Taxes
Offer in Compromise: settling for less than you owe, and why most ads lie
An Offer in Compromise lets you settle IRS debt for less than the full amount when the IRS agrees it could not collect more from you. The IRS accepts a minority of offers, and it accepts them because the math works, not because of the story. The math is your reasonable collection potential: the equity in your assets plus what you could pay from income over 12 or 24 months. If that number is close to what you owe, an offer will be rejected.
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The formula
Reasonable collection potential equals the net realizable equity in your assets (after allowances) plus your monthly disposable income (income minus IRS allowable expenses) multiplied by 12 for a lump-sum offer or 24 for a periodic one. Offer at least that amount and it can be accepted. Offer less and it will not be, however compelling the hardship.
The process
Form 656 with a full financial statement (433-A OIC), the application fee and an initial payment (both waived for low-income applicants). The IRS can take six months to a year to decide. While it reviews, collection pauses but the ten-year collection clock also pauses.
When it works
Low or fixed income, few assets, and a balance far beyond what the formula produces. Retirees on Social Security with a large old balance are the classic case. A working professional with home equity and a $30,000 balance usually is not; a payment plan serves them better.
Questions people ask
- How much will the IRS settle for?
- Whatever its formula produces for your finances. There is no percentage; some accepted offers are a small fraction of the balance and others are most of it.
- What happens if my offer is rejected?
- You can appeal within 30 days, or move to a payment plan or CNC status. Nothing you submitted is wasted; the same financial statement supports those.