Offer in Compromise vs Other Tax Relief Options

Finding the Best Option for Your Unique Tax Situation

tax relief options

If you have unpaid taxes, you’re probably looking for any option available to get your debt paid off. Fortunately, the IRS offers several tax resolution avenues to help you pay what you owe, whether paying it off over time or coming to a settlement with the agency.

One option many taxpayers apply for is an offer in compromise (OIC), which is a way to settle your tax debt for less than you owe. However, many people who apply for an OIC don’t actually qualify. They may not realize that there are several other options out there when you can’t afford to pay your full balance — these include payment plans, partial payment agreements, and hardship status. 

Figuring out which option is right for you is the first step to resolving your tax problems. The tax professionals at Seattle Legal Services can help you navigate the IRS and tax resolution options based on your financial situation.

This guide walks through factors to consider when reviewing your options, including the OIC and other forms of tax relief.

What Is an Offer in Compromise (OIC)?

With an OIC, you complete an application that outlines your financial details and provides an offer, which is an amount you are offering to pay the IRS for your taxes. 

However, analyses of tax data have shown that the acceptance rate for OICs is around 38%, so most OICs that are submitted are not accepted.

You usually won’t qualify for an OIC if you can afford to pay your full tax liability, whether as a lump sum or through an installment agreement. You usually must demonstrate financial hardship and that you cannot afford the tax bill. 

Here are other qualifications for an OIC:

  • You must have filed all tax returns
  • You must have made all required estimated tax payments for the current year
  • You must have received a bill for at least one tax debt you include on your application
  • If a business, you must have made all required federal tax deposits for this quarter and the two prior

When reviewing your application, the IRS assesses your reasonable collection potential. This is the factor the IRS uses to assess your ability to pay what you owe. The reasonable collection potential looks at factors like the value of your assets, such as your home, car, or financial accounts. The IRS also looks at income you will likely earn in the future and your basic living expenses.

If you’re considering submitting an offer in compromise, first talk to a tax attorney who can look at your situation and provide guidance on your best way forward.

Offer in Compromise Forms to Know

There are a few IRS forms used to submit your OIC request. Here’s a breakdown:

  • Form 656, Offer in Compromise: This is your application for the OIC and includes your personal details, tax periods you owe, low-income certification, reason for the offer, and the proposed offer.
  • Form 433-A (OIC): If you’re an individual, use this form to provide the required financial documentation.
  • Form 433-B (OIC): If you’re a business, use this form to provide your financial information.
  • Form 656-L: Use this form if you are applying to OIC, doubt as to liability (discussed in the next section).

With your forms, you should provide the OIC application fee of $205, unless you qualify for the low-income certification guidelines. You also need to pay a downpayment. It’s 20% of the offer if you’re offering a lump sum payable in up to five months, or one monthly payment if you’re applying to pay the offer over 24 months. 

Criteria the IRS Uses to Determine OIC Approval

Let’s also walk through the criteria the IRS uses when reviewing OIC applications. There are three key areas: doubt as to liability, doubt as to collectability, and effective tax administration. 

  • Doubt as to liability: The IRS may approve an OIC if they suspect that the tax bill they sent you was incorrect.
  • Doubt as to collectability: If the IRS doesn’t think they’ll be able to collect your full tax liability from you based on your finances, they may agree to your offer.
  • Effective tax administration: This type of OIC only applies if you don’t qualify for the other two above. Under this criterion, the IRS will assess your finances to see if you can realistically pay what you owe, including your income and your asset equity.

Basically, the IRS is more likely to accept an OIC if the agency determines that the tax bill was incorrect, they cannot expect to collect the full amount from you, or paying your bill would create unnecessary financial hardship. 

When you have additional questions about OIC review criteria, talk to a tax professional who can explain these processes to you in detail.

Other IRS Tax Relief Options

So, you may realize that you’re not able to provide the information the IRS wants to see for an OIC, or you’re able to pay off your balance in other ways. What are your tax relief options? Here’s an overview of what you might qualify for:

IRS Payment Plans

Payment plans, or installment agreements, are much easier to set up and get approval for. You can usually apply online. You will agree to pay a monthly payment amount over a set period of time to get your balance paid off. 

Short-term payment plans are for 180 days or less and are reserved for individual taxpayers. You can apply online for these if you owe less than $100,000. Long-term payment plans are for longer periods of time, and you can apply online for these if you owe $50,000 or less.

With an installment agreement, you commit to pay the full amount you owe for taxes, but you can spread out your payments over time so it’s less of a burden. Another advantage is that you’re much more likely to be approved for a payment plan than an OIC. 

That said, be careful about applying for installment agreements that strain your budget. The default rate is high on installment agreements, and independent analysis suggests that many taxpayers who set up payment plans may have qualified for an offer or another relief option. 

Hardship Status: Currently Not Collectible (CNC)

If you’re not able to afford your full tax bill, you may also qualify for hardship status, also known as currently not collectible (CNC) status. This is a temporary status the IRS designates to accounts of taxpayers who are dealing with a hardship but could be able to pay in the future.

When your account is in CNC status, the IRS will temporarily cease its collection actions against you. So, you don’t have to worry about them coming after you or seizing your assets while you’re in CNC status. Just note that this is temporary relief – once your financial situation improves, the IRS will begin trying to collect again.

With hardship status, the only way your debt would be forgiven is if your account remains in CNC status until the statute of limitations has expired for tax collection, which is 10 years.

Partial Payment Installment Agreements (PPIA)

One type of installment agreement is the partial payment installment agreement (PPIA). With this agreement, you could potentially settle your debt for less than you owe. A PPIA allows for smaller monthly payments with no obligation to pay your full tax amount. It’s similar to an OIC but easier to qualify for. 

The IRS uses these agreements in situations where the taxpayer won’t be able to pay off their full tax liability within the collection statute expiration date (CSED), which is 10 years. This means that you could potentially make affordable payments until the CSED is up, and then the rest of the debt would not be collectible by the IRS.

Choosing the Right Tax Relief Option: Your Checklist 

So, is the OIC right for you? Should you apply for other tax relief options in your situation? Go through this checklist to determine what you may qualify for and which tax relief avenue you should pursue:

  • Are your total assets and income below the IRS allowable living standards? The allowable living standards are based on the national standards for food, clothing, and other necessary costs of living. For example, in 2024, the allowable living expenses national standard for food is $458 for one person per month, and there are also standards for medical expenses, transportation expenses, and housing expenses. The IRS uses these standards when reviewing your finances.
  • Would paying your full tax liability put you into financial hardship? This means that you would not be able to afford your living expenses if you were to pay your tax bill in full. If this would cause financial hardship, you are more likely to qualify for a relief program like CNC status or OIC. 
  • Do you have limited or no assets to sell or liquidate to pay your tax debt? Take stock of your assets and their value to determine what you would have if you were to liquidate to pay off what you owe.
  • Is your current income low or unstable? If your income is not consistent and stable, it may be unlikely you can pay your debt in full, even with a payment plan in place. The IRS will look at your potential for earning when considering whether or not you have a financial hardship.
  • Can you make a monthly payment to pay off your debt? Evaluate your monthly income and expenses, and figure out what you could realistically afford to pay on taxes each month. If you have enough, you may want to go with the payment plan option, which is easy to apply for and set up.
  • Can you make smaller, affordable payments over time? If so, you may want to choose the PPIA option if you don’t qualify for an OIC. With a PPIA, payments are usually lower and you may be able to settle for less if you continue to pay your set amount until the CSED expires.
  • Are your financial difficulties only temporary? If your issues are only temporary, and you expect your situation to improve soon, you may want to ask for CNC status. This status gives you time to figure out your finances while the IRS pauses collections actions. 
  • Can you show the IRS proof of your financial hardship? Remember that in applying for an OIC, you will need to provide documentation that supports your application, including financial statements, asset information, and debts and liabilities.

These questions will help you break down your financial situation. If the IRS is likely to agree with you that you cannot be reasonably expected to pay your full bill, you may want to take the chance and apply for an OIC. If not, an option like CNC status, a PPIA, or a standard payment plan could be better options. 

When Should You Seek Professional Help?

Applying for tax relief isn’t always straightforward. The path you choose to take will depend on your circumstances, including whether you’re up to date with your tax filings, your tax liability amount, your income, and your asset value. Every taxpayer’s situation is different, so there is no one right answer to whether you should apply for an OIC or other relief option.

Working with a tax professional is the best way forward. An expert can provide personalized advice after reviewing your situation.

IRS processes are complex, and so is tax law. But you want to go with the right solution to set yourself up for a better financial future.

Get Started with Tax Debt Resolution Now

Remember that the offer in compromise is only one of a set of solutions offered by the IRS to help taxpayers through challenging financial times. Your individual circumstances will determine whether you should apply for an OIC, payment plan, PPIA, or CNC status.

The team at Seattle Legal Services is here to guide you through these matters. Our tax attorneys will review your situation and work with you to determine the right way forward. 

Contact Seattle Legal Services now to set up a consultation with someone from our team.