Offer in Compromise

What is an Offer in Compromise (OIC)?

An Offer in Compromise (OIC) is a formal agreement between a taxpayer and the Internal Revenue Service (IRS) that allows a taxpayer to settle outstanding tax liabilities for less than the full amount owed. The purpose of an OIC is to reach a resolution that is fair, reasonable, and in the best interest of both the taxpayer and the IRS.

Taxpayers who are unable to pay their tax debt in full—or who would experience significant financial hardship by doing so—may qualify for an Offer in Compromise. The IRS may agree to accept a reduced settlement when it determines that collecting the full amount is unlikely or would be unjust.

Reasons the IRS Accepts an OIC

Common reasons the IRS accepts an OIC

The IRS generally considers an Offer in Comprimise under the following circumstances:

Insufficient Income and Assets

The taxpayer does not have sufficient income, assets, or equity to pay the full tax liability.

Economic Hardship or Equity Considerations

The taxpayer technically has the ability to pay, but doing so would create an undue economic hardship or would be unfair or inequitable under the circumstances.

How does the IRS Determine Eligibility?

How does the IRS determine eligibility?

When evaluating an OIC application, the IRS conducts a comprehensive review of the taxpayer's financial situation, including:

Income - current and projected earnings
Expenses - allowable living and business expenses
Asset Equity - value of assets such as bank accounts, real estate, vehicles and investments.

This information is used to determine the taxpayer's reasonable collection potential, which helps the IRS decide wether the proposed offer reflects maximum amount it can reasonably expect to collect.

What Happens Once an OIC Is Accepted?

What happens once an OIC is accepted?

Once the taxpayer pays the full amount agreed to under the OIC—within the approved timeframe—the IRS considers the tax debt fully resolved. Even if the settlement amount represents only a small portion of the original balance, the remaining tax liability is legally satisfied, provided all terms of the agreement are met.

Offer in Compromise Payment Options

Taxpayers must select one of the following payment options when submitting an OIC an dinclude the required initial payment:

Lump Sum Offer

The taxpayer generally submits 20% of the total offer amount with the application. The remaining balance must be paid in five or fewer payments within five months of the IRS accepting the offer.

Periodic Payment Offer

The taxpayer submits the first payment with the offer and pays the remaining balance in monthly installments over up to 24 months, in accordance with the terms of the agreement.

The amount and timing of payments depend on the total offer amount and the payment option selected.

Compliance Requirements for OIC Approval

To be eligible for an Offer in Compromise, taxpayers must:

File all required tax returns
Be current on estimated tax payments or payroll withholding
For business owners with employees, remain current on all federal tax deposits and filings

Failure to maintain compliance can result in rejection of the offer or termination of an accepted OIC.

How Often Does the IRS Accept Offers in Compromise?

The IRS acceptance rate for OICs is relatively low. Many offers are rejected due to incomplete applications, calculation errors, missing documentation, or failure to meet eligibility requirements. Working with a qualified tax professional can significantly improve the likelihood

of approval by ensuring accurate financial analysis, proper documentation, and adherence to IRS procedures.