Q: What exactly is an offer in compromise?

A: An offer in compromise (OIC) is a settlement offered to the IRS to settle your tax debt. For example, if you can afford to make a lump sum payment, but only for a portion of the amount, you can offer the IRS an OIC. The IRS generally prefers to get a lump sum payment, since it saves them money. Even if they can't collect the full amount that you owe, at least they get money up front, rather than over time with a payment plan. Also, they don't have to spend money to pursue legal action like garnishments, liens, or levies.

In order to be eligible to offer an OIC, you must meet one of the following qualifications:

1. You can show doubt that the debt owed is correct

2. You can prove that the debt is unlikely to be collectible

3. You can demonstrate that paying the debt in full will cause undue financial hardship.

Make sure to consult with a licensed tax professional, because there are companies that make claims to settle your IRS debt for "pennies on the dollar," but this isn't really feasible. You need to fill out IRS Form 656 and have it submitted for review by the IRS. Having a qualified tax professional who has dealt with OICs before will be able to help you make an offer that has a good chance of being accepted, since they've seen similar settlements.

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