Pros & Cons: IRS Offer in Compromise Pre-Qualifier

If you’re struggling to pay your delinquent taxes, an Offer in Compromise may be a great option for you. However, qualifying for this payment option can be challenging—you’ll need to meet specific requirements, and even then, the IRS may still deny your offer. That’s why the IRS has an Offer in Compromise Pre-Qualifier tool that can help taxpayers determine whether or not they should apply. 

Learn more about this tool, its benefits and limitations, and what other options are available to you.

An Overview of the Offer in Compromise Payment Option

The Offer in Compromise program is available to certain taxpayers who are unable to pay their taxes in full. Essentially, you submit an application to the IRS that includes detailed financial information and what you are offering to pay. If they accept your offer, you make your payment—either in full or over the course of multiple payments—and the rest of your tax debt is cleared. 

This program is fairly stringent in its requirements; there’s a misconception that you can simply make any offer, and the IRS will accept it rather than risk taking nothing. However, the IRS will only accept an offer that genuinely reflects what the taxpayer can pay. An offer below that number will likely be denied.

Because of the work involved in applying for an Offer in Compromise, some people have completely avoided this option. The Pre-Qualifier tool gives you a general idea as to whether or not your application would be accepted.

What is the Pre-Qualifier Tool?

This is a tool created by the IRS to show taxpayers whether or not they're likely to get approved for an offer in compromise. When you use the Pre-Qualifier, you answer some basic qualification questions and then provide an overview of your financial situation. Based on the information it provides, you can then decide whether or not you want to proceed with a full application.

The Pre-Qualifier tool can save certain taxpayers time. In some cases, an applicant has such significant financial limitations that their offer would likely be accepted. In others, an applicant is so financially secure that the IRS would not accept less than what they owe. But most people fall somewhere in the middle, and the Pre-Qualifier helps clarify these situations.

Note that the Pre-Qualifier is not required for those who want to apply for an Offer in Compromise. It’s simply there as an option.

How to Use the Pre-Qualifier Tool

Using the Pre-Qualifier tool is simple. On the first page, you must confirm whether or not you are currently filing for bankruptcy, if you have filed all federal tax returns, if you have made required estimated tax payments, and if you have submitted required tax deposits (only applicable for people with employees). If you are in bankruptcy proceedings, have not filed your tax returns, have not made required estimated tax payments, or have not made required federal tax deposits, you automatically do not qualify for an Offer in Compromise. The tool stops you there, tells you why you do not qualify, and terminates the questionnaire.

The next step involves providing basic information about your geographic area, the number of people in your household, the amount of your tax debt, and which tax year you want to make an offer for.

The next step requires you to list your general assets and equity held in assets. Be ready to estimate your:

• Bank balances
• Market value of your home and the loan balance on your home
• Equity in your family’s vehicles
• Equity in your retirement accounts
• Other real property equity
• Other assets you own
• Stocks, bonds, and investments

You must also estimate your income and expenses. The Pre-Qualifier includes spaces for your wages, interest and dividends, rental income, child support, business income, and other sources of income. Expenses are broken down into rent and mortgage, vehicle payments, operating costs, health insurance, other insurance costs, and tax payments.

The final screen of the Offer in Compromise Pre-Qualifier tool sums up the information you’ve provided, listing your tax debt, available equity, monthly income, allowable monthly expenses, and remaining income. Based on the remaining income and your tax debt, the tool indicates whether or not you may be eligible for an Offer in Compromise.

Benefits of the Pre-Qualifier

Perhaps the main benefit of the Pre-Qualifier is that it can save certain people a lot of time. If you’re just starting to weigh your options, you may not have thought of the different assets you have. As you go through the Pre-Qualifier tool, you may realize that the amount of equity you have in your home, vehicles, and other assets will bar you from a successful Offer in Compromise. Finding that out at this stage is a lot easier than finding it out after going through the entire application process.

If you are likely to qualify for an Offer in Compromise, using this tool can help you start getting your numbers and records in order. When you go through the application process, you’ll need to provide detailed financial information and records. If you have already done that work while using the Pre-Qualifier, you may save some time on your application.

Downsides of the Pre-Qualifier

There are significant limitations to the Pre-Qualifier, and you cannot rely entirely on this tool for your final decision. To start, this only takes a very basic look at your finances. When the IRS is assessing Offer in Compromise applications, they look at far more information than what is included in the Pre-Qualifier. There’s also quite a bit more nuance in the actual application process.

The tool also only looks at your current financial situation. Those who are in dire financial straits may still be able to keep up with their payments and assets for some time before everything catches up with them. For example, the tool may look at your assets and think that you have more than enough money to pay your tax debt. But it can’t see that you are on the verge of losing your home, having your rent jump $500 per month, or getting laid off. If you know that tough financial times are just around the corner, the Offer in Compromise Pre-Qualifier may not be an accurate tool for you.

The Pre-Qualifier is also only applicable to those who want to apply for a settlement based on inability to pay. It cannot be used by those who want an offer in compromise based on doubt as to liability or for those seeking fair tax administration.

What to Do After Using the Pre-Qualifier Tool

Once you’ve gone through the Pre-Qualifier, looking at the tool’s calculations of your expendable income and assets can be a good starting place for you. Depending on the outcome of your application, there are several things you can do next.

If The Pre-Qualifier Says Your Offer May Be Accepted

If the Pre-Qualifier says that you may qualify for an Offer in Compromise and you’re certain this is how you would like to proceed, you can start the application process. The tool provides a link to the Offer in Compromise application packet so you can begin the paperwork right away.

If the Pre-Qualifier Indicates a Denial is Likely

Just because the tool says you likely don’t qualify doesn’t mean you have to give up. You can still proceed with an application if you wish. Before doing so, you may want to look at the parts of your Pre-Qualifier form that led it to say you don’t qualify. Will those aspects of your application change, or is there other information that may be relevant? If you’re not sure, you can talk to a tax pro to weigh your next steps.

How to Apply for an Offer in Compromise

The application packet includes all of the IRS forms you will need to submit your completed offer. Everyone must submit Form 656. Form 433-A is required for individuals and Form 433-B is required for businesses requesting an Offer in Compromise. Once you have completed your forms, you can submit them with a $205 application fee. If you are considered low-income by the IRS’s standards, this fee may be waived.

In addition to the application fee, be prepared to pay part of your offer. If you are requesting periodic payments, send in the first monthly payment. If you are willing to pay in full, send 20% of your offer. The IRS will process your paperwork, and if your offer is too low, they will send you their calculation and give you a chance to update your offer. Should you choose not to change your offer, then they will refuse it. The amount you included with your application will be applied to your tax debt.

Other Options to Consider

If the Pre-Qualifier has convinced you that an Offer in Compromise is not a viable option for you, there are still options available to you beyond just paying your tax debt in full. You may consider:

• Installment Agreement: An installment agreement is a good option for those who have more assets or income than the IRS allows for an Offer in Compromise. By stretching your tax debt payments out over a period of up to 72 months, you can give yourself some breathing room in your budget and stay in good standing with the IRS.
• Currently Not Collectible: If you’re not applying for an Offer in Compromise because the $205 filing fee and 20% downpayment are too much for you, you may be considered not collectible. This means that the IRS will temporarily stop trying to collect payments from you. While interest still accrues during this time, the IRS will not attempt to collect from you until your financial situation has improved.

Keep in mind, however, that the pre-qualifier tool doesn't take everything into account. It is a fairly basic program. A tax pro can take a deeper look at your situation to see if you might qualify now or in the future. In some cases, weird quirks can allow you to qualify or get a lower offer. 

For example, the IRS's financial standards allow anyone who applies for an offer in compromise to have a set amount of money earmarked for a car payment every month. If you don't have a car payment, the pre-qualifier tool will simply include those extra funds in your disposal income, and based on that, the tool may assume that you can afford monthly payments and don't qualify.

In contrast, a tax pro may advise you to use this to your advantage. They may advise you to take out a car loan with a payment that's below the IRS's allotted amount. Then, once your disposable income has been decreased on paper, you may qualify for an offer or a more attractive payment plan.

Not Sure What to Do Next? When It’s Time to Request Assistance

We understand that trying to settle your tax debt can be overwhelming and stressful, especially when it seems like rejection waits around every corner. Consulting a tax professional who can look at your financial situation, run the numbers for you, and help you decide your next step could save you considerable time and effort. Browse our tax pro listings to find one near you. On TaxCure, you can search for Tax Pros that are experienced with offer in compromise filings near you. Simply start a search on our site, select your applicable problems and agencies and once you get to the results page, click on “IRS Solution Experience” in the filters and select “Offer in Compromise”. 

At TaxCure, we have the largest marketplace of tax resolution professionals. You can read the offer in compromise success stories our professionals have achieved using offer-in-compromise for clients. All these pros are available for hire.

Frequently Asked Questions

How accurate is the Offer in Compromise Pre-Qualifier tool?

The Pre-Qualifier is fairly accurate for some applicants, but it does leave out quite a few unusual scenarios and cases. Whatever the tool tells you, it’s best to take it as a general recommendation rather than view it as the IRS’s official ruling.

What type of debt is eligible for settlement with an Offer in Compromise?

An Offer in Compromise can be used to settle your federal tax debt, penalties, and accrued interest. The IRS may settle individual income tax and certain business taxes, but it generally will not settle trust fund taxes.

Can I still apply if the Pre-Qualifier says I’m not eligible?

Yes, you can still apply—and in some cases, the Pre-Qualifier tool wrongfully says that you’re unlikely to qualify. The IRS considers many additional factors with Offer in Compromise applications, and you may have unique circumstances that warrant an accepted offer. However, it is good to consider why the Pre-Qualifier said you’re not eligible and think about talking to a tax professional before going through the entire application process.

What are common reasons for an OIC rejection and how does the tool help avoid them?

Some rejections are because people overestimate how much money they need to live on each month or they underestimate the equity they hold in their home and vehicles. Since the IRS looks both at expendable income and equity in your assets, the OIC tool can help those who fit into these categories save their time and money.

How long should I wait to submit my application after pre-qualifying?

There’s no need to wait at all after you fill out the Pre-Qualifier. You can move forward with your application immediately if you wish, or you can wait and decide if it’s the right option. The tool doesn’t take your personal information, so it won’t check your Pre-Qualifier information against your actual application.

What can I do if I don’t qualify for an Offer in Compromise?

You can apply for an installment agreement, find out if you may be Currently Not Collectible, or meet with a tax professional about other options.

Does this tool affect my credit or my standing with the IRS?

No. The tool does not even gather your name, address, or Social Security number, so there is nothing linking you to your Pre-Qualifier form.

What if I disagree with the tool’s assessment?

You don’t have to take further action. You can move forward with your application if you choose.