Offer in Compromise Help: An Honest Look at Who Qualifies

The short version

The IRS will accept less than the full balance when it believes the amount you offer is the most it can reasonably expect to collect before the collection period runs out. It's not a negotiation over what feels fair, and it's not a discount for hardship stories. It's a calculation, called your reasonable collection potential, and if your offer is at or above that number, it has a real chance. If it isn't, it will almost certainly be returned or rejected.

That's why the honest answer to "Do I qualify for an offer in compromise?" is usually, "Let's run the numbers." We do that before anyone files anything.

How the IRS calculates what you'd have to offer

For the most common type of offer (doubt as to collectibility), your minimum acceptable offer is roughly:

Net equity in your assets + a multiple of your monthly disposable income

• Net equity in assets. Bank accounts, retirement accounts, home equity, vehicles, investments, and business assets are counted at what the IRS calls "quick sale value," generally about 80% of fair market value, minus what you owe on them. Some allowances apply, but significant equity almost always shows up in the offer amount.
• Monthly disposable income. Your average monthly income minus allowable living expenses. The IRS uses national and local standards for food, housing, utilities, transportation, and health care, not your actual spending.
• The multiple. If you pay the offer in five or fewer payments within five months (a lump-sum offer), the IRS counts 12 months of disposable income. If you pay over 6 to 24 months (a periodic payment offer), it counts 24 months.

A simple illustration: Someone owes $85,000, has $4,000 in net asset equity, and has $150 a month left over after IRS-allowed expenses. A lump-sum offer would need to be at least $4,000 + ($150 × 12) = $5,800. That's a strong offer candidate. Now change one fact: the same person has $60,000 of equity in their home. The minimum offer is now over $60,000, and a payment plan is probably the smarter route. These numbers are illustrative; real cases involve more detail.

Who usually qualifies

• People whose income barely covers IRS-allowed living expenses, often because of a job loss, illness, disability, retirement on a fixed income, or a business that closed
• People with little or no equity in assets, or whose equity is far smaller than the debt
• People who owe a large balance relative to what they could pay over the remaining collection period
• People who are current on all filing requirements and on estimated tax payments or withholding for this year

Who usually doesn't

• People who can pay over time. If your disposable income would pay the balance off before the collection statute expires, the IRS expects a payment plan, not an offer.
• People with significant equity. Home equity and retirement accounts are the most common reasons offers fail.
• People with unfiled returns. The IRS won't process an offer until every required return is filed. See unfiled tax returns.
• People in an open bankruptcy. Offers aren't available during a bankruptcy case.
• Business owners who aren't current on payroll deposits. The current quarter's federal tax deposits have to be made.
• People hoping to settle for "pennies on the dollar" because a commercial said so. The amount is set by your finances, not by advertising.

The other two types of offers

Doubt as to liability is for when you don't actually owe the tax, for example because an assessment was based on incorrect information. It requires evidence, not an inability to pay.

Effective tax administration is for unusual cases where you technically could pay, but collecting the full amount would create an exceptional hardship or would be unfair because of compelling circumstances, such as a serious long-term illness that will consume your assets. These are rarely accepted and need strong documentation.

What applying actually involves

1. Form 656 (the offer itself) plus Form 433-A (OIC) for individuals or 433-B (OIC) for businesses, which is a detailed financial statement with supporting documents: bank statements, pay stubs, loan statements, asset values, and expense proof.
2. The $205 application fee, unless you qualify for the low-income waiver.
3. The initial payment. For a lump-sum offer, 20% of the offer amount is sent with the application and is generally nonrefundable. For a periodic payment offer, you send the first proposed payment and keep paying monthly while the IRS reviews it.

While the offer is pending, the IRS generally can't levy you, but the collection statute is extended for the time the offer is under consideration, and the IRS may still file a tax lien. Reviews commonly take many months.

If the offer is accepted, you must file and pay on time for the next five years. The IRS keeps any refund for the year the offer was accepted and earlier years. Miss the terms, and the IRS can reinstate the original balance.

If it's rejected, you have 30 days to appeal. Payments made with the offer are generally applied to your balance rather than refunded.

What we do differently

Many offer mills take a large fee, file an offer that never had a chance, and leave the client worse off, with months of extended collection time and a nonrefundable payment gone. We start with your IRS transcripts and your actual financial picture, calculate your reasonable collection potential, and show you the result. If an offer is your best option, we prepare and submit it and deal with the IRS examiner through to a decision. If it isn't, we'll show you what is, usually an installment agreement, currently not collectible status, or penalty abatement, and we'll be clear about why.