IRS’ Offer in Compromise

You’ve heard the ads on radio and TV:

Settle your debt with the IRS for pennies on the dollar! Our staff of former IRS employees will work with you and make your problems go away!

They’re talking about an Offer in Compromise. It’s a real thing, and it is possible to settle your debt with the IRS for less than you owe. But it’s nowhere near that simple. And it’s certainly not automatic, nor is it available to everyone. Recent information from the IRS indicates that approximately 60% of all requests for an Offer in Compromise (OIC) are not successful in reducing the amount of the tax owed. The good news is that 40% have been accepted, and the taxpayer was allowed to compromise on the tax they owe.

If you are successful with an Offer in Compromise, you’re truly in dire straits, financially speaking. You need to prove to the IRS that you have no (or severely diminished) capacity to pay, either from your wages or assets (such as your retirement plans, bank accounts, or other assets). This review of your wherewithal is rigorous. The IRS will impose its will on how you budget – no paying off other debts in advance of the IRS debt, for example. And you may have to give up certain lifestyle items that you have become accustomed to as part of this budgeting process. If it turns out that you have the capacity to pay the debt, instead of compromising you’ll wind up with a payment plan to pay the full amount.

It’s not a fair system; it’s based on how collectible the debt is, not on whether it’s applied fairly to all taxpayers. These factors aren’t divulged in those ads – odd how that works.

Recently the IRS issued a Special Edition Tax Tip 2017-07 that details some information you need to know about how the Offer in Compromise works, in addition to several resources to help you decide if this is something that can help in your situation. The text of the Tip follows:

IRS Explains How Offer in Compromise Works

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

• In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans – Installment Agreements.
• A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
• The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
• Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at www.irs.gov/forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.

Additional IRS Resources:

• Tax Topic 204– Offers in Compromise

IRS YouTube Videos:

• Offer in Compromise – English