Offer in Compromise: Settling Tax Debt for Less Than You Owe

Offer in Compromise: Your Path to IRS Debt Relief

If you owe the IRS more than you can realistically pay, an Offer in Compromise (OIC) might provide relief. This program allows qualified taxpayers to settle their tax debt for less than the full amount owed. However, the IRS approves only about 33% of applications, so understanding the process is crucial.

What Is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's debt for less than the full amount owed. The IRS will accept an OIC when:

• The amount offered represents the most the IRS can expect to collect within a reasonable time, OR
• There is doubt about the liability (you don't actually owe the tax), OR
• Paying the full amount would create economic hardship or be unfair

Example:

• You owe the IRS $75,000
• After reviewing your finances, the IRS determines you can realistically pay $12,000
• You submit an OIC for $12,000
• IRS accepts, and your $75,000 debt is settled for $12,000

The Three Types of Offers in Compromise

1. Doubt as to Collectibility (Most Common)

You admit you owe the tax, but cannot pay the full amount based on your income and assets.

2. Doubt as to Liability

You don't believe you actually owe the tax, or don't owe the full amount. This is rare and requires strong evidence.

3. Effective Tax Administration

You owe the tax and could pay, but doing so would cause economic hardship or be unfair due to exceptional circumstances.

Example of Effective Tax Administration:

• You're elderly and terminally ill
• Paying the full debt would deplete your life savings needed for medical care
• IRS may accept a lower amount as fair under the circumstances

Most Arab Americans pursue Doubt as to Collectibility offers.

Who Qualifies for an Offer in Compromise?

The IRS considers your:

• Ability to pay based on income and assets
• Income (past, present, and future earning potential)
• Expenses (necessary living expenses only)
• Asset equity (value of your property minus debts)

You Must Meet These Requirements:

1. Have Filed All Required Tax Returns

The IRS won't consider your offer if you haven't filed all returns. File missing returns before applying.

2. Have Made All Required Estimated Tax Payments

If you're self-employed or have withholding requirements, stay current.

3. Not Be in an Open Bankruptcy Proceeding

Wait until bankruptcy is complete before applying for OIC.

4. If You're a Business Owner with Employees:

Must have made all required federal tax deposits for the current and past two quarters.

You Probably DON'T Qualify If:

• You can pay the full debt through an installment agreement
• The IRS hasn't yet determined how much you owe
• You're intentionally hiding assets or income
• You haven't filed all required tax returns
• You haven't explored other payment options first

How the IRS Calculates Your Offer Amount

The IRS uses a formula to determine the minimum acceptable offer:

Reasonable Collection Potential (RCP) = Net Realizable Equity in Assets + Future Income

Step 1: Calculate Net Realizable Equity in Assets

List all your assets and calculate equity (value minus liens):

Assets Include:

• Cash in bank accounts
• Investments (stocks, bonds, retirement accounts)
• Real estate (home, rental property, land)
• Vehicles
• Business assets
• Personal property with significant value (jewelry, art, collectibles)

Quick Sale Value:

IRS uses 80% of current market value (assuming quick sale)

Example:

• Home worth $300,000
• Mortgage balance: $250,000
• Equity: $50,000
• Quick sale value: $50,000 × 80% = $40,000

Exemptions:

• Personal items (clothing, furniture) - usually exempt
• Retirement accounts - may receive favorable treatment
• Tools necessary for your trade - may be exempt up to certain values

Step 2: Calculate Future Income

The IRS projects your future income based on:

• Monthly disposable income (gross income minus allowed expenses)
• Number of months (12, 24, or longer depending on payment terms)

Formula:

Monthly disposable income × multiplier

Multiplier:

• Lump sum offer (paid within 5 months): 12 months
• Short-term payment plan (6-24 months): 24 months

Example:

• Monthly gross income: $5,000
• Allowed monthly expenses: $4,200
• Disposable income: $800
• Lump sum offer: $800 × 12 = $9,600

Step 3: Add Them Together

RCP = Asset equity + Future income

Using examples above: $40,000 + $9,600 = $49,600 minimum offer

The IRS will typically not accept less than your RCP.

What Expenses Does the IRS Allow?

The IRS uses standardized expense allowances for necessities and limits on other expenses:

National Standards (Set amounts for household size):

• Food, clothing, personal care
• Housekeeping supplies
• Apparel and services
• Personal care products

Local Standards (Vary by county):

• Housing and utilities
• Transportation (car payment/lease, operating costs)

Other Necessary Expenses (Must be reasonable):

• Health insurance
• Out-of-pocket medical expenses
• Child care
• Life insurance (term, not whole)
• Current year taxes
• Court-ordered payments (child support, alimony)

Expenses the IRS Does NOT Allow:

• Credit card payments (except for IRS-approved necessary expenses)
• Private school tuition
• Cable/satellite TV beyond basic
• Entertainment and recreation
• Luxury items
• Voluntary retirement contributions
• Whole life insurance premiums
• Payments on unsecured debt

This is where many applications fail. The IRS strictly limits expenses. An Arabic-speaking tax attorney can help maximize allowable expenses within IRS guidelines.

The Offer in Compromise Application Process

Step 1: Pre-Qualify Using the IRS OIC Pre-Qualifier Tool

Visit irs.gov and use the OIC Pre-Qualifier tool to see if you're likely to qualify before investing time and money.

Step 2: Gather Financial Documentation

You'll need extensive documentation:

• Tax returns (past 2 years if not already filed)
• Bank statements (3 months for all accounts)
• Pay stubs (3 months)
• Proof of income (W-2s, 1099s, business records)
• Asset documentation (deeds, car titles, account statements, appraisals)
• Debt documentation (mortgage statements, car loans, medical bills)
• Monthly expense verification (utility bills, insurance bills, receipts)

Step 3: Complete Form 656 (Offer in Compromise)

This form includes:

• Your personal information
• The tax years/periods owed
• Your offer amount
• Payment terms (lump sum or periodic payment)
• Reason for your offer
• Your signature (under penalty of perjury)

Step 4: Complete Form 433-A (OIC) or 433-B (OIC)

Form 433-A (OIC): For individuals

• Detailed financial statement
• Income sources
• Assets and liabilities
• Monthly income and expenses

Form 433-B (OIC): For businesses

• Business financial information
• Business assets and liabilities
• Business income and expenses

Step 5: Pay Application Fee

$205 application fee (non-refundable)

Fee waiver available if:

• Your gross monthly income is at or below federal poverty guidelines

Step 6: Make Initial Payment

Lump Sum Offer:

• Submit 20% of total offer amount with application
• If accepted, pay remaining balance in 5 or fewer payments

Periodic Payment Offer:

• Submit first proposed payment with application
• Continue making payments while IRS considers your offer
• If accepted, pay remaining balance over 6-24 months

Important: Application fees and initial payments are non-refundable even if your offer is rejected, UNLESS you qualify for the low-income waiver.

Step 7: Mail Your Package

Send to the address specified in Form 656 instructions (varies based on your state).

Include:

• Form 656
• Form 433-A and/or 433-B
• Application fee (or waiver request)
• Initial payment
• All supporting documentation
• Any additional required forms

Make complete copies of your entire package before mailing.

After You Submit Your Offer

Processing Time: 6-24 months

While the IRS considers your offer:

1. The IRS May Request Additional Information

Respond quickly and completely to any requests.

2. An IRS Examiner Will Review Your Case

They'll verify your income, assets, and expenses. They may:

• Contact your bank
• Request additional documentation
• Interview you about your finances
• Verify asset values

3. Collection Activity Stops

While your offer is being considered, the IRS generally won't:

• Levy your bank accounts
• Garnish your wages
• Seize your property

However, penalties and interest continue to accrue on your unpaid tax debt.

4. The Statute of Limitations Is Extended

The normal 10-year collection statute is suspended while your offer is pending, plus 30 days.

5. You Must Stay Compliant

During the offer process and for 5 years after acceptance:

• File all tax returns on time
• Pay all taxes owed on time
• Don't incur new tax debt

Failing to stay compliant can void your offer and reinstate the original debt.

Possible Outcomes

Offer Accepted:

• You receive written acceptance
• Pay the remaining balance as agreed
• Your tax debt is resolved
• Must stay compliant for 5 years

Offer Rejected:

You'll receive a letter explaining why. Common reasons:

• You can afford to pay more
• Your offer is too low based on your financial situation
• You have equity in assets you didn't disclose
• Your expenses exceed IRS allowances
• You haven't filed all required returns
• You haven't explored other payment options

If Rejected, You Can:

• Appeal within 30 days to the IRS Office of Appeals
• Submit a new offer with a higher amount or better documentation
• Request an installment agreement instead

Offer Returned:

The IRS may return your offer without consideration if:

• Application is incomplete
• Required documentation is missing
• You didn't include the application fee or initial payment
• You're not eligible for an OIC

If returned, fix the problems and resubmit.

Pros and Cons of an Offer in Compromise

Advantages:

• Settle tax debt for less than you owe (sometimes significantly less)
• Stop IRS collection actions
• Get a fresh start
• Avoid bankruptcy
• Penalties and interest stop accruing once offer is accepted
• One-time resolution

Disadvantages:

• Complex and time-consuming process
• Low acceptance rate (about 33%)
• Application fee and initial payment non-refundable if rejected
• Collection statute of limitations is extended
• Must remain compliant for 5 years or offer can be voided
• Public record (offer acceptance is disclosed to credit bureaus)
• Not everyone qualifies

Alternatives to Offer in Compromise

If you don't qualify for an OIC:

1. Installment Agreement

Pay your debt over time in monthly payments.

• Easier to qualify
• Keeps you in compliance
• Full debt must be paid, but over extended period

2. Currently Not Collectible (CNC) Status

If you can't afford to pay anything, IRS may place your account in CNC status.

• Collection actions stop
• No monthly payments required
• Debt isn't forgiven, but IRS waits until your financial situation improves

3. Penalty Abatement

Request removal of penalties (not tax itself) if you have reasonable cause.

• Can significantly reduce total debt
• Easier to obtain than OIC
• Doesn't eliminate tax, but reduces penalties and interest

4. Bankruptcy

Chapter 7 bankruptcy can discharge certain old tax debts if specific criteria are met.

• Last resort option
• Complex eligibility requirements
• Significant credit impact
• Consult a bankruptcy attorney

Special Considerations for Arab Americans

Income from Abroad:

If you receive income from family businesses abroad, rental properties in your home country, or international investments:

• You must disclose ALL income, including foreign income
• Failure to report foreign income can result in rejection
• Your attorney can help you document and explain foreign income

Assets in Arab Countries:

If you own property, have bank accounts, or business interests in Lebanon, Jordan, Egypt, or other countries:

• You must disclose all worldwide assets
• IRS will verify values of foreign assets
• Failure to disclose can result in criminal prosecution

Family Support:

Many Arab Americans send money to family abroad or support extended family in the U.S.

• IRS does NOT allow deductions for support of extended family
• Only dependents claimed on your tax return count
• Court-ordered support (child support, alimony) is allowed

An Arabic-speaking tax attorney can help you navigate these issues and present your case effectively.

FBAR and Foreign Account Compliance:

If your OIC involves years when you had unreported foreign accounts:

• You may need to file delinquent FBARs
• The OIC can potentially resolve FBAR penalties too
• This requires specialized expertise

Language Barriers:

The OIC forms are complex and require detailed financial disclosures. Mistakes or unclear explanations reduce your chances of acceptance.

An Arabic-speaking tax attorney:

• Ensures you understand what's being asked
• Helps you gather proper documentation
• Presents your financial situation clearly
• Maximizes your chances of acceptance

Common Mistakes That Lead to Rejection

1. Offering Too Little

Calculate your offer carefully. Low-ball offers are rejected.

2. Incomplete Financial Disclosure

The IRS will find undisclosed assets. Full disclosure is required.

3. Overstating Expenses

Only necessary living expenses within IRS standards are allowed.

4. Poor Documentation

Without proper documentation, IRS rejects the offer.

5. Not Filing All Tax Returns

File ALL returns before applying, even if you can't pay.

6. Being in Bankruptcy

Wait until bankruptcy is closed before applying.

7. Having Sufficient Ability to Pay

If you can afford an installment agreement, IRS won't accept an OIC.

8. Not Staying Current During Processing

Must file all returns and pay all current taxes while offer is pending.

Protecting Your Offer in Compromise

Once your offer is accepted:

For 5 Years You Must:

• File all tax returns on time
• Pay all taxes in full when due
• Don't incur any new tax debt

If You Violate the Terms:

• Your offer is immediately void
• Original tax debt is reinstated
• Minus any payments you made
• Plus penalties and interest that continued to accrue
• IRS can resume collection immediately

Protect Your Offer By:

• Setting up tax withholding or estimated payments
• Filing returns early
• Making quarterly estimated tax payments if self-employed
• Maintaining good records
• Consulting your tax attorney if issues arise

Should You Hire an Attorney for an OIC?

The statistics are clear:

• Self-prepared offers: ~18% acceptance rate
• Attorney-prepared offers: ~33%+ acceptance rate

An Arabic-speaking tax attorney:

• Determines if you qualify before you waste time and money
• Calculates the correct offer amount
• Gathers and presents documentation properly
• Maximizes allowable expenses
• Handles IRS communications
• Appeals rejections
• Increases your chances of acceptance
• Explains everything in Arabic

Cost vs. Benefit:

• Attorney fees: $3,500-$10,000+ depending on complexity
• Potential savings: Tens of thousands of dollars in forgiven tax debt

For most people, the investment in professional help pays for itself many times over.

Get Expert Help with Your Offer in Compromise

An Offer in Compromise can provide life-changing relief from crushing tax debt, but only if done correctly. The IRS scrutinizes every detail, and mistakes lead to rejection.

Don't navigate this complex process alone. Our network of Arabic-speaking tax attorneys specializes in Offers in Compromise and has helped countless Arab Americans settle their tax debts for far less than they owed.

We provide:

• Free initial consultation to determine eligibility
• Expert preparation of all forms and documentation
• Communication with the IRS in English while explaining everything to you in Arabic
• Appeals if your offer is rejected
• Ongoing compliance support after acceptance

Contact us today to learn if an Offer in Compromise is right for you. Stop drowning in IRS debt and get the fresh start you deserve.