Offer in Compromise – What You NEED to Know

What Is an Offer in Compromise?

An Offer in Compromise (OIC) is a formal IRS or state agency application by a taxpayer to satisfy their tax liability for less than the full amount owed. It’s designed for taxpayers who do not have the resources to pay the full tax debt or for whom full payment would create undue hardship.

The IRS’s data show that many offers are submitted each year, but only a fraction are accepted (on page 59 of the 2024 IRS Data Book, about 7,199 of 33,591 received offers were approved). 

Be aware the IRS will scrutinize the offer closely. Thus you must present your financial situation in strict  detail and make a convincing legal and factual case.

How Moskowitz LLP Can Help You TODAY

Moskowitz LLP is a Nationwide recognized authority in tax law and accounting. With over forty years of experience, our tax attorneys, CPAs and enrolled agents have assisted countless taxpayers in negotiating their tax liability with the IRS. The IRS has their army, it’s time to fortify your position with your own. With offices in San Francisco, Los Angeles and Salt Lake City and serving clients Nationwide, we at Moskowitz LLP are known for our strategic approach to complex tax matters and our long track record of resolving high-stakes disputes with federal and state tax authorities.

Call us now at 888-829-3325 to put our expertise to work for you.

When Will the IRS Accept an Offer in Compromise?

There are three primary legal grounds on which IRS may accept an OIC:

• Doubt as to liability — You legitimately dispute the amount the IRS claims you owe (e.g. because of errors or misassessment).
• Doubt as to collectibility — You understand that you owe, but your resources (income, assets, expenses) are so limited that collection of the full amount is unlikely.
• Effective Tax Administration (ETA) — Even if you owe and have some ability to pay, requiring full payment would create economic hardship or be inequitable due to exceptional circumstances.

Successfully navigating an Offer in Compromise requires more than just filling out forms. It demands a deep understanding of tax law, financial analysis, and IRS negotiation strategy. This is where the experienced team of tax attorneys and CPAs at Moskowitz LLP makes a meaningful difference. 

Key Eligibility Requirements

Submitting an OIC involves more than just proving hardship. Below is a checklist of the major requirements and constraints.

Additionally, the IRS provides an Offer in Compromise Pre-Qualifier tool that can help you estimate whether your offer is realistic and whether you might qualify under current rules.

How the IRS Evaluates an OIC

When the IRS (or State taxing bodies) reviews an OIC, its goal is to confirm that the offer is the maximum reasonable amount it can expect to collect from you over a specific period. Here’s how it typically proceeds:

Reasonable Collection Potential (RCP)

• The IRS computes your RCP by combining:
  1. The equity in your assets (after allowable liens, encumbrances, etc.), and
  2. The amount it believes it can collect from your future income (i.e. projected disposable income) over a defined timeframe (up to 10 years).
• Your offer must be at least equal to or exceed that RCP. If your offer is lower, the IRS often  rejects the offer.

Income & Expenses Assessment

• The IRS uses standard guidelines (e.g. living expense allowances for housing, food, transportation), though exceptions are available, to assess whether your claimed expenses are reasonable.
• Unusually high discretionary expenses, or lack of documentation, may lead the IRS to adjust your figures upward (i.e. reduce your “allowable” expenses) and reject your offer as too low.

Asset Valuation

• The IRS will examine your reported equity in real property, vehicles, investments, retirement accounts, cash reserves, etc. Depreciation, liens, outstanding debts against those assets will be considered.
• Understating asset values or failing to disclose an asset is a frequent red flag.

Additional Factors

• The IRS may consider any prior patterns of noncompliance, whether you cooperate with information requests, and your overall cooperation and credibility.
• In “ETA” (Effective Tax Administration) cases, they examine any special or extraordinary circumstances (medical, age, hardship, etc.) that may justify a lower offer despite some ability to pay.

Because the IRS has significant internal expertise and experience, a taxpayer’s presentation must anticipate the IRS’s likely adjustments or objections.

Step-by-Step OIC Process

Below is a more detailed walkthrough of how the OIC process typically unfolds:

1. Preliminary evaluation / consultation
2. Review your tax liabilities, prior returns, penalties, interest.
3. Gather financial documentation (bank statements, pay stubs, asset valuations, living expenses, etc.).
4. Estimate your reasonable collection potential and the likely range for an acceptable offer.
5. Complete required IRS forms
6. Form 656 (Offer in Compromise) — the core application.
7. Form 433-A (OIC) (for individuals) or Form 433-B (OIC) (for businesses) — detailed financial disclosure.
8. Any additional local or state forms if applying to state tax agencies.
9. Assemble supporting documentation
10. Bank statements, pay stubs, investment statements, real estate appraisals, vehicle valuations, proof of living expenses, medical bills, etc.
11. Detailed schedule describing debts and obligations.
12. Submit required initial payment
13. For a lump sum offer (5 or fewer payments): include 20% of your proposed offer with your application.
14. For short- or long-term periodic offer: include first installment.
15. The initial payment you submit is generally nonrefundable; if the offer isn’t accepted, it’s applied to your tax debt. Also include the current $205 application fee (nonrefundable) unless the low-income certification applies.
16. IRS reviews your offer
17. The IRS will correspond, request clarifications, additional documents, or audit your submissions.
18. You or your representative may negotiate back and forth with the IRS.
19. The process can take several months, sometimes 6–12 months or longer, depending on complexity and backlog.
20. IRS decision: accept or reject
21. If accepted: you must comply fully with the payment terms, remain current on future tax obligations, and follow all other conditions in the acceptance letter (e.g. disallowance of refunds).
22. If rejected: you can appeal within 30 days by formal written appeal letter or via Form 13711 (Request for Appeal of Offer in Compromise).
23. After acceptance
24. The IRS applies your payments to outstanding tax, penalties, and interest.
25. Any liens may be released (depending on conditions).
26. For offers accepted on or after Nov. 1, 2021, the IRS no longer automatically offsets your refund for the year of acceptance. Earlier years included in the OIC may still have standard offset rules; ask counsel how this applies to your facts.
27. You must file and pay on time for five years after acceptance (or through the payment term, if longer), or the OIC can default.

Common Reasons for Rejection

• Offer below RCP
• Weak or inconsistent documentation
• Undisclosed assets or income
• Failure to stay current on filings/payments
• Errors or omissions in Forms 433-A/B or 656
• IRS skepticism over claimed expenses or “bet you’ll pay someday” attitude
• Missing deadlines or ignoring IRS queries

Appeal & Re-submission

• If rejected, you have 30 days to appeal.
• You may negotiate a modified offer, which is more than what you proposed but less than the full amount owed.
• In some cases, a new offer may be resubmitted later (though some IRS guidance puts limitations on multiple submissions).

Alternatives & Complementary Tools

• Installment Agreement (Payment Plan) — spread payments over time
• Currently Not Collectible (CNC) status — temporarily halt collection if hardship is severe
• Penalty abatement/reductions — reduce or eliminate penalties before negotiating
• Innocent spouse relief, hardship exemptions, bankruptcy — in some cases

This is Our Area of Expertise – Contact Us

Handling an OIC on your own is risky. The IRS and state tax agencies are quick to spot inconsistencies, undervaluations, or omissions, often rejecting offers without negotiation.

Working with experienced tax attorneys and CPAs who understand IRS methodology can significantly improve your chances of success. At Moskowitz LLP, our team begins with a thorough case evaluation, analyzing your full tax picture including liabilities, penalties, past returns, assets, income, and possible defenses. Our attorneys strategically structure your proposal based on collectibility, liability, or Effective Tax Administration, while ensuring every financial document is complete, accurate, and persuasive.

With a proven track record of resolving complex tax matters and successfully winning offer in compromise negotiations, the attorneys and financial professionals at Moskowitz LLP understand how IRS agents and auditors think, what documentation they expect, what they might accept & how to position it, and how to avoid the pitfalls that can derail a case. Call us today at 888-829-3325 or schedule a confidential consultation through our secure online contact form to put our experienced advocates on your side.