Can You Settle IRS Tax Debt With an Offer in Compromise?

If you owe the IRS and have seen advertisements promising to “settle your tax debt for pennies on the dollar,” you may be wondering whether an Offer in Compromise is actually real.

The answer is yes! The IRS does have a program that allows some taxpayers to settle IRS debt for less than the full amount owed.

However, qualifying for an Offer in Compromise is not as simple as many people believe. The IRS carefully reviews a taxpayer’s financial situation before approving any settlement, and many applications are denied because the taxpayer either does not qualify or submits incomplete financial information.

Understanding how the program works can help you determine whether an Offer in Compromise may be a realistic option for your situation.

What Is an Offer in Compromise?

An Offer in Compromise (OIC) is a program offered by the IRS that allows qualifying taxpayers to settle IRS debt for less than the total balance owed. It is often referred to as the IRS settlement program.

The IRS created this program for taxpayers who cannot realistically afford to fully pay their tax debt through other collection options. This allows for tax debt forgiveness through one major program, the Offer in Compromise program.

When reviewing an Offer in Compromise application, the IRS looks at several financial factors, including:

• Your income;

• Your monthly expenses;

• Your bank accounts;

• Your assets;

• Your future earning ability.

The IRS ultimately wants to determine one thing: will they ever get their money?

Who Qualifies for an Offer in Compromise?

Not everyone who owes back taxes qualifies for an Offer in Compromise. In many cases, the IRS will reject an application if it believes the taxpayer can pay the balance through:

• A monthly payment plan;

• Liquidating assets, and/or;

• Future income.

Generally, taxpayers who may qualify are individuals who have been experiencing financial hardship for a few years and/or individuals who do not have many assets. Each case is different, which is why a detailed financial review is so important.

Why Many Offer in Compromise Applications Get Rejected

One of the biggest misconceptions about the program is that anyone with tax debt can apply and automatically receive a settlement.

Unfortunately, that is not how the IRS process works.

Many applications are rejected because:

• The taxpayer is not compliant with filing requirements;

• Financial disclosures are incomplete;

• The IRS believes the taxpayer can afford monthly payments;

• Assets were not properly disclosed;

• Some expenses are categorized as luxury expenses.

Before the IRS will even review an Offer in Compromise, taxpayers generally must:

• File all required tax returns;

• Stay current with estimated tax payments, and/or;

• Stay current with payroll tax deposits if self-employed.

Remaining compliant throughout the process is critical.

How the IRS Calculates Settlement Eligibility

The IRS uses a formula called “Reasonable Collection Potential” when evaluating an Offer in Compromise. Basically, this is when the IRS is trying to forecast your future income to determine if you will be able to pay the debt.

For example, even if a taxpayer owes a large amount of tax debt, the IRS may still reject the offer if it believes the taxpayer has sufficient future income to pay through an installment agreement.

This is why the amount you owe does not automatically determine whether you qualify. Someone owing $25,000 may qualify, while another taxpayer owing $250,000 may not.

Is an Offer in Compromise Worth It?

For taxpayers who truly qualify, an Offer in Compromise can provide significant financial relief and help resolve years of IRS collection stress.

However, the process can also be complicated and LONG.

The IRS requires detailed financial documentation and carefully reviews:

• Bank statements;

• Pay stubs;

• Asset information;

• Monthly expenses;

• Business financials, and/or;

• Retirement accounts.

Submitting inaccurate or incomplete information can delay the process or result in a denial.

It is also important to understand that the IRS may keep future tax refunds and will require taxpayers to remain fully compliant for five years after the offer is accepted.

Other IRS Tax Relief Options

An Offer in Compromise is not the only option available for resolving IRS debt. Depending on your financial situation, other solutions may include:

• Installment agreements;

• Currently Not Collectible status, or;

• Partial pay installment agreements.

In some situations, these alternatives may provide faster or more realistic relief than pursuing an Offer in Compromise. For true help with IRS back taxes, having a tax professional review your financial circumstances is your best method.

Final Thoughts

An Offer in Compromise is one of the IRS’s most well-known tax debt relief programs for taxpayers struggling with back taxes, but it is not automatic and it is not available to everyone. The IRS carefully evaluates each taxpayer’s financial condition before deciding whether to accept a settlement.

If you are struggling with IRS debt, the most important step is understanding your options and determining which resolution strategy best fits your financial situation.

A thorough financial review can help identify whether an Offer in Compromise, or another IRS relief option, may be the right path toward resolving your tax debt and moving forward with peace of mind.

Speak With a Tax Resolution Professional

If you are struggling with IRS tax debt, an Offer in Compromise may or may not be the right solution for your situation. The key is understanding your options before submitting an application to the IRS.

A professional financial review can help determine whether you may qualify for:

• An Offer in Compromise

• IRS payment plans

• Currently Not Collectible status

• Other IRS tax relief programs

Tax Attorney | IRS & State Tax Resolution | Tax Controversy Advocate | Legal & Financial Strategist

Theresa Speights is a Tax Attorney dedicated to helping individuals and business owners resolve complex IRS and state tax issues. Her work focuses on tax controversy matters, including audits, collections, penalties, liens, levies, and business tax disputes.

Known for breaking down complicated tax topics into practical guidance, Theresa is passionate about educating taxpayers and tax professionals while helping clients protect their financial future. Through her articles, videos, and educational content, she provides insights designed to help readers better understand their rights, responsibilities, and options when dealing with tax matters.