In this article, you can discover…
- What an “offer in compromise” means for your tax debt settlement.
- How long the offer in compromise process takes, and what to expect.
- Your next steps if your offer in compromise application is denied.
What Is An Offer In Compromise, And How Do They Work For Tax Debt Settlement?
An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their federal tax debt for less than the full amount owed. It’s typically an option for individuals facing financial hardship, such as those living paycheck to paycheck with limited assets and minimal disposable income.
The IRS designed the program to assist people who cannot reasonably pay their tax debt in full. If your financial situation meets certain criteria, the IRS may accept a reduced payment as full satisfaction of your debt. North Carolina and South Carolina also offer their own state-level compromise programs. However, these tend to be more stringent and harder to qualify for than the federal program.
What Are The Eligibility Requirements For An Offer In Compromise With The IRS?
The IRS evaluates Offers in Compromise based on the taxpayer’s Reasonable Collection Potential, which is essentially their ability to pay. There are three main types of offers:
Doubt As To Collectibility
This is the most common type. It applies when the taxpayer does not have sufficient assets or income to pay off the full tax debt. If the IRS determines they likely won’t be able to collect the full amount within the statute of limitations, which is typically 10 years, they may accept a lesser amount.
Doubt As To Liability
This offer is based on a legitimate dispute about the validity or accuracy of the tax debt itself. For example, if the tax was assessed in error or reported incorrectly, and the taxpayer missed deadlines to appeal, they may submit an offer under this category.
Effective Tax Administration
This applies when the taxpayer technically has the ability to pay since they have equity in a home or a retirement account, for example, but doing so would create financial hardship or be unfair due to special circumstances. An example might be a retiree living on a fixed income who needs access to their retirement funds for basic living expenses.
John Ecton, founder of Ecton Law Firm, PA, in South Carolina, has built a reputation for helping individuals navigate complex tax relief options like Offers in Compromise.
With years of experience advocating for clients before the IRS and in tax court, John Ecton and his team understand how to challenge unjust denials and push for fair outcomes, even when the odds seem stacked. His team has helped numerous taxpayers reduce overwhelming debt and avoid long-term collection action.
If you’re struggling with tax liability and think an Offer in Compromise might be right for you, contact Ecton Law Firm today.
How Long Does The IRS Offer In Compromise Process Take? What Factors Can Delay Approval?
The IRS Offer in Compromise process typically takes 8 to 12 months, though it can extend beyond that. After submitting the offer and all required documentation, your case enters a queue with other applications. Key factors that may delay the process include:
- Missing or incomplete documentation
- Not staying current on tax filings or estimated payments
- IRS backlogs or the need for updated financial information during the review
While the offer is pending, IRS collection activities are suspended, offering temporary relief. However, it’s important to note that the statute of limitations on your debt is also suspended during this period. This may extend your exposure to collection efforts if the offer is ultimately denied.
What Are Potential Consequences If My Offer In Compromise Application Is Denied By The IRS?
Roughly 25% of offers are accepted, meaning most are rejected, especially those submitted without professional assistance. If your offer is denied, you have 30 days to file an appeal. You can appeal if the IRS made an error in evaluating your financial situation or misapplied the law.
If you miss the appeal window, your case will return to active collections, and interest will continue to accrue. You can reapply later if your financial circumstances change significantly.
Turning Around Denied Offers In Compromise
One notable case we handled involved a client whose offer was initially rejected due to what the IRS deemed a “dissipated asset.” They claimed she disposed of a property to manipulate her financial standing. However, we believed she clearly qualified for relief and moved forward with the case.
The IRS claimed she had sold property just to appear eligible. In reality, she had briefly been added to a deed and then removed without any ownership or financial stake. They also overvalued the property by ignoring the mortgage encumbrance, essentially treating the full value of the property as available equity. We challenged both assertions:
- First, we argued she never truly owned the asset.
- Second, we pointed out the incorrect valuation and failure to deduct the mortgage balance.
The case escalated to tax court, where the IRS agreed to adjust the valuation significantly, from over $200,000 to less than $20,000. The fight to remove the asset consideration entirely was long and hard.
This case highlights the sincere importance of:
- Understanding how the IRS calculates equity and eligibility
- Leveraging appeal rights
- Presenting strong evidence and, when necessary, escalating to court
Appeals often receive more thoughtful consideration than initial reviews, so persistence and preparation can make a major difference. Keep this in mind should you ever find yourself in a situation where you may need to challenge an unfavorable decision, whether it’s a denied Offer in Compromise, a disputed audit finding, or an unexpected tax assessment. Having strong documentation, a clear explanation, and, when possible, professional representation can significantly improve your chances of a favorable outcome.
Still Have Questions? Ready To Get Started?
For more information on Offer in Compromise applications, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (803) 797-4600 today.
