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Tax FAQ:

Offer in Compromise

Get answers about Offer in Compromise, including eligibility, reasonable collection potential, financial statements, and IRS requirements.

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Offer in Compromise

Ability to pay refers to whether a taxpayer has sufficient financial resources to pay the full IRS tax liability within the applicable collection period.

The IRS uses financial information to determine whether the taxpayer can fully pay the tax debt and whether an Offer in Compromise may be appropriate.

The IRS may consider income, living expenses, assets, liabilities, equity, and other relevant financial information.

Potentially. Limited income can affect the IRS’s calculation of a taxpayer’s reasonable collection potential.

Yes. The value and available equity in assets can be important factors in determining the amount the IRS may expect the taxpayer to offer.

Yes. The IRS generally considers allowable living expenses when evaluating a taxpayer’s ability to pay.

Yes. Changes in income, expenses, assets, or other financial circumstances can affect the IRS’s evaluation.

Potentially. Having income does not automatically disqualify a taxpayer. The key issue is whether the taxpayer’s financial circumstances support the proposed offer.

The IRS generally considers reasonable collection potential when determining whether the proposed offer represents an amount it can reasonably expect to collect.

Yes. Accurate and complete financial information is essential when the IRS evaluates an Offer in Compromise.

Doubt as to Collectibility is an Offer in Compromise category used when there is genuine uncertainty about whether the IRS can collect the full amount of a taxpayer’s tax liability.

Taxpayers whose assets and income indicate that they cannot reasonably pay the full tax debt within the applicable collection period may potentially qualify.

Yes. The IRS generally requires detailed financial information to evaluate the taxpayer’s reasonable collection potential.

Reasonable collection potential generally represents the amount the IRS believes it can reasonably collect from a taxpayer’s available assets and future income.

Potentially. The amount owed alone does not determine eligibility. The IRS considers the taxpayer’s overall financial circumstances.

Potentially. Income and future earning capacity are also considered when determining reasonable collection potential.

Yes. An accepted Offer in Compromise based on Doubt as to Collectibility can resolve eligible tax liabilities for less than the full amount owed.

Yes. The IRS can reject an offer if it determines that the proposed amount does not adequately reflect reasonable collection potential or if other requirements are not satisfied.

In many circumstances, taxpayers have the right to appeal an OIC rejection through the IRS administrative appeals process.

Professional assistance can be useful when calculating reasonable collection potential, documenting finances, and determining an appropriate offer amount.

Doubt as to Liability is an Offer in Compromise category used when there is a legitimate dispute about whether the taxpayer actually owes all or part of the assessed tax liability.

A taxpayer who has a legitimate dispute regarding the existence or amount of the tax liability may potentially submit an offer under this category.

No. The basis for this type of offer is a genuine dispute about the correctness of the tax liability rather than inability to pay.

Issues can include incorrect IRS assessments, disputed income, incorrect deductions, computational errors, or other factual or legal issues affecting the tax liability.

Generally, no. Inability to pay is more directly associated with Doubt as to Collectibility or another appropriate collection alternative.

Yes. The taxpayer generally needs documentation or other evidence supporting the position that the assessed liability may be incorrect.

Potentially. If the IRS accepts the offer, the disputed liability can be resolved according to the terms of the approved agreement.

Depending on the circumstances, taxpayers may have administrative appeal rights after an OIC rejection.

No. Other administrative procedures may be available depending on how the liability was assessed and the taxpayer’s procedural rights.

Professional assistance may be beneficial when the dispute involves complicated tax law, an examination adjustment, or substantial supporting documentation.

Effective Tax Administration is an Offer in Compromise category that may apply when the taxpayer does not have doubt about the liability or sufficient doubt about collectibility, but requiring full payment would create exceptional circumstances.

A taxpayer may potentially qualify when collecting the full amount would result in economic hardship or would be unfair and inequitable because of exceptional circumstances.

Economic hardship can be one basis, but the applicable rules also recognize situations involving exceptional circumstances where full collection would be inequitable.

Yes. Doubt as to Collectibility is based primarily on uncertainty about the IRS’s ability to collect the full liability, while Effective Tax Administration addresses qualifying exceptional circumstances.

Potentially. The purpose of this category is to address certain situations where full payment may be possible but would result in circumstances meeting the applicable hardship or equity standards.

Yes. A taxpayer generally needs to provide documentation supporting the financial hardship or exceptional circumstances underlying the offer.

An accepted offer can resolve eligible tax liabilities according to the approved terms, potentially for less than the full amount owed.

The IRS considers the taxpayer’s financial circumstances, the proposed offer amount, and whether the circumstances satisfy the applicable requirements.

Yes. The IRS can reject an offer if the taxpayer does not establish the required hardship or exceptional circumstances.

Generally, an eligible taxpayer may have administrative appeal rights regarding an OIC rejection.

An Offer in Compromise is an agreement that may allow an eligible taxpayer to settle certain federal tax liabilities for less than the full amount owed.

Eligibility depends on factors including the taxpayer’s financial circumstances, tax liability, compliance history, and ability to pay.

The proposed amount generally needs to reflect the taxpayer’s reasonable collection potential and comply with the requirements applicable to the selected OIC category.

Certain collection activity may be affected while a qualifying offer is pending, but taxpayers should not assume that all collection activity automatically stops in every circumstance.

Generally, taxpayers need to be current with required filing obligations before an OIC can be considered.

Certain employment tax liabilities can have special rules and restrictions. Eligibility depends on the specific liability and the taxpayer’s circumstances.

Processing times vary depending on the complexity of the case, the completeness of the submission, and IRS processing conditions.

The taxpayer must satisfy the payment terms and comply with applicable filing and payment requirements during the required compliance period.

The taxpayer may generally have an opportunity to appeal the rejection or consider another tax resolution option.

Yes. An accepted offer can be subject to termination if the taxpayer fails to meet the agreement’s requirements, including certain future filing and payment obligations.

Reasonable collection potential is an estimate of the amount the IRS can reasonably expect to collect from a taxpayer’s assets and future income.

It is a key factor the IRS uses when evaluating certain Offers in Compromise, particularly offers based on Doubt as to Collectibility.

Yes. The IRS can consider available equity in assets when calculating reasonable collection potential.

Yes. Future income can be considered when determining how much the IRS could reasonably collect.

Yes. Allowable living expenses can affect the amount of disposable income considered available for tax debt repayment.

 

Potentially. The IRS may consider the value and available equity of retirement accounts depending on the circumstances and applicable rules.

Yes. Home equity can potentially be included in the IRS’s financial analysis, subject to applicable rules.

Yes. Changes in asset values, income, expenses, or other financial circumstances can affect the calculation.

Potentially. Taxpayers can provide documentation and explanations supporting a different valuation or financial calculation.

Yes. Understanding reasonable collection potential can help determine whether an Offer in Compromise is realistic and how the proposed offer amount should be developed.

OIC financial statements are documents used to provide the IRS with detailed information about a taxpayer’s income, expenses, assets, and liabilities when applying for an Offer in Compromise.

The IRS uses financial information to evaluate the taxpayer’s ability to pay and determine reasonable collection potential.

Information can include employment income, business income, living expenses, bank accounts, investments, real estate, vehicles, retirement accounts, debts, and other financial information.

Yes. Self-employed taxpayers may need to provide detailed business financial information in addition to their personal financial information.

Yes. Inaccurate, incomplete, or unsupported financial information can delay processing or result in rejection.

The IRS may verify financial information using documents, account records, databases, and other available sources.

The IRS may request updated information when necessary to evaluate the taxpayer’s financial circumstances.

Supporting documents can include bank statements, pay records, profit-and-loss statements, mortgage information, loan records, investment statements, and other financial documentation.

Yes. A tax professional can help organize financial information and identify documentation needed to support the OIC submission.

Yes. Taxpayers should retain copies of all submitted financial statements and supporting documentation.

The required forms depend on the type of OIC and the taxpayer’s circumstances. Form 656 is generally used to submit the offer, while financial disclosure forms may also be required.

Form 656 is the primary Offer in Compromise form used to identify the taxpayer, tax liabilities, proposed offer amount, and payment terms.

Form 433-A is generally used to provide detailed financial information for an individual taxpayer applying for an Offer in Compromise.

Form 433-B is generally used to provide financial information about a business when required as part of an Offer in Compromise evaluation.

No. Required forms and supporting documentation can vary based on the taxpayer’s circumstances and the type of offer being submitted.

Electronic submission options depend on the specific form and current IRS procedures.

An incomplete submission can be returned, delayed, or rejected depending on the missing information and applicable IRS procedures.

Yes. Financial and other supporting documentation may be necessary to establish eligibility and substantiate the information provided.

If an error is discovered, the taxpayer may need to provide corrected information or additional documentation according to IRS instructions.

Professional review can be helpful when the tax debt is substantial, financial circumstances are complex, or the taxpayer is uncertain about eligibility and required documentation.

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