Settling Tax Debt Through an IRS Offer in Compromise

For many taxpayers struggling with back taxes, an IRS Offer in Compromise (OIC) can provide a realistic path to a fresh start. The program allows eligible taxpayers to settle their federal tax debt for less than the full amount owed, if they can demonstrate that paying the full balance would cause financial hardship or is otherwise unlikely.

What Is an Offer in Compromise?

An Offer in Compromise is a formal agreement between a taxpayer and the IRS that settles a tax liability for less than the total amount due. It is authorized under 26 U.S.C. § 7122 and is designed to help taxpayers who cannot pay their full debt without severe financial difficulty, or where full collection is unlikely.

The IRS accepts an OIC only when it believes the offered amount reasonably reflects the taxpayer’s ability to pay. In practice, this requires detailed financial analysis and documentation.

When the IRS Will Consider an Offer

The IRS considers an Offer in Compromise under three main grounds:

•       Doubt as to Collectibility – The taxpayer’s income and assets are insufficient to satisfy the full tax debt.

•       Doubt as to Liability – There is a legitimate dispute about whether the amount of tax assessed is correct.

•       Effective Tax Administration – The taxpayer can technically pay the full amount, but doing so would create an economic hardship or be unfair due to exceptional circumstances.

Most accepted offers fall under the first category, doubt as to collectibility.

How the Offer Amount Is Calculated

The IRS determines an acceptable offer amount based on the taxpayer’s reasonable collection potential (RCP), essentially, what the IRS believes it could collect through enforced measures such as wage garnishment, bank levies, or asset seizures.

The RCP is calculated from:

•       Net Realizable Equity in assets (real estate, vehicles, savings, etc.), and

•       Future Income, adjusted for allowable living expenses.

If the taxpayer’s offer equals or exceeds this calculated RCP, and all filing and payment requirements are current, the IRS may accept the offer.

Key Eligibility Requirements

To be considered for an OIC, taxpayers must:

•       Have filed all required tax returns.

•       Have made all required estimated tax payments for the current year.

•       Not be in an open bankruptcy proceeding.

Submit a complete application using Form 656 and Form 433-A(OIC) or Form 433-B(OIC) for businesses.

Pay the required application fee and initial offer payment (unless qualifying for the low-income certification).

Incomplete or inaccurate submissions are one of the most common reasons for rejection.

The Offer in Compromise Process

1.     Initial Consultation & Financial Review
At Reiter Tax Law, PLLC, we begin by analyzing your full financial picture to determine whether you are a strong OIC candidate and what offer amount the IRS is likely to accept.

2.     Preparing and Submitting the Offer
We prepare all forms, supporting documentation, and legal arguments for submission to the IRS Offer in Compromise Unit.

3.     IRS Review and Negotiation
The IRS reviews your offer, verifies financial details, and may request additional documentation. We communicate directly with the IRS to address inquiries and advocate for acceptance.

4.     Decision and Compliance Period
If your offer is accepted, you must stay compliant with all tax filing and payment obligations for five years after acceptance. Failure to do so can void the agreement.

Benefits and Risks of an Offer in Compromise

Benefits:

•       Settle tax debt for less than the full amount owed.

•       Stop active collection efforts (levies, garnishments) while the offer is pending.

•       Regain peace of mind and a clear financial path forward.

Risks:

•       The IRS may reject the offer and resume collections.

•       The process can take 6–12 months or longer.

•       All future refunds until the offer is finalized will be applied to your debt.

An experienced tax attorney can help minimize these risks by presenting a realistic, well-supported offer and maintaining proactive communication with the IRS.

Why Work with Reiter Tax Law, PLLC

The Offer in Compromise program is complex, and approval is far from automatic—only a small percentage of offers are accepted each year. Success depends on detailed financial analysis, strategic presentation, and a deep understanding of IRS evaluation criteria.

At Reiter Tax Law, PLLC, we combine in-depth tax law knowledge with practical experience in IRS negotiations. We:

•       Conduct a thorough review of your finances before submitting an offer.

•       Calculate a realistic settlement amount using IRS methodology.

•       Handle all communications and submissions with the IRS on your behalf.

•       Protect your rights and prevent collection actions during the review process.

Our goal is simple: to help you achieve the best possible resolution with the IRS—efficiently, lawfully, and with lasting results.

Contact Reiter Tax Law, PLLC

If you are facing significant IRS tax debt, an Offer in Compromise may provide the relief you need. Contact Reiter Tax Law, PLLC today for a confidential consultation.

 We help clients across the United States resolve tax controversies, settle tax debts, and move forward with financial confidence.