You owe the IRS $50,000. Maybe $100,000. Perhaps $250,000 or more.
You cannot afford to pay the balance in full.
The IRS keeps sending notices. Penalties and interest continue increasing the amount owed.
You may already be facing a federal tax lien, an IRS Revenue Officer, a bank levy, or wage garnishment.
Then you see an advertisement promising to settle IRS tax debt for pennies on the dollar.
It sounds almost too good to be true.
Can you really settle a substantial IRS tax debt for a fraction of what you owe?
The answer is yes—in appropriate circumstances.
The IRS has an established program called an Offer in Compromise (OIC) that allows qualifying taxpayers to settle their federal tax liabilities for less than the full amount owed.
But there is something important you need to understand before paying a tax-relief company thousands of dollars:
Not everyone qualifies for an IRS tax settlement.
And submitting an Offer in Compromise without first evaluating your financial circumstances can waste time, cost money, and potentially complicate your tax-resolution strategy.
If you owe the IRS more than you can afford to pay, understanding how the program actually works could be one of the most important financial decisions you make.
What Is an IRS Offer in Compromise?
An Offer in Compromise, commonly called an OIC, is an agreement between a taxpayer and the Internal Revenue Service that settles a federal tax liability for less than the full amount owed.
The program exists because the IRS recognizes that some taxpayers cannot reasonably pay their full tax debts.
Rather than pursuing collection indefinitely, the IRS may agree to accept an amount that reflects the taxpayer’s financial circumstances and collection potential.
For example, a taxpayer might owe $100,000 but have limited income, modest assets, and insufficient financial resources to pay the entire balance.
If the taxpayer qualifies, the IRS may agree to accept substantially less than the amount owed.
However, the IRS does not simply reduce tax debts because a taxpayer requests a discount.
The decision generally depends upon a detailed financial analysis.
Can the IRS Really Settle a $100,000 Tax Debt for $10,000?
Potentially.
There is no universal rule requiring the IRS to accept a particular percentage of the tax debt.
An Offer in Compromise is not simply a negotiation in which the taxpayer offers 10% or 20% and waits for the IRS to counter.
For offers based on doubt as to collectibility, the IRS generally evaluates the taxpayer’s reasonable collection potential, commonly referred to as RCP.
This analysis considers the amount the IRS could reasonably expect to collect from the taxpayer’s assets and future income.
A taxpayer owing $100,000 might qualify for an offer of $10,000.
Another taxpayer owing the same $100,000 might be expected to pay the full balance.
The difference is not necessarily the amount of tax owed. It is the taxpayer’s financial circumstances.
How Does the IRS Decide Whether to Accept an Offer in Compromise?
The IRS generally evaluates two major financial components:
1. Net realizable equity in assets
2. Future income available to pay the tax liability
The IRS may examine:
- Bank accounts
- Savings and investments
- Retirement accounts
- Real estate
- Vehicles
- Business interests
- Life insurance cash values
- Other assets
- Wages and self-employment income
- Household expenses
- Financial obligations
- Other relevant financial circumstances
The IRS generally calculates future income using the taxpayer’s monthly income minus allowable living expenses, multiplied by the applicable future-income factor.
For certain lump-sum offers, the future-income component generally uses 12 months.
For certain periodic-payment offers, it generally uses 24 months.
These calculations are subject to applicable rules, adjustments, and exceptions.
This is why two taxpayers with identical IRS balances may receive very different settlement results.
What If I Own a House?
Owning a home does not automatically disqualify you from an Offer in Compromise.
However, the IRS generally considers available equity in real estate when evaluating an offer.
Suppose you own a home worth $350,000 and have a mortgage balance of $300,000.
The IRS may evaluate the equity after applying the relevant valuation and collection rules.
The analysis can become more complicated when:
- The home is jointly owned
- A spouse is not liable for the tax debt
- The property has additional liens
- Refinancing is unavailable
- The taxpayer has limited income
- Selling the property would create hardship
The fact that you own a home does not necessarily mean you can afford to pay the IRS in full.
But the equity must be evaluated carefully.
What About Retirement Accounts?
Retirement accounts can also affect Offer in Compromise eligibility.
Depending upon the circumstances, the IRS may consider the realizable value of certain retirement assets.
This can surprise taxpayers who assume retirement savings are automatically excluded from the financial analysis.
The treatment depends upon the type of account, applicable rules, and the taxpayer’s circumstances.
For someone approaching retirement, the financial analysis may be particularly important.
An improperly evaluated retirement account could significantly affect the amount the IRS expects the taxpayer to offer.
Does the IRS Consider My Monthly Living Expenses?
Yes.
The IRS generally considers allowable living expenses when determining the amount of future income potentially available to pay the tax liability.
These may include:
- Housing and utilities
- Food and clothing
- Transportation
- Health insurance
- Medical expenses
- Taxes
- Certain court-ordered payments
- Other allowable necessary expenses
However, the IRS does not automatically accept every expense a taxpayer reports.
The IRS uses Collection Financial Standards and other rules to evaluate necessary living expenses.
In certain circumstances, actual expenses exceeding standard amounts may be considered when properly substantiated and justified.
This is an important part of the OIC process.
A taxpayer’s actual financial hardship may not be fully understood without a careful presentation of the supporting financial information.
What If I Am Unemployed or My Income Recently Declined?
A substantial reduction in income may affect the Offer in Compromise analysis.
For example, a taxpayer may have accumulated a large IRS liability during years of relatively high earnings.
But the taxpayer’s current financial situation may be very different.
Perhaps the taxpayer:
- Lost a job
- Experienced a business failure
- Became disabled
- Retired
- Experienced a substantial reduction in income
- Developed significant medical expenses
- Lost a major customer
- Experienced other financial difficulties
The IRS generally evaluates current financial information and, where appropriate, relevant future earning potential.
A large historical tax liability does not necessarily mean the taxpayer still has the ability to pay it.
What If I Owe the IRS $250,000 or More?
Large IRS tax liabilities can potentially qualify for an Offer in Compromise.
There is no general rule that a taxpayer becomes ineligible merely because the balance exceeds $100,000 or $250,000.
However, larger liabilities can involve more complicated financial and collection issues.
For example:
- Multiple tax years
- Substantial penalties and interest
- Federal tax liens
- Real estate equity
- Retirement assets
- Business ownership
- IRS Revenue Officer involvement
- Collection statute considerations
- Prior installment agreements
- Previous OIC submissions
These cases often require a comprehensive review before deciding whether an OIC is the appropriate strategy.
The larger the tax debt, the more important it may be to evaluate the case before committing to a particular resolution program.
Does the IRS Have to Accept My Offer?
No.
An Offer in Compromise is not guaranteed.
The IRS may reject an offer when it determines that the taxpayer can pay more than the amount proposed or when other applicable requirements are not satisfied.
For example, the IRS may conclude that:
- The taxpayer has substantial equity in assets
- Monthly disposable income supports a higher offer
- Financial documentation is incomplete
- Required tax returns have not been filed
- Current tax compliance requirements have not been met
- The taxpayer has not established eligibility under the applicable OIC rules
This is why the initial evaluation matters.
A taxpayer should understand the potential obstacles before submitting an offer.
What If the IRS Rejects My Offer in Compromise?
A rejection does not necessarily mean the matter is over.
Depending upon the circumstances, the taxpayer may have the right to appeal the rejection.
The IRS generally provides a 30-day period to appeal a rejected Offer in Compromise.
An appeal may involve disputes concerning:
- Income calculations
- Allowable living expenses
- Asset valuations
- Available equity
- Financial hardship
- Future earning potential
- Other relevant issues
A properly supported appeal can be an important opportunity to challenge the IRS’s financial analysis.
However, appeal rights and deadlines must be reviewed carefully.
Can an Offer in Compromise Stop IRS Collection?
An Offer in Compromise can affect IRS collection activity.
Generally, the IRS is prohibited from levying while an offer is pending, during the applicable period following rejection, and while a timely appeal of the rejection remains pending, subject to statutory exceptions.
However, taxpayers should not assume that submitting an offer automatically eliminates existing liens or resolves every collection issue.
A federal tax lien may remain in place.
The IRS may also continue to evaluate the taxpayer’s compliance and financial circumstances.
And submitting an OIC generally affects the time remaining on the IRS collection statute.
An Offer in Compromise should be pursued because it is an appropriate resolution strategy—not merely as a way to delay collection.
What If I Have Unfiled Tax Returns?
Filing compliance is extremely important.
The IRS generally requires taxpayers to have filed required tax returns before it will consider an Offer in Compromise.
If you have several years of unfiled returns, those returns may need to be addressed before submitting an offer.
The IRS also generally requires taxpayers to be current with applicable estimated tax payments and other ongoing tax obligations.
Business taxpayers may have additional compliance requirements.
This is another reason to address missing returns promptly.
You cannot reliably resolve a tax debt if you do not yet know the full amount owed or have not satisfied applicable filing requirements.
What Happens After the IRS Accepts My Offer?
An accepted Offer in Compromise is a significant accomplishment.
But acceptance does not mean the taxpayer can ignore future tax obligations.
The taxpayer must satisfy the terms of the agreement.
Generally, an OIC taxpayer must remain compliant with filing and payment obligations for five years after acceptance, including any extensions applicable under the agreement.
Failure to comply can result in serious consequences, including default and potential reinstatement of the compromised liability.
The taxpayer must also make all required offer payments.
An accepted Offer in Compromise is an opportunity for a financial fresh start—but the taxpayer must comply with the agreement.
What If I Do Not Qualify for an Offer in Compromise?
An Offer in Compromise is not the only IRS tax-resolution option.
Depending upon your financial circumstances, alternatives may include:
IRS Installment Agreement
An Installment Agreement may allow you to pay your tax liability through monthly payments.
Partial Payment Installment Agreement
A Partial Payment Installment Agreement may allow qualifying taxpayers to make monthly payments without fully paying the liability before the applicable collection period expires.
Currently Not Collectible Status
If paying the IRS would prevent you from meeting necessary living expenses, the IRS may temporarily suspend active collection through Currently Not Collectible status.
Penalty Abatement
Certain penalties may qualify for administrative or reasonable-cause relief.
Collection Due Process
If you have received a qualifying Final Notice of Intent to Levy or Notice of Federal Tax Lien filing, you may have rights to request a Collection Due Process hearing.
The appropriate resolution depends upon your particular situation.
The goal is not simply to submit an Offer in Compromise. The goal is to find the most appropriate way to resolve your IRS tax problem.
Beware of Companies Promising to Settle Your Tax Debt for Pennies on the Dollar
Advertisements promising dramatic IRS settlements can be misleading when they imply that nearly everyone qualifies.
Some taxpayers legitimately qualify for substantial reductions through the Offer in Compromise program.
Others do not.
A taxpayer with substantial available equity or sufficient disposable income may not qualify for the settlement advertised.
Before paying substantial fees, ask:
- Has my financial situation been evaluated?
- Have my assets and equity been considered?
- Has my income been analyzed?
- Have allowable expenses been reviewed?
- Am I current with required tax filings?
- Does the proposed settlement appear financially realistic?
- Who will actually represent me before the IRS?
- What happens if I do not qualify?
You deserve a realistic evaluation—not a promise that the IRS will accept an offer before anyone has reviewed your finances.
Indiana Offer in Compromise Attorney for IRS Tax Settlements
I am Eric C. Keuling, founder of the Keuling Law Firm, and I have more than 18 years of tax and tax-resolution experience.
Before establishing my law practice, my tax career included serving as a Tax Director with Grant Thornton in Tokyo, Japan.
I also earned an LL.M. in Taxation from the University of Florida Levin College of Law.
Today, I represent individuals and businesses throughout Indiana in tax matters involving the Internal Revenue Service and Indiana Department of Revenue.
My tax-resolution practice includes:
- IRS Offers in Compromise
- IRS tax settlements
- Large federal tax debts
- IRS Installment Agreements
- Partial Payment Installment Agreements
- Currently Not Collectible status
- IRS penalty abatement
- Federal tax liens
- IRS bank levies
- IRS wage garnishments
- IRS Revenue Officer representation
- Collection Due Process hearings
- IRS tax audits and appeals
- Unfiled and delinquent tax returns
- Tax preparation and compliance assistance
- Business and payroll tax liabilities
- Trust Fund Recovery Penalties
- Indiana tax warrants
- Indiana Department of Revenue collection matters
When you hire the Keuling Law Firm, I personally handle your tax matter.
Your case is not sold by one person and then handed to a case manager.
I work directly with you to evaluate your IRS liabilities, analyze your financial circumstances, determine whether an Offer in Compromise may be appropriate, and develop a strategy for resolving your tax problem.
Owe the IRS More Than You Can Afford? Find Out Whether You Qualify for a Tax Settlement.
If you owe the IRS $50,000, $100,000, $250,000, or more, the amount may seem impossible to pay.
Perhaps the IRS has already filed a federal tax lien.
Perhaps a Revenue Officer is demanding financial information.
Perhaps you are worried about a bank levy or wage garnishment.
Or perhaps you simply cannot afford the monthly payments the IRS is requesting.
You may have options—but you need to know which ones actually apply to your situation.
An Offer in Compromise may allow a qualifying taxpayer to settle an IRS liability for substantially less than the full amount owed.
But not everyone qualifies.
And choosing the wrong strategy can cost valuable time and money.
If you owe substantial back taxes and cannot afford to pay the IRS in full, contact the Keuling Law Firm to schedule a consultation.
I can review your IRS tax liabilities, evaluate your financial circumstances, and help determine whether an Offer in Compromise or another tax-resolution strategy may be appropriate.
Don’t wait until the IRS files a lien, levies your bank account, or garnishes your wages to find out whether you may qualify for tax relief.
This article is provided for general informational purposes only and does not constitute legal or tax advice. Offer in Compromise eligibility, financial calculations, filing requirements, collection procedures, appeal rights, and settlement terms depend upon applicable law, IRS procedures, and the particular facts and circumstances of each taxpayer.