Unlock Financial Freedom with an Offer in Compromise

A man and woman shaking hands in agreement over the IRS Offer in Compromise.

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Ergedine Pericles, May 13, 2025

Introduction: Seeking IRS Tax Relief? Discover the Power of the Offer in Compromise

Are you an individual or business facing overwhelming IRS tax debt? Do you genuinely want to comply with your tax obligations but find the amount owed impossible to pay without facing severe financial hardship? Take heart, the Internal Revenue Service (IRS) offers a potential lifeline through a program called the Offer in Compromise (OIC). This valuable tax resolution tool allows eligible taxpayers to settle their tax liability for a significantly lower amount than what they originally owe.

At Ergedine Pericles, CPA, P.A., we understand the complexities and anxieties that come with tax problems. An Offer in Compromise provides a formal avenue for certain taxpayers to resolve their IRS debt for a more manageable sum. However, it’s crucial to recognize that securing an OIC is not a simple process and demands careful consideration, meticulous preparation, and a thorough grasp of the IRS requirements. In this comprehensive guide, we will break down the essentials of the OIC process, helping you determine if this tax relief option is the key to your financial freedom.

What Exactly Is an Offer in Compromise?

An Offer in Compromise is a legally binding contract between you (the taxpayer) and the IRS that allows you to settle back taxes, penalties, and interest for less than the full amount owed. IRS won’t accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP).

To calculate RCP, the IRS evaluates:

• Income streams (wages, self‑employment, rental)

• Allowable living expenses (housing, utilities, food, transportation)

• Equity in assets (real estate, vehicles, investments, digital assets)

An OIC is not granted solely on hardship; the IRS also considers whether it can collect more through standard enforcement actions.

Why Should You Consider Filing an Offer in Compromise?

Filing an OIC offers advantages over other IRS resolution tools — like installment agreements or currently not collectible status:

1. Significant Tax Debt Relief: Potentially pay a fraction of your total liability.

2. Protection from Enforcement: Halts bank levies, wage garnishments, and liens once accepted.

3. Peace of Mind: Eliminates the anxiety of ongoing IRS collection activity.

4. Financial Fresh Start: Frees up cash flow for living expenses or business reinvestment.

5. Shorter Commitment Period:
• Lump‑Sum Cash Offer: 20% of your proposed amount with your application; remainder due in five or fewer payments after acceptance.
• Periodic Payment Offer: Initial payment with submission and monthly installments during review; if accepted, continue payments over up to 24 months—often shorter than the 72‑month span of traditional installment agreements.

Compare Options:

For a deeper dive into installment agreements, see our IRS Installment Agreement: Benefits & CPA Assistance.

Determining Your Eligibility

Before applying, confirm you meet all IRS OIC prerequisites:

• Filed All Required Tax Returns: No unfiled years within the last six (no Substitute for Returns on file).

• Current on Estimated Payments: Including self‑employment and year‑end taxes.

• Not in Open Bankruptcy Proceedings: You may only apply post‑discharge.

• Valid Extension (if applicable): For current‑year filing deadlines.

Failure on any point leads to automatic rejection.

Navigating the Application Process

1. Pre‑Filing Compliance Checks
• 6‑Year Lookback Rule: File returns for the past six years; replace any Substitute for Return (SFR).
• Current‑Year Obligations: Ensure all estimated and payroll taxes are paid.

2. Complete Required Forms
• Form 656, Offer in Compromise: Primary application detailing the tax periods and proposed offer.
• Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses: Detailed financial statements.

3. Gather Supporting Documentation
• Bank Statements & Pay Stubs
• Appraisals (real estate, vehicles)
• Loan Agreements and Investment Statements

4. Submit Payment
• Application Fee: Fee waiver possible if AGI ≤ 250% of poverty level.
• Initial Offer Payment: 20% (lump sum) or first periodic installment.

5. IRS Review & Negotiation
• The IRS may accept, reject, or counter your offer.
• You retain the right to negotiate or withdraw at any stage.

Pro Tip: Partnering with a CPA experienced in OIC negotiations can significantly improve your odds of acceptance.

What the IRS Considers in Your Offer

Assets

• Real Estate Equity: Primary and rental properties (FMV minus liability)

• Investments & Digital Assets: Stocks, bonds, cryptocurrency, NFTs

• Cash & Accounts: Checking, savings, on‑hand cash

• Personal Property: Vehicles, jewelry, art, collectibles.

• Retirement Accounts: subject to limited exemptions

• Business Assets: Equipment, inventory, goodwill.

Liabilities

• Secured Loans: Mortgages, auto loans

• Credit Card Debt: Only for necessary living expenses.

• Student Loans & Other Debts: Federal, private, business obligations.

Expenses

• IRS‑Allowed Living Costs: Housing, utilities, food, transportation

• Family Obligations: Childcare, health insurance, alimony/child support payments

• Business Operating Expenses (self-employed taxpayers): Rent, supplies, payroll

Honesty in disclosing every asset and expense is non‑negotiable; any omissions can lead to rejection or revocation.

Understanding the Approval Timeline

The IRS typically processes an OIC in 6–12 months, with timing influenced by:

1. Application Completeness: Accurate, thorough submissions minimize delays.

2. IRS Workload: Seasonal peaks and staffing levels affect review speed.

3. Case Complexity: Multiple years or extensive business finances require deeper analysis.

Respond promptly to IRS requests to keep your application moving

What You Must Do During the Evaluation Period

While your OIC is under review, you must:

• Remain Current on all filings and tax payments.

• Respond Promptly to any IRS requests for additional documents or clarification.

Non‑compliance at this stage typically leads to outright rejection.

The Crucial 5‑Year Compliance Rule

Upon acceptance, you enter a five‑year compliance period where you must:

1. File All Required Returns On Time.

2. Pay All New Tax Liabilities when due.

Failure triggers default, reinstates the full original liability (plus penalties and interest), and requires payment of the previously compromised amount.

Conclusion: Partnering for Successful Tax Debt Resolution

An Offer in Compromise can be the key to settling IRS debt for less than the full amount owed—if you meet the stringent IRS requirements and follow every step carefully. By partnering with Ergedine Pericles, CPA, P.A., you gain:

• Expert preparation of Forms 656 and 433‑A(OIC) or 433-B(OIC)

• Thorough documentation of assets, liabilities, and expenses

• Proactive management of IRS communications and deadlines

• Guidance through the critical five‑year compliance period

Don’t navigate the OIC process alone.

Contact our firm today to determine if an Offer in Compromise is right for you and take the first step toward lasting financial freedom.