An Offer in Compromise is a formal agreement between a taxpayer and the IRS that allows you to settle your tax debt for less than the full amount owed. While it can be a powerful solution, it’s not a shortcut, and it’s not available to everyone. The IRS carefully reviews financial details before approving an offer.
In this guide, we’ll break down exactly how an Offer in Compromise works, who qualifies, common mistakes to avoid, and how to determine if it’s the right strategy for your situation.
IRS Tax Debt: What Is an Offer in Compromise?
An Offer in Compromise is a negotiated settlement with the IRS. If approved, the IRS agrees to accept a reduced amount as full payment of your tax liability.
For example:
- You owe $80,000 in taxes, penalties, and interest.
- After reviewing your financial situation, the IRS determines you can realistically pay only $22,000.
- If accepted, you pay $22,000, and the remaining balance is forgiven.
However, the IRS does not approve offers simply because someone cannot afford to pay in full today. They evaluate your ability to pay over time.
Why Does the IRS Accept Less Than the Full Amount?
The IRS’s goal is to collect as much as reasonably possible, not necessarily the entire balance at any cost.
If the IRS determines that:
- You do not have sufficient income,
- You have limited assets,
- And collection efforts are unlikely to recover the full debt,
They may accept a reduced settlement instead of pursuing long-term collection.
The Three Types of Offer in Compromise
There are three main grounds under which an Offer in Compromise may be submitted:
Doubt as to Collectibility
This is the most common type.
It applies when:
- You cannot afford to pay your full tax debt.
- Your income and assets are insufficient to cover the balance.
The IRS calculates what’s called your “Reasonable Collection Potential” (RCP). If your offer equals or exceeds that amount, approval becomes possible.
Doubt as to Liability
This applies when:
- You believe the tax was assessed incorrectly.
- You dispute the amount owed.
In these cases, you must provide evidence showing the IRS calculation is incorrect.
Effective Tax Administration
You technically have the ability to pay the debt in full, but doing so would create severe financial hardship or would be unfair due to exceptional circumstances.
This is less common and requires compelling justification.
