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How to Get an Offer in Compromise with the IRS

This form of relief is the closest you can get to tax debt forgiveness.

Written by Ben Luthi / July 20, 2022

Quick Bites

  • An offer in compromise allows you to settle a tax debt for less than what you owe.
  • To be eligible, you need to meet certain criteria, such as doubt regarding liability or collectibility or that collection would be unfair or inequitable.
  • If you don't qualify for an offer in compromise with the IRS, you can opt for a payment plan instead.

No one likes having a big tax bill, but if you can't pay it, you may be wondering about your options. The IRS offers installment plans, so you can pay down your federal tax debt over time. But if your financial situation is dire, you may be eligible for an offer in compromise.

An offer in compromise is a form of partial forgiveness from the IRS that's designed for taxpayers who truly cannot afford to pay. Here's what you need to know about how this form of tax debt relief works and how to get approved.

Inside this article

  1. What is an offer in compromise?
  2. How to know if you're eligible
  3. How to apply for an OIC
  4. What to do if you don't qualify

What is an offer in compromise?

An offer in compromise is similar to a debt settlement with a private lender. If you owe money to the IRS that you can't afford to pay, even on an installment plan, you may be able to settle your tax bill for less than what you owe.[1]

This form of relief is sometimes referred to as tax debt forgiveness, but it's important to keep in mind that, if approved, you will be required to pay at least some of your bill—full forgiveness is generally not on the table.[1]

If you're approved, the IRS may accept a lump-sum payment or installment payments. Once you've paid the agreed amount, the remaining debt is forgiven with no future ramifications.[1]

How to know if you're eligible for IRS debt relief

The IRS has stringent guidelines for qualifying for an offer in compromise. For starters, you need to meet the following requirements:

  • You have no open bankruptcy proceedings.

  • You've filed all of your required federal tax returns.

  • If you're a business owner, you've made all of your required estimated tax payments for the current year (individual taxpayers typically don't need to do this).

  • If you're self-employed and you have employees, you've submitted all of your required federal tax deposits.

  • You have no open audits or innocent spouse claims.

  • The IRS hasn't referred your case involving liabilities in the offer to the Department of Justice.[2]

If you meet these criteria, the tax agency may approve your offer based on one of the following:

  • Doubt as to liability: There's a genuine dispute about the validity of the debt or the amount of the debt.

  • Doubt as to collectibility: Your assets and income are less than the full amount of the tax liability.

  • Effective tax administration: The debt is valid and collectible, but the IRS deems that collecting it from you would create financial hardship or would be unfair and inequitable due to exceptional circumstances.[3]

"Many people make the mistake of going through the process of doing an offer in compromise when they have little to no chance of it being accepted," says Moswen James, an enrolled agent (EA) at Get Tax Help. "Therefore, it’s critical to determine if you are a good candidate first."

Headshot of Enrolled Advisor Moswen James

Meet the Expert

As an EA, James is authorized by the IRS to help consumers prepare and file their tax returns. James, who has also passed the Certified Public Accountant exams, founded Get Tax Help to assist individuals and small business owners with their filings.

The IRS has an offer in compromise pre-qualifier tool you can use to see if you meet the basic requirements and even get a preliminary offer amount.

What are your chances of approval?

It can be challenging to get approved for an offer in compromise, even if you believe that your financial situation merits the assistance.

In 2021, the IRS received 49,285 offers in compromise from taxpayers, approving 15,154 of them, with an average of about $1,511 per settlement. That's only a 31% success rate, the lowest rate of approvals in the last 10 years. From 2013 to 2018, approval rates were at or above 40%.[4]

How to apply for an offer in compromise

Once you've used the pre-qualifier tool, you can start the IRS debt relief process by downloading the IRS’ offer in compromise booklet (via Form 656).

This document will give you all of the information you need to know about the process, including exceptions and limitations—tax code can be incredibly complex, so it's difficult to include every detail here.

With that said, here are the steps you'll take to complete the application:[2]

  1. Gather information: You'll need as much information as possible about your cash, investments, assets, income, debt, available credit and your household's gross monthly income and expenses.

  2. Fill out Form 433-A (if applicable): If you're an individual wage earner or have a sole proprietorship, or you're submitting an offer on behalf of an estate, you'll use this form to calculate an appropriate offer based on your financial situation and future earning potential. You can also include a written statement to explain any special circumstances that apply.

  3. Fill out Form 433-B (if applicable): This form functions similarly to Form 433-A but is for businesses structured as a corporation, partnership or limited liability company. Note that you can exclude equity in assets you use to produce income, such as a tow truck if you own a towing business.

  4. Attach your documentation: At the end of the 433-A and 433-B, you'll find a list of documents, such as pay stubs and bank account statements, that you'll need to attach to your application. These documents provide evidence of the information you've shared. The IRS recommends sending copies of your original documents.

  5. Fill out Form 656: This form asks for your personal information, the tax periods for which you're making the offer, the reason for the offer, the amount and the payment terms.

  6. Include your initial payment and the application fee: An offer in compromise has a $205 application fee. Additionally, if you're offering a lump-sum payment, you'll need to include 20% of the offer, or if you want installment payments, you'll include the first installment. The application fee and initial payment should be separate and in the form of a cashier's check, personal check or money order. That said, if you meet the guidelines included in the application for low-income certification, you don't have to send any money.

  7. Mail your application: Make a copy of your application before you send it to the IRS, then mail it to the address listed on the form for your state of residence.

As you run the numbers in the application to calculate your offer, it's crucial that you do your best to estimate something reasonable and affordable.

Otherwise, "you risk having your offer rejected and wasting both time and money," says James. "The offer should be based on the taxpayer’s reasonable collection potential, a calculation that looks at your available assets and income and weighs that against your current living expenses and financial obligations."

Note that if the IRS chooses not to approve your offer in compromise, it'll return your application fee, but it will keep any initial payment you've provided and apply it to your debt. If you disagree with the decision, you can file an appeal within 30 days.[3]

What to do if you don't qualify

An OIC is the only legitimate way to get federal tax debt forgiveness, so if you can't get approved for IRS debt relief, you may be feeling somewhat helpless.

Alert

Unfortunately, if you do nothing, the IRS will charge interest and penalties on your unpaid debt and may offset future tax refunds or place a lien on your assets to get you to pay, meaning the government has a legal claim on some of your assets.

The good news is that the IRS also offers installment plans. These plans make it possible for you to pay off the balance over time based on your ability to pay. Here are two options and what to expect with each:[5]

Terms Short-term planLong-term plan
Repayment term 180 days or fewer72 months or fewer
EligibilityHave less than $100,000 in combined taxes, penalties and interest Have $50,000 or less in combined taxes, penalties and interest (for business owners, the limit is $25,000)[5]
Setup fee$0For automatic payments, $31 if you apply online or $107 if you apply by phone, mail or in-person; for other payment options, $130 if you apply online or $225 if you apply by phone, mail or in-person
Payment methodsDirectPay from a bank account, online by phone with the Electronic Federal Tax Payment System (EFTPS) or by check, money order or debit or credit card Automatic payments if you choose the cheaper setup fee, or DirectPay from a bank account, online by phone with the Electronic Federal Tax Payment System (EFTPS) or by check, money order or debit or credit card

For payment plans, note that if you use a debit or credit card to make your payments, fees will apply, so it's generally best to get direct debits from your bank account or use EFTPS. If you have a low income, you may be able to get your setup fee reduced or waived altogether.

The IRS won't charge you interest as long as you're on a payment plan, so it's generally the best option. With that in mind, it's best to avoid other options to pay off your tax debt, such as using a personal loan or credit card or tapping your home equity.

Article Sources
  1. "Offer in Compromise," IRS, https://www.irs.gov/payments/offer-in-compromise.
  2. "Form 656 Booklet Offer in Compromise," IRS, https://www.irs.gov/pub/irs-pdf/f656b.pdf.
  3. "Topic No. 204 Offers in Compromise," IRS, https://www.irs.gov/taxtopics/tc204.
  4. "2021 Data Book," IRS, https://www.irs.gov/pub/irs-pdf/p55b.pdf.
  5. "Additional Information on Payment Plans," IRS, https://www.irs.gov/payments/payment-plans-installment-agreements.

About the Author

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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