The idea of an offer in compromise is very appealing. You may have seen it on a billboard or TV commercial—“Settle your tax debt for pennies on the dollar!” If you’ve been laboring under the burden of massive tax debt for months or years, the idea of paying a few hundred or thousand to wipe the slate clean is hard to ignore.

The fact is, though, that most people just don’t qualify for an offer in compromise. Only a small percentage of people truly qualify for an offer in compromise – in 2023, 40% of offers were accepted. Many more people never even made it to the application stage after running their numbers through the pre-qualifier tool.

Learn more about why you may not qualify for an offer in compromise, how to find out if you do, and what other options may be available to you. At Seattle Legal Services, we understand that tax relief is a top priority for you—we can help you find solutions that work. Call us at 206-536-3152 to get started.

Key Takeaways:

  • Misleading advertising – The offer in compromise program is often misrepresented in tax relief advertising campaigns.
  • Low acceptance rates – Less than half of applicants are approved, and most people don’t qualify.
  • Tough application process – The IRS is extremely thorough when assessing each applicant’s ability to pay.
  • Hard to get if you have assets – The IRS expects you to exhaust the equity in your assets before considering an offer in compromise.
  • Other options – If you don’t qualify, there are other options that may be a better fit for your financial situation.

Unpacking Offer in Compromise Myths

The offer in compromise program is easily one of the most misunderstood IRS tax relief programs. That’s not taxpayers’ fault—there are quite a few unscrupulous companies out there that do their best to misrepresent the program in an effort to bring in new clients.

The IRS is extremely thorough in how it handles offer in compromise applications. It’s not uncommon for people to wait months and months for an answer—the IRS does their best to verify a taxpayer’s ability or inability to pay before making a decision. If they have any reason to believe you can pay, expect to have your offer rejected.

Let’s look at some of the myths that taxpayers often fall victim to:

  • Myth: The offer in compromise program is a secret program that lets taxpayers settle their tax debt for pennies on the dollar. In actuality, the offer in compromise program isn’t something that you just have to discover to utilize. The IRS doesn’t hide it away, and they don’t reward you just for finding out about it. It’s a legitimate tax relief option that allows qualifying taxpayers to settle their tax debt. However, the qualifications are stringent.
  • Myth: If your offer is accepted, it’s a fresh start, and you won’t be subject to further scrutiny. The truth is that for five years from the date of acceptance, you must file all required tax returns and pay your taxes on time to keep your offer in compromise. If you fail to meet this requirement, the IRS can revoke their acceptance.
  • Myth: Requesting an offer in compromise means you’ll be audited. Applying for an offer in compromise can feel like an audit since the IRS goes into excruciating detail while looking into your finances. However, an offer in compromise application does not automatically trigger an audit, nor does it make an audit more likely.
  • Myth: Any financial hardship qualifies you for an offer in compromise. Unfortunately, even if you feel financially strained, you may not qualify for an offer. The IRS won’t consider an offer just because paying your taxes in full will require you to stop going out to eat, cut back on your kids’ extracurricular activities, or scale back your retirement contributions. In fact, they expect you to exhaust every reasonable payment option before turning to an offer in compromise.

Different Ways to Qualify for an Offer in Compromise

There are a few reasons you may pursue an offer in compromise. It’s important to understand which path you’re pursuing before you begin the application process.

Doubt as to Collectibility

This is what most people think of when they think about the offer in compromise program. Doubt as to collectibility exists when the IRS is unlikely to be able to recover the full amount owed due to the taxpayer’s assets and income. If your income and assets are significantly lower than what you owe, you may have doubt as to collectibility.

Doubt as to Liability

There is doubt to liability if the amount owed—or the existence of the tax debt at all—is genuinely in question. This is not an option if the taxpayer has exhausted their appeal options and the tax debt has been established via a final court decision. As is the case with any offer in compromise request, you’ll need extensive documentation. The IRS will want to see that you have a legitimate reason to doubt what you owe and that you aren’t just unhappy with your tax bill.

Effective Tax Administration

This path to an offer in compromise is less common than others. If you technically could pay off your tax debt but doing so would cause you significant financial hardship, you may apply for an offer in compromise for effective tax administration. This option can also apply in situations where you might qualify for an offer based on doubt as to collectibility, but there are extenuating reasons why the IRS should accept an even lower offer.

Consider, for example, someone with substantial equity in their home. However, refinancing the house would make their monthly mortgage unaffordable, and selling the home to pay off the tax debt would leave them unable to rent or buy in their area. Or think about this scenario—a parent has found themselves in significant tax debt, and on paper, it looks like they have enough money to pay it off with an installment agreement. However, they have unusually high healthcare expenses because they have a special needs child.

In these types of cases, the IRS may accept an offer in compromise because collecting the full amount would be unfair or inequitable.

Do You Qualify? Running the Numbers

The IRS does offer a pre-qualifier that you can use to see if you have a shot at getting accepted. However, you can also run the numbers yourself to see if it’s worth going through the demanding application process.

Here’s a quick litmus test. If you plan on making a lump sum payment, add up your monthly expenses. Subtract that amount from your monthly income and multiply it by 12. Add the value or equity in your assets – use the full value of cash equivalent assets and about 80% of the value of non-cash assets (for example, your home). That amount is what the IRS could reasonably expect you to pay. If you want to make periodic payments, you’ll multiply your leftover monthly income by 24 instead of 12.

Let’s look at a couple of examples. You go through the list of allowable expenses and subtract your monthly expenses. After all is said and done, you have $500 left at the end of each month. You also have $15,000 of equity in your home based on 80% of your home’s value minus your remaining mortgage. You want to make a lump sum payment, so you calculate ($500 x 12) + $15,000 for a total amount of $21,000. If you owe $18,000 in taxes, the IRS would likely reject your offer. However, if you owe $50,000, you may reduce your total amount owed by over 50%.

Another example. You have $300 left at the end of each month after accounting for your allowable expenses. Your paid-off home is worth $300,000, and you’re interested in making periodic payments. Your calculation would be ($300 x 24) + $240,000 = $247,200. Note that you don’t apply the full value of your home; instead, you use the quick sale value, which is about 80% of fair market value. You owe $160,000 to the IRS. Although your tax debt is high and you likely don’t want to tap into your home equity, the IRS would likely reject this offer.

Rejection is Common for DIY Filers—Here’s Why

The overall rejection rate for offers in compromise applications is high, but it’s even higher among DIY filers. There are several reasons for that trend:

  • Incomplete forms: Applicants have to fill out multiple forms to be considered for an offer in compromise, and they are all extremely detailed. Form 433-A, on its own, is eight pages. Skipping any information or providing ambiguous answers to questions will likely get you denied right away.
  • Inaccurate financial disclosures: The financial disclosure makes up the bulk of your offer in compromise application. You have to account for all of your assets and their equity. If you fail to include assets, underestimate their value, or otherwise misrepresent your ability to pay, expect a rejection.
  • Misunderstanding your reasonable collection potential: The IRS looks at several factors when determining a taxpayer’s ability to pay, including their income, allowable living expenses, assets, other financial obligations, and future earning potential. People often overestimate their expenses or underestimate their earnings, leading them to think they qualify when they don’t. Consider, for example, the IRS’s adherence to allowable living expenses. Just because you receive a bill for it does not mean that the IRS considers it an allowable living expense. A good example is private school tuition. Private school tuition may be so high that it keeps you from paying your taxes, but because it isn’t a required expense, it’s unlikely that the IRS will allow it.
  • Insufficient documentation: At the bottom of the offer in compromise application packet, you’ll find an extensive list of the documentation you need for your financial disclosure. This documentation includes your most recent paystub or earning statement from each income source, your most recent statement from each retirement account, three months’ worth of statements from each bank account, and statements from each of your lenders. This is only a sampling—the real list is much longer. Failing to provide this documentation often leads to rejection.

It’s fairly common for people to get denied because they don’t realize just how much their assets work against them in the application process. If a taxpayer has significant tax debt but a very healthy retirement account, the IRS will likely deny an offer in compromise request because they could pay with their retirement funds. The same is true for a taxpayer with substantial home equity or a completely paid-off home.

Alternatives If An Offer in Compromise Isn’t Right for You

Perhaps you’ve run the numbers and realized that your odds of acceptance are low. Maybe you want to explore other options before subjecting yourself to the grueling application process required for an offer in compromise. There are other options you can check out before committing to an offer in compromise application.

Installment Agreements

Installment agreements are easily one of the most straightforward options available to taxpayers. Because an installment agreement does result in you paying off your tax debt in full, the IRS isn’t quite as extensive in its documentation requirements.

In fact, many taxpayers can apply online and get an instant decision. With this option, you can stretch your payments over a period as long as 72 months (even longer in some cases). The fees associated with an installment agreement are also considerably lower than those required for an offer in compromise application.

Partial Payment Installment Agreements

In some ways, partial payment installment agreements are similar to the offer in compromise program. This payment option is also based on a taxpayer’s ability or inability to pay. This payment plan requires you to make monthly payments until the Collection Statute Expiration Date.

However, these payments are not enough to pay off your tax debt in full before the CSED passes, so the rest of your tax debt is then written off. Plan on providing in-depth financial records for this payment option, and note that if your finances improve before the CSED, the IRS can demand payment in full.

Currently Not Collectible Status

This form of relief is only extended to taxpayers for whom making any payments toward their tax debt would cause extreme hardship. Currently not collectible status pauses all collection activity, but interest and penalties continue to accrue. The IRS may revoke your currently not collectible status if your financial situation changes.

Penalty Abatement

If penalties make up a big part of your tax debt, penalty abatement could give you some much-needed relief. For example, failure-to-pay and failure-to-file penalties can each add 25% of your initial tax debt to your final tax bill. Furthermore, you then have to pay interest on those penalties. Penalty abatement gets rid of those penalties and the interest associated with them.

How to Know If You’ll Qualify Before You Waste Time and Money

It’s important to take this process extremely seriously and not rush through it. When it comes to trying your hand at something new or risky, people often say, “The worst they can say is no.” That isn’t the case with an offer in compromise.

Yes, the IRS can say no, but they can also keep your $205 application fee and your 20% down payment or any monthly payments made toward your period payment schedule. Although the payments go toward your tax debt, they may be more than you wanted to pay if you weren’t getting an offer.

That’s why an in-depth financial analysis is necessary. You’ll want to pull your IRS transcript for a full overview of what you owe and how it breaks down, look into your assets and the true amount of equity you have in each, allowable living expenses, and how much disposable income the IRS thinks you have, and whether or not other payment options may be accessible to you.

Yes, this takes time—and we know that can be frustrating when you just want some relief from the pressing burden of tax debt. But spending the time on a financial analysis now can save you even more time down the road, not to mention the hundreds or thousands of dollars you may put down on your offer. It’s better to find out that you’ll never qualify before you spend time and money applying. You can then use that time and effort to find a payment option better suited to your circumstances.

Why You Should Reach Out to Seattle Legal Services

The team at Seattle Legal Services knows how mentally draining tax debt can be. We’ve helped countless taxpayers find relief through a variety of IRS programs and payment options. That means that we’ve also been through the offer in compromise application process many times.

Our team is extremely thorough in each client’s financial analysis because we believe in telling you upfront what to expect if you move forward with an application. If you have a chance at having your offer accepted, we will ensure that your application is accurate, complete, and substantiated by the IRS’s requested documentation.

By telling you what to expect and what the timeline usually looks like, we hope to alleviate some of your anxiety and prepare you for whatever comes next.

Even if an offer in compromise isn’t the right option for you—perhaps your income is too high, or your assets disqualify you—we can still help. Other payment options may be suitable for your needs, and thanks to the full financial analysis we do to see if you qualify for an offer in compromise, we’ll be able to advise you on potential next steps.

While an offer in compromise can bring significant relief to those who qualify, it isn’t a one-size-fits-all option that is accessible to every taxpayer. Whenever possible, the IRS wants to secure payment in full. Before you go through the work of an offer in compromise application, analyzing your finances and talking to a tax professional can help you better understand the likely outcome of your application.

Contact Seattle Legal Services now to schedule a complete evaluation of your tax situation and determine whether or not an offer in compromise is the best tax resolution method for you. Give us a call at 206-536-3152 or reach out online.