Can You Pay Less Than You Owe?
If you owe a large tax debt to the IRS but can’t afford to pay it in full, you may qualify for an Offer in Compromise (OIC)—a program that allows you to settle your tax debt for less than the full amount owed.
However, the IRS does not accept every offer, and you must meet strict eligibility requirements. This guide will explain how the IRS Offer in Compromise works, who qualifies, and how to apply for the best chance of approval.
1. What Is an Offer in Compromise (OIC)?
📌 An Offer in Compromise (OIC) is an IRS program that allows eligible taxpayers to settle their tax debt for less than what they owe.
✔ The IRS reviews your financial situation to determine if you can afford to pay in full.
✔ If you qualify, you can offer a lower amount to settle your tax liability.
✔ Once approved and paid, the IRS forgives the remaining balance.
💡 Tip: An OIC is not a payment plan—it’s a one-time settlement to clear your tax debt.
2. Who Qualifies for an Offer in Compromise?
📌 The IRS considers three main reasons to accept an OIC:
✅ 1. Doubt as to Collectibility (Most Common)
✔ You don’t have enough income, assets, or resources to pay the full debt.
✔ The IRS believes it is unlikely they can collect the full amount from you before the statute of limitations expires.
📌 Example:
- You owe $50,000 in taxes.
- Your income is $30,000 per year, and you have no significant assets.
- The IRS may accept a reduced settlement amount based on what they realistically expect to collect.
✅ 2. Doubt as to Liability
✔ You believe the IRS calculated your tax debt incorrectly.
✔ You have evidence that you don’t owe the full amount.
📌 Example:
- The IRS says you owe $25,000, but you have proof that deductions were incorrectly disallowed.
- You file an OIC to reduce your debt based on new evidence.
✅ 3. Effective Tax Administration (Exceptional Cases Only)
✔ You can technically pay the debt, but doing so would cause extreme financial hardship.
✔ You have a serious medical condition, disability, or elderly status that prevents full payment.
📌 Example:
- A retired senior with a fixed income owes $40,000 in back taxes.
- Paying in full would leave them unable to afford housing or medical care.
- The IRS may approve a reduced settlement based on hardship.
💡 Tip: If you qualify under “Effective Tax Administration,” provide extensive documentation of your hardship.
3. Who Does NOT Qualify for an OIC?
🚨 The IRS is unlikely to accept your OIC if:
❌ You haven’t filed all required tax returns.
❌ You haven’t made estimated tax payments (if self-employed).
❌ You’re in an active bankruptcy case.
❌ The IRS believes you can afford to pay through an installment plan.
💡 Tip: Before applying for an OIC, make sure you’re fully compliant with IRS tax filing requirements.
4. How Much Should You Offer the IRS?
📌 Your offer amount must be based on your:
✔ Monthly disposable income (income minus necessary expenses).
✔ Equity in assets (home, car, savings, retirement accounts).
✔ The IRS Future Income Projection (typically 12 to 24 months of disposable income).
✅ Formula for OIC Offer Calculation:
(Monthly Disposable Income × 12 months) + Asset Equity = Minimum Offer Amount
📌 Example Calculation:
- Monthly income after expenses: $300
- Asset equity: $5,000
- Minimum offer: ($300 × 12) + $5,000 = $8,600
💡 Tip: The IRS rarely accepts lowball offers—use their formula to make a reasonable offer.
5. How to Apply for an Offer in Compromise
📌 Follow these steps to submit your OIC application:
✅ Step 1: Check Eligibility
✔ Use the IRS Offer in Compromise Pre-Qualifier Tool: www.irs.gov/oic.
✅ Step 2: Complete IRS Forms
✔ Form 656 (Offer in Compromise Application) – Specifies your offer amount and reason.
✔ Form 433-A (Collection Information Statement for Individuals) – Lists your income, expenses, debts, and assets.
✅ Step 3: Submit Your Application & Fees
✔ Application Fee: $205 (waived for low-income applicants).
✔ Initial Payment (depends on offer type):
- Lump Sum Offer: Pay 20% upfront, and the rest if approved.
- Periodic Payment Offer: Start making monthly payments while waiting for approval.
✅ Step 4: Wait for IRS Decision (Can Take 6-12 Months)
✔ The IRS may:
- Accept your offer (you must pay the agreed amount).
- Reject your offer (you can appeal or enter a payment plan).
- Request additional documents before making a decision.
💡 Tip: While your OIC is pending, the IRS stops collection actions!
6. What Happens If Your OIC Is Rejected?
🚨 If the IRS denies your offer, you have options:
✔ File an appeal within 30 days using Form 13711 (Request for Appeal of Offer in Compromise).
✔ Negotiate a different payment plan with the IRS.
✔ Request “Currently Not Collectible” status if you truly cannot pay.
💡 Tip: If your OIC is rejected, work with a tax professional to adjust your offer and resubmit.
7. OIC vs. Installment Agreement: Which Is Better?
📌 If you don’t qualify for an OIC, you may still be eligible for a payment plan.
| Option | Best For | Key Benefit |
|---|---|---|
| Offer in Compromise (OIC) | Those who truly can’t afford full payment | Settle for less than you owe |
| Installment Agreement | Those who can pay over time | Avoid IRS collection actions |
| Currently Not Collectible | Those in extreme financial hardship | IRS pauses collections |
💡 Tip: If you can pay within 72 months, the IRS will likely deny your OIC and offer an installment agreement instead.
8. Should You Hire a Tax Professional for an OIC?
📌 An Offer in Compromise is complex—hiring a tax expert can increase approval chances.
✅ When to Seek Professional Help:
✔ You owe over $10,000 and can’t afford to pay.
✔ You have limited income and assets.
✔ You previously had an OIC rejected.
✔ You don’t understand the IRS financial disclosure requirements.
💡 Tip: Beware of OIC scam companies that promise to “settle for pennies on the dollar”—always verify credentials!
Is an Offer in Compromise Right for You?
📌 If you owe more than you can afford to pay:
✔ Check if you qualify using the IRS OIC Pre-Qualifier Tool.
✔ Submit Form 656 & Form 433-A with a reasonable offer.
✔ If rejected, appeal or request an installment agreement.
📌 Need help with tax debt? Contact First Union Tax for professional Offer in Compromise assistance and IRS negotiation support!
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