How to Qualify for an Offer in Compromise

An Offer in Compromise (OIC) is one of the most misunderstood IRS programs. While it can be an excellent solution for some taxpayers, it's not available to everyone, and the qualification requirements are strict.

What is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer's tax debt for less than the full amount owed. The IRS will accept an OIC when they determine that the amount offered represents the most they can reasonably expect to collect within a reasonable period.

The Three Grounds for an Offer in Compromise

1. Doubt as to Collectibility

This is the most common ground for an OIC. It applies when you don't have sufficient assets or income to pay the full tax debt. The IRS will evaluate your ability to pay based on your income, expenses, and assets.

2. Doubt as to Liability

This applies when there's legitimate doubt about whether you actually owe all or part of the tax debt. This might occur due to errors in tax assessment or when you believe the tax was incorrectly calculated.

3. Effective Tax Administration

This applies when collecting the full tax debt would create economic hardship or would be unfair due to exceptional circumstances.

Financial Requirements

To qualify for an OIC based on doubt as to collectibility, the IRS will conduct a thorough financial analysis. They'll look at:

• Your monthly income
• Your monthly expenses (but only those they consider necessary)
• Your assets and their liquidation value
• Your future earning potential

The Offer Amount Calculation

The IRS uses a specific formula to determine the minimum acceptable offer amount:

Reasonable Collection Potential (RCP) = Net Equity in Assets + Future Income

Your offer must equal or exceed your RCP for the IRS to consider accepting it.

Compliance Requirements

Before the IRS will consider your OIC, you must be in compliance with all tax filing and payment requirements:

• All required tax returns must be filed
• All required estimated tax payments for the current year must be made
• If you're a business owner with employees, all federal tax deposits must be current

The Application Process

Step 1: Complete Form 656

This is the official OIC application. You'll need to specify which ground you're using for your offer and provide detailed financial information.

Step 2: Complete Form 433-A or 433-B

These forms provide detailed financial statements. Form 433-A is for individuals, while Form 433-B is for businesses.

Step 3: Submit Required Documentation

You'll need to provide supporting documentation for all income, expenses, and assets listed on your financial statements.

Step 4: Pay Application Fee and Initial Payment

There's a $186 application fee (waived for low-income taxpayers) and you must make an initial payment with your offer.

Common Mistakes to Avoid

• Overestimating your expenses or underreporting your income
• Failing to include all assets
• Not being in current compliance with tax filings
• Submitting an offer amount that's too low
• Poor documentation or incomplete forms

What Happens After Submission?

The IRS will review your offer, which can take 6-12 months or longer. During this time:

• Collection activities are generally suspended
• The statute of limitations on collection is extended
• You must remain in compliance with all tax obligations

If Your Offer is Accepted

If the IRS accepts your offer, you must:

• Pay the offered amount according to the agreed terms
• Remain in compliance with all tax obligations for 5 years
• Waive certain refunds and credits

Professional Help is Recommended

The OIC process is complex, and the IRS rejects the majority of applications. Working with an experienced tax professional can significantly improve your chances of success. They can help you determine if you qualify, calculate an appropriate offer amount, and ensure your application is complete and properly documented.

Remember, an Offer in Compromise isn't right for everyone, but for those who qualify, it can provide a fresh start and relief from overwhelming tax debt.