Offer in Compromise: What you need to know
We may receive commissions from some links to products on this page. Promotions are subject to availability and retailer terms.
If you owe money to the IRS, an Offer in Compromise could help you reduce your total tax burden.
Getty Images/iStockphoto
Tax season might be behind us, but for millions of Americans, the stress of unpaid tax bills still lingers. But whether it's due to an issue with unexpected income, a missed payment to the Internal Revenue Service (IRS) or penalties that have grown out of control, owing money for back taxes can put you in a tough spot. After all, the IRS has powerful tools it can use to try and collect what you owe, so the concern over things like wage garnishments and bank levies, as well as mounting interest, can make you wonder if there's any way out of the financial hole.
But while the IRS has a reputation for being relentless when it comes to collecting unpaid taxes, the tax agency understands that not everyone has the means to pay off their full tax bill. That's where the Offer in Compromise program comes in. This lesser-known tax relief option allows qualified taxpayers to settle their tax debt for significantly less than the full amount owed. It won't make all your tax problems disappear, of course, but it can provide genuine relief and a fresh start.
The catch? The IRS doesn't hand out these deals to just anyone. They have strict criteria and a thorough evaluation process, so understanding how this program works before applying could be the difference between years of financial stress and finally dealing with your unpaid tax debt.
Find out how to start tackling your unpaid tax debt today.
What is an Offer in Compromise?
An Offer in Compromise is essentially a settlement agreement between you and the IRS. Instead of paying your full tax debt, you negotiate with the IRS to pay a reduced amount — one that the IRS agrees is the most it can collect from you. Think of it as the tax equivalent of settling a credit card debt, except the IRS has much stricter standards and more thorough investigation processes.
The program exists because the IRS recognizes that sometimes collecting the full amount owed isn't realistic or in anyone's best interest. So, if you're genuinely unable to pay your full tax debt without creating financial hardship, and your offer reflects your true ability to pay, the IRS may accept it to close out your case and move on.
Learn what tax relief options are available to you now.
Who qualifies for an Offer in Compromise?
Not everyone qualifies for an Offer in Compromise, and meeting the basic criteria doesn't guarantee approval. The IRS evaluates your eligibility based on your:
Ability to pay
Income
Expenses
Asset equity
If your financial records show you could reasonably make monthly payments through an installment plan or pay in full with asset liquidation, your Offer in Compromise will likely be denied. You also must have filed all required tax returns and made any necessary estimated payments for the current year. And, if you're in an open bankruptcy proceeding, you're automatically disqualified.
How much should you offer to the IRS?
This is one of the trickiest parts of the process. The IRS has a specific formula for calculating your reasonable collection potential, and your offer needs to equal or exceed this amount. They'll examine your monthly disposable income and multiply it by either 12 or 24 months, depending on how you plan to pay. Then they'll add the equity in your assets.
For example, if you have $200 in monthly disposable income and choose to pay your offer over 24 months, that's $4,800. If you have $10,000 in asset equity, your minimum offer would be $14,800, even if you owe $50,000 in taxes.
The key to having your offer accepted is being realistic and honest about your finances. Lowball offers that don't reflect your true ability to pay will be rejected and you'll lose your application fee in the process.
How do you apply for an Offer in Compromise?
Applying for an Offer in Compromise requires substantial paperwork and documentation. You'll need to complete Form 656 (the actual offer) and Form 433-A or 433-B (detailed financial statements). The IRS will also want to see bank statements, pay stubs, asset valuations and proof of monthly expenses.
There's also a non-refundable application fee and an initial payment that needs to be made with your offer. If you're making a lump sum offer, you must include 20% of the offer amount. For periodic payment offers, you must include the first month's payment and continue making payments while your offer is under review.
The review process typically takes six to 24 months. During this time, the IRS may request additional documentation or propose changes to your offer. They might also send a revenue officer to verify your financial information in person.
What mistakes could lead to rejection?
Most offers get rejected because applicants either don't qualify financially or make errors in their applications. Some people try to hide assets or underreport income, which leads to automatic rejection and potential fraud penalties.
Others fail to account for all allowable expenses or don't provide sufficient documentation to support their financial claims. The IRS is thorough in its review, so incomplete or inconsistent information will derail your application. Another common mistake is applying too early. If you're still able to pay through an IRS-approved installment agreement or other means, the IRS will reject your offer and suggest those alternatives instead.
The bottom line
An Offer in Compromise can provide life-changing relief for taxpayers who genuinely cannot pay their full tax debt, but it's not a program that will work for (or be available to) everyone. The IRS accepts less than half of all applications, and the process requires patience, honesty and detailed financial documentation.
Before pursuing this option, consider whether you might qualify for other programs, like installment agreements or currently not collectible status, which might be easier to obtain and serve your needs just as well. If you do decide to apply, consider working with a qualified tax debt professional who can help navigate the complex requirements and improve your chances of success.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
37 minutes ago
- Yahoo
Top Steelers NFL draft prospect LaNorris Sellers passes up huge NIL deal
The top priority of the Pittsburgh Steelers scouting staff this college football season is to sort out what is already shaping up to be an elite quarterback class for the 2026 NFL draft. Thanks to the ridiculous nature of NIL money, the NFL now has another aspect of players to track and that's their loyalty to their team as opposed to making fast money in college football. One of the top quarterback prospects in the upcoming draft is LaNorris Sellers out of South Carolina. News came out about Sellers this week and thanks to some intervention by his dad, Sellers chose to pass up $8 million over two years in NIL money to stay. According to Sellers' dad, there were multiple schools bidding for his services, but he showed maturity and loyalty by staying, which is a huge green flag for an NFL team. Advertisement From a football standpoint, Sellers is poised for a huge breakout season. His athleticism and mobility are already off the charts and as the season progressed, we saw his pocket presence and processing speed improve drastically down the stretch. Sellers and Clemson's Cade Klubnik are my top two options for the Steelers and this move by Sellers just helps his case. This article originally appeared on Steelers Wire: Steelers NFL draft prospect LaNorris Sellers passes up huge NIL deal
Yahoo
38 minutes ago
- Yahoo
Franklin County home listings asked for more money in May - see the current median price here
The median home in Franklin County listed for $364,900 in May, up 1.2% from the previous month's $360,720, an analysis of data from shows. Compared to May 2024, the median home list price increased 13.2% from $324,723. The statistics in this article only pertain to houses listed for sale in Franklin County, not houses that were sold. Information on your local housing market, along with other useful community data, is available at Franklin County's median home was 1,968 square feet, listed at $183 per square foot. The price per square foot of homes for sale is up 2.2% from May 2024. Listings in Franklin County moved briskly, at a median 36 days listed compared to the May national median of 51 days on the market. In the previous month, homes had a median of 38 days on the market. Around 196 homes were newly listed on the market in May, a 7.7% increase from 182 new listings in May 2024. The median home prices issued by may exclude many, or even most, of a market's homes. The price and volume represent only single-family homes, condominiums or townhomes. They include existing homes, but exclude most new construction as well as pending and contingent sales. In Pennsylvania, median home prices were $325,000, a slight increase from April. The median Pennsylvania home listed for sale had 1,708 square feet, with a price of $196 per square foot. Throughout the United States, the median home price was $440,000, a slight increase from the month prior. The median American home for sale was listed at 1,840 square feet, with a price of $234 per square foot. The median home list price used in this report represents the midway point of all the houses or units listed over the given period of time. Experts say the median offers a more accurate view of what's happening in a market than the average list price, which would mean taking the sum of all listing prices then dividing by the number of homes sold. The average can be skewed by one particularly low or high price. The USA TODAY Network is publishing localized versions of this story on its news sites across the country, generated with data from Please leave any feedback or corrections for this story here. This story was written by Ozge Terzioglu. Our News Automation and AI team would like to hear from you. Take this survey and share your thoughts with us. This article originally appeared on Waynesboro Record Herald: Franklin County home listings asked for more money in May - see the current median price here
Yahoo
39 minutes ago
- Yahoo
Trust in AI is growing in finance, especially behind the scenes
This story was originally published on CX Dive. To receive daily news and insights, subscribe to our free daily CX Dive newsletter. A majority of customers trust the use of AI in behind-the-scenes tasks at financial institutions, according to a TD Bank survey conducted by Ipsos released Tuesday. Among the 2,500 U.S. consumers polled, 70% are comfortable with technology being used for fraud detection, and 64% are comfortable with it being used in credit score calculations. Consumers also believe that AI should offer more ease. Two-thirds believe it can expand access to financial tools, and nearly half expect benefits from AI like 24/7 banking access. As consumers have become more familiar with AI tools, their trust in the technology has slowly grown. Nearly 7 in 10 consumers say they are at least somewhat familiar with AI — a finding seen in other surveys, too. Notably, half of consumers trust that AI will provide reliable, competent information, trusting AI just as much as news stations. But consumers are more comfortable with AI in specific use cases and the more complex or sensitive the matter, the more they want to speak to a human or know that a human will be reviewing AI before making any decisions. Consumers are less inclined to want to only use AI when it comes to tasks that one might typically use a financial adviser for, according Ted Paris, EVP, TD Bank AMCB, and head of analytics, intelligence & AI. When it comes to personal finance, 3 in 5 of consumers were comfortable with the idea of using AI financial tools for budgeting and automating savings goals. But less than half were comfortable with more complex tasks like retirement planning and investing. Banks enjoy high consumer trust — more than 4 in 5 consumers trust banks for accurate information. As they deploy AI, it's important that they maintain that, Paris said. 'What's probably the key piece, is creating and enabling and allowing customers and colleagues to feel that they can trust the outcomes of what this capability then generates,' Paris said. One of the ways TD Bank is approaching this is by always having a human in the loop, meaning that the output of an AI solution will be passed through some internal expert before going to a client. 'We need to make sure that first, anything that we're doing is directed toward a particular need,' Paris said. 'We need to make sure that this is going to meet all hurdles that we would set, legal, regulatory, for security and privacy.' Sign in to access your portfolio
