How to Qualify for IRS Offer in Compromise: Qualifications & Eligibility Requirements
An offer in compromise lets you pay off your tax debt for less than you owe. This is one of the hardest IRS programs to qualify for, but if you can't afford to pay your full tax liability (or if you doubt that you owe the tax), you should look into it. Wondering how to qualify for an offer in compromise? Here is a look at the criteria you need to meet.
Note that there are three main situations where the IRS considers an Offer in Compromise (OIC). The IRS will only agree to reduce your tax bill if you meet the general requirements as well as the specific requirements for the program you apply to.
Offer in Compromise Pre-Qualifiers
To see if you meet the basic criteria to qualify for an IRS offer in compromise, work through these pre-qualifier questions. You must answer yes to all five of these questions if you want to apply for an offer in compromise to settle your tax debt.
- Have you filed all required tax returns?
- Have you received a bill for at least one tax liability included in your offer in compromise application?
- Have you made all of your estimated tax payments for this year?
- If you're an employer, have you made all of your required federal tax deposits for the last three quarters?
- Do you meet the requirements for one of the specific IRS offers in compromise programs?
So, what should you do if you have answered no to these offer in compromise pre-qualifier questions? You should get in a position where you can answer yes to these questions, and then, you should start to work through the rest of the offer requirements. Additionally, you can't be in an open bankruptcy proceeding or you won't qualify to apply.
What to Do If You Don't Meet the Pre-Qualification Criteria for an Offer in Compromise
However, even if you answered no to these questions, you may still want to reach out to a tax professional to talk about an offer in compromise. They can tell you what you need to do to meet the pre-qualification criteria, and then, they can guide you through the rest of the application process. They can also talk with you about your situation to help you determine if you're likely to qualify for the offer in compromise program.
For instance, if you have unfiled tax returns, your tax pro can help you file them, and then, you can start the offer in compromise paperwork. If you're behind on your required estimated tax payments or required federal deposits, get caught up, and then, get ready to apply.
If you haven't received a bill for the tax debt, wait until you receive one. This usually only applies to people who have unfiled returns or who have recently filed a return for the tax period in question. However, if you think your tax bill got lost in the mail, you can get a tax professional to contact the IRS and see how much you owe, or you can set up an IRS online account to check the amount of your tax debt.
Now let's look at the requirements for each of the different types of IRS offer in compromise programs. Each of these programs has a slightly confusing name, but the concepts are relatively clear.
1. How to Qualify for OIC Doubt as to Collectibility
To qualify for this IRS offer in compromise program, you must convince the IRS that it is impossible to collect the full amount of your tax debt. This program is called "doubt as to collectability" because it applies in situations where the IRS doubts that it will be able to collect all of the tax debt in the future. So, the agency agrees to reduce your tax bill and let you pay less than you owe.
How does the IRS decide who qualifies? The IRS looks closely at every applicant's financial situation, and it uses that information to determine whether or not the agency should reduce the tax bill. When you apply, you have to fill out paperwork that asks for very detailed information about your finances. Basically, you tell the IRS about all of your income, every single bill that you have, all of your debts including tax debts from states, and the value of every significant asset that you own.
Then, you offer how much you want to pay. Finally, an IRS agent looks at your application (Form 656-B) and decides whether or not your offer qualifies. For this OIC program, the agency will only accept offers that match your reasonable collection potential.
How the IRS Decides if You Qualify for a Tax Debt Settlement
To determine your collectibility status, the IRS considers the following three questions. If you answer “no” to these questions, your offer has a higher chance of being accepted.
- Would the IRS be able to collect more through forced collections than by accepting your offer? The IRS needs to believe it is getting the best deal possible.
- Is your financial situation going to improve over time? If the IRS believes it could collect the full tax debt in the next few years, it probably won’t accept the offer.
- Would other people think the offer was inappropriate? The IRS won't accept an offer that is absurdly low. The offer needs to be reasonable.
If you answered "yes" to any of these questions, you're unlikely to qualify for this type of offer in compromise. However, that doesn't mean that you wouldn't qualify to settle your IRS tax debt through one of the other programs. Look at the qualification criteria in the other two categories to see if they apply to your situation. But first, let's check out more details about your collection potential.
Reasonable Collection Potential
Your reasonable collection potential (RCP) is the amount that the IRS could collect if it exercised all of its collection rights. Imagine that the IRS garnishes your wages and seizes and sells all of your assets. How much money would the IRS get if it did that? Nothing? $10,000? $100,000? That's your collection potential, and it's the amount of money the IRS wants to see reflected in your offer. It's a different number for every taxpayer.
When you fill out the OIC application, the paperwork guides you through calculations to help you find this number. The IRS calculates your RCP using Form 433-A (OIC) for individuals and 433-B (OIC) for businesses. For both individuals and businesses, calculating the RCP starts with a certain percentage of the equity in your assets, and it adds all of that together. Then, it asks you to list your monthly income and basic living expenses. The difference is your disposable income, and you must include 12 or 24 months of disposable income in your offer.
If you apply to pay off the offer in a lump sum, you include 12 months of disposable income, and if you want to pay off the settlement over a 24-month period, you need to include 24 months of your disposable income in your offer. If you work through these calculations and you can afford to pay the full tax liability, you generally won't qualify for an offer in compromise. Instead, the IRS will most likely require you to make monthly payments on your tax debt.
In some situations, you may be able to pay the bill in full but it wouldn't be fair for the IRS to require you to do so. Or you may need to settle the bill but you need to pay less than your RCP. In these cases, you typically won't be able to qualify for an offer in compromise based on doubt as to collectibility. However, you may qualify under the next program — effective tax administration.
2. How To Qualify for Effective Tax Administration
If the IRS believes that paying your taxes would create financial hardship, you may qualify for an OIC under this category. This also applies in situations where paying the taxes owed would be very unfair. Again, you must meet the basic qualifications outlined above which include being up to date on filing your tax returns, paying quarterly estimated tax payments, and making federal tax deposits if you're an employer.
To apply for this program, you use the same application as you do when you apply based on doubt as to collectability. However, you also must explain why your offer needs to be lower than your collection potential. The explanation varies greatly depending on your circumstances. To boost your chances of getting accepted, you should work with a tax pro who understands what the IRS wants to see.
Example of ETA
For instance, imagine that your RCP is based on the equity in your home. But you live on a fixed income. If you sold your home, you wouldn't be able to afford rent or other basic living expenses in your area. It would be unfair and unreasonable for the IRS to ask you to sell your home, and it would cause you economic hardship. This is just an example of the type of scenario where you might want to apply for this program. This example does not guarantee that the IRS would accept an offer in this situation.
This offer in compromise program applies when there is a legitimate doubt that your tax bill is correct. To qualify for this program, you don't have to prove that you can't afford to pay the full tax liability. Instead, you have to prove that you don't really owe the tax.
Why would you have a tax bill that you don't really owe? This can happen if a tax assessor makes a mistake or if an audit examiner refuses to accept your documents. This can also come into play if you have new documents proving you owe less tax.
Once again, you must be up to date on your tax filing and payment obligations. That is a requirement for all of the offer in compromise programs. Then, you must complete the application which is Form 656-L. Note that this is a different form than the other two programs require.
Other Eligibility Requirements for an Offer in Compromise
To recap, if you meet the pre-qualification requirements and your situation falls into one of the above three categories, you may qualify for an IRS offer in compromise. However, there are a few additional requirements:
- You cannot currently be going through bankruptcy.
- You must have filed all federal tax returns you are required to file.
- If a business wants to apply, it must have made all required federal tax deposits for the current quarter and the last two quarters.
- If a sole proprietor, a self-employed person, or a partner wants to apply, they must have made all of their estimated quarterly tax payments for the current year.
- You must file all of the required paperwork — Form 656-B or 656-L plus any additional required forms such as the 433-A or 433-B.
- You must include all of the supporting documents requested in the application.
- You must pay the OIC application fee ($205 dollars as of 2022) unless you meet the low-income certification guidelines. For the IRS to consider a taxpayer low-income, their income must be at or below 250% of the federal poverty level. This is based on the adjusted gross income reported on your last tax return, or you can use the monthly income noted in your offer in compromise application. There is no application fee for Form 656-L.
- You must pay the required initial payment based on the type of offer you select. You don't have to make this payment if you qualify as low income or if you apply based on doubt as to liability.
The IRS Has Streamlined Offer Requirements
Over a decade ago, the IRS streamlined the OIC program with the Fresh Start Initiative. As a result, in 2012, the IRS changed how it calculates future income. Specifically, Lump Sum offers now only look at one year of future income, and Short-Term Periodic offers now only look at two years of income. Moreover, the IRS will consider state taxes and student loans in calculating monthly living expenses. These changes made the OIC program available to a larger group of taxpayers.
More recently, in 2021, the IRS updated how it handles tax refunds when you apply for an offer in compromise. In the past, you were required to let the IRS keep your tax refund if you wanted to qualify for an offer in compromise. Now, the IRS will keep your refund and apply it to your tax bill while your offer is pending — however, you can get some or all of the refund if you prove that you're experiencing a specific financial hardship. Once the offer is accepted, you get to keep any refunds you earn from a tax return from the year the offer is accepted.
Payment Requirements for an Offer in Compromise
Now, you understand the basic requirements for an offer in compromise. You also know which paperwork you need to fill out. On top of meeting those two requirements, you must meet the payment requirements if you want to qualify for an offer in compromise.
If you apply to pay your offer in a lump sum, you must send 20% of the lump sum offer as an initial payment with your application. If you want to pay the offer in 24 installments over a two-year period, you need to include the first month's payment with your application. You should also send in monthly payments while the IRS reviews your offer.
Failure to meet these payment requirements will cause the IRS to reject or return your offer. However, if you meet the low-income certification guidelines, you don't have to make these initial payments. You only have to pay if the IRS accepts your offer. You also don't have to make initial payments when you apply based on doubt as to liability.
Requirements After the IRS Accepts Your Offer
Once the IRS accepts your offer, you must make the payment by the deadline. For a lump sum offer, the payment is due within five months after the IRS accepts your offer. If you selected periodic payments, the payments must all be on time, and the entire offer amount must be paid off within 24 months or fewer.
Then, after you've paid the offer, your journey is still not over. You have to meet a few more requirements or the IRS can retroactively disqualify your offer and demand full payment of the tax liability. In particular, you must stay current with tax filing and payment obligations for five years after your offer gets accepted.
Do I Qualify for an IRS Offer in Compromise?
Only the IRS can determine if you qualify, but a tax expert can help you determine if you're likely to qualify. They can also help you file the paperwork and negotiate the best offer possible with the IRS. Do you want to see if you might qualify to settle your tax debt for less than you owe? Then, you should reach out to a local tax professional for help today.
Applying for an offer In compromise is time-consuming and confusing, and you should get help from a licensed tax professional. You can use the search box below to look for tax pros in your area and once the search results load, use a filter under solutions and select "offer in compromise" to find tax pros with offer in compromise experience.
Disclaimer: Not legal or tax advice. This article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.