Even if you owe the IRS a significant amount, there’s still hope. In many cases, the agency is open to reducing your total balance to something more manageable through a program called an Offer in Compromise (OIC).
What Is an OIC?
An Offer in Compromise allows you to settle your tax debt for less than the full amount owed by demonstrating that paying in full would create financial hardship.
If you can prove that there’s no reasonable way to pay the total balance, the IRS may agree to accept a reduced payment as full satisfaction of your debt. For example, if you owe $20,000, you might settle for $4,000 and have the rest forgiven.
How to Qualify
When reviewing OIC applications, the IRS considers several factors:
- Doubt as to Collectability – You’re unlikely to pay the full amount due to limited income or low-value assets.
- Economic Hardship – Paying the full debt would cause significant financial strain.
- Doubt as to Liability – You believe the amount assessed by the IRS is incorrect (this requires additional documentation).
In 2012, the IRS adjusted its OIC formula. Instead of multiplying your disposable income by 48 months, it now uses 12 months, making offers far more affordable than before.
To qualify, you must:
• File all required tax returns.
• Provide all requested financial documentation.
• Stay current on your tax payments for the year of application.
Drawbacks of OICs
Applying for an OIC can be time-consuming and paperwork-heavy. You’ll need to provide bank statements, pay stubs, and other financial evidence.
Once accepted, you must file and pay all future taxes on time for the next five years — failure to do so can void the agreement.
If your application is denied, the IRS can still use the financial details you submitted for future collection efforts. Also, interest continues to accrue while your application is under review, potentially increasing your balance.
What to Do If Your Application Is Rejected
Only about 40% of OIC applications are approved each year. If yours is denied, you can:
• Contact the IRS employee listed on the rejection letter to request reconsideration.
• File a formal appeal within 30 days of receiving the denial.
Because the OIC process is complex and lengthy, it’s best to partner with an experienced tax professional who can guide you through each step and improve your chances of approval.
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