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Back Taxes and Tax Debt

What is an IRS offer in compromise?

Jo Willetts, EA

Director, Tax Resources

Updated on: July 12, 2022

The IRS offer in compromise (OIC) allows qualified taxpayers to settle their tax bill for less than they owe.

Tip: If you have equity in a car, homes, or investments worth more than you owe, you won’t qualify for an OIC, because the IRS would decide that you can pay your tax bill with those assets.

How do I qualify for an OIC?

The most important qualification criterion is that you can’t pay the IRS due to your hardship.

You must:

  • Be free of any ongoing bankruptcy proceedings
  • Filed all required federal tax returns
  • Have received a tax bill for at least one debt included in the OIC offer
  • Be current with all estimated tax payments and/or withholding (be in a position so they won’t owe in the future)
  • Be current with all federal tax deposits (if self-employed with employees)

If you don’t meet all items on that list, the IRS will automatically reject your OIC. This means that your net equity in assets plus the amount that you could pay in monthly payments is significantly less than the taxes you owe.

What to send to the IRS to apply for an OIC

To properly file an OIC, make sure you send the IRS a complete application. Your application and supporting documents should clearly show why an OIC is the right choice for your situation. Keep in mind that since the IRS approves only a third of these applications, it’s a great idea to get the help of knowledgeable professionals such as Jackson Hewitt’s Tax Resolution Specialists.

At a minimum, your application must include:

  • Form 656, Offer in Compromise
  • A completed and signed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable
  • Completed and signed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable
  • A $205 application fee, unless you meet low-income certification requirements
  • Your down payment or other payments based on the payment option you chose, unless you meet low-income certification requirements
  • Required documentation to support your financial circumstances

Jackson Hewitt’s Tax Resolution Specialists are familiar with the complex requirements of the OIC process and can help manage the review, submission, and appeals process to increase the chances of getting your OIC application approved.

OIC payment options

The IRS offers two payment options to pay your OIC offer amount:

  • Periodic payments: In this case, you send your first payment in your offer and then pay the rest over 24 months or less. This means you would be sending payments while the IRS is considering the OIC. A typical OIC takes the IRS about 7-12 months to decide, and you would need to make the payments each month during that time.
  • Lump sum cash: With this option, you pay 20% of your total offer when you apply for the OIC. You pay the remaining 80% in 5 or fewer payments within 5 months of the date the IRS accepted the offer.

Exceptions: If you meet the low-income certification requirements, you don’t have to pay the application fee, any down payments, or anything while the IRS considers your offer.

If the IRS rejects your OIC application, you still owe your original tax debt plus all interest and penalties. The IRS will apply any payments you already made (such as in your OIC offer) to your tax bill. You’ll have 30 days to appeal this decision using a Request for Appeal of Offer in Compromise Document (Form 13711).

The IRS Independent Office of Appeals can help you with appealing a rejected offer. It is also a good idea to seek the help of a tax professional when applying for, or appealing, an OIC decision.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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