IRS Offer in Compromise (OIC) FAQ
If you owe the IRS and cannot pay in full, an Offer in Compromise (OIC) may allow you to settle your debt for less. The program is highly technical, and the IRS accepts only a fraction of offers submitted each year. Below are answers to the most common questions clients ask about the OIC process.
What is an Offer in Compromise (OIC)?
An OIC lets taxpayers settle their IRS debt for less than the full amount owed if they meet strict eligibility and financial criteria.
Who is eligible for an OIC?
You must show that you are unable to pay the full liability through income or assets. Eligibility requires that you:
- File all required tax returns
- Are current with estimated tax payments (if self-employed)
- Are current with federal tax deposits (if a business with employees)
- Not be in an open bankruptcy proceeding
What does the IRS require to submit an OIC?
The IRS requires:
- Form 656 (Offer in Compromise)
- Form 433-A(OIC) or 433-B(OIC) with full financial disclosures
- Supporting documentation (bank statements, pay stubs, mortgage/lease info, bills, asset valuations)
- Application fee and initial payment
How long does the OIC process take?
Typically 6 to 12 months, though complex cases may take longer. The IRS may request additional documentation during review.
What are the general terms of an OIC?
- Lump-sum offer: 20% down, balance in 5 or fewer payments within 5 months of acceptance
- Periodic payment offer: Initial payment with application, then monthly payments during review and after acceptance
What does “current compliance” mean for OIC eligibility?
All required returns must be filed, and estimated taxes or withholdings must be current. Noncompliance is a common reason offers are returned without review.
What documents will the IRS request during review?
Bank records, income statements, property and vehicle valuations, proof of expenses, and any other records needed to verify your financial situation.
Does the IRS consider bankruptcy when evaluating an OIC?
Yes. The IRS considers whether bankruptcy would result in a better outcome. If bankruptcy would eliminate more debt, the IRS may be more inclined to accept an offer.
How does the IRS value a home in an OIC?
The IRS uses quick-sale value (about 80% of fair market value) minus any mortgages or liens. This adjusted equity is part of the settlement calculation.
What happens if my OIC is rejected?
You can appeal within 30 days to IRS Appeals. Many rejected offers are resolved at this stage.
What happens if my OIC is accepted?
You must remain in full compliance for 5 years (filing and paying on time). If not, the IRS can revoke the agreement and reinstate the original debt.
Does an OIC cover penalties and interest?
Yes. If accepted, the settlement resolves tax, penalties, and interest for the periods included.
Can businesses submit an OIC?
Yes, but compliance with payroll deposits and filings is critical. Business OICs are scrutinized closely.
Is an OIC right for everyone?
No. Many taxpayers may be better served with installment agreements or “currently not collectible” status. Success depends on careful preparation and proper presentation of your financial situation.
Next Steps
An Offer in Compromise can be a powerful solution, but it’s not simple. The IRS denies most poorly prepared offers, and mistakes can cost time and money.
👉 If you’re considering an Offer in Compromise, contact Robert Leonard, Tax Attorney, for a confidential consultation:
📞 818-587-3333
🌐 www.LeonardTaxLAW.com