Offer in Compromise: How to Settle Your IRS Tax Debt for Less
An Offer in Compromise (OIC) is a formal IRS program that allows qualifying taxpayers to settle their entire tax liability for less than the full amount owed. It is not a loophole — the IRS only accepts offers that reflect the most it can reasonably expect to collect.
What Is an Offer in Compromise?
An OIC is a legal agreement between a taxpayer and the IRS that settles the taxpayer's tax liability for less than the full amount owed. The IRS accepts OICs when it determines that the offered amount represents the maximum it could realistically collect, considering the taxpayer's income, expenses, and asset equity.
OIC Eligibility Requirements
To qualify for an OIC, you must be current on all tax filings, not be in an active bankruptcy proceeding, and have received a bill (assessment) for the debt you want to settle. The IRS evaluates your Reasonable Collection Potential (RCP), which includes the net realizable value of your assets plus an allowance for future income over a defined period.
Calculating Your Offer Amount
The minimum acceptable offer is your Reasonable Collection Potential: asset equity + (monthly disposable income × 12 or 24 months). If you offer a lump sum within 5 months, the multiplier is 12. If you offer a periodic payment over 6–24 months, the multiplier is 24. Lower assets and lower income produce lower offer amounts.
The OIC Application Process
Complete Form 656 (Offer in Compromise) and Form 433-A (OIC) for individuals or 433-B (OIC) for businesses. Submit the $205 application fee (waived for low-income taxpayers), a 20% initial payment for lump sum offers, and all required financial documentation. The IRS typically takes 6–12 months to review an OIC.
What Happens During OIC Review
The IRS assigns a specialist to evaluate your offer. Collection activity is suspended during the review period. The IRS will request additional documentation and may propose a counter-offer. If accepted, you must remain compliant with all tax obligations for 5 years. If rejected, you can appeal within 30 days.
Common OIC Mistakes
Underestimating asset values, not listing all assets, failing to account for retirement accounts (the IRS values them at 80% of current balance), not being current on filings before applying, and not including the required payment with the application are all common errors that lead to automatic rejection.
Real-World Example
A former restaurant owner in Burbank owed $142,000 in payroll taxes from a business that had closed. His only assets were a 2018 vehicle worth $11,000 and a checking account with $2,300. His monthly disposable income was $380. We calculated his RCP at approximately $15,500 and submitted an OIC for $14,800. The IRS accepted it after 9 months.
Offer in Compromise Help in Burbank and Los Angeles
Calculus Tax, Inc. prepares and negotiates Offers in Compromise for taxpayers throughout Burbank, Los Angeles, and LA County. Call (310) 598-3759 or visit 1050 W. Alameda Ave., Burbank, CA 91506 for a confidential consultation.
Frequently Asked Questions
What percentage of OICs does the IRS accept?
The IRS accepts approximately 30–40% of submitted OICs. Many rejections result from incomplete applications or offers below the calculated RCP. Working with a professional significantly improves acceptance rates.
Does applying for an OIC stop IRS collections?
Yes. Once the IRS receives your OIC application, collection activity is suspended during the review period. However, the statute of limitations on collection is also suspended during this time.
How long does an OIC take?
The IRS aims to process OICs within 6–12 months. Complex cases or cases requiring appeals can take longer.
Can I submit an OIC while on an installment agreement?
Yes. You can submit an OIC even if you are currently on an installment agreement. The installment agreement remains in effect until the OIC is accepted or rejected.
What happens if my OIC is rejected?
You can appeal the rejection within 30 days by filing Form 13711. If the appeal is unsuccessful, you can still propose an installment agreement or pursue other resolution options.
Are there scams involving OICs?
Yes. Beware of companies that guarantee an OIC acceptance or claim to settle any amount for 'pennies on the dollar.' OIC acceptance depends entirely on your specific financial situation.
Offer in Compromise: How to Settle Your IRS Tax Debt for Less Services in Los Angeles
Calculus Tax, Inc. provides offer in compromise: how to settle your irs tax debt for less services to individuals and businesses throughout Los Angeles County. Our licensed CPAs are based in Burbank and serve clients in Burbank and surrounding communities.
Our Burbank office serves clients throughout Los Angeles County including Los Angeles, Long Beach, Santa Monica, Glendale, Burbank, and more.
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