Rarely, when resolving your Tax Debt, the IRS or Internal Revenue Service may accept an "Offer In Compromise" (OIC). An OIC is contract or agreement between the taxpayer or tax debt holder and the Internal Revenue Service (IRS). This agreement usually results in both sides (i.e. IRS and the liable taxpayer) coming to a resolution on the total amount due. It may be difficult to tackle this option alone as you can find many professional tax experts who can help you not only with an Offer In Compromise, but decide whether it is right for you.

An Offer In Compromise becomes a viable method in resolving tax debt when payment in full or installment payment plans are not possible methods of tax debt consolidation. It is recommended that you do not explore this option unless all other options have been ruled out as about one percent of all tax disputes are resolved through OICs. Remember, the IRS expects you to pay the full amount in the shortest amount of time. When submitting the offer, the amounts and the due dates must be specified on form 656 (link below).

An Offer In Compromise can be beneficial for the tax payer as usually the agreement results in the IRS "settling" or "compromising" with the taxpayer on an amount less then what he or she owes. Sometimes, the taxpayer's total liability can be wiped clean if:

1."Doubt as to Liability" - the IRS is not sure if the total tax liability is accurate
2."Doubt as to Collectibility" - the IRS doesn't think total tax amount owed can be paid by taxpayer
3."Effective Tax Administration" - IRS is certain of taxpayer's total liability and ability to pay, but under special circumstances considers an OIC. An OIC only becomes a reality if the taxpayer can reason that the tax liability will create financial problems for them and therefore is unfair and unjust.

Typically with an OIC, you must determine what is reasonable for the IRS to collect. In order to submit the OIC, the revised (Feb 2007) Form 656-L must be filled out when "Doubt as to Liability" is the case. When "Doubt as to Collectibility" is the case then Form 656 should be filled out. One change that has taken effect is that taxpayers are no longer to simultaneously file offers for bullet points "A" and "B" above. Furthermore, if a taxpayer submits an OIC for a tax year or period that has not assessed, the IRS will notify the taxpayer that the OIC cannot be considered.