IRS TAX DEBT SETTLEMENT
IRS OFFER IN COMPROMISE
An Offer in Compromise may allow qualifying taxpayers to settle an IRS tax debt for less than the full amount owed. Switchback Accounting can evaluate whether an Offer in Compromise may be a realistic option, prepare the required financial information, and represent you throughout the process.
WHAT IS AN OFFER IN COMPROMISE?
An Offer in Compromise (OIC) is an IRS program that allows qualifying taxpayers to settle their tax debt for less than the full amount owed. The IRS generally considers an OIC when it determines that the full tax liability cannot be collected, there is a genuine dispute about the amount owed, or requiring full payment would create an economic hardship or be unfair because of exceptional circumstances.
The IRS does not simply negotiate a tax debt down to an arbitrary amount. When evaluating an Offer in Compromise, the IRS looks closely at your ability to pay, including your income, necessary living expenses, assets, and the amount of time remaining to collect the debt.
If an Offer in Compromise is appropriate, the goal is to determine an offer amount the IRS may accept based on your financial situation. If it is not the right option, another resolution strategy—such as an installment agreement or Currently Not Collectible status—may make more sense.
WHO QUALIFIES FOR AN OFFER IN COMPROMISE?
Qualifying for an Offer in Compromise depends on much more than the amount of tax you owe. The IRS evaluates your overall financial situation to determine what it believes it can reasonably collect from you.
Income & Expenses
The IRS considers your income and necessary living expenses when evaluating your ability to pay.
ASSETS & EQUITY
Bank accounts, investments, real estate, vehicles, business assets, and other property may be included in the financial analysis.
TIME LEFT TO COLLECT
The amount of time remaining on the IRS collection statute can affect what the IRS believes it can reasonably collect.
TAX COMPLIANCE
Required tax returns generally must be filed, estimated tax payments made when required, and employers must generally be current with required federal tax deposits.
Because the qualification rules involve both IRS formulas and the facts of your individual situation, a careful financial analysis should be completed before deciding whether an Offer in Compromise is the right strategy.
How Does the IRS Determine an Offer Amount?
The amount offered in an Offer in Compromise is not simply a number chosen by the taxpayer. For most offers based on inability to pay the full tax debt, the IRS evaluates what it believes it could reasonably collect from you. This is generally referred to as your Reasonable Collection Potential (RCP).
The calculation considers the value of your assets along with your future ability to pay from income. The IRS reviews items such as cash, investments, equity in real estate and vehicles, business assets, monthly income, and allowable living expenses.
This means two taxpayers who owe the same amount to the IRS could have very different Offer in Compromise outcomes. The amount of tax debt alone does not determine the offer amount—your individual financial circumstances are a critical part of the analysis.
ASSET EQUITY + FUTURE ABILITY TO PAY → REASONABLE COLLECTION POTENTIAL (RCP)
THE OFFER IN COMPROMISE PROCESS
An Offer in Compromise requires more than submitting a settlement amount to the IRS. Before an offer is filed, we evaluate your tax compliance, financial circumstances, and potential eligibility. If an OIC appears to be an appropriate resolution strategy, we prepare the required financial disclosures and supporting documentation and represent you throughout the IRS review process.
1. EVALUATE
We review your tax debt, filing compliance, financial circumstances, assets, income, expenses, and collection history to determine whether an Offer in Compromise may be a realistic option.
2. CALCULATE & PREPARE
We analyze your financial information, estimate your Reasonable Collection Potential, determine an appropriate offer amount, and prepare the required IRS forms and supporting documentation.
3. SUBMIT & REPRESENT
We submit the Offer in Compromise and communicate with the IRS on your behalf as the offer is reviewed, including responding to requests for additional information or documentation.
4. RESOLVE & STAY COMPLIANT
If the IRS accepts the offer, the terms of the agreement must be completed and ongoing tax compliance requirements must be followed. If the offer is not accepted, we evaluate the available next steps and other resolution options.
What Happens While an Offer Is Pending?
Once the IRS accepts an Offer in Compromise for processing, it begins evaluating the offer and the financial information submitted with it. The IRS may request additional documentation or clarification during its review.
While an OIC is pending, the IRS generally suspends levy action, although it may still file a Notice of Federal Tax Lien. If you already have an installment agreement, you generally do not have to continue those installment agreement payments while the offer is being considered.
Payment requirements depend on how the offer is structured. With a periodic payment offer, required monthly offer payments generally must continue while the IRS reviews the offer. Different payment rules apply to lump-sum offers and to taxpayers who qualify for the low-income certification.
It is also important to understand that submitting an Offer in Compromise suspends the running of the IRS collection period while the offer is pending. If the offer is rejected, the collection period generally remains suspended for another 30 days and during a timely appeal of the rejection.
WHAT IF AN OIC ISN’T THE RIGHT OPTION?
An Offer in Compromise can be an effective way to resolve tax debt, but it is not the right solution for every taxpayer. If your financial circumstances do not support an acceptable offer, or another resolution option would provide a better outcome, there may be other ways to address the tax debt.
INSTALLMENT AGREEMENT
Monthly payments over time when paying the full balance immediately isn’t feasible.
CURRENTLY NOT COLLECTIBLE
A temporary pause in collection when paying the IRS would create financial hardship.
PENALTY RELIEF
Potential reduction or removal of qualifying IRS penalties.
The goal is not simply to pursue an Offer in Compromise—it is to identify the resolution option that makes the most sense for your specific situation. We evaluate the available tax resolution options before recommending a strategy based on the facts of your case.
OFFER IN COMPROMISE FAQs
How much will the IRS accept in an Offer in Compromise?
There is no standard percentage of tax debt that the IRS will accept in an Offer in Compromise. The IRS evaluates your ability to pay based on factors such as your income, necessary living expenses, assets, and equity. For offers based on inability to pay the full debt, the IRS generally looks for an offer that reflects what it believes it can reasonably collect from you. This is why two taxpayers who owe the same amount may have very different acceptable offer amounts.
How long does an Offer in Compromise take?
The Offer in Compromise process can take many months, and the exact timeline depends on factors such as IRS inventory levels, the complexity of your financial situation, and whether additional information is requested. The IRS states that a complete OIC investigation can take up to 24 months. If the IRS does not make a determination within two years of receiving an offer, the offer is generally deemed accepted, although certain periods are excluded from that two-year timeframe.
Can I apply for an Offer in Compromise if I have assets?
Yes. Having assets does not automatically prevent you from qualifying for an Offer in Compromise. However, the IRS considers the equity in assets such as bank accounts, investments, real estate, vehicles, and business assets when evaluating your ability to pay and determining an acceptable offer amount.
Depending on the value and equity of your assets, they may increase the amount the IRS expects you to offer. An Offer in Compromise may still be possible when you own assets, but your entire financial situation—including income, expenses, asset equity, and future ability to pay—must be evaluated.
What happens if the IRS rejects my Offer in Compromise?
If the IRS rejects your Offer in Compromise, you generally have 30 days from the date of the rejection letter to request an appeal. An appeal gives you the opportunity to challenge the IRS’s determination, including disagreements involving income, allowable expenses, asset values, or other factors used in evaluating the offer.
We can review the IRS’s reasons for rejection, determine whether an appeal is appropriate, and represent you through the appeals process. If an appeal is not the best course of action, we can evaluate other tax resolution options, such as an installment agreement or Currently Not Collectible status.
What happens after the IRS accepts an Offer in Compromise?
If the IRS accepts your Offer in Compromise, you must pay the agreed offer amount according to the terms of the acceptance agreement and satisfy the other conditions of the offer. For most accepted offers, you must also remain compliant with federal tax filing and payment requirements for five years from the date the offer is accepted.
If you fail to meet the payment terms or required future tax compliance, the IRS may default the offer and reinstate the original tax liability, less payments and credits received. If a Notice of Federal Tax Lien was filed, the IRS generally releases the lien after the payment terms of the accepted offer have been completed.