Offers in Compromise (OIC) – How Tax Works
In episode 42 of How Tax Works, Matt Foreman discusses the often misunderstood Offer in Compromise process, focusing on what types of OICs are likely to get accepted and the different reasons to request one, as well as state OIC corollaries.
Listen to the episode here:
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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.
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Transcript:
**This transcript has been prepared automatically by AI and may contain inaccuracies**
Matthew Foreman (00:00)
Hello and welcome to the 42nd episode of How Tax Works. I’m Matthew Foreman. In this episode, I’ll discuss offers and compromise, not offer and compromises. I’m going to note that one. That’s always a fun one. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please hire your own attorney. Telling you to hire your own attorney, that’s legal advice. You can take that. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulation, case law, regulations, case law, and guidance to demystify how taxes shape the financial and business decisions that we all make.
Might get rid of that one. Might have to revise that at some point. We’re coming on 2026. This is the last one of the year, so we’re moving on.Before we get started, a few administrative things. New episodes every two weeks. Next episode, I’m getting out of controversy. This is the fourth one of a sort of quasi-series, quasi-non-series, whatever you want to call it.Excited. I think it’s been interesting, but we’re going to move on. We’re going to talk about allocations under section 704C of the Internal Revenue Code. We’re diving head first into one of the more quirky areas of Subchapter K.
If you have any questions, comments, or constructive criticism, you can email me at my FRB email address. I don’t have any webinars or speaking engagements for a little bit. I’m going to be doing some in probably April, May, June timeframe, as I often do right after the filing season ends. If you have topic ideas, feel free to send them. As some of you have noticed, I tend to do webinars and then I put it on my podcast or I do like a multi-part podcast and turn it into a webinar. Obviously a lot of commonalities. If you have any topic ideas, hit me up. Email. I’m interested. Nothing too specific though. So if you’re looking for something like what is tax advice for someone who lives in Toledo, Ohio and wants to do this and is in the automotive industry, that’s a little much. But if you want to talk about situations in which you can depreciate land, I can talk about that. The answer is basically really limited, maybe in a golf course. I know everyone’s thinking about that. So now let’s get started. Let’s talk about offers in compromise. I’m really going to call this again, I tried to make this two episodes total out of the four, 39, 40, 41, 42, and it ended up being four.
Matthew Foreman (02:20.814)
I’ll eventually have more about some other controversy topics, but this is all for now. In it, I’m going to generally talk about federal. At the end, I’m going to talk about states a bit. Most states, I mean every state has one. A lot of larger municipalities also have an offer in compromise mechanism. New York City does, Miami-Dade County does, et cetera, so on and so forth. So states kind of vary a little. They tend to generally follow it. Some states even have a rule where they automatically accept it if the federal accepts it. And some will do different things. They will all consider whether the federal government accepted it, which I think is really important.
So let’s talk about a federal offer in compromise. I’m going to use the acronym OIC. I’m going to repeatedly use the acronym OIC because offer in compromise is long and OIC is shorter. Internal Revenue Code Section 7122 allows the IRS to compromise on unpaid taxes for less than the full amount. It allows, but does not mandate, the IRS to do it. A compromise is any amount that is less than the full amount. They have to be unpaid taxes. You can also compromise interest and penalties. You cannot do an offer in compromise on paid taxes.
You can sue for a refund or request penalty abatement. Treasury regulations and IRS guidance help shape how these offers are evaluated. Over the years I’ve done many OICs and the memos tend to follow similar structures explaining why the taxpayer qualifies. The goal of an OIC, according to IRM 5.8, is to collect as much as possible as soon as possible and as cheaply as possible.
It also provides taxpayers with a fresh start and allows them to comply going forward. If someone has $50 and the IRS tries to collect $100, it’s pointless. So the compromise program exists to collect what is realistically collectible. Low-income taxpayers cannot have their offer rejected solely because the offer amount is small. Many pro bono clients offer very small amounts. The first OIC I ever had accepted when I worked at Legal Aid was $26 because that was the client’s lucky number.
The IRS provides booklet 656-B, which includes Form 656 and the financial disclosure forms called 433s. Form 433-A is the collection information statement for wage earners and self-employed individuals. Most of my clients fall into this category.
The form essentially functions like a balance sheet and cash flow statement. You list assets, income, and expenses to determine what the taxpayer can realistically pay. Certain assets receive valuation reductions. Retirement accounts, real estate, and vehicles are typically discounted by about twenty percent.
The IRS also allows taxpayers to retain a small amount of cash in their bank accounts. Income is calculated after deducting federal and state taxes and reasonable living expenses. Those expenses are limited by IRS collection standards based on household size and geographic location.
Sometimes those numbers are surprisingly high, particularly in large metropolitan areas. The resulting calculation helps determine the minimum offer amount. We’re about ten minutes in, so let’s get some music going and I’ll be back in just a moment.
Matthew Foreman (10:41.005)
All right, so let’s talk about OICs some more. We’ve gone through the 433 part. Let’s talk about the 656. The 656 is the actual offer in compromise itself. Some of the information is really basic: name, address, dependents, and similar identifying information. You must list the offer amount and how it will be paid. You can either make an initial payment followed by five monthly payments, or propose a payment plan lasting up to twenty-four months.
Sometimes I advise clients not to pursue an OIC because installment agreements can stretch payments over five or even six years. That additional time can make repayment more manageable depending on the taxpayer’s circumstances. The form also asks why the taxpayer qualifies for the compromise. One common reason is doubt as to collectibility, meaning the taxpayer simply does not have enough money to pay the full liability.
Another category is effective tax administration based on economic hardship. That applies when the taxpayer technically has the funds but paying in full would create severe financial hardship. This often comes up with retirement accounts. For example, a seventy-five-year-old living on Social Security with $500,000 left in retirement savings may face significant hardship if forced to liquidate it.
There is also a category for public policy or equity, where collecting the tax would be inequitable or undermine public confidence in the tax system. Before diving deeper into those categories, it is important to note that the IRS has two years to reject an offer. If they fail to act within two years, the offer is deemed accepted under Internal Revenue Code Section 7122(f). Sometimes the best strategy is simply to wait quietly while the clock runs. Once the two years pass, the taxpayer begins making the agreed payments.
Matthew Foreman (22:41.709)
All right, I’m back to finish up talking about OICs. Now I’m going to talk about states. I’ve worked on OIC-type cases in roughly ten or twelve states. Each state has its own quirks. New York State used to have a very different process but updated its forms several years ago to more closely mirror the federal system.
However, New York sometimes focuses less on strict mathematical calculations and more on the total settlement amount offered. The process can take a long time. The fastest one I’ve seen took about fourteen months, but some have taken nearly two years. New Jersey has a similar program but does not technically call it an offer in compromise. The structure and reasoning are largely the same.
In cases involving property sales and tax liens, the state sometimes resolves them quickly because it wants to secure payment from the transaction. Connecticut has a particularly interesting rule. If the federal government accepts an offer in compromise on substantially similar terms, Connecticut will automatically accept the same proportionate settlement. Many states consider the federal decision heavily, but Connecticut formally adopts it.
That was the 42nd episode of How Tax Works. I hope you learned something and enjoyed it. I’ll be back in 2026 with the 43rd episode, where I’ll discuss allocations under Section 704C. Now let’s get some music and happy new year.