IRS Payment Plans and Installment Agreements
From Tax Guide.
Tax Guide · Arab, Alabama
Offer in Compromise Explained: Can You Settle Your Tax Debt for Less?
An offer in compromise asks the IRS to accept less than the full tax debt, but only some people qualify. Learn how it works and what else to consider.
The short answer
What is an offer in compromise?
An offer in compromise (OIC) is a request to the IRS to settle a tax debt for less than the full amount owed, and it is accepted only in limited circumstances.
The name sounds like a simple deal, but it is not a shortcut. The IRS looks at your income, expenses, assets and ability to pay, and it agrees only when its review shows the offer reflects what it can reasonably expect to collect.
Ads promising to settle tax debts for pennies on the dollar can be misleading. Many applicants are not accepted. No one can promise that an offer will be approved, so be cautious of anyone who does.
Reasons an offer is made
Who can settle a tax debt for less?
The IRS considers an offer on one of a few grounds, and the most common is that paying the full amount would not be possible.
The grounds below are general descriptions from IRS materials. Whether any of them fits you depends on the full facts, and we do not tell anyone in advance that they qualify.
- Doubt as to collectibility: the IRS doubts it could ever collect the full balance given your finances.
- Doubt as to liability: there is a real question whether the tax is owed at all. This ground is different from a normal disagreement handled through an appeal or an amended return.
- Effective tax administration: collecting the full amount would cause serious hardship or be unfair for special reasons. This is used rarely.
The requirements
What does the IRS require before it will consider an offer?
You generally must have filed all required returns, made required estimated payments and be current on tax deposits if you have employees.
The IRS wants to see that you are in compliance before it evaluates the debt. Business owners with employees must also keep up with payroll deposits. If you have years you have not filed, see our guide to unfiled tax returns first.
You submit the application using the IRS forms, which include detailed financial information about your income, expenses and assets. The IRS may require an application fee and an initial payment with the offer. Those amounts and any exceptions are set by the IRS and change, so we confirm them before you send anything.
What to know first
What happens after I submit an offer in compromise?
The IRS reviews your financial picture, which can take a long time, and during that period collection is generally paused.
An examiner may ask for more documents or explanations. The IRS can accept, reject or return the offer, and you have appeal rights if it is rejected. If accepted, the terms usually require you to file and pay on time for several years, and the IRS may keep future refunds.
While an offer is pending, the IRS generally keeps the ability to place a lien. The details matter, so read the terms carefully; our guide on federal tax liens explains what a lien is.
Because interest and penalties can continue in some situations, and because a rejected offer can leave you where you began, think of the offer as one path among several.
Comparing paths
Should I choose an offer in compromise or a payment plan?
A payment plan may suit someone who can pay over time, while an offer is aimed at someone who truly cannot pay the full amount.
The two answer different problems, and the IRS looks at whether you could pay in full or over time before it will accept an offer. See IRS payment plans for how installment agreements work.
Other tools may fit better. Removing a penalty is a separate request (see penalty relief and abatement), and a delay in collection may help if you cannot pay anything for now. Our guide on what to do when you owe and cannot pay lays out the first steps.
- Can you pay the full amount over time? A plan may fit.
- Is your income too low and your assets too limited to pay the balance? An offer may be worth reviewing.
- Do you dispute that you owe the tax? A different process may apply.
- Are you behind on filing or deposits? Fix that first.
Warning signs
How do I avoid offer in compromise scams?
Be wary of any company that promises approval of an offer, because the IRS decides each one on its own facts.
Some businesses advertise heavily and charge large fees to prepare offers, then submit applications that were never likely to be accepted. Fees paid may not be refundable. A trustworthy representative will explain honestly whether an offer makes sense, and what else could work.
You can also apply on your own, using the IRS materials. Compare what a service charges with what the work involves, and ask exactly what you are paying for before signing.
- Promises of approval are a red flag.
- Pressure to sign or pay immediately is a red flag.
- Ask who will actually do the work.
- Ask what happens if the offer is rejected.
- Get everything in writing.
How we can help
Not sure whether an offer makes sense for you?
Melton Tax Services can help through our tax representation service.
We can review your notice, explain the options and respond to the agency on your behalf. We cannot promise that any request will be accepted, but we can help you understand what the IRS is asking and choose a path.
We serve Arab and the surrounding area. Call 256-586-4635 or use the contact page. Please bring notices and financial records to the office rather than sending them through the website.
Answers
Questions about offer in compromise
Does everyone qualify for an offer in compromise?
No. Many applicants do not, and the IRS decides based on your finances and compliance. There is no way to know in advance whether an offer will be accepted.
Is there an IRS tool to check eligibility?
Yes, the IRS provides a pre-qualifier tool on its website. It is only a screening step, and it does not mean an offer will be accepted.
Can I make an offer on state taxes too?
A federal offer covers only federal debt. The Alabama Department of Revenue has its own process for state debts, so ask what is available.
What happens if my offer is rejected?
You can generally appeal the rejection, and other options such as a payment plan may still be open. The IRS letter explains the deadline for an appeal.
Should I pay a company to file an offer for me?
Be careful. Some companies charge a lot for work that you or a trusted representative can do, and they may promise more than they can deliver. Ask what the service includes before paying.
Will an accepted offer end my tax problems?
It resolves the debt covered by the offer, provided you follow the terms. You still must file and pay on time in the following years.
How long does the IRS take to decide on an offer?
It can take many months. The timing varies, and the IRS may ask for more information along the way.
Do I keep filing and paying taxes while an offer is pending?
Yes. You generally must stay current on filing and on new taxes while the offer is being reviewed.
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