Offer in Compromise Requirements: Do You Qualify for Tax Debt Reduction?

If you have a large tax bill that you can’t afford to pay, you may be able to settle with the IRS using an Offer in Compromise. However, Offer in Compromise requirements are strict, and more than half of these requests are rejected, according to IRS data.

Knowing the OIC requirements beforehand, and working with an experienced tax attorney, will give you the best chance of settling your tax debt.

To successfully apply for an Offer an Compromise, you must meet one of the following conditions:

• Doubt as to Collectability: Your assets and income won’t cover your full tax debt within the IRS collection window.
• Doubt as to Liability: You have a reasonable dispute about the amount of tax or penalties the IRS claims you owe. (Not sure what counts as “reasonable”? Ask one of our tax attorneys!)
• Effective Tax Administration/Economic Hardship: You owe what the IRS says you do, and you could pay the debt off in full within the collection window, but doing so would create economic hardship. Alternatively, you have outstanding circumstances that would make it unfair for the IRS to collect the full amount.

You must also meet all the following Offer in Compromise requirements if you want your application to be considered.

• You must file all required tax returns.
• You must have made all your estimated tax payments or deposits for the current year (if applicable).
• You must not be in the middle of certain proceedings, including: a bankruptcy filing, tax audit, Innocent Spouse Relief case, US Tax Court case, or a tax case that has already been referred to the Department of Justice.
• You must be able to pay the amount you’re offering.

Let’s dive into each of these requirements for a successful Offer in Compromise.

1. File all required tax returns

The IRS really looks down on non-filing. So it makes sense that if you’re asking the IRS to reconsider your tax debt, you should first file all required tax returns. The typical look-back period is 6 years. You can file these returns late; it just needs to be done before you request an OIC.

If you have not filed your past 6 years of tax returns, reach out to the trusted tax attorneys and accountants at Gordon Law Group and let us handle it for you. This is the first step toward meeting the Offer in Compromise requirements!

2. Make all tax payments or deposits for the current year

If you’re required to make estimated tax payments, you’ll need to be squared up on those payments for the year to date. Similarly, if you are a business owner with at least one employee, then you must have made all quarterly tax deposits for the year so far.

The IRS wants to make sure you won’t incur more tax debt for the current year when they’re considering your Offer in Compromise.

3. You can’t be in the middle of certain proceedings

You won’t qualify for an OIC if you have an open bankruptcy proceeding with the US Bankruptcy Courts;  if you’re currently being audited by the IRS; if you have an open Innocent Spouse Relief claim; or if you have pending litigation in US Tax Court. Each of these proceedings could change the amount you owe to the IRS, so it wouldn’t make sense to negotiate your debt while the process is still ongoing.

You also can’t meet the OIC requirements if the IRS has already referred you to the Department of Justice for a tax crime. However, if that’s the case, you should absolutely call our tax attorneys at 312-471-0126 to learn how we can help.

4. You must be able to pay the amount you’re offering (on time)

This might seem obvious, but to qualify for an Offer in Compromise, you need to be able to pay what you’re offering and pay it on time. An OIC payment could be a lump sum (paid in full within 5 months), or it could be paid monthly over the course of 2 years. Failing to make timely payments for an accepted Offer in Compromise would default the agreement and reinstate your full balance.

It is possible to settle your IRS debt for pennies on the dollar, and in fact, our firm has secured many of these settlements for our clients—watch the story below of how we brought one client’s debt down from $50,000 to less than $5,000!

But you’re unlikely to erase 100% your tax debt with an OIC. Learn how to calculate your Offer in Compromise amount here.