may be better off setting up a payment plan with the IRS.
There are two types available. A short-term plan allows eligible taxpayers up to 180 days to pay their tax debt. Alternatively, you may apply for a long-term payment plan — also known as an installment agreement. You can do so through the IRS's Online Payment Agreement application or by submitting Form 9465, "Installment Agreement Request." This allows you to make monthly payments over time.
Short-term plans have no setup fee. For long-term agreements without automatic bank withdrawals, the fee is $69 if you apply online or $178 if you apply by phone, mail or in person. (These fees are subject to change.) Lower fees may apply if you authorize automatic withdrawals, and certain low-income taxpayers may qualify for reduced or waived fees. Interest and applicable penalties continue to accrue until the debt is paid in full.
Get in touch today and find out how we can help you meet your objectives.
