If you’re struggling to pay your full tax bill, an Offer in Compromise (OIC) might be a helpful option. The IRS uses this program to settle tax debts for less than the total amount owed, but only when it’s clear that paying in full would create financial hardship. For example, if someone owes $40,000 in back taxes but earns a modest income and has limited assets, the IRS might accept an offer of $7,000 as a fair resolution. This process requires detailed financial disclosure and documentation, and the IRS considers income, expenses, equity, and ability to pay. While not everyone qualifies, understanding how a real-life scenario might unfold can help determine whether pursuing an OIC is a practical step toward resolving tax debt.
How Much Should I Offer In Compromise To The IRS?
If you’re facing a tax bill that feels out of reach, you’ve likely come across the idea of reducing your IRS liability through something called an Offer in Compromise.
That probably raises a few big questions. How much less could you end up paying? What does the process involve? And most importantly, how do you figure out what kind of offer might actually be accepted?
The truth is, there’s a clear formula behind what the IRS considers an acceptable offer. We’ll break that down shortly so you can see exactly how the numbers are calculated.
While this type of tax relief can provide real hope for people struggling with federal debt, it’s not a simple fix. The process involves careful steps, important rules, and a level of detail that can trip people up if they don’t fully understand what’s required.
In this article, we’ll walk you through how to prepare an Offer in Compromise, how to determine the right amount to propose, what terms are involved, the common pitfalls to avoid, and what you can do to improve your chances of having your offer approved.
What is an Offer in Compromise, and who is it for?
An Offer in Compromise is a tax resolution option that gives eligible individuals a chance to settle their IRS tax debt for less than the full amount owed.
This option is designed for people who genuinely cannot pay their full tax bill or would face financial hardship by trying to do so. To qualify, you must meet specific conditions.
Some of the main eligibility factors include:
- Filing all required tax returns and making all necessary estimated payments
- Not being involved in an active bankruptcy case
- Having a valid extension if applying for the current year’s return
Although it may sound ideal to reduce your tax debt, this is one of the more challenging relief options to get approved. More than half of all applications are denied.
The best way to apply for an Offer in Compromise is with the guidance of a tax expert. They can help you determine if this is the right solution or if another option, like an Installment Agreement, might be more realistic and cost-effective over time.
How Do You Determine the Right Amount to Offer in an Offer in Compromise?
While the term “Offer in Compromise” might sound like a flexible negotiation, it actually follows a strict formula.
The amount you propose in your application is not just a guess. It’s based on a defined calculation that follows official IRS guidelines.
This calculation determines what’s called your “reasonable collection potential” or RCP. In simple terms, your RCP is what the IRS believes you can realistically pay. It takes your income and the value of your assets, subtracts allowable living expenses, and then evaluates what could be collected before the IRS’s time to collect runs out.
Your offer must match or exceed your RCP. If it’s accepted, you’ll need to pay the full amount either within 5 months or over a 2-year period, depending on the payment option you choose.
Offer in Compromise examples: How to calculate your offer amount
To figure out how much to offer in an IRS Offer in Compromise (OIC), you’ll need to complete two important forms:
- Form 656 – This is the official application for your Offer in Compromise
- Form 433-A (OIC) for individuals, or Form 433-B (OIC) for businesses
While Form 656 handles the actual submission, the 433 forms are what help you calculate your offer. These documents require full disclosure of your household or business finances, including income, assets, and monthly expenses.
From there, two key calculations are made:
- Available equity in your assets
- Disposable monthly income
Your disposable income is based on your earnings minus necessary living costs. However, these expenses follow national guidelines, not your personal spending, which can change the outcome. Asset equity is also figured using specific formulas. Because of the complexity, it’s a smart move to work with a tax professional who understands the process and can help you get the numbers right.
Once those values are in place, you’ll be able to estimate an offer that the IRS is more likely to approve.
There are two different payment methods you can choose for your Offer in Compromise, and each has its own calculation process.
Option 1: Pay Your Offer in a Lump Sum
Choosing a lump-sum payment can lead to the largest overall savings on what you owe in taxes. However, you must be able to pay the full amount within five months after your offer is accepted.
When you apply, you are required to submit 20 percent of your total offer up front. This payment is not refundable. If your offer is not approved, the amount you paid will still be used to reduce your existing tax balance.
Here is how the lump-sum offer is calculated and must be paid within five months:
Disposable monthly income X12 + Available equity in assets = OIC amount IRS will accept
Option 2: Monthly Tax Debt Settlement Plan
Choosing to pay in monthly installments gives you more flexibility, though the overall savings on your tax debt will be less than with a lump-sum payment. This option lets you spread out your payments over a period of up to 24 months.
To get started, you must submit your first monthly payment when you apply. You also need to keep making each monthly payment while your application is being reviewed. Even if your offer is not approved, the payments you make will still go toward reducing your total tax balance. However, they are non-refundable.
Estimated payment schedule (to be completed within 24 months):
Disposable monthly income X24 + Available equity in assets = OIC amount, IRS will accept
Option 3 :Offer in Compromise Example With Breakdown
Imagine you’re a single taxpayer who owes $50,000 to the IRS. You don’t have any dependents, and your total available equity in assets is $10,000. You also have $400 left over each month after covering your basic living expenses.
If you apply for the lump-sum payment option through an Offer in Compromise, here’s how your offer might be calculated:
$400 x 12 + $10,000 = $14,800
If approved, your total tax balance could drop significantly, from $50,000 down to $14,800.
You’d need to pay $2,960 upfront when you apply, which is 20 percent of the new total. The rest, $11,840, would need to be paid in full within the next five months.
If you choose to go with a periodic payment plan, the total amount and monthly breakdown would be calculated differently:
$400 x 24 + $10,000 = $19,600
If approved, your total tax debt could be reduced from $50,000 to $19,600.
You’d start by paying $817 as your first monthly payment out of 24 total installments. This same amount would be due each month while your application is under review and would continue for all 24 months if the plan is accepted.
A lump-sum payment might seem better because the total is lower, but it requires a 20 percent down payment and the full balance must be paid within five months. For most people, this can be hard to manage, which is why the monthly payment plan tends to be a more practical choice.
What Are the Costs of Submitting an Offer in Compromise?
When applying for an Offer in Compromise (OIC), you’ll need to pay a $205 application fee along with an initial payment toward your offer amount. This upfront expense is required at the time you submit your request.
There aren’t any additional official charges tied to the application itself. However, the bigger risk lies in having your offer denied. Since the upfront payment isn’t refunded, a rejected application can leave you in a more difficult financial situation than when you started. That’s why it’s critical to assess your eligibility before sending money to the IRS.
Another factor to keep in mind is that interest and penalties continue to build while your offer is under review. If the IRS rejects your proposal, these extra charges can increase your total tax balance.
Some individuals may qualify to skip the $205 fee and initial payment. If your gross income is at or below 250% of the federal poverty level, you may meet the requirements for low-income certification. If approved, this waiver removes the application fee and the need for a down payment. Still, if your offer is accepted, you’ll be responsible for paying the full amount of the compromise within the agreed timeframe.
What Increases Your Chances of Getting an Offer in Compromise Approved
To improve your chances of having an Offer in Compromise (OIC) approved, it’s important to take the right steps from the start:
Show that you are unable to pay the full tax amount before the collection period ends, or that paying would cause serious financial hardship. This usually applies to people with a low monthly income and few, if any, assets.
Make sure you meet all the necessary eligibility requirements.
Offer an amount that is equal to or more than your calculated Reasonable Collection Potential (RCP).
Submit every required form and document accurately and completely.
While it’s possible to apply for an OIC on your own, the process can be very complicated. One mistake in the numbers or missing information could lead to a denial.
Working with a trusted tax relief service often makes the process easier and more successful. These professionals only submit offers when they believe approval is likely, and they handle the paperwork and calculations for you. This not only boosts your chances but also removes the stress and guesswork from the process.
Mistakes That Can Derail Your Offer in a Compromise Application
Applying for an Offer in Compromise can be a great way to settle your tax debt for less than you owe, but many applicants make avoidable mistakes that lead to rejection. Some of the most common errors include:
Failing to provide all required documents and details. The application process involves a significant amount of paperwork. Leaving out even one item by accident can raise red flags with the IRS and result in a denied offer.
Incorrectly calculating the value of your assets. Underestimating what you own can make your offer appear less credible.
Reporting expenses that are higher than what the IRS allows. This often leads to a miscalculation of disposable income and weakens your case.
Ignoring future earning potential. If your income is expected to rise in the near future, this must be factored into the offer to avoid problems later.
Skipping over other forms of tax relief. Options like Installment Agreements or Currently Not Collectible status may work better for your situation and could save more money over time.
Not working with a tax professional. Every mistake listed above can be avoided with guidance from an expert. Professionals understand what to include, how to complete calculations correctly, and whether an Offer in Compromise is truly the right fit.
Why Getting Expert Support for Your Offer in Compromise Matters
An Offer in Compromise can be a powerful solution for anyone dealing with overwhelming tax debt.
But applying for one isn’t simple. It’s one of the most detailed and difficult tax relief processes to qualify for. Because of that, there’s a high risk of mistakes or confusion that could lead to a denied request.
With so much on the line, it makes sense to seek guidance from someone who understands the system.
The team at Austin & Larson Tax Resolution knows how to manage the entire process. They can confirm eligibility, take care of forms and financial calculations, and help you choose the most effective tax relief strategy for your situation.
If you’re struggling with tax debt and unsure how to move forward, consider reaching out for support. Austin & Larson Tax Resolution can help determine if an Offer in Compromise is the right step for you.
Conclusion
An Offer in Compromise offers real hope for individuals facing serious tax debt. While the process can be complex and approval is not guaranteed, understanding how it works and calculating a fair, accurate offer can increase your chances of success. From evaluating your income and assets to choosing the right payment plan, each step matters. Errors, missing information, or unrealistic proposals can lead to denial, making expert guidance an essential part of the process. A qualified professional can walk you through the application, help avoid costly mistakes, and ensure your offer reflects your true financial situation. Whether you choose to pay in full or over time, the right strategy can reduce your debt and provide long-term relief. If you are ready to explore this path, now is the time to act. Contact Austin & Larson Tax Resolution to see if an Offer in Compromise is right for you.
FAQs
Do I qualify for an Offer in Compromise?
You may qualify if paying your full tax debt would cause financial hardship or if you genuinely cannot afford it. You must be current on all tax filings, not in bankruptcy, and meet IRS eligibility rules. The IRS reviews your income, assets, and expenses to determine qualification.
How much should I offer the IRS?
The IRS expects an offer equal to or greater than your Reasonable Collection Potential. This includes your available asset equity and monthly disposable income. Offering too little often results in denial. Calculating your offer correctly can greatly improve approval chances and helps avoid wasting time and non-refundable payments.
What forms do I need for an Offer in Compromise?
You must complete and submit Form 656 to make your offer. Also include Form 433-A (OIC) for individuals or 433-B (OIC) for businesses. These forms ask for detailed financial information, including income, assets, and expenses. Incomplete or inaccurate documents often lead to rejection or processing delays.
How long does the process take?
Most Offers in Compromise take six to twelve months for the IRS to review. During that time, if you selected a monthly payment plan, you must continue submitting payments. Delays can happen if documentation is incomplete, so it’s important to submit accurate financial information from the start.
What if the IRS rejects my offer?
You have 30 days to appeal if the IRS denies your offer. Any payments already made apply to your tax balance, even if the offer is rejected. You can reapply later with updated information or explore other tax relief options like Installment Agreements or Currently Not Collectible status.
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