IRS Offer in Compromise (OIC) Success — Reducing Federal Tax Debt by Over 90%

TAX LAW · SONG LAW FIRM TAX SUCCESS STORY

Client Profile

A New Jersey self-employed professional who had been unable to fully pay federal income taxes over several years due to business downturn and prolonged personal circumstances. Interest and penalties accumulated, and the client received IRS notices indicating an outstanding tax balance exceeding approximately two hundred thousand dollars. Levy notices for assets and wages were imminent, and the client's asset composition and business viability were highly fragile.

Case Background

The client initially attempted to file an Installment Agreement on their own, but the IRS did not respond for several months, during which interest and penalties continued to accrue. A Notice of Federal Tax Lien was filed, significantly reducing the client's credit score and effectively blocking real estate sale and refinancing options. The self-filed installment terms were calculated based on the total outstanding balance rather than reasonable collection potential, resulting in unaffordable monthly obligations that were about to trigger default. At this juncture, the client retained Song Law Firm.

Legal Issues

IRS tax debt resolution generally offers three principal alternatives: Installment Agreement, Offer in Compromise (OIC) allowing partial settlement, and Currently Not Collectible (CNC) status. The core legal issue in this matter was whether, under the IRS Doubt as to Collectibility standard, the client could demonstrate that actual collectible amounts were substantially lower than reasonable collection potential (RCP) based on current assets, income, and allowable necessary living expenses. Equally decisive were the integrity of Form 656, Form 433-A (OIC), and supporting documentation including special expenses, dependents, and exempt asset justifications.

Song Law Firm Strategy

First, we obtained the client's IRS Master File Transcript and Account Transcript to reverify unpaid tax, interest, and penalty entries. Analysis revealed certain penalties had been double-assessed due to internal IRS errors, and we simultaneously filed a penalty abatement petition based on reasonable cause. Second, through Form 433-A (OIC), we documented in detail the current fair market value of assets versus quick sale value, monthly necessary expenses under national and local standards, and special expenses including retirement contributions and medical costs. Third, in the RCP calculation, we argued for exemption of essential business equipment and inventory required for ongoing self-employment operations. Fourth, we submitted a Doubt as to Collectibility Offer in Compromise via Form 656, supported by accounting and economic analysis demonstrating a realistically collectible amount of approximately fifteen thousand dollars.

Process

Following submission, we participated in three rounds of readjustment negotiations with the IRS Collection Unit. The IRS initially attempted to increase the offer to approximately thirty-five thousand dollars, but through additional documentation of business revenue decline trends, dependent care, and medical expenditure records, we reduced the final settlement to below twenty thousand dollars. During the OIC review, we secured a suspension of levy actions to prevent wage garnishment and account freezes. Review took approximately nine to twelve months.

Result

OIC accepted. Total tax debt reduced by more than ninety percent. The Notice of Federal Tax Lien is being released within thirty days of full payment. The client resumed normal business operations and began rebuilding the credit score.

Lessons Learned

An Offer in Compromise is a formal IRS-recognized tax debt resolution procedure, but acceptance rates hover around thirty percent, and the key to approval lies in precise understanding and documentation of the RCP calculation formula. If special expenses and asset exemption bases in Form 433-A (OIC) cannot be logically substantiated, the IRS will significantly increase the required amount. Additionally, IRS enforced collection actions are not automatically suspended during OIC review, making levy suspension applications and simultaneous penalty abatement requests essential.

Frequently Asked Questions

Q1. What are the qualifying grounds for an Offer in Compromise?

The applicant must qualify under one of three grounds: Doubt as to Liability, Doubt as to Collectibility, or Effective Tax Administration. This case proceeded under Collectibility.

Q2. What is the application cost?

An application fee of two hundred five dollars (2026 rate) plus an initial payment (twenty percent of the lump sum offer, or the first installment for periodic payments) is required. Low-income filers may qualify for a fee waiver.

Q3. How long is the review period?

On average nine to twelve months. Complex matters or those requiring readjustment can extend up to twenty-four months.

Q4. Are there conditions after approval?

The applicant must comply with all tax filing and payment obligations for five years after approval. Violations restore the original debt and void the OIC.