Offer in Compromise: How to Ask the Government for a Discount

There comes a time in life — usually around your third unopened IRS notice and a rapidly emptying bottle of Tums — when you start to wonder, Can I haggle with the IRS? Surprisingly, the answer is yes. Sort of. But don’t get too excited … this isn’t a flea market, and the IRS is not some cheerful vendor tossing in a free avocado slicer. 

This is called an Offer in Compromise (OIC), and it’s the federal government’s way of saying, “Fine, we’ll take what we can get, if you can just prove you’re not hiding a Ferrari in your cousin’s garage.”

The IRS Bargain Bin

What Is an Offer in Compromise?

At its core, an OIC is a formal request to settle your tax debt for less than the full amount you owe. The IRS doesn’t do this out of kindness; they do it because they’d rather get something than nothing. So while you’re asking for a deal, they’ll be checking if you’re living in a mansion or a shoebox.

The Three Flavors of “Please Don’t Make Me Pay That Much”

An Offer in Compromise is not a blanket “I’d rather not” plea. Your argument must fit neatly into one of these three official categories.

1. Doubt as to Collectibility: You simply can’t pay, and you have the depressing spreadsheets to prove it.
2. Doubt as to Liability: You’re not even sure you owe this much, or even owe at all.
3. Effective Tax Administration: You technically could pay, but doing so would put you in such financial straits that Dickens could have written a novel about you. (Selling your home and living in a van is not that glamorous, despite what Instagram says)

Qualifying Without Qualms

Once you’ve determined you might be a good match, the IRS is going to take a long, hard look at your financial life to see if you’re really the one.

The IRS Pre-Qualifier Tool

Imagine a dating app, but for IRS mercy. Answer some questions at irs.gov, and it’ll tell you whether you stand a chance or if the IRS is going to ghost you.

What They’ll Snoop Into

• Your income and every expense, down to your Netflix account
• Equity in homes, cars, and yes, even your Pokémon card collection
• Whether your lease is reasonable or just the byproduct of bad life choices

How It All Works

The Paper Parade

Filing for an OIC is less “Let’s make a deal” and more “Let’s fill out 23 pages of federal forms in triplicate.” You’ll need:

• Form 656: The official “Please accept this modest offer” form
• Form 433-A (OIC) or 433-B for businesses: Where you bare your financial soul
• A $205 application fee (waived if you qualify as low income)
• An initial payment, which they keep, even if they reject you faster than a bad Tinder match

Payment Options

• Lump Sum: Pay 20% up front, then the rest in five or fewer payments
• Periodic Payment: Pay monthly while they think it over (which can take a while)
• Low-Income Waiver: No fee, no upfront payment, and a slightly smaller headache

The Waiting Game (and Possible Endings)

• If Accepted: You pay the agreed amount, stay current on taxes for five years, and the IRS removes its lien… eventually. They also keep any refunds due during the review period.
• If Rejected: You can appeal within 30 days. Think courtroom drama but with more receipts.
• If Returned: Your application can be sent back without review if it’s incomplete or you’re using it as a stall tactic. No refund, no sympathy.

Downsides & Scams to Avoid

Beware the “OIC Mills”

If a company promises guaranteed acceptance or says you qualify before reviewing your finances, run. These outfits are to tax relief what pyramid schemes are to friendship.

Other Downsides:

• You give up certain tax credits
• The IRS might still file a lien
• Your financial life gets put under a microscope, so maybe hold off on the jet ski

When It Works, It Works

A well-prepared Offer in Compromise can save you thousands and let you breathe again without flinching at the mail. But many are rejected because the IRS decides you can technically pay more — say, if you liquidated your kid’s college fund and stopped buying kombucha. 

So if you’re going to apply, be honest, be thorough, and for the love of all that’s deductible … don’t forget the forms!