Offer in Compromise qualifications: what the IRS requires

Before the IRS will even consider an offer, you must:

• Have filed all legally required tax returns.
• Have made all required estimated payments for the current year.
• If you're a business owner with employees, have made required federal tax deposits for the current quarter.
• Not be in an open bankruptcy proceeding.
• Submit the $205 application fee and the initial payment (20% of a lump-sum offer, or the first monthly payment of a periodic offer) — unless you meet the low-income certification.

Run the official IRS Offer in Compromise Pre-Qualifier to check these basics.

• Doubt as to collectibility — by far the most common. You can't pay the full balance before the collection statute expires. The offer must equal at least your reasonable collection potential.
• Doubt as to liability — you dispute that you owe the tax. Filed on Form 656-L, with evidence.
• Effective tax administration — you could technically pay, but doing so would cause economic hardship or be unfair given exceptional circumstances (for example, serious illness with large medical costs).

For doubt-as-to-collectibility offers, the IRS calculates your reasonable collection potential (RCP) from Form 433-A (OIC):

• Net realizable equity in assets — generally 80% of fair market value minus loans, with some exclusions.
• Future remaining income — monthly income minus allowable expenses, times 12 months for a lump-sum offer or 24 months for a periodic offer.

If RCP is equal to or greater than the balance, the IRS will generally reject the offer and expect a payment plan. Estimate yours with the Offer in Compromise calculator. A settlement amount can't be predicted from the balance alone.

• People who can pay in full through a payment plan before the collection statute ends.
• People with significant home equity, retirement savings or investments relative to the balance.
• People whose income is well above IRS allowable expenses.
• People with unfiled returns or who aren't making current estimated payments.
• Anyone in an open bankruptcy.

Be cautious of anyone promising you'll qualify before reviewing your finances — the IRS warns about "offer in compromise mills." See tax relief scams and red flags.

The IRS generally stops levy action while the offer is pending, though a lien may be filed. Interest keeps accruing. Periodic offers require you to keep making proposed monthly payments during review. If the IRS doesn't make a decision within 24 months, the offer is deemed accepted under the law. If accepted, you must file and pay on time for five years. If rejected, you can appeal within 30 days. The IRS keeps the application fee and payments in either case, and keeps any refunds for the year the offer is accepted.

Imagine someone owes $40,000. After allowable living expenses under the Collection Financial Standards, they have $150 a month left over, and their only asset is a car with $3,000 of equity after the quick-sale reduction. For a lump-sum offer, the IRS multiplies the $150 by 12 months ($1,800) and adds the $3,000 of equity, for a reasonable collection potential of about $4,800. An offer around that figure may be acceptable because it's what the IRS could realistically collect. Now change one fact: if the same person had $60,000 of home equity, their RCP would exceed the balance and the IRS would expect full payment. This example is simplified — the IRS's actual calculation uses detailed forms and documentation — but it shows why the debt amount alone tells you almost nothing about a settlement. Run your own numbers through the IRS Pre-Qualifier or our estimator before paying anyone.

If the numbers don't support an offer, look at a payment plan, a partial-payment installment agreement, Currently Not Collectible status, and penalty abatement. Compare costs with the repayment vs settlement calculator.