If you have outstanding tax debt that you cannot afford to pay, you may wonder what, if any, options you have so as to prevent your debt from going to collections. Though the Internal Revenue Service is largely unforgiving, it does offer a few programs designed to assist taxpayers with liabilities. One such program is the offer in compromise.

According to the IRS, an OIC is an arrangement between you and the IRS that allows you to reconcile your tax debts for less than what you owe. The IRS has strict qualification requirements for an OIC and will only grant one in select few circumstances.

Reasons for an OIC

Rarely is an inability to afford your tax debt reason enough to qualify for an OIC. In fact, the IRS will only consider accepting your proposal if you can show that one of the following is true:

  • There is question regarding what you owe, meaning that there is an honest dispute as to the amount you owe or your debt’s existence
  • There is doubt as to collectability, meaning that the total value of your assets and income amount to less than what you owe
  • Doubt does not exist as to the amount you owe or its collectability, but the IRS recognizes that collecting the payment in full would create undue economic hardship

If your situation meets one of the above three criteria, the IRS may genuinely consider approving your request for an OIC, but there is no guarantee that it will.

Reasonable collection potential

Even if your situation qualifies for an OIC, the IRS may reject your application if you fail to offer an amount that is equal or greater to the reasonable collection potential. The RCP is the potential total value of your assets, such as your home, vehicles, artworks, antiques, bank accounts and the like. The RCP also includes future anticipated income, less the cost of basic living expenses. If your offer is less than the calculated RCP, the IRS will likely reject your request.

Payment options

If the IRS accepts your proposal, you will have two repayment options. The first is a lump sum cash offer. Despite its name, you can pay the proposed amount over the course of five months and five or less repayments. Your first payment is nonrefundable and must equal at least 20% of the offer amount.

The second option is a periodic payment offer. If you choose this route, you have up to 24 months to pay the proposed amount over a course of six or more monthly installments. As with the lump sum option, your first payment is nonrefundable and must amount to at least 20% of the offer amount.