The IRS settles for what it can collect, not for what you can talk it into.

The three grounds

• Doubt as to collectibility. You cannot pay the full amount before the collection period expires. This is the basis for nearly all accepted offers.
• Doubt as to liability. There is a real dispute about whether you owe the tax, and you did not have a fair chance to contest it earlier. This uses a different form, Form 656-L.
• Effective tax administration. You could technically pay, but collection would cause economic hardship or would be unfair because of exceptional circumstances, such as a serious long-term illness that will consume your assets.

How the IRS calculates an acceptable offer

The IRS computes your reasonable collection potential from the financial statement you submit on Form 433-A (OIC), or Form 433-B (OIC) for a business:

• Net realizable equity in assets. Bank balances, investments, retirement accounts, vehicles, and real estate, generally valued at a quick-sale discount, minus the loans against them.
• Future income. Your monthly income minus allowable living expenses, multiplied by 12 if you will pay the offer in five or fewer installments within five months, or by 24 if you will pay over a longer period.

The allowable expenses are where most of the work is. The IRS uses national and local standards for food, housing, transportation, and health care. For Tarrant County and Dallas County, the housing allowance is a fixed figure that may be less than your actual mortgage or rent. Expenses above the standards have to be justified with documents. An offer prepared without reference to those standards is a guess.

Eligibility

• All required federal tax returns are filed.
• You have made the estimated tax payments or withholding required for the current year.
• If you have employees, the current and prior quarter's payroll deposits are made.
• You are not in an open bankruptcy case.
• You have received a bill for at least one of the debts included in the offer.

Payment options and fees

A lump sum offer requires 20 percent of the offered amount with the application, and the rest in five or fewer payments after acceptance. A periodic payment offer requires the first monthly payment with the application and continued payments while the IRS considers it. Those payments are not refunded if the offer is rejected. They are applied to the debt. There is also an application fee. Taxpayers who meet the low-income certification guidelines pay neither the fee nor the payments during consideration.

After acceptance

You must file and pay all taxes on time for the next five years. If you do not, the IRS can default the agreement and reinstate the original debt, less what you paid. Federal tax liens are released once the offered amount is paid in full.

If the offer is rejected

You have 30 days to appeal a rejection to the IRS Independent Office of Appeals. Many rejections come down to a disagreement about one asset value or one expense category, and those can be resolved on appeal. An offer that the IRS does not reject within 24 months of receipt is deemed accepted by law.

When an offer is the wrong tool

If your income supports a monthly payment that would retire the debt within the remaining collection period, the IRS will expect an installment agreement instead. If you have no equity and no disposable income, currently not collectible status stops collection without the fee, the disclosure risk, or the five-year compliance term, and the collection clock keeps running in your favor. If the real problem is penalties, abatement may remove a large share of the balance. A straight answer about which of these fits should come before any offer is prepared.

When a lawyer matters

Valuation and judgment. How a retirement account, a home with equity, a closely held business, or a spouse's separate income is presented changes the number, and in Texas, community property rules complicate what belongs on the form. An attorney can also give privileged advice about facts you would rather not put on a signed financial statement until you understand their consequences. Every figure on Form 433-A (OIC) is signed under penalty of perjury, so accuracy is not optional.