What Makes Offers in Compromise Successful?
Settling your IRS tax debt through an Offer in Compromise (OIC) can be a major relief when financial pressures become overwhelming. At Common Law PC in Salt Lake City, Utah, we work closely with individuals and businesses seeking a second chance at resolving unpaid tax liabilities.
Knowing how to approach the OIC process can make all the difference between acceptance and denial. As a tax law attorney, we’ve seen what helps an offer succeed—and what leads to rejection. From your income level to how your offer is calculated, every detail matters. Read on for more information about how to build a strong, well-supported Offer in Compromise.
The Purpose Behind the Offer in Compromise Program
The IRS created the Offer in Compromise program to give taxpayers a path to settle tax debt for less than they owe. It exists for those who truly can’t afford to pay the full amount, even with payment plans or asset liquidation.
An accepted OIC reflects the IRS’s judgment that collecting the full balance is either unlikely or would create unreasonable hardship. This means approval isn’t based on convenience—it’s based on detailed financial analysis. Understanding that purpose helps frame the rest of the process.
Since this program is intended for those in serious financial distress, the IRS scrutinizes each application. That makes your approach and documentation especially important, as we’ll explore next.
Meeting Eligibility Before Applying
Before submitting an OIC, taxpayers must meet several basic qualifications. If these aren't satisfied, the IRS will automatically return the application without review.
To even be considered, taxpayers must be current on all required tax filings. You also can’t be in active bankruptcy proceedings. In addition, self-employed individuals must have made all estimated payments for the current year.
If these standards aren’t met, it’s a waste of time and money to move forward. Once eligibility is confirmed, the next focus becomes the financial components of your offer.
How the IRS Evaluates Financial Capability
The IRS uses a detailed formula to assess a taxpayer’s ability to pay. They review assets, income, expenses, and future earning potential. This is called the “reasonable collection potential” (RCP), and it becomes the benchmark against which your offer is judged.
The lower your RCP, the more likely the IRS is to accept a reduced settlement. However, they won’t take your word for it—they’ll expect proof for every number you provide. Bank statements, pay stubs, asset valuations, and documentation of household bills are all part of the process.
Because this calculation is so central, working with a tax law attorney can help you avoid costly mistakes or overstatements. That accuracy also plays into the offer amount, which we’ll discuss next.
Making a Strategic Offer Amount
One of the most misunderstood parts of the OIC process is how to calculate the offer amount. Offering too little can make the IRS dismiss your request as unreasonable. Offering too much may place unnecessary strain on your finances.
The offer must reflect your RCP. The IRS typically requires either a lump sum cash offer (paid in five or fewer payments) or a periodic payment plan (monthly payments over two years). Your offer should be supported by documentation and math, not hope.
When the numbers are tight, presenting an honest and complete financial picture is more important than ever. The offer isn’t just a number—it’s a reflection of what you can realistically afford.
Presenting Accurate and Complete Documentation
Sloppy or incomplete paperwork is one of the leading reasons Offers in Compromise are rejected. The IRS expects thorough documentation that supports every claim you make in your application.
Some essential documentation includes:
Proof of income – pay stubs, bank deposits, benefit letters
Living expenses – rent or mortgage statements, utilities, insurance bills
Asset valuations – home equity statements, vehicle values, retirement accounts
Liabilities – loan statements, credit card balances, child support
The IRS applies national and local standards to certain expenses. For instance, they’ll limit allowable food, housing, or transportation costs based on your location and household size. A tax law attorney can help verify which expenses are allowed and how to present them correctly.
Accurate records help reduce processing delays and show the IRS that your application is worth serious consideration. Next, we’ll explore another key ingredient: hardship.
Demonstrating True Financial Hardship
The IRS isn’t in the business of forgiving debt lightly. They want proof that paying your tax liability in full would create genuine hardship. This is different from simply showing inconvenience or dissatisfaction with the amount owed.
Acceptable hardship examples include long-term unemployment, medical issues that reduce income, or caring for dependents with disabilities. If your circumstances limit your earning capacity or deplete your resources, make that part of your application.
Hardship claims must be credible and supported by evidence. That might include medical records, disability documentation, or long gaps in work history. Presenting this information clearly and persuasively is where a tax law attorney can make a powerful difference.
Even with hardship, the IRS will still compare your expenses against allowable standards. That’s why proving hardship is just one piece of a larger strategy, which includes your compliance history.
Maintaining Tax Compliance History
Your chances of having an offer accepted improve dramatically if you show a pattern of tax compliance. That means you’ve filed your returns on time, paid what you could, and responded to IRS communications.
A poor compliance record—such as repeated non-filing or ignoring notices—suggests to the IRS that you may not meet the terms of any settlement. They want to see that you're serious about resolving your debt and avoiding future problems.
Some key behaviors that show compliance include staying current on estimated tax payments if you're self-employed and avoiding new tax debt during the application process. These small steps build credibility with the IRS.
This background also affects how the IRS views your offer’s potential risk. Let’s now look at the payment structure and how it can influence acceptance.
Choosing the Right Payment Option
The IRS offers two payment structures for OICs: lump sum and periodic. While the lump sum requires a higher upfront payment, it can sometimes speed up approval. Periodic payments allow more time but require consistent monthly contributions during review.
The choice depends on your financial situation. Lump sum offers require 20% of the total offer to be paid with the application. Periodic plans don’t require that upfront amount but commit you to begin monthly payments right away.
Some key points to consider when choosing a payment structure:
Lump sum offers may be more attractive to the IRS if you're able to pay quickly
Periodic payment plans reduce the need for large upfront cash but increase total out-of-pocket costs
Defaulting on payments during the review process can result in rejection
Your tax law attorney can help calculate which method makes the most sense for your budget and increases your offer’s chances of being accepted.
Whichever option you choose, communication with the IRS during the review process is critical.
Staying in Contact With the IRS During Review
OIC reviews can take several months or more. During that time, the IRS may request additional documents or clarification. Prompt responses show cooperation and commitment to resolving your debt.
If you move, change jobs, or experience a change in income during the review, let the IRS know. Transparency works in your favor. Silence or delays can cause your application to be returned or rejected.
A tax law attorney can help manage those communications, track deadlines, and follow up if your file sits too long without updates. Staying actively engaged during the process is just as important as how you prepare the offer itself.
That effort matters even more when addressing IRS doubts or potential red flags.
Addressing Red Flags That Hurt Approval Chances
There are common red flags that trigger concern with IRS reviewers. If they suspect assets are hidden, expenses are inflated, or income is understated, they’ll likely reject the offer.
Some warning signs include:
Transferring assets to family or friends before applying
Claiming high personal expenses beyond standard allowances
Failing to disclose bank accounts or investment holdings
Inconsistent or outdated financial documentation
Anticipating these concerns and addressing them proactively can strengthen your application. A tax law attorney can help you identify weak areas before the IRS does, so you can correct or explain them in advance.
Knowing what not to do is just as important as knowing what to include. We’ll now look at how life changes can impact your application.
Timing Your Application Around Life Events
Changes in health, employment, or family size can dramatically affect your offer’s success. If you recently lost a job, gave birth, or had a medical emergency, that could reduce your RCP and improve approval chances.
Conversely, a sudden increase in income or inheritance may work against you. Timing your application to reflect your current and future ability to pay is critical.
For example, if you’re about to retire or enter a long period of reduced earnings, applying before your income rebounds can present a clearer case for settlement. Your tax law attorney can help you weigh whether to apply now or wait until your financial picture better supports your offer.
Once your offer is submitted, the final factor becomes your willingness to commit to IRS terms going forward.
Following Terms After Approval
If your OIC is accepted, that doesn’t end your obligations. You must remain fully compliant with tax filings and payments for the next five years. Failing to do so can void the agreement and restore the full balance owed.
That means timely filing, full payment of future taxes, and adherence to any special terms in your agreement. For some, that may include regular reporting or staying within a specific income range.
An experienced tax law attorney can help you understand what’s required after approval so you don’t unintentionally default. Success with an OIC doesn’t just mean getting approved—it means staying on track in the years that follow.
Let’s close with how we can help you through that process.
How Common Law PC Can Help
An Offer in Compromise offers real hope—but only when approached carefully, with realistic goals and complete financial detail. At Common Law PC, we walk clients through the entire process, from eligibility to post-approval compliance. Located in Salt Lake City, Utah, we serve clients throughout Park City, Provo, Ogden, and St. George. Contact Common Law PC today to get started.