An offer in compromise allows you to settle your tax debt for less than the balance due, but very few taxpayers qualify. Even those who do qualify may find that another form of tax relief is better for them. That’s why it’s critical to understand the downsides and the other options before you apply.
Ready to discuss your situation with a tax resolution professional from McLaud Law P.C.? Call us at 585-397-7785 now for a free consultation.
Key Takeaways:
- An IRS offer in compromise allows qualifying applicants to settle tax debt for less, but it’s not the right option for everyone.
- This process can take months to complete, and you must meet strict requirements to qualify.
- An accepted offer in compromise requires full compliance with future tax filings and payments—otherwise, you risk having the agreement revoked.
- Many taxpayers benefit from other relief options, including installment agreements, currently not collectible status, or partial payment installment agreements.
Who Actually Qualifies – And Why Rejection Rates Are High
The offer in compromise program has several basic eligibility requirements, but those are just the starting point. Meeting these requirements just means that the IRS will process and review your application if you apply – not that you qualify.
These requirements include:
- Filing all required tax returns – typically the last six years.
- Being up to date on estimated payments if you are self-employed.
- Being current on payroll deposits for business taxpayers with employees.
- Providing detailed financial disclosures – Form 433-A (OIC) for individuals and Form 433-B (OIC) for businesses.
- Paying the down payment on your offer.
If you don’t meet these requirements, the IRS will return your application without reviewing it. You can then fix the issue and reapply. In contrast, if you meet the basic eligibility requirements, the IRS will review your application and decide whether or not you qualify based on the information in your collection information statements.
Unfortunately, at this point, fewer than half of applicants get approved. That’s why you should work with a tax resolution firm that understands the process inside and out and can advise you on whether or not it’s the best option. If you’ve applied on your own and been rejected, a tax attorney may be able to help you appeal, depending on the situation.
Why an Offer in Compromise May Not be the Best Option
There are several reasons that an offer in compromise may not be the most strategic option for you. Ultimately, it boils down to the situation, but you should consider:
- The Collection Statute Expiration Date on your tax debt: The IRS typically has 10 years from the date of assessment to collect what you owe. If the CSED is near, waiting it out could eliminate your debt entirely. But applying for an offer could extend the CSED, giving the IRS more time to collect, or force you to pay a portion of a debt that was about to expire.
- Post-settlement compliance requirements: For five years after the offer is accepted, you must file all returns on time and pay all taxes in full. Any failure to comply may result in your OIC being canceled, which means you’ll owe the full amount (minus any payments made). If you’re not prepared for future compliance, this may be a risky option for you.
- Unintentional consequences of the financial disclosure: An offer-in-compromise application requires an extremely in-depth disclosure of your assets, income, and expenses. The IRS may expect you to liquidate some of the assets on your application, causing them to reject your offer or expect a larger payment. Navigating this correctly requires professional help.
Major Drawbacks Most People Miss
When people learn about the offer in compromise program, they often focus on the possibility of reducing their tax debt without considering the downsides of the process. In the right situation, this program can be a lifesaver, but you should consider the drawbacks.
These downsides include:
- Application fees and upfront payments: It costs $205 to apply for an offer in compromise. If you make a lump sum offer, you must pay the IRS a 20% initial payment of the total amount. If you make a periodic payment offer, you must submit the first month’s payment and make all ongoing monthly payments while the IRS considers your offer.
- Nonrefundable payments: If your offer is rejected, you do not get any of that money back. The money you put down and any money put towards monthly payments is applied to your tax debt, but depending on how much you owe, that may not make a significant dent.
- Loss of tax refunds: The IRS intercepts your tax refunds while your offer in compromise application is being processed. That amount goes toward your tax debt but does not decrease your offer amount.
- Long processing times: The wait time for a decision can be incredibly long – often more than six months, and in some cases, more than a year. If your application is ultimately rejected, that’s six or more months that you could have spent paying down your tax debt.
- High rejection rates: The IRS publishes data on acceptance rates each year, and it usually hovers between 30% and 40%. The majority of applicants are rejected and lose their application fee and offer payments.
- Public record of offers: If your offer is accepted, it becomes public record. Anyone willing to do a tiny bit of digging can find out the liability amount and the reason for acceptance of the offer. This can be a huge downside for business owners, political figures, and others who need to maintain a public image.
Cases Where Applying for an Offer Can Backfire
Some financial situations can make an offer in compromise application risky.
If the Collection Statute is Close to Expiring
As discussed earlier, applying for an offer on tax debt that is close to its collection expiration date can be risky. If the IRS accepts your offer, you can end up paying tax debt that may have expired without payment. If the agency rejects your offer, you’ll be on their radar, and they’ll get extra time to collect, as the collection statute is paused while the application is under review.
That said, you shouldn’t necessarily wait for tax debt to expire – that can also be risky. Talk with a tax attorney to learn the right approach in your situation.
If You Are Facing Financial Hardship
If you can’t afford to pay anything, you may be better off applying for currently not collectible (CNC) status, instead of an offer in compromise. CNC stops all IRS collection actions, and you don’t have to pay anything while your account is marked uncollectible. That can save a lot of money compared to paying an offer.
However, CNC status requires you to start making payments if your finances improve. If you expect a change in income or assets, you may be better off securing an offer while you can – but again, a tax attorney can help you make the right call.
When Retirement Funds or Home Equity Are Involved
The IRS considers the full range of your assets when determining how much they can accept from you. This includes assets that are difficult to access, such as retirement funds and home equity. To protect these assets, you may be better off setting up monthly payments instead of requesting an offer.
Who Should Consider an Offer in Compromise
While this program does have downsides, offers in compromise can be a useful tool in many circumstances. This option may make sense for those who:
- Have little or no income
- Own few assets
- Have no realistic way to pay the tax debt in full
- Are facing permanent financial hardship due to personal circumstances
- Can afford to make a lump sum payment or up to 24 installments
This may include taxpayers who have been unemployed for a long time, are permanently disabled, struggle with chronic illness, or have limited earning potential due to age or health.
In these scenarios, the IRS is more likely to recognize that they are not going to be able to collect the full amount owed.
Smart Alternatives to Offer in Compromise For Most People
Some taxpayers may find that other tax relief options help them address their tax debt more effectively.
Installment Agreements
An installment agreement lets you pay your tax debt in smaller monthly payments until you reach your Collection Statute Expiration Date. You can avoid bank levies, wage garnishments, and more aggressive collection efforts. If your financial circumstances change, you may also be able to ask the IRS for a modification.
Currently Not Collectible Status
If you cannot afford to make any payments toward your tax debt, the IRS may deem you currently not collectible. This means a temporary stop to collection activity and no required payments. Interest and penalties continue to accrue, but the collection window keeps running. This option can provide significant relief during periods of intense financial stress.
Letting the Collection Statute Expire
If you’re close to your CSED, letting the debt expire may be a viable option. This depends on actions the IRS takes – in some cases, the IRS pursues liens or levies more aggressively when the CSED is approaching. This option requires careful legal analysis and planning.
Bankruptcy
Bankruptcy does not eliminate all tax debt; generally, only older, income tax debts can be discharged in bankruptcy. But for qualifying taxpayers, this form of relief can bring significant financial relief.
Strategic Warning – The “Feel Good” Trap
People may jump directly into the offer in compromise application process because reading about it gives them emotional relief. This is especially true with how some tax relief firms market this option. They claim that you can settle your debt for pennies on the dollar and that the IRS “doesn’t want you to know” about this “Fresh Start” option.
However, an offer in compromise isn’t some secret form of relief that the IRS is hiding from you – they make information about it easy to find and publicly available. Also, although strategy is critical, there’s no secret way to qualify – the settlement offer that is calculated for you depends on your assets and income.
Whenever possible, avoid working with companies that try to strongarm you into signing up for their services by promising that you’ll qualify for an offer in compromise. If they haven’t looked at your financial situation in depth, they can’t make these types of promises. Also, be wary of anyone who says you need to “decide now” – reputable tax attorneys give you a chance to think about your options.
Why You Need an Experienced Tax Attorney
When you discuss your tax scenario with an experienced tax attorney, you get personalized insight into your tax problem. At McLaud Law P.C., our experienced tax resolution professionals look at the full picture to customize the best strategy possible for you.
Instead of just recommending the fastest or most obvious form of relief, we’ll look at your CSEDs, evaluate your income and assets, compare your financial obligations to IRS-allowable expenses, and review the full range of resolution options. From there, we can build a strategy that minimizes your long-term risk and provides you with relief.
Start your path to tax debt freedom by scheduling your free consultation with McLaud Law P.C. today. Contact us online or call us at 585-397-7785.
Frequently Asked Questions
Can I really settle my tax debt for a fraction of what I owe?
Maybe—but it depends on your financial details. The majority of taxpayers do not qualify for an offer in compromise, but if you do qualify, it can be a great way to save money.
Can I lose money applying for an offer in compromise?
Yes. You have to pay a $205 application fee and put money down towards your offer. If your offer is rejected, you do not get that money back. The down payment will be applied to your tax debt, but you’ll just lose the application fee.
What’s the best form of tax relief – currently not collectible, offer in compromise, or installment agreement?
There is no “one best form of tax relief” for all taxpayers. It depends on your circumstances and finances, which is why we recommend talking to a tax attorney.
Will an offer in compromise stop collections?
An offer in compromise can temporarily stop collection actions while the offer is pending. However, the IRS collection statute is suspended and then extended once the IRS makes a decision on the application, so the IRS will have more time to collect from you if your offer is not accepted.
This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.
Sources:
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/pub/irs-sbse/f7249-sample.pdf
https://www.irs.gov/statistics/collections-activities-penalties-and-appeals
https://www.taxpayeradvocate.irs.gov/notices/currently-not-collectible/
