How to Make a Deal with the IRS: Understanding the Offer in Compromise Program

The IRS’s Offer in Compromise program lets you settle your tax debt for less than you owe, but only if you can prove full payment is out of reach. Discover how this program works and if you qualify for a deal.


Let’s face it—who doesn’t love a great deal?  Can you make a deal with the IRS and get them to settle your account for less than you owe?  Well….maybe you can.  The IRS’s “deal” program is called: the Offer in Compromise (OIC) program. This amazing avenue gives taxpayers the opportunity to settle their tax debt for less than they owe. It’s like haggling at a garage sale, but instead of that vintage lamp, you’re negotiating your way out your tax bill.

 

What is an Offer in Compromise?

An Offer in Compromise is the IRS’s version of the old game show “Let’s Make a Deal”.  You are telling the IRS, “you can continue to try and get money out of me, OR I will voluntarily give you this amount to settle my account.”  The idea is that they might be willing to accept a lower amount than you owe if you can convince them it’s all you can afford, and it isn’t likely they will ever get more. This isn’t because the IRS has suddenly gone soft—it’s simply more practical for them to get something rather than nothing.

When you submit an offer, you are saying, “Yes IRS, I know I owe the taxes penalties and interest, but how about we call it even for a little less?” The IRS will use a government-spec magnify glass on your finances to see if they agree. It’s like trying to get a discount at your favorite store, but instead of a coupon, you submit a pile of financial documents.

 

Who Qualifies for an Offer in Compromise?

Now, before you start dreaming of settling your tax debt for the price of a used car, let’s be real: not everyone qualifies. The IRS doesn’t hand out OICs like candy at Halloween. They take a long, hard look at your financial situation. Here’s what they are looking for:

  1. Ability to Pay: Can you pay the full amount? The IRS is going to check your income, expenses, and assets with a fine-tooth comb. If you’ve got a hidden treasure chest in your backyard, they’ll probably find it.
  2. Financial Hardship: If you’ve hit tough times—unemployed and broke—you’ve got a better shot. The IRS knows it can’t get blood from a turnip, so they’ll consider your current situation.
  3. IRS Collection Timeline: The IRS has 10 years to collect your tax debt.  After that, the debt goes away by law. If you’re near the end of that window, it could work in your favor.
  4. Tax Compliance: You must be in compliance with your tax filings and current on estimated payments.  Before the IRS even opens your application they will check to see if you are current and compliant. Get your paperwork in order before you ask for mercy!

How the Offer in Compromise Process Works

If you think you’re ready to make a deal, the process goes roughly like this:

  1. Submitting the Offer: File IRS Form 656, which is basically your pitch for a deal. There will be an application fee unless you qualify for a waiver. It’s like paying a cover charge to get into the club where you negotiate with the IRS. It’s non-refundable.
  2. Calculating the Offer: Don’t go in low-balling like you’re on a used car lot. The IRS wants an offer based on your reasonable collection potential (RCP)—meaning, what they calculate you can pay based on your net assets, current and future income.  The calculation the IRS uses is based on the current government standards.
  3. IRS Review: Now we wait. The IRS will spend months digging into your financials like Sherlock Holmes on a case. During this time, don’t be surprised if they ask for more documents, information, and verifications. It’s their version of “we’ll get back to you.”
  4. Acceptance or Rejection: If the IRS accepts, congrats! You’ve just made a deal with Uncle Sam. If they reject it, well, you’ll get an explanation and the opportunity to appeal. At least you tried!

Benefits of an Offer in Compromise

The OIC program can provide major relief in many ways, here are a few:

  • Debt Reduction: You might get away with paying a fraction of what you owe. That’s like getting a clearance price on your taxes. DEAL!
  • End to Collection Actions: No more letters, no more wage garnishments, no more IRS agents showing up at your door (who likes that?).
  • Peace of Mind: Finally being able to sleep at night knowing the IRS isn’t looming over you? Priceless.
  • Fresh Start: Once you settle up, you’re free and clear—just make sure to stay on top of your taxes in the future. Nobody wants to go through this twice!

Is an Offer in Compromise Right for You?

The OIC program isn’t for everyone, and the IRS doesn’t just accept any offer that comes their way. The percentage of accepted OICs is extremely low. You’ll need to take a close look at your finances to determine if you qualify.  This is where most folks get tripped up.  If you can afford (as the IRS defines “afford”) to pay your taxes through an installment plan, or by liquefying assets, the IRS will not accept your OIC.

Conclusion

If you’re overwhelmed by IRS debt, the Offer in Compromise program might be an option for you. Sure, negotiating with the IRS may not be as glamorous as cutting a deal on reality TV, but it can give you the financial freedom you need to move forward. And who doesn’t love a good deal?