How to Negotiate an Offer in Compromise With the IRS

If you owe a significant amount in back taxes and can’t repay the full amount, making the Internal Revenue Service (IRS) an Offer in Compromise might be your best path forward.

We’ll show you how, with an Offer in Compromise, you can settle your tax debt with less than you owe (sometimes much less).

What is an Offer in Compromise?

An Offer in Compromise is a way to settle a tax debt you owe the IRS. You make a payment offer—often a fraction of what you owe—and if the IRS accepts, it considers your tax bill paid in full. Keep reading because we’ll explain how to negotiate your tax debt down.

How it works

Say you owe $55,000 in overdue taxes, but you can’t afford to repay it. Instead, you make the IRS an Offer in Compromise of $5,000. It accepts, and you no longer owe back taxes to the government.

Who qualifies for an Offer in Compromise?

To qualify, a taxpayer must be unable to repay their full tax liability or prove that repaying the total tax bill would cause financial hardship.

How can I get an Offer in Compromise?

To make an Offer in Compromise, you’ll need to submit a few forms, provide documentation of your income, and pay your application fee. You also may need to make an initial payment depending on which payment plan you choose.

The application process

The first step to making an Offer in Compromise is to make sure you’re current on your tax return filings. If you’re not, you’ll need to file any missing returns before moving forward with your application.

Once your missing returns are on file, you’ll need to:

• Fill out IRS Forms. IRS Form 656 and IRS Form 433-A (for individuals, see image below) or Form 433-B (for businesses)
• Pay the $205 application fee. If you meet the IRS’ Low-income Certification Guidelines, this fee is waived.
• Include your initial offer payment. This payment must be at least 20% of your offer. If the IRS accepts your offer, you can choose to pay the remaining balance all at once or via monthly payments.

When evaluating an offer, the IRS will consider your future income, debts, assets, and overall ability to repay the tax debt. The full directions for submitting an Offer in Compromise are in the IRS booklet.

Note: You can’t apply if you’re in bankruptcy proceedings.

How much should you offer?

You want to get by with as low a payment as possible, but to ensure yours isn’t one the IRS rejects, be sure to calculate how much to offer as payment.

You’ll need your financial details—your income, your bank account balances, the value of any investments or assets, and any debts to your name. Keep an estimate of your monthly costs (including housing, utilities, and insurance) too.

You’ll enter this all into Form 656, which the IRS will then use to calculate how much you can afford to pay to settle your debts. 

The formula is:

Total projected monthly disposable income for a year + Total asset value

So if you have $300 per month in disposable income ($3,600 per year: $300 x 12 = $3,600) and $10,000 in savings, your offer should be $13,600 ($3,600 + $10,000)

Filing alone vs. getting professional help

Anyone can file for an Offer in Compromise, but getting help from a tax relief company can ease the process—particularly if you owe a large amount of money.

If you go this route, the tax relief company will do an initial investigation into your tax issues to see whether it can help. If so you’ll pay a flat fee or a portion of your total tax debt.

To determine whether using a tax professional is the right move, you’ll want to consider the size of your tax debt and the costs of the service. The Tax Hardship Center charges an average of $3,750 on tax relief cases, so if only owe $10,000, the costs may not be worth it. , The potential savings can be a much higher fraction of larger debts.

Decide whether an Offer in Compromise is right for you

An Offer in Compromise is a solid option for taxpayers with severe tax debt. It’s also smart for those facing potential legal problems with the IRS. The agency would much rather settle than deal with a lawsuit.

All in all, an Offer in Compromise may be wise if:

• You’re on a fixed income or meet the low-income guidelines.
• You’re facing bankruptcy.
• You have a significant amount of tax debt you can’t settle through other programs.
• You don’t have much in assets to pay off the debt.

Offers in Compromise aren’t always accepted, so make sure you’ve looked at other tax resolution services as well. The IRS offers other programs to help those behind on their tax debts, including payment plans and extensions. You also may be able to file for Currently Not Collectible status, which puts your tax debts on hold due to financial hardship.

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Tip

If you’re considering making an Offer in Compromise, use the IRS’s prequalifying tool. Because offers require a $205 application fee, it’s important to know you qualify before moving forward with your application. In 2022, the IRS accepted about 36% of Offers in Compromise.

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What if your OIC application is rejected?

Rejections are common with OIC applications. If it denies your Offer in Compromise, you can appeal the decision using IRS Form 13711. You’ll need to do this within 30 days of getting your rejection notice.

On the appeal form, note what you disagree with in the IRS rejection notice and your reason for the disagreement. You can attach supporting documents to prove your point further.

Another option is to submit a new offer. You can do this with a letter detailing your new offer amount (if it’s within 30 days of rejection) or filling out a new Form 656 (if it’s after 30 days or post-appeal).

Offers in Compromise can be the right solution if you’re facing a large tax debt. They’re not always successful, so make sure you consider alternatives, and call in a pro if you need further help.