The IRS Explains How Offer in Compromise Works

Before you read "exactly" what the IRS tells you about the OIC or Offer in Compromise program, understand a few things the IRS doesn't say.

1. If you read and follow the instructions you can prepare and file a successful OIC.  This doesn't mean that the IRS won't reject your first or even second submission.  Just follow the instructions and stay committed.
2. When completing your expenses and income form (Form 656, Form 656-A, Form 656-B) ALWAYS remember that private school and your cable bill are NOT qualified expenses.  This also applies to additional luxury items that you may be financially responsible for. 
3. If you have the finances, it's best to consult with an Enrolled Agent to help you file your OIC, especially if you have assets that you'd like to protect.
4. Know that the IRS is governed by a book called "The Tax Codes."  In most cases, their response to you is not personal, but legal.  Yes, an IRS agent can make decisions which can make your life easier, and that is why you always want, to be honest, and professional when speaking with an IRS agent.  It is a felony to lie to a federal agent.

Now let's read what the IRS has to say on the matter:

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

• In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans – Installment Agreements.

• A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.

• The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.

• Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at www.irs.gov/forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.