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Avoid These Mistakes When Negotiating an Offer in Compromise with the IRS

Avoid These Mistakes When Negotiating an Offer in Compromise with the IRS

You’re not swimming, but do you feel like you’re drowning in the sea? But not on muddy waters but of IRS debt? Do late-night worries about collection calls and letters keep you up at this very moment? You aren’t alone, friends, as tax burdens this heavy can induce complete paralysis. 

But hold on just a hot second – on the not-so-distant horizon, I spy a glimmer of hope peeking through! Did you know the fine folks at the IRS actually have a little something called an Offer in Compromise that could wipe out most of your money woes? Through an OIC, folks struggling with financial hardship have the chance to settle what they owe for a smidge of the full price. 

By filling out the proper paperwork and meeting their criteria, you get an opportunity to whittle down your tax debt to a fraction of what it is now. And once the IRS approves? They’ll legally forget about any amount leftover – effectively pressing their big red reset button on your finances after years under their thumb. Now doesn’t that prospect pique your interest in the slightest?

OIC At Glance

Who wouldn’t jump at the opportunity to get out from under a suffocating pile of tax bills? Just imagine how liberating it would feel to have the IRS off your back for good. You could finally sleep easy at night and spend more time focusing on goals that really matter, like your family, health, or career. 

If slashing your liability through an Offer in Compromise inspires you to action, this guide provides all the tools and knowledge needed to tackle the application process step-by-step. I’ll walk you through the essential details like qualifying requirements, necessary forms, establishing your financial case, negotiating with the IRS and common mistakes to avoid. By the end, submitting a successful OIC will feel very achievable. 

Ready to learn how you could gain freedom from federal tax debt? Let’s get started on exploring if an Offer in Compromise is the right fit for your situation.

Understanding the Basics of an Offer in Compromise

The Lowdown on What It Is and Who Qualifies 

Basically, an Offer in Compromise is a lil’ “deal” between you and the IRS where you suggest paying less than what you truly owe ’em. The tax folks may say yes if they decide to try to collect the full thing that would wreck your finances or treat you unjustly due to some funky scenario.

So in short, an OIC is an agreement where you offer to settle for less moolah. The IRS takes into account if pocketing the entire amount would burst your bank or seem downright unfair because of rare circumstances on your end. As long as certain criteria are met, there’s a chance they’ll accept your compromise.

To qualify for an OIC, you generally need to:

– Owe at least $10,000 in federal taxes, penalties, and interest

– Have filed all required tax returns 

– Be current on estimated tax payments (if self-employed)

– Not be in an open bankruptcy proceeding

– Not have the ability to full pay your tax debt through an installment agreement or other means

– Meet guidelines for allowable living expenses


The IRS also considers factors like your income, expenses, assets, and overall financial situation to determine eligibility. Only some people who apply will be accepted, so ensure you have a solid case.  


Pros and Cons of Opting for an OIC

Submitting an OIC gives you a chance to significantly lower your tax debt burden. If accepted, the IRS will forgive any remaining balance—giving you a fresh financial start. However, OICs also have disadvantages to keep in mind:

Pro: Potential tax services. If the IRS accepts your offer amount (often 20-25% of what’s owed), that’s all you’ll have to pay.

Pro: Avoiding wage garnishments and bank levies. An OIC protects your assets while under consideration. 

Con: Unknown outcome. Getting accepted isn’t guaranteed; waiting for a decision could take a year or more. 

Con: Less leverage. Once submitted, you lose some negotiating power if the IRS counteroffers or denies your application. 

Con: Future tax compliance. The IRS may reject future OICs if you wind up owing taxes again after acceptance.

An OIC is usually better than bankruptcy if you don’t meet filing thresholds. And waiting for collections to expire could take 10+ years. Weigh these pros and cons carefully based on your unique financial situation.


How to Apply for an Offer in Compromise

Required Forms and Documentation 

To submit an OIC, you need to fill out Form 656, along with supporting documents. Follow these steps:

  1. Submit Form 656, plus a non-refundable $205 application fee. Carefully fill out the financial details worksheet.  
  2. Provide Form 433-B (businesses) or Form 433-A (individuals) listing all the assets, wages, and expenses. Add the proofs of documents like tax returns, bank/investment statements, and pay stubs.
  3. Send requested documentation to prove your current situation, like recent medical bills if citing hardship. Clearly explain your reasons for not paying in full.
  4. Pay 20% of the total offer amount upfront or the lowest monthly payment if paying over time. This proves your offer is made in good faith.
  5. Mail completed forms along with any additional correspondence directly to the IRS, allowing adequate processing time of 3-6 months.  


Navigating the IRS Negotiation Process

After submitting your application, the real “fun” begins—waiting for an IRS determination! Most OICs are reviewed over 6-12 months as the IRS verifies finances and decides whether your offer seems reasonable. 

During this time, you may receive counter-offers to pay more. Negotiate respectfully but firmly using any new financial information on your changed circumstances. Appealing a denied OIC requires reworking numbers and sending additional documentation for reconsideration. 

With patience and open communication, you have a decent chance of settling for less. But prepare for a lengthy back-and-forth that requires flexibility on all sides. Hiring a tax pro can help guide the process.


Common Mistakes to Avoid When Applying for an OIC

Carelessly submitted OICs often get rejected, wasting both your time and money. Here are some of the biggest blunders people commonly make and how to sidestep them:

Not qualifying financially. Study eligibility rules thoroughly and provide rigorously verified household finances showing the inability to fully pay. 

Inflating expenses. The IRS compares expenses to reasonable standards, so don’t pad living costs. Small adjustments could disqualify your application.  

Omitting key details. Missing required forms, fees or documentation ensures a denial. Double check your application is complete before mailing.

Failing to disclose assets. Being caught hiding bank accounts, real estate, or other valuables signals dishonesty and invites automatic rejection. 

Lying about income. OIC applications are audited, so fudging numbers will backfire. Honestly report your full earnings to establish credibility.

Missing payment deadlines. Keep good faith deposit/payments on schedule or risk invalidation of the agreement if accepted down the road. 


Avoid sloppy mistakes by carefully preparing your OIC submission and being upfront with all financial specifics. Prove your case is legitimate and compliant with IRS standards.



Settling your tax debt for less than owed through an Offer in Compromise can alleviate significant financial strain. Just be sure your situation aligns with eligibility rules before embarking on this tax consultancy.  

With diligent preparation of required forms, documentation of present hardship, open communication during IRS review, and avoidance of common errors—your chances of accepting a reasonable offer increase substantially. Weigh all factors carefully and consult an experienced tax professional for guidance in navigating this complex process.

If an OIC makes sense for resolving your IRS debt woes, start your application today. Remember—if you don’t ask, the answer is always no. But with the right approach, you too, could emerge from Uncle Sam’s grasp with a clean slate to build upon financially.

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