How to Settle Your Tax Debt for Less?

Tax debt builds up fast. Interest and penalties keep adding on, and soon the letters and calls from the IRS feel nonstop. For many people, paying the full amount just isn’t possible anymore, and that’s when the IRS gives you another way forward. Instead of pushing you into a corner, they offer a process that can ease the burden and give you a fair chance to deal with what you owe, known as the IRS offer in compromise.

This blog post will show you how that process works, why so many offers get turned down, and how Mr. Michael D. Sullivan can guide you toward a better result. 

Read along to see what really matters when it comes to settling with the IRS.

What is an Offer in Compromise (OIC)?

An Offer in Compromise is an Internal Revenue Service (IRS) program that helps those people who are in trouble paying their full tax bills. If you are under financial hardship and cannot pay the full amount of your tax, through this application for an IRS tax settlement, you may be able to pay smaller amounts that are manageable for you.

It’s meant for situations where paying the full tax debt would create serious financial stress. If the IRS agrees that you truly can’t afford to pay in full, they may accept your offer and clear the remaining balance.

This gives taxpayers a real chance to move forward without being buried in debt they can’t afford.

Eligibility Criteria

Before the IRS reviews your Offer in Compromise IRS application, you need to meet a few basic rules. This program is meant only for individuals or businesses in good standing and not involved in certain legal or filing issues. Here’s what you should know:

1. You can’t be in bankruptcy right now: If you’re going through an active bankruptcy case, you won’t qualify for an IRS Offer in Compromise. Any tax debt you have needs to be handled through the bankruptcy process itself.
2. All required tax returns must be filed: The IRS won’t consider your offer if you haven’t filed every tax return you’re supposed to. Even if you can’t pay, you still need to file. Being behind on filings will make you ineligible.
3. Business owners must be current on tax deposits: If you run a business and need to make regular payroll tax deposits, you have to be up-to-date, especially for the current quarter and the two before it. Missing deposits can disqualify your offer.
4. No criminal tax investigations: If your tax case has been handed over to the Department of Justice for possible criminal charges like fraud or false returns, the IRS won’t accept an offer for the years under investigation.
5. Your finances must show that you truly can’t pay: The IRS will look closely at your full financial situation, your income, your monthly expenses, and any assets you own. They only accept offers when it’s clear that you genuinely can’t afford to pay the full amount.

If none of these issues apply to you, you’re allowed to apply. This doesn’t guarantee that the IRS will accept your offer, but it means they’ll at least review it and give you a fair chance to resolve your debt.

If you’re not sure you qualify, you can use the IRS’s free OIC Pre-Qualifier tool to check your chances before applying.

Here are some of the benefits you can get if the IRS accepts your offer →

1. You won’t have to deal with new IRS collections while they review your request: Once you apply, the IRS usually stops sending letters, freezing accounts, or taking money from your paycheck.
2. You don’t have to pay everything at once: The IRS lets you choose how to pay, either in one go or through small monthly payments based on your budget.
3. Low-income taxpayers don’t have to pay upfront: If you meet the IRS Low-income Certification, you don’t have to pay the $205 application fee or the first payment when you apply.
4. You’re allowed to keep your refunds from the years included in your offer: If the IRS accepts your Offer in Compromise on or after November 1, 2021, they will no longer offset refunds from the same calendar year that are included in your offer.

Application Process

Applying for an IRS Offer in Compromise is not complicated if you break it into steps. Here’s how it works:

How Does an IRS Offer in Compromise Work?

When you send in an IRS Offer in Compromise, the IRS doesn’t just look at the amount you wrote down. They study your finances closely to decide whether your offer is fair and whether it matches what they think they can actually collect from you.

How Does the IRS Decide What You Can Pay?

The IRS uses something called Reasonable Collection Potential (RCP). In plain words, that’s the total of:

• The quick-sale value of what you own (like cash, property, or a car, minus loans), and
• Any monthly income you have left after covering basic living expenses (using IRS expense standards).

Together, this number shows what the IRS believes you’re able to pay. Your offer usually needs to be at least that much for them to consider it.

Example: if you have $1,000 of usable equity in assets and about $200 left each month after bills, the IRS will weigh both when judging your offer.

Types of Offers the IRS May Accept

Not every IRS Offer in Compromise is the same. The IRS looks at three different situations:

1. Doubt as to Collectibility: You agree you owe the back tax, but there’s no way you can pay it in full. This is the most common type.
2. Doubt as to Liability: You believe the tax bill itself is wrong. In that case, you use Form 656-L to challenge it.
3. Effective Tax Administration: You could technically pay, but doing so would cause serious hardship, like losing the ability to afford medical care.

What Happens While the IRS Reviews Your Offer?

• Collection actions pause: The IRS usually stops new liens, levies, and garnishments while your offer is being reviewed.
• Interest keeps running: Even during review, interest and penalties continue to add up in the background.
• The 10-year clock is paused: The statute of limitations for collections (CSED) is frozen while your offer is pending.

The IRS might ask for extra documents or suggest a revised amount instead of outright rejecting your offer. If they do deny it, you have 30 days to file an appeal.

After Acceptance

Getting your Offer in Compromise accepted is a big tax debt relief, but it comes with conditions. The IRS clears the rest of your debt only if you stick to the rules that follow.

• Stay Compliant for Five Years: For the next five years, you must file every tax return on time and pay all taxes you owe in full. If you run a business, you also need to make current payroll deposits. Missing even one filing or payment can break your agreement and bring back your old balance.
• Complete All Offer Terms: If you agreed to pay in installments, you must finish every payment as promised. The IRS won’t fully release your liability until the last payment is made.
• Federal Tax Liens: The IRS usually keeps a lien on your property until you’ve met all the terms of your OIC. Once you finish everything, they release the lien and clear your record for those years.
• Refunds After Acceptance: The IRS will not take your future refunds once your OIC is in place, but they will keep any refunds from tax years assessed before the date of acceptance.

What Can Cause a Default?

Your OIC can be canceled if:

• You missed a required payment.
• You don’t file or pay on time within the 5-year compliance window.
• You provided false or incomplete information in your application.

If your offer defaults, the IRS reinstates your full original debt, minus any payments you already made.

The Role of a Former IRS Agent in Your Offer in Compromise

When it comes to resolving tax debt, few professionals understand the process better than someone who worked inside the IRS. Mr. Michael D. Sullivan spent 10 years with the Internal Revenue Service as a Revenue Officer and Offer in Compromise Specialist before moving into private practice. That insider knowledge gives him a perspective most practitioners can’t offer.

As a Former IRS Agent, he knows:

• How the IRS reviews an OIC, what details matter most, and what can lead to rejection.
• The standards they use include how income, expenses, and assets are weighed.
• The pitfalls to avoid range from incomplete forms to overlooked documents, which can delay or sink an application.

With over 42 years of private tax practice, Mr. Sullivan has guided individuals and businesses through countless complex cases. His ability to combine IRS experience with real-world client work makes him uniquely positioned to help taxpayers reach fair settlements.

Common Reasons the IRS Rejects Compromise Offers

Many Offers never make it through the final approval because of avoidable errors. Knowing the common mistakes in IRS OIC applications and understanding how to avoid OIC errors can make the difference between approval and rejection. 

Here are the most common reasons why:

• Missing documents: If you don’t provide bank statements, pay stubs, or expense records, the IRS won’t have enough proof to consider your case.
• Offering too little when you can afford more: Your offer must reflect what the IRS calculates as your reasonable ability to pay.
• Unpaid estimated taxes: If you owe current estimated payments, the IRS will not move forward with your offer until you are fully up to date.
• Active bankruptcy: Tax debts have to be handled within the bankruptcy process, so you can’t apply for an OIC while in bankruptcy.
• Hidden income or assets: If the IRS finds unreported money or property, they will reject your offer and may take further action.
• Incomplete forms: Leaving blanks or errors on Form 656 or the financial forms is one of the fastest ways to get a rejection.
• Not including the application fee or initial payment: Unless you qualify for the low-income waiver, forgetting these payments will stop your offer cold.
• Not following Form 656 instructions: Even small oversights, like missing signatures or attachments, can result in rejection.

Act Now to Resolve Your Tax Debt with an Offer in Compromise

The IRS Offer in Compromise can be very effective in settling tax debt; it is often the problem that taxpayers come up against. However, recent data from the IRS shows that only about 40% of the offers are accepted; thus, the majority are rejected.

Success relies on being honest, providing strong proof, explaining the situation clearly, and submitting complete documentation on the first attempt. Instead of focusing on an accepted application, an applicant may go off on their own, wasting valuable time. A single mistake can lead to rejection.

That’s where professional help makes a difference. Mr. Michael D. Sullivan understands exactly how the IRS reviews these cases and ensures your application is complete from start to finish. And if your offer has already been denied, he can appeal, review the reason, fix the issues, and guide you through reapplying.

He assists taxpayers with U.S. tax obligations no matter where they live. Backed by a skilled team of attorneys, CPAs, and enrolled agents, if an IRS Offer in Compromise is not the right fit, he can also help you explore other solutions, including installment agreements, currently not collectible status, and tax relief.

You don’t have to face the IRS alone. Trust Mr. Michael Sullivan and his team, and schedule your consultation today so you know exactly where you stand and how to move forward.

Frequently Asked Questions