An offer in compromise is a program offered by the IRS and most States to help financially troubled taxpayers reduce their tax debts. If you have back taxes and can’t afford to pay, the IRS may settle for less than you owe.
If you or your business can’t afford to pay your full tax debt, the IRS may let you settle for less through an Offer in Compromise (OIC). Approval isn’t automatic, but with proper preparation and guidance, you can navigate the process and potentially resolve your tax liability for a reduced amount.
Start by making sure all tax filings and any existing payment plans are current. The IRS can’t evaluate your request without a complete record of your tax obligations. While not required, hiring a tax professional can help ensure accuracy. You’ll also need to:
Submit Form 433-A (individuals) or 433-B (businesses) with full financial documentation.
Submit Form 656 with your proposed offer.
Pay the $186 non-refundable application fee and the initial non-refundable payment for each Form 656.
Your application must show that paying the full amount would create financial hardship. You can propose either a lump-sum settlement or a series of installment payments. Any payments you send while waiting for approval reduce your balance even if the IRS rejects your offer. If rejected, you have 30 days to appeal.
Approval is only the beginning. Be prepared to:
Follow every term of the repayment plan until the agreed amount is paid in full.
Give up any tax refund for the year the offer is accepted—those funds go toward your debt.
Account for the federal tax lien, which remains until your final payment clears.
If you choose installments, include those payments in your long-term budget to avoid defaulting on the agreement.
The IRS accepts an OIC when it believes the proposal represents the most it can reasonably collect. Working with an experienced tax professional improves your odds by ensuring your offer meets IRS standards for a fair settlement.
The IRS may file a tax lien during the review process.
Your existing installment plan is suspended while the OIC is under review.
You cannot apply if you’re in active bankruptcy proceedings.
The IRS offers an online pre-qualifier tool to gauge eligibility.
Stay current on all future tax filings and payments to keep the agreement valid. If your plan includes more than 12 monthly installments, plan ahead until the lien is officially released.
Negotiating an Offer in Compromise can be complex. Our experienced tax specialists can review your finances, prepare all required forms, and work directly with the IRS on your behalf. Contact City Tax Services today to explore your options for settling tax debt and regaining financial peace of mind.
Additional Resource: My Offer in Compromise Got Rejected—What Are My Options?
