Offer in Compromise

Offer in compromise summary: 

• If you owe money to the IRS, you might get tax debt relief by making an offer in compromise (OIC). 

• To qualify for an offer in compromise, you must prove to the IRS that you have limited ability to pay your tax debt based on your income, expenses, and assets. 

• The IRS website has more information and a pre-qualifier tool that you can use to see if you qualify for an offer in compromise. 

Offer in Compromise Definition and Meaning

An offer in compromise (OIC) is a way for people who qualify based on financial hardship to get out of tax debt with the IRS. If you owe money to the IRS and can't pay, or if paying your full tax debt would cause you financial difficulty, you could ask the IRS to accept less than you owe on your taxes. This is called an “offer in compromise” because you make a compromise with the IRS. It could be considered sort of like debt settlement for your tax bill. 

Using an offer in compromise is not a get out of taxes free card. It’s only for people who can show the IRS that they can’t pay their taxes based on income, and do not have other assets they could use to pay off a tax debt. 

For example, if you owe money on your taxes and have recently lost your job, had a big loss of income, or suffered other major financial setbacks like long-term health issues or the death of a spouse, you might consider asking the IRS about an offer in compromise.

Many people who don’t have clear financial hardships could still get help from other tax debt relief options, like setting up a payment plan with the IRS.  

Offer in Compromise: Key Features  

The IRS does not accept an offer in compromise from everyone or in every situation. Here are a few details about what an offer in compromise is, who can qualify, and how it works to get rid of IRS tax debt.  

• You pay less than the total you owe in taxes: If you qualify, an IRS offer in compromise could mean you pay less than you owe on your IRS tax debt. In this way, it’s similar to debt settlement. 

• Making the best of a bad situation: An offer in compromise could help you get out of tax debt, but it also lets the IRS get what it can from you, too. The IRS will only accept an offer in compromise if it believes the amount you offer is the most money it's likely to collect from you within a reasonable timeframe. 

• You must follow IRS rules and deadlines: The offer in compromise is only available for people who have filed the required federal tax returns and have made estimated tax payments. Business owners with employees must also be up to date on quarterly federal tax deposits.  

• You cannot be going through bankruptcy: If you are in an open bankruptcy proceeding, you can’t use an offer in compromise for IRS tax debt. 

Offer in Compromise: Comprehensive Breakdown 

If you owe tax debt to the IRS and you want to try an offer in compromise, you must apply through the IRS website, via email, or via U.S. mail. You must also pay a non-refundable application fee. 

The IRS website has a prequalification tool to help you crunch the numbers before you apply so you can understand whether you are likely to qualify for an offer in compromise. This tool asks about your income, expenses, bank accounts, vehicles, and other assets. If you make too much money or have other financial assets, even if that means equity in a car or home, the IRS is likely to reject your offer in compromise. This tax debt compromise program is only intended for people who can clearly prove that they have a limited ability to pay their tax debts. 

Don’t assume you can use an offer in compromise to get rid of IRS tax debt. The IRS wants to get paid. And unlike some other creditors or debt collectors, the IRS is unlikely to accept a significantly lower amount to get rid of your tax debt. But if you have lost a job or are experiencing severe financial problems, talk to the IRS. It could be worth trying to make an offer in compromise.