If you owe tax debt you cannot afford to pay, you may qualify for an offer in compromise with the IRS. With this process, you can arrange to settle your balance for less than you owe if you can prove that you are in financial hardship. 

Before moving forward, review the strict guidelines for OIC eligibility and learn how to apply. 

Eligibility requirements 

Before IRS consideration for an OIC, you must file all outstanding tax returns and make all estimated tax payments unless you have already filed an extension and received approval. You may not have an open bankruptcy filing to qualify for this program. The IRS Pre-Qualification Tool can help you determine if you are eligible for the OIC program. 

Making an offer 

To request an OIC, you must file IRS Form 433-A as an individual taxpayer or Form 433-B as a business owner, along with Form 656 indicating your tax debt, an initial payment toward your debt and an application fee of $186, which is not refundable. 

This application requires you to submit an offer amount, which must reflect the percentage of tax debt the IRS could reasonably expect to collect from you. You can request a lump sum OIC arrangement or a payment plan. For the latter arrangement, send your first payment with your application packet. If you plan to pay your OIC in a lump sum, send 20% of that amount with your application. 

Review and acceptance 

While your application is pending, you should continue to make periodic payments as you requested in your application. These payments can apply to a specific year if desired. Although the IRS will suspend collection activities during this time, you may still receive a Notice of Federal Tax Lien. If you already have an installment agreement, you do not need to make those payments in addition to your proposed OIC payments. 

If you do not receive IRS approval for your OIC in two years, approval is automatic. If the IRS rejects your application, you have 30 days to appeal.