The process of managing tax debt creates overwhelming financial pressure that traps people and businesses in continuous debt cycles. The Internal Revenue Service (IRS) provides a financial relief option through their Offer in Compromise (OIC) program. The Offer in Compromise program enables qualified taxpayers to pay their tax debt at a reduced amount, which is lower than their total outstanding balance. The program exists to help people who face insurmountable financial challenges to pay their complete tax debt and those who would suffer severe financial difficulties from making full payments. The OIC program offers attractive settlement options, but it does not provide automatic acceptance to all applicants.
The IRS maintains strict program rules, which result in yearly rejections of numerous applications. The IRS processed only 7,199 successful OIC applications during 2024 from a total of 33,591 submitted offers. That is, the acceptance rate was only 21.43%. The high number of annual rejections demonstrates why applicants need to understand all qualification requirements and create detailed applications.
The following guide provides essential information to help you understand the IRS Offer in Compromise program so you can determine your eligibility and prepare a successful application.
What is an Offer in Compromise (OIC)?
The IRS allows taxpayers to reach agreements with the agency for paying their tax debts at reduced amounts through an Offer in Compromise program. The IRS will approve an OIC when the proposed payment amount represents the maximum amount they can collect during a reasonable time frame. Your financial situation determines OIC acceptance through evaluation of your payment capabilities and income levels and expense amounts and asset values. The program serves as a valid solution when you cannot afford your complete tax debt or when paying it would lead to severe financial difficulties.
Who Qualifies for an OIC Program? The Core Requirements
You need to fulfill multiple essential requirements before starting an OIC application process. Your application will not proceed to processing when these essential requirements remain unmet. The IRS allows you to submit an Offer in Compromise application:
- To meet the compliance requirements, you have submitted all tax returns that are required by law and made sufficient withholding and/or estimated tax payments to prevent a balance due at the time of filing the return. This is a critical first step. You need to fix all unfiled tax returns and unpaid estimated tax obligations before you can submit an OIC application.
- You cannot have an ongoing bankruptcy case active at the time of application. The OIC program becomes unavailable to applicants who have active bankruptcy proceedings.
- You must have a valid tax return extension for the current year when you apply for the current year. Your current year tax requirements need to be fully compliant.
- Business owners who apply for an OIC must have made federal tax deposits for both the current and previous two quarters. Businesses need to meet this requirement to qualify for an OIC.
The IRS will return your OIC application in the following cases:
- The application process fails because you omit essential details.
- The IRS will reject your application if you have not received a tax bill for at least one debt included in your offer.
- Your tax payments and return submissions must continue during the time you wait for an OIC decision.
- The Justice Department received your case from the IRS.
- The application fee becomes a problem when you forget to include it although low-income applicants might qualify for a waiver.
You must resolve all these problems before submitting your OIC application because unresolved issues will trigger automatic rejection and prolong the processing time.
Understanding the IRS’s Decision-Making Process:
The IRS bases its decision-making process for Reasonable Collection Potential (RCP) on a set of established criteria. The IRS conducts a calculation to find out how much they can collect from your assets which they refer to as your “Reasonable Collection Potential”.
The IRS will not accept your OIC unless the amount you offer is equal to or greater than this RCP. To determine your RCP, the IRS will meticulously examine your financial situation, including:
- Assets including cash together with bank accounts, real estate and vehicles, and other valuable possessions.
- Income: Your present and projected ability to earn money.
- Your basic living expenses include housing costs and utility bills and food and transportation expenses.
The IRS may grant an OIC for three primary reasons:
1. Doubt as to Liability: The tax debt exists but there is a dispute about the actual amount of tax debt.
2. Doubt as to Collectibility: The IRS believes you cannot pay the full amount of the tax liability, and your financial situation is unlikely to improve significantly.
3. Effective Tax Administration: Although you could pay the full amount, doing so would cause economic hardship or be unfair and inequitable due to exceptional circumstances.
Payment Options for Your OIC
If your OIC is accepted, you will have two main payment options:
- Lump Sum Offer: The payment system requires a 20% down payment of the total offer value when you choose this option. The IRS needs you to pay your remaining tax debt through five or fewer payments during a five-month period after they accept your offer.
- Periodic Payment Offer: The first payment becomes due at program application time followed by monthly payments until the IRS completes your offer review. You will continue making monthly payments until you finish paying the full amount which usually takes 24 months after your offer gets accepted.
It’s important to note that if you meet the low-income certification guidelines, you may be exempt from sending the application fee and the initial payment, and you won’t have to make monthly installments while your offer is under review.
Other Important Considerations
The application fees, together with the first payments made to the program, remain non-refundable to students. The payments will go toward your current tax debt if the OIC application gets denied.
The IRS will stop all collection activities after you submit your OIC application. The IRS maintains tax liens until your offer becomes accepted and you complete all requirements of the agreement.
The public can access your name along with your city and state and ZIP code and liability amount and offer terms through public information channels.
You have thirty days from when you receive the denial to start an appeal against the OIC decision. The IRS Independent Office of Appeals can provide additional assistance in this process.
The following options exist for tax relief when an OIC does not work for your situation or gets denied: partial pay or regular installment agreements and “currently not collectible” status.
Conclusion
The IRS Offer in Compromise program provides major assistance to individuals who struggle with unpayable tax obligations. You need to prepare yourself by knowing all the requirements and showing complete evidence of your financial situation. The checklist helps you achieve a successful OIC application by following all requirements, which leads to tax debt resolution. You should always consult with a qualified tax professional who specializes in this complex process.