How to Get an Offer in Compromise Approved

To get an Offer in Compromise (OIC) approved, you must meet the IRS’s eligibility criteria and present a compelling case. The IRS generally approves OICs only when it believes that collecting the full tax liability is impractical or causes significant financial hardship.

When the IRS assesses your application, it considers factors such as your ability to pay, your current income, expenses, and asset equity. Submitting accurate financial documentation, selecting the right basis for your offer, and making a reasonable settlement proposal can improve your chances with the IRS. These steps help demonstrate that you are unable to pay the full tax bill.

If you’re considering an Offer in Compromise, allow us to assist you with the process. Whether you’re dealing with collection activities or exploring a compromise offer, we’re here for you. Start by scheduling a free attorney consultation with Victory Tax Lawyers today to discuss your case and explore the options at your disposal.

In this post, we’re going to break down the OIC process, explain the IRS eligibility requirements, and show you how to qualify for an Offer in Compromise.

Are You Eligible for the Offer in Compromise Program?

Not everyone qualifies for an Offer in Compromise. The IRS accepts only about 40% of OIC requests because of the strict approval standards it sets. The IRS primarily evaluates applications based on three primary reasons:

1. Doubt as to Collectability: This applies in cases where the taxpayer’s income and assets are less than the full amount owed in taxes. In other words, there is doubt that the taxpayer could ever pay the tax liability in full. The IRS typically assesses your income, expenses, assets, and overall ability to pay when determining this requirement.
2. Doubt as to Liability: If you dispute the tax amount owed, you can apply for an OIC under Doubt as to Liability. This applies when a taxpayer believes there was an error in tax assessment or calculation. In such cases, the taxpayer must be able to provide strong supporting evidence to challenge the IRS’s claim.
3. Effective Tax Administration: Even if you can technically afford to pay, you might still qualify for an OIC under Effective Tax Administration (ETA). However, this is only if you can prove that paying in full would cause severe financial hardship or would be unfair and inequitable due to exceptional circumstances such as illness. This applies to situations such as severe illness, disability, or other significant financial difficulties.

How to Get an Offer in Compromise Approved in 6 Steps

Getting an OIC approved is difficult but not impossible. Because of how strict the IRS is with approvals, you need to meet all eligibility requirements and provide thorough documentation to support your case. Understanding the process involved and preparing for it is your first step toward securing approval. Below, we’ve compiled a step-by-step process of how to do an Offer in Compromise and get approved. If you want to see how others have successfully navigated this process, check out our OIC success stories.

Step 1: Assess Your Financial Situation

The very first criterion the IRS assesses is your financial eligibility. This is the IRS bases its decision on your ability to pay up your liability amount. So, the IRS wants sufficient evidence that you’re truly incapable of meeting your tax obligation, either by making full payment or arranging a feasible installment agreement, before approving an OIC.

Hence, having a proper understanding of your financial situation and how to present it to the IRS is critical. Gather and assess your financial documents, including your income statements, bank statements, investment account information, and proof of expenses. Make sure these records truly substantiate your claims; otherwise, you’ll be outrightly rejected.

Step 2: Calculate an Offer Amount

When calculating your offer amount, ensure that it is the maximum amount you can comfortably afford without threat to your day-to-day living expenses. Endeavor to provide accurate numbers that truly reflect your financial capacity. It is important because the IRS will scrutinize your financial information and may reject your offer if they suspect any attempt to lowball your offer. 

The IRS determines a taxpayer’s ability to pay by calculating their Reasonable Collection Potential (RCP). In most cases, the IRS will not accept an Offer in Compromise (OIC) unless the amount offered is equal to or greater than the RCP. To estimate your RCP, follow these steps;

1. Determine your monthly income. Calculate your average monthly gross income from all sources.
2. Determine your disposable income. Calculate all living expenses and subtract their total from your gross income to arrive at your disposable income.
3. Value your assets. Make a list of your assets, including real estate, vehicles, investments, and other valuable possessions.
4. Estimate future income potential. Consider any opportunities for future income potential, such as salary increments.
5. Calculate your RCP. Multiply your disposable income by 12 (or 24 if you plan to request a periodic payment plan). If you have assets that can be sold, add that amount to the overall total. The result is that you should be able to pay the IRS at a bare minimum.

Step 3: Hire an Expert Tax Lawyer

Let’s be real. Can you apply for an OIC directly? Yes, you can. What are your chances of securing approval for your offer? Very, very slim. One misstep and the IRS tosses your application aside. Working with a tax professional is often the number one way to guarantee the best outcome in an OIC process. And the reasons for this are clear.

A seasoned tax lawyer, especially one who has worked on OIC cases in the past, knows exactly what the IRS expects at every stage of the process. They can spot potential issues in your application before the IRS does and structure your offer in a way that’s more likely to be accepted. Basically, their training prepares them to handle legal requirements on a wide variety of issues, including the complexities of an OIC.

Their experience with IRS negotiations can greatly impact the IRS’s decision to approve or reject your request. A tax lawyer can determine if you meet the eligibility criteria for an Offer in Compromise, review and ensure the accuracy of financial disclosures and supporting documents.

They can also help calculate a reasonable offer amount that aligns with IRS expectations. If you have a large tax debt, a complex financial situation, or you feel unsure about your application, consider hiring a tax attorney.

Step 4: Submit IRS Form 656

The form you will need to complete will vary slightly depending on your reason for applying for an OIC. When submitting an OIC based on doubt as to collectibility or effective tax administration, a taxpayer must use the most current version of Form 656. You must also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. 

the IRS requires businesses to use Form 433-B (OIC), which is the Collection Information Statement for Businesses. However, if you’re submitting an OIC based on doubt as to liability, Form 656-L is the appropriate form to submit.

To complete Form 656, start by providing your personal information in Section 1, including your name, tax ID number (SSN or ITIN), and address. And if you are filing an offer with your spouse, also fill out your spouse’s information. The next step is to indicate the tax form(s) and year(s) that have outstanding balances. If you’re filing for a business tax debt, skip Section 1 and fill out Section 2, which requires business-related details.

After this, you’ll need to choose the reason for your settlement in Section 3. This states whether you base your offer on doubt as to collectibility or Effective Tax Administration, and it provides a detailed written explanation to support your case. Once you’re done explaining, you can then move on to Section 4. Here, you’ll make an offer by specifying the amount you’re proposing to settle your tax debt and how you intend to pay it. You can choose between a Lump Sum or a Periodic Payment plan.

In Sections 5 & 6, you’ll explain the sources of your funds by detailing how you intend to pay for your offer and where the money will come from. You’ll also need to indicate which tax year(s) or specific tax debt(s) your OIC payments will apply to. Before submitting the form, carefully review the IRS terms outlined in Section 7 and confirm that you can comply with them.

Finally, in Sections 8 and 9, you’ll be required to sign the form. If a tax professional helped you with your application, they must also sign where applicable. Ensure you double-check your information for accuracy before submitting, especially your personal information and offer terms. Also, attach other necessary documents, including Form 433-A or 433-B (if applicable).

Step 5: Pay the Application Fee and Initial Payment

Once you’ve completed your form, you’ll need to pay a $205 Application fee. This could be done through check, money order, cashier’s check, or Electronic Federal Tax Payment System (EFTPS). However, if your current income is low enough, you may qualify for a waiver. Note: even if the IRS accepts your OIC, you must still handle any remaining balance according to the agreed terms.

Payment Options: Lump Sum vs. Periodic Payments

There are two payment options for the offer amount: Lump Sum and Periodic Payments. Here’s a breakdown of each:

• Lump Sum Offer:
  1. This option requires that the offer be paid in 5 or fewer installments within 5 or fewer months after the IRS accepts your offer.
  2. A 20% nonrefundable payment of the total offer amount must be submitted with your Form 656. This payment is nonrefundable—even if the IRS rejects your offer, it will still apply the 20% to your tax liability.
• Periodic Payment Offer:
  1. This option involves paying the offer amount in 6 or more monthly installments within 24 months after the IRS accepts your offer.
  2. The first installment payment must be included with your Form 656, in addition to the application fee (unless you qualify for the low-income waiver). Like the lump sum option, these payments are nonrefundable. You’re required to continue making the installment payments even while the IRS is evaluating your offer.

Once you’ve submitted your application and made your payments, make at least one extra copy of your form, accompanying financial documents, payment receipts, and written statements for your records. Then, mail your OIC application package to the correct IRS facility.

Step 6: Respond Promptly to IRS Requests

The IRS will review your offer and provide a decision within a few weeks. While you wait for feedback from the IRS, ensure your documents are organized and accessible to avoid delays. Most times, they request additional documentation to correctly process your offer. It’s important to respond promptly, particularly if it’s deadline-sensitive.

Common Reasons for OIC Rejections and How to Avoid Them

Below are common reasons why the IRS may reject an OIC application and how to avoid them. 

1. Incomplete or Inaccurate Forms

One of the most common reasons for OIC rejections is submitting forms that are either incomplete or inaccurate. The IRS requires taxpayers to use specific forms based on the reason for their OIC request.

If you mistakenly file the forms that do not apply to your case, the IRS may reject your offer on the grounds of improper documentation. So, double-check your forms before submitting them to ensure you’re using the correct form.  

2. Unrealistic Offer Amounts

Submitting an unrealistic offer is another reason the IRS might reject your OIC. Sometimes, taxpayers try to undervalue their offers in an attempt to pay less, but this often backfires. The IRS carefully analyzes your financial documents to determine your true Reasonable Collection Potential (RCP).

This means they likely already have your financial records and have reviewed them. Stating otherwise doesn’t necessarily serve you any good. You want to be realistic about what you can afford to pay.

Also, present supporting documents that show your financial capacity. For any figure you submit on your offer, you must be able to present a supporting document. The IRS will thoroughly analyze these documents to ensure your offer truly reflects your ability to pay. If you aren’t sure how to correctly determine your offer, you should seek the help of a tax professional.

3. Failure to Stay Compliant with Tax Filing

To be eligible for an OIC, you must comply with all your tax filings. If you haven’t filed your current year’s tax return, the IRS will likely reject your OIC application. More so, the IRS requires that you file and pay your taxes for five years following the acceptance of your Offer. Failure to do so will void the agreement and may have additional financial implications in the form of penalties and interest. If this sounds complicated, consult with a tax expert for guidance on the necessary steps.

4. Insufficient Supporting Documentation

The IRS requires some vital information to evaluate your offer application. If any of these are missing, it can prolong the OIC process and, in some cases, lead to outright rejection of your offer. When applying for an OIC, ensure to include all necessary documents required for the process. 

Tips for Increasing Approval Chances

Although it’s up to the IRS to decide, there are a few IRS Offer in Compromise tips you could apply to increase your odds of getting approval. These include:

1. Working With a Tax Professional or Attorney: One of the most effective ways to increase your chances of an OIC approval is by consulting with a tax attorney experienced in handling OIC cases. Their benefits are numerous. From ensuring your application is accurate and complete to spotting mistakes that could cost you, to negotiating with the IRS if such needs arise.

   The guidance of a tax professional is essential for the Offer in Compromise process. If you’re serious about resolving your tax debt but are unsure how to proceed, our team at Victory Tax Lawyers is there to help.

2. Staying Current with Tax Obligations: Again, the IRS is going to look at various factors to determine your eligibility for an OIC, and one of these is your compliance with tax obligations. They will only consider your offer if you have filed all tax returns and made all required estimated tax payments for the current year.
3. Being Honest and Transparent: Full honesty and transparency in your application are non-negotiable. The IRS will scrutinize your financial disclosures. Any attempt to hide assets or underreport income can lead to immediate rejection of your OIC and, in extreme cases, potential fraud investigations or legal action.
4. Keeping Records of All Correspondence: Accurate documentation can increase your odds significantly. Keep a copy of your form and supporting documents. Also, maintain organized records of all communications with the IRS, as you may need them if there’s a need to appeal.

What to Do if Your OIC Is Rejected

If the IRS rejects your offer, it’s not the end of the road. You can consider appealing the decision or exploring other tax relief options. To appeal the IRS’s decision, you must submit a written protest within 30 days of receiving the rejection notice. This appeal process allows you to present arguments supporting your offer or provide additional documentation.

If your appeal is unsuccessful, you can look into other tax debt relief options, such as an installment agreement, penalty abatement, or hardship status. Before pursuing any of these alternatives, ensure you understand their benefits and potential downsides to enable you to make the best choice. 

If you’re unsure of how to proceed and need a professional to talk to, our team is here to help. We’ll walk you through the various tax relief services available for you to maximize. Let us assess your case and guide you toward the best solution for reducing your tax burden.

Need a Tax Attorney to Maximize Your OIC Approval Chances?

An OIC is one of the most popular tax relief options for taxpayers because it allows them to pay less than they owe. However, the complexity of the OIC process can discourage one from taking that route. If you’re worried about the stress of handling an OIC process or the success odds for your situation, consider talking to a tax professional.

They’ll assess your unique tax situation to ascertain if an OIC is your best option, and if so, will help you navigate the process to ensure the best possible outcomes. Working with the best tax lawyers on your OIC application journey can help you avoid making costly mistakes in the process of filing your offer. This, in turn, will increase your chances of fast approval. Contact us today for a free consultation!

FAQ

Here are some answers to the common questions people are frequently asking about how to get an OIC offer approved.

How Long Does an Offer in Compromise Take?

On average, the Offer in Compromise process takes between 6 and 12 months, but it can be shorter if you choose to work with an experienced tax attorney. When it comes to the timeline of the OIC process, many factors play a part.

These include the complexity of the case, the quality of the taxpayer’s submission, the IRS backlog, and the expertise of the individual handling the process. An experienced tax attorney ensures that your offer is filed correctly, including the necessary documents so the IRS can respond promptly.

How Hard Is It to Get an Offer in Compromise?

Getting an Offer in Compromise approved can be challenging because the IRS only accepts offers when it believes full collection is unlikely. You must provide complete financial information to show that paying the full tax debt isn’t possible. The IRS then reviews your income, basic living expenses, assets, and ability to pay. Approval often hinges on proving economic hardship or a limited collection potential.

How Much Will the IRS Accept for an Offer in Compromise?

The Internal Revenue Service will generally accept an amount equal to what it believes it can reasonably collect from your assets and future income. This is known as your reasonable collection potential (RCP). If paying the full amount would cause economic hardship, the IRS may accept a lower offer. The IRS evaluates each case based on detailed financial disclosures.

Does an Offer in Compromise Affect Credit?

An Offer in Compromise does not directly impact your credit score because the IRS doesn’t report to credit bureaus. However, if the IRS filed a federal tax lien before your offer, it may keep appearing on your credit report until the you resolve the debt. Once the IRS accepts and you pay your offer, you can request a lien withdrawal. Resolving tax debt through an OIC can support financial recovery after economic hardship.

Is an Offer in Compromise a Good Idea?

An Offer in Compromise is a good idea if you cannot realistically pay your full tax debt and want a fresh start. It lets you settle for less, but approval is only granted if the IRS believes you qualify. You’ll need to demonstrate your financial situation and offer an amount based on your ability to pay. This can be especially beneficial if you’re facing ongoing economic hardship.

Do I Need a Tax Attorney for an Offer in Compromise?

You don’t need an attorney to file an Offer in Compromise, but having one can significantly improve your chances of approval. A tax attorney can help you navigate the complex IRS requirements and avoid common mistakes. This is particularly helpful if your case involves detailed financial records or prior rejections. Legal guidance is also useful when economic hardship is part of your claim.

Can You Do an Offer in Compromise on Payroll Taxes?

Yes, businesses can apply for an Offer in Compromise on payroll taxes under specific conditions. The IRS requires proof that the business cannot pay the full amount and has no realistic ability to do so. Approval is more difficult with payroll taxes, especially trust fund portions, but still possible. Strong documentation and evidence of economic hardship can improve your chances.

What Is a “Compromise Offer” and Does It Differ From a Standard OIC?

A compromise offer is essentially another name for an Offer in Compromise, where you propose a reduced payment (less than the entire amount) in settlement of your liability amount. The IRS considers whether your current income, financial condition, and special circumstances justify accepting less than full payment.

Can I Have an Installment Agreement While an Open Bankruptcy Proceeding Is Active?

If you are under an open bankruptcy proceeding, the IRS generally puts collection activities on hold. However, you may not be able to enter into a separate installment agreement or OIC while bankruptcy is unresolved. Always consult with an experienced Offer in Compromise attorney or your bankruptcy attorney to coordinate your debt resolution strategies.

When Is a Compromise Offer in Los Angeles a Good Strategy?

If you’re located in Southern California, an Offer in Compromise Los Angeles or tax Offer in Compromise Los Angeles is simply an OIC case processed under the same IRS rules. However, working with a local offer specialist who understands the nuances of state/regional tax offices can help achieve success. Local experience may help to argue special circumstances or negotiate favorable terms.

Are There Any IRS Offer in Compromise Tips I Should Know Before Applying?

Here are some of the best IRS Offer in Compromise tips:

• Be transparent and provide sufficient evidence for your claims.
• Do not lowball your offer more than what your offer specialist or attorney advises.
• Use credible documentation for fixed income or current income.
• Track all communications to preempt collection activities.
• If possible, engage an Offer in Compromise lawyer who has handled local cases (e.g., in Los Angeles or your jurisdiction).

Can a Tax Relief Company Help With an Offer in Compromise?

Yes, a reputable tax relief company can assist with filing an Offer in Compromise (OIC). These companies often specialize in negotiating with the IRS on behalf of clients who owe back taxes. Before engaging any tax relief company, it is important to verify their credentials and check reviews about them.

Does an Offer in Compromise Really Work?

Yes, an Offer in Compromise can work for taxpayers who genuinely cannot afford to pay their full tax debt. It allows you to settle for less if you meet the IRS’s strict criteria. However, success depends largely on your financial situation and how well you can prove it.

Why Would an Offer in Compromise Be Rejected?

An OIC might be rejected if the IRS believes you can pay the full amount through assets or future income. It can also be denied as a result of errors, missing documents, or noncompliance with current tax filings. Also, when you lowball your offer or fail to include the necessary payments, it could lead to rejection.

What Is the Acceptance Rate for Offer in Compromise?

Generally, experts estimate that the IRS accepts close to 30% or 40% of all Offer in Compromise applications each year. In 2022, the IRS received 36,022 offers and accepted 13,165 of them, giving an acceptance rate of 36.5%. This means that roughly 1 in 3 applicants are successful.

What Is a California Offer in Compromise?

An Offer in Compromise California allows qualified individuals and businesses to settle their California state tax debt for less than the full amount owed. It is offered by the Franchise Tax Board (FTB) for people who are unable to pay their full tax liability.