Settling a Tax Bill with an Offer in Compromise

For those who qualify for an offer in compromise (“OIC”), an outstanding tax bill can sometimes be settled for significantly less than what is owed.  While there is no right to such a settlement, in most cases the IRS must at least consider a properly submitted OIC.  The IRS accepts less than half of the OICs submitted, however, a taxpayer can take a rejected OIC to the IRS Appeals Office.

Who Qualifies for an OIC?


To qualify for OIC consideration, a taxpayer must demonstrate that at least one of the following conditions exist:

  • Doubt as to collectability: There is some doubt as to whether the tax bill can be collected from the taxpayer now or in the foreseeable future.
  • Doubt as to liability: There is some doubt as to whether the tax bill is actually owed.  (This is very rare.)
  • Economic hardship: Because of exceptional circumstances, collection of the full bill would be “unfair” or “inequitable,” or would otherwise cause an economic hardship.

How Does the Process Work?

For OIC consideration, one must first submit IRS Form 656, Offer in Compromise, and attach to the Form the $150 application fee.  For those whose monthly income falls below poverty guidelines, this fee may be waived by submitting an Application Fee Worksheet demonstrating that the taxpayer qualifies for the poverty guideline exemption.

In addition, a taxpayer must submit an IRS Form 433-A, Collection Information Statement.  For married taxpayers in community property states, the IRS may request that this form include information on the taxpayer’s spouse.  It is very important that the Collection Information Statement is completed accurately.  The IRS analyzes the information contained in the Collection Information Statement very closely.

Please keep in mind that the submission of these forms is merely the beginning of the process.  The IRS will then request financial documentation, from bank records to pay stubs to vehicle registrations, the extent of which can often become daunting. It is also important to note that interest on the outstanding tax bill continues to accrue throughout the negotiation process, meaning that if an OIC is rejected, the taxpayer will end up owing even more.

Why Are OICs Rejected?


Anytime an OIC is rejected, the IRS must provide a written explanation of its decision.  The two most common reasons an OIC is rejected are, 1) the offer is too low, or 2) the taxpayer has been convicted of a serious crime.

Can a Taxpayer Appeal a Rejected OIC?

Taxpayer’s have the option of formally appealing a rejected OIC.  To start the appeal process, a taxpayer must submit a letter within 30 days of the date of the rejection letter.  A taxpayer may also attempt to contact the person that signed the rejection letter to continue the negotiation process.  The IRS may reconsider an offer if requested.

For help settling your tax bill with an Offer in Compromise contact San Francisco Tax Attorney Aubrey Hone today at 415.765.1754.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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