Settle for Less: Smart Strategies for Your Tax Debt

Understanding Your Path To Tax Debt Relief

Offer in Compromise advice begins with a simple truth: an Offer in Compromise (OIC) can be a lifeline, but it’s not for everyone. This IRS program allows qualified taxpayers to settle their federal tax debt for less than the full amount owed, but only under specific circumstances. You may qualify if you can’t pay the full amount (doubt as to collectibility), the debt itself is incorrect (doubt as to liability), or paying would cause significant financial hardship (effective tax administration).

When tax debt piles on top of life’s other obligations, it can feel crushing. The OIC program exists for this exact scenario. However, the process is notoriously complex, with the IRS accepting only about 40% of applications. A single error can lead to rejection, and the IRS keeps your non-refundable application fees and payments.

To succeed, you must have filed all tax returns, be current on estimated payments, and not be in bankruptcy. The IRS will carefully calculate your ability to pay based on your income, assets, and allowable expenses. If your offer is accepted, you must remain tax-compliant for five years.

As Attorney Samuel Landis, Managing Partner at Segal, Cohen & Landis, I’ve spent over 15 years providing expert Offer in Compromise advice. My team and I have helped countless clients steer this intricate process to achieve favorable settlements with the IRS.

Understanding The Offer In Compromise: What It Is And Who Qualifies

An Offer in Compromise (OIC) is a settlement agreement with the IRS to resolve your tax debt for less than the full amount you owe. It’s part of the IRS Fresh Start Initiative, designed for taxpayers facing genuine financial struggles. However, the IRS has strict eligibility requirements.

Before considering an OIC, you must meet several basic criteria:

• You must have filed all required tax returns.
• You cannot have an open bankruptcy proceeding.
• You must be current on estimated tax payments for the current year and have received a bill for the tax debt you wish to settle.

These prerequisites ensure you’re serious about resolving your tax situation. A great first step is using the IRS’s free Offer in Compromise Pre-Qualifier Tool. It provides a preliminary check of your eligibility and can save you significant time and effort. For a deeper dive, our guide, The IRS Offer in Compromise: A Taxpayer’s Guide to Settlement with the IRS, offers more detail.

The Three Grounds for an OIC

The IRS requires a legitimate reason for your offer, which must fall into one of three categories:

• Doubt as to Collectibility: This is the most common reason. It applies when your income and assets are insufficient to pay your full tax debt. Essentially, you’re proving to the IRS that they can’t collect the full amount from you.
• Doubt as to Liability: This applies if you have a legitimate reason to dispute that you owe the tax or that the amount is correct. You’ll need to provide evidence proving the assessment is wrong. For this type of offer (Form 656-L), no application fee or initial payment is required.
• Effective Tax Administration (ETA): This is for cases where paying the full amount would cause exceptional hardship, even if you technically have the assets to do so. This could mean being unable to afford basic living expenses or facing other unique circumstances, like a serious medical condition, that would make full payment unfair.

Understanding which ground applies to you is crucial. You can review the official IRS guidelines on OIC eligibility requirements for more information.

OIC vs. Other Tax Debt Solutions

Some of the best Offer in Compromise advice is knowing when another solution is better. An OIC is a complex last resort, and it’s important to compare it to other options.

An Installment Agreement is simpler if you can afford to pay the full debt over time. Currently Not Collectible (CNC) status is a temporary pause on collections for those in severe financial crisis. The IRS will reject an OIC if they believe you can pay in full via an installment plan. Exploring all your options is key, and our article on Understanding Tax Debt Relief Options can help you decide which path is right for you.

The OIC Calculation: How To Determine Your Offer Amount

Your offer amount isn’t a guess; it’s based on the IRS’s formula for your “Reasonable Collection Potential” (RCP). This is the maximum amount the IRS believes it could collect from you through legal means. It’s a calculation of what they can get, not what you’d like to pay.

Your RCP is calculated based on two main components:

1. Asset Equity: The net realizable value (quick sale value minus what you owe) of your assets, such as your home, car, bank accounts, and investments.
2. Future Income: Your average monthly income minus your allowable monthly living expenses. This disposable income is then multiplied by 12 (for a lump-sum offer) or 24 (for a periodic payment offer).

For example, let’s say you have $7,000 in asset equity and $400 in monthly disposable income.

• A lump-sum cash offer would be calculated as: ($400 × 12) + $7,000 = $11,800.
• A periodic payment offer would be: ($400 × 24) + $7,000 = $16,600.

This is crucial Offer in Compromise advice: a lump-sum offer is often significantly lower because the IRS prefers to receive payment quickly. If you can borrow funds to make a lump-sum offer, you may settle for less.

Regarding “allowable living expenses,” the IRS uses National Standards (for food, clothing, etc.) and Local Standards (for housing, utilities, transportation) that vary by location and family size. For example, the IRS might only allow $2,119 for housing in a specific county, even if you spend $3,000. Any spending above these standards is typically considered disposable income available to pay your tax debt, unless you can prove exceptional circumstances.

Required Financial Information and Forms

To apply for an OIC, you must provide the IRS with a complete financial picture. This requires extensive documentation:

• Proof of income: Pay stubs, W-2s, 1099s, and profit and loss statements.
• Financial statements: Bank, investment, and retirement account statements.
• Asset valuations: Real estate appraisals and vehicle values.
• Debt statements: Mortgage, car loan, and credit card statements.
• Expense documentation: Utility bills, medical bills, and insurance premiums.

The primary forms are Form 656 (Offer in Compromise) and Form 433-A (OIC), Collection Information Statement. Business owners use Form 433-B (OIC).

Accuracy is everything. The IRS will scrutinize every detail. Mathematical errors, incomplete forms, or inconsistencies are common reasons for rejection, and the IRS will keep your application fee and any payments made. Submitting false information can lead to severe penalties, including criminal prosecution. This is why professional Offer in Compromise advice is so valuable—navigating these complex forms and calculations alone is risky.

Getting Expert Offer In Compromise Advice: The Application And Aftermath

Once you’ve gathered your documents and calculated your offer, it’s time to submit your application. This involves completing Form 656 and the appropriate financial statement (Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses), along with all supporting documentation. You’ll also include your application fee and initial payment, unless you qualify for a low-income waiver.

Be prepared to wait. The process timeline for an OIC typically ranges from 6 to 24 months. During this time, the IRS generally suspends collection activities like levies and wage garnishments. Interestingly, if the IRS doesn’t make a decision within two years of receiving your application, your offer is automatically accepted.

This lengthy, complex process is why seeking professional Offer in Compromise advice is so beneficial. At Segal, Cohen & Landis, we have over 33 years of experience guiding clients through this maze. We ensure your application is accurate, complete, and presented in the strongest possible light. Learn more about how we can help with your IRS Offer in Compromise.

Submitting Your Offer: Fees and Payment Options

A non-refundable application fee of $205 is required, but it can be waived if you meet the IRS’s low-income certification requirements (generally, if your household income is at or below 250% of the federal poverty guidelines from the Department of Health and Human Services).

You must also choose a payment option and include an initial payment:

• Lump-Sum Cash Offer: You submit 20% of your offer amount with the application. If accepted, you pay the rest in five or fewer installments within five months. This option often results in a lower total settlement.
• Periodic Payment Offer: You submit your first proposed monthly payment with the application and continue making payments while the IRS reviews your offer. If accepted, you continue payments until the full amount is paid, typically within 24 months.

All payments made with your application are non-refundable and will be applied to your tax debt, even if the OIC is rejected. The IRS provides more details on the two payment options on its website.

Common Mistakes and Key Offer in Compromise Advice

The IRS rejects about 60% of OIC applications, often due to avoidable mistakes. Here’s what to watch out for:

• Errors and Incomplete Forms: Mathematical mistakes or blank spaces can lead to immediate rejection.
• Not Staying Current: You must file all required returns and make all current tax payments before, during, and after the OIC process.
• Ignoring Other Options: The IRS will reject your OIC if they believe you can pay in full through an installment agreement.
• Underestimating Your RCP: Offering too little without strong justification will fail. Your offer must align with the IRS’s collection potential formula.
• Lack of Documentation: You must provide concrete proof for all income, assets, expenses, and debts.
• Giving Up Too Soon: A rejection isn’t the end. You have the right to appeal and submit a revised offer.

Our website has more resources to help you avoid these pitfalls in our Category: Offer in Compromise.

After the Decision: Acceptance vs. Rejection

If your offer is accepted, you must pay the agreed-upon amount and adhere to a strict 5-year compliance period. This means filing and paying all future taxes on time. Failure to comply can void the agreement, reinstating your original debt. Once you’ve paid the offer in full, the IRS will release any federal tax liens against you.

If your offer is rejected, the IRS will explain why and outline your appeal rights. You have a 30-day window to file an appeal using Form 13711, Request for Appeal of Offer in Compromise. This gives you a chance to present your case to the IRS Independent Office of Appeals. An experienced professional can be invaluable in navigating an appeal and strengthening your case after an initial rejection.

Frequently Asked Questions About OICs

Navigating the OIC process often brings up many questions. Here are answers to some of the most common ones we hear.

How long does the Offer in Compromise process typically take?

An OIC is not a quick fix. On average, expect the IRS to take 6 to 24 months to make a decision after receiving your application. The timeline depends on the complexity of your finances and the accuracy of your submission. While you wait, the IRS generally suspends collection activities like levies and garnishments, though interest and penalties continue to accrue.

There is a provision for 2-year automatic acceptance: if the IRS doesn’t rule on your offer within two years of its receipt date (excluding appeal time), it is automatically accepted. While not something to count on, it’s a built-in safeguard against excessive delays.

What are the potential downsides of an OIC?

While an OIC can provide significant relief, it’s important to understand the drawbacks:

• Non-Refundable Payments: The $205 application fee and any initial payments (the 20% lump-sum down payment or periodic payments) are kept by the IRS, even if your offer is rejected.
• Public Record: Accepted OICs are public record for one year. Your name, city, and settlement amount can be accessed by the public.
• Extended Collection Statute: The 10-year statute of limitations on collections is paused for the entire time your offer is pending, plus 30 days, and any time spent in appeals. This gives the IRS more time to collect if your offer fails.
• Strict 5-Year Compliance: After acceptance, you must file and pay all taxes on time for five years. One mistake can void the agreement and reinstate your original debt.
• Forfeiture of Refunds: The IRS will keep any tax refunds you are due for tax years up to the date the OIC is accepted.

Why is professional Offer in Compromise advice recommended?

While you can file an OIC on your own, the complexity and high stakes make professional guidance invaluable. With a rejection rate of around 60%, expert help can be the difference between success and failure.

• Complexity and Accuracy: An experienced tax professional understands the intricate forms (like Form 433-A), IRS financial standards, and asset valuation rules. We prevent common errors that lead to rejection.
• Negotiation and Advocacy: The OIC process is a negotiation. We know how to present your case in the most favorable light, justify your offer, and effectively communicate with IRS agents.
• Maximizing Acceptance: We know what the IRS looks for and how to build a compelling application that addresses their concerns from the start, significantly improving your odds of approval.
• Peace of Mind: Dealing with the IRS is stressful. Handing the process over to a professional allows you to focus on your life while we manage the complexities of your case.

At Segal, Cohen & Landis, our 33 years of experience have helped thousands of clients successfully steer the OIC process. We understand the system and are committed to achieving the best possible outcome for you.

Conclusion: Take The First Step Towards Tax Freedom

An Offer in Compromise is a powerful tool for resolving overwhelming tax debt, but it is not a simple request for a discount. It is a complex legal process with strict rules, detailed calculations, and a high potential for rejection. From calculating your Reasonable Collection Potential to navigating the 5-year compliance period after acceptance, the margin for error is slim.

With only about 40% of OIC applications being accepted, going it alone is a significant risk. This is where professional Offer in Compromise advice becomes essential.

At Segal, Cohen & Landis, we have spent over 33 years mastering the OIC process. We’ve helped more than 25,000 clients find relief from tax debt by handling the forms, the negotiations, and the stress. We know how to build a strong case and avoid the common pitfalls that lead to rejection.

Tax debt doesn’t have to control your life. You’ve taken the first step by learning about your options. Now, let us help you take the next one.

For personalized guidance through the OIC process, the experienced team at Segal, Cohen & Landis can help. Let us put our decades of expertise to work for your unique situation. Get professional help with your IRS Offer in Compromise and start your journey toward tax freedom today.