IRS Offer In Compromise Example: $13,444.76 Tax Debt Resolved For $50 (Case Study)
In this case, a client who owed the IRS $13,444.76 had an Offer in Compromise of $50 accepted after the tax professional documented that the client could not pay the balance or keep up installment payments. It is one real case, not a typical result. The IRS accepts an offer only when the amount reflects what it could reasonably collect, and most offers are based on your income, expenses and assets.
What Was The Client's Situation?
The client owed the IRS $13,444.76 from a tax credit claimed in error and could not afford the installment agreement already in place. The client contacted us owing about $14,000 to the IRS and was already in an installment agreement. The balance came from a tax credit claimed in error on a prior return. After the account was investigated, the balance being collected was confirmed at $13,444.76.
| Detail | This case |
|---|---|
| Total amount owed | $13,444.76 |
| Starting point | Already in an installment agreement |
| Resolution | Offer in Compromise |
| Accepted offer | $50.00, one-time payment |
| Time from filing to approval | About 4 months |
| Phases worked | Investigation and resolution |
How Was The Case Investigated?
The tax professional paused collection, pulled IRS transcripts and documented the client's income, expenses and assets. The first step was to request a hold on collection so that enforcement, such as levies, would not expand while the case was reviewed. The tax professional then pulled the client's IRS account transcripts and master file records, gathered bank statements and IRS letters, and organized the client's income, expenses and assets on the IRS collection financial forms.
With the full picture in hand, the conclusion was that the client could not pay the balance or afford to keep making the installment payments. That made an Offer in Compromise the option worth pursuing.
How Was The $50 Offer Accepted?
The offer was filed with full financial documentation and the IRS accepted it after about four months. The offer was prepared and submitted with the supporting financial information. It took about four months for the IRS to review it, and the IRS agent then called to confirm the offer of $50 had been accepted. After the accepted amount was paid and the offer terms were met, the remaining balance was resolved.
How Does An IRS Offer In Compromise Work?
You offer the IRS less than you owe, based on what it could reasonably collect from your income and assets, and pay a $205 application fee plus an initial payment unless you qualify as low income. An Offer in Compromise lets you settle a federal tax debt for less than the full amount when paying in full would not be possible or would create a real hardship. The IRS generally compares your offer with your reasonable collection potential, which is based on your assets and the income left over after allowable living expenses.
- Eligibility basics. You must have filed all required returns, made required estimated payments, and not be in an open bankruptcy case.
- The forms. Offers are submitted on Form 656 with financial statements on Form 433-A (OIC) and, for businesses, Form 433-B (OIC).
- Fees and payments. The application fee is $205. A lump-sum offer requires 20% of the offer with the application and the rest in five or fewer payments after acceptance; a periodic-payment offer requires ongoing payments while the IRS reviews it. Individuals who meet the low-income certification skip the fee and payments.
- The review. Most collection activity is suspended while the offer is pending, but the IRS may file a federal tax lien and the collection period is extended. If the IRS does not decide within two years, the offer is treated as accepted.
- If it is rejected. The $205 fee is not refunded, payments are applied to your balance, and you can appeal to the IRS Independent Office of Appeals.
- After acceptance. You must stay current on filing and paying taxes for the following five years or the offer can be defaulted, the IRS keeps refunds due for the year the offer is accepted, and any federal tax lien stays until the offer is paid.
The IRS offers a pre-qualifier tool you can use to see whether an offer may be worth exploring.
Could An Offer In Compromise Fit Your Situation?
An offer may fit if your income and assets show you cannot pay the full balance; if you can pay over time, the IRS usually expects a payment plan instead. Many people ask whether they can settle for "pennies on the dollar" after seeing ads; the honest answer is that the IRS decides from your numbers, not from a negotiator's pitch.
| Option | May fit if |
|---|---|
| Offer in Compromise | Your income and assets show you cannot pay the full balance before the collection deadline |
| Installment agreement | You can pay the balance over time with a monthly payment you can afford |
| Currently not collectible status | You cannot pay anything right now without hardship; interest and penalties keep growing |
| Penalty abatement | Penalties make up a large part of the balance and you have reasonable cause or a clean history |
See more real cases on our tax relief issues and solutions page, or learn about tax debt relief options.