The Internal Revenue Service (IRS) offers the Offer in Compromise (OIC) program, which allows eligible taxpayers—individuals or businesses—to settle outstanding tax debt for less than the full amount owed. Here’s a clear overview of how it works, who may qualify, and what to consider before applying.
What is an Offer in Compromise?
An Offer in Compromise lets you propose an amount you can pay now or in the near future and ask the IRS to accept it as full satisfaction of your tax debt.
The program is designed for taxpayers who cannot pay the full amount or for whom paying in full would cause financial hardship.
The IRS evaluates your ability to pay, income, expenses, and asset equity—known as your Reasonable Collection Potential (RCP)—to determine whether your offer represents the most they can expect to collect.
Who May Be Eligible?
You may qualify if:
- You have filed all required tax returns and made all required estimated tax payments
- You are not in an open bankruptcy proceeding
- If you are an employer, you have made all required federal tax deposits for the current and previous two quarters
Applying does not guarantee acceptance. The IRS also encourages reviewing other options, such as installment agreements, before submitting an OIC.
How to Submit an Offer in Compromise?
Before applying, use the Pre-Qualifier Tool to check basic eligibility.
Submit the complete application package by mail or through your IRS Online Account (individual taxpayers only):
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses
- Form 656 (individual and business debts require separate Forms 656)
- $205 non-refundable application fee and the required initial payment
- These may be waived if you qualify for IRS low-income certification
Choose a payment option:
- Lump-sum offer: Pay 20% of the offer amount with your application. If accepted, pay the remainder in up to five installments within five months.
- Periodic payment offer: Make monthly payments while the offer is being reviewed and continue payments until the full amount is paid if accepted (6–24 months).
What Happens After Submission
- IRS collection activity is suspended while your offer is pending, but a federal tax lien may still be filed.
- If accepted, you must comply with all terms—file all required tax returns, make payments on time, and stay compliant for five years.
- If rejected, you may appeal within 30 days using Form 13711 (Request for Appeal of Offer in Compromise).
Important Considerations
- Not suitable for everyone: If you have sufficient income or assets, the IRS is unlikely to accept the offer.
- Non-refundable payments: The application fee and any payments made with your offer are non-refundable.
- Public inspection: Certain information about accepted offers may be publicly available.
- Strict compliance required: Failure to file or pay on time during the 5-year period after acceptance can cause the IRS to revoke the agreement.
How This Affects Small Businesses and Individuals
- Individuals: OIC can help resolve long-standing tax debt and avoid bankruptcy.
- Small businesses: The program may apply to payroll tax, income tax, or other liabilities—but cash flow, asset value, and future income must be carefully evaluated.
- Tax professionals: Advisors help determine whether an OIC is appropriate or whether alternatives (e.g., installment agreements) are more realistic.
Conclusion
The Offer in Compromise program offers a structured path to resolve tax debt when full payment isn’t possible or would cause financial hardship. Understanding eligibility, documentation requirements, and compliance expectations is essential before applying.
For full details, visit the IRS Offer in Compromise page and IRS FAQs.
At The Wisebook, we help individuals and small businesses understand IRS programs like the OIC, evaluate options, and make informed decisions toward long-term financial stability. Feel free to reach out if you’d like support reviewing whether an OIC may be right for your situation.
