An offer in compromise (OIC) is a way to settle IRS tax debt for less than the full amount. It is only available to people who would face significant financial hardship if required to pay the debt; to people who dispute the debt the IRS claims they owe; and to those who can make a good faith argument that it is in the IRS’s best interest to compromise on the debt.
You apply for an offer in compromise by filling out Form 656 (Offer in Compromise) and the accompanying form 433-A (for individuals) or 433-B (for businesses). These forms will allow you to lay out an argument that you are not in a position to pay the full amount the IRS says you owe in taxes.
Be aware that the IRS will consider many factors, including your age, your education level, your assets, your income and your expenses when deciding whether to accept an OIC. This includes an evaluation of whether your lifestyle indicates an ability to pay the debt.
If your OIC proposal is not accepted, you can appeal. However, you can also consider other repayment options, such as a repayment plan.
In 2018, the IRS accepted about 41% of the offers in compromise proposed by taxpayers. According to a former Treasury revenue officer, you are most likely to get approved for an OIC if you offer to pay most of what the IRS would legally be able to collect anyway.
A few mistakes you should avoid in an OIC proposal
The revenue officer was able to give three examples of errors to avoid. The first is simply math errors. Double-check your calculations before submitting your request.
Second, instead of leaving blank spaces on the form, write “N/A” or zero, as appropriate. This is because the IRS will have no way of knowing why you left a space blank. Knowing you did so intentionally will assist them in evaluating your claim.
If you owe more on your home or property than it’s worth, this is called negative equity. Unfortunately, you can’t use the amount in negative equity as a negative number in your calculations. You can only rightfully report zero equity.
Talk to your tax lawyer as soon as possible
If you’re facing financial hardship, you may be reluctant to pay an attorney to help you negotiate an offer in compromise. If you can find a way, however, you may have a significantly better chance at getting your OIC approved if a tax attorney helps you prepare the offer. A tax attorney can help you determine the amount the IRS can lawfully collect from you, which is a large part of a successful OIC.