DEFINITION of 'Offer In Compromise'

A program offered by the IRS to taxpayers who are unable to pay their tax debt. Those who qualify are allowed to make an offer in compromise, which is an offer to pay a lesser amount than that which is owed. The offer in compromise program is intended to allow taxpayers with substantial back taxes to settle their tax debt and start over with a clean slate, so that they can remain current on their taxes in the future.

BREAKING DOWN 'Offer In Compromise'

Taxpayers can find out whether they are eligible for an offer in compromise by consulting the checklist on Form 656 of the offer in compromise IRS package. In order to qualify, taxpayers must fall into at least one of the following three categories:

1) Uncertain Liability - Is tax really owed?
2) Uncertain Collectability - Taxpayer has no way to pay this debt.
3) Economic Hardship - Taxpayer must prove that paying the debt would be unfair or create further hardship.

According to the IRS, taxpayers should beware of promoter's claims that tax debts can be settled for "pennies on the dollar."

  1. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  2. IRS Publication 594

    A document published by the Internal Revenue Service (IRS) that ...
  3. Substitute Return

    A tax filing that the IRS will create for a taxpayer in order ...
  4. Back Taxes

    Taxes that have been unpaid in the year that they were due. Taxpayers ...
  5. Proportional Tax

    A tax system that requires the same percentage of income from ...
  6. Stimulus Check

    A check sent to a taxpayer by the U.S. government. Stimulus checks ...
Related Articles
  1. Taxes

    Start Over With The IRS

    If you're struggling to pay back taxes, try a fresh start with the IRS. They really can help.
  2. Taxes

    The Truth About IRS Tax Settlement Firms

    These companies claim that they can reduce or even eliminate what you owe to the IRS. Find out the facts behind this alluring fiction.
  3. Taxes

    20 Tax Changes You Need To Know About

    Don't miss out on the tax changes. Here's a list that you need to know about.
  4. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  5. Taxes

    Why People Don't Lie On Their Tax Returns

    Studies show people are overwhelmingly truthful when it comes to their tax filing, even when lying would benefit them.
  6. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  7. Taxes

    Getting A Job As The Tax Man

    If you'd like the IRS to pay you some money for a change, consider a career working in taxes.
  8. Taxes

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  1. What’s the difference between IRS Forms 1040 and 1040EZ?

    Though very similar, the differences between the 1040 and 1040EZ Forms are significant when it comes to filing your tax return. ... Read Answer >>
  2. Can the IRS take your house?

    Understand why a person would have his home seized by the IRS and what he can do to avoid it. Learn about the seizure process ... Read Answer >>
  3. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center