IRS Offer in Compromise Payment Options Explained

Facing tax debt can be stressful, and navigating IRS payment programs can feel overwhelming. The IRS Offer in Compromise (OIC) program offers a way to settle your tax debt for less than what you owe—but understanding the payment options is crucial to making it work for your situation. Here’s a detailed guide that breaks down the IRS Offer in Compromise payment options, helping you decide which path fits your finances best.

What Are IRS Offer in Compromise Payment Options?

When submitting an Offer in Compromise, the IRS requires you to make a payment upfront. This initial payment signals your commitment to resolving your tax debt and helps protect the IRS in case the offer is not accepted or not fulfilled.

There are two main payment structures within the OIC program:

• Lump Sum Cash Offer: Pay your settlement balance within five or fewer installments after the IRS accepts your offer.
• Periodic Payment Offer: Make monthly payments while the IRS reviews your offer and continue payments after acceptance.

Both structures affect your payment amount and timeline, and the choice depends on your financial standing and long-term affordability.

Lump Sum Cash Offer

A Lump Sum Cash Offer means you pay the full offer amount rapidly—usually through no more than five installments. When you submit your application, you must include a 20% down payment of your offer.

The IRS calculates your reasonable collection potential (RCP) by projecting your future income and assets for the next 12 months. This shorter window often results in a lower offer total compared to the periodic option.

Pros:

• Lower overall offer amount due to a 12-month future income projection.
• Resolve your tax debt faster, sometimes within months.
• Best suited for those who have access to funds upfront.

Cons:

• The upfront payment can be a barrier if you don’t have sufficient cash.
• Higher risk of default if you can’t meet payment deadlines.

Periodic Payment Offer

The Periodic Payment Offer spreads your settlement out with monthly payments during the IRS’s review period and after your offer is accepted. Your first monthly payment must be submitted with the offer application.

Here, the IRS estimates your ability to pay based on your income over the next 24 months. Due to the longer projection period, this option usually results in a higher offer amount.

Pros:

• More affordable upfront since your payments are spread out monthly.
• Suitable for taxpayers with steady income but limited savings.
• Less immediate financial pressure during the IRS review process.

Cons:

• The total offer amount tends to be higher because of the 24-month income window.
• It takes longer to fully settle the debt.
• Requires consistent monthly payments without interruption.

How IRS Chooses Between Payment Options

While you select which payment plan to propose, the IRS reviews your offer relative to your Reasonable Collection Potential, the formula used to assess your overall ability to pay.

Choosing between Lump Sum and Periodic Payments often boils down to a strategic balance between liquidity (cash availability) and the ability to afford payments over the long term. Self-employed individuals or those with variable income can sometimes manage better with periodic payments due to staggered commitments.

Example of Each Payment Option in Action

Case Study 1: Lump Sum Cash Offer

Maria owes $15,000. Based on her financial information, the IRS calculates her lump sum offer at $10,000. She submits $2,000 with her application (20%) and pays the remaining $8,000 over four months. The IRS considers her future income over 12 months, leading to a lower settlement figure and a quick resolution.

Case Study 2: Periodic Payment Offer

John owes $20,000 but has fluctuating freelance income. The IRS estimates his payable amount as $15,000 over a 24-month period. John submits $500 with his application and agrees to pay $500 monthly for 30 months. This staggered approach is easier on his monthly budget but means more payments overall.

Mistakes to Avoid When Choosing a Payment Option

• Opting for a lump sum offer without enough liquidity can lead to missed payments and offer default.
• Choosing periodic payments without stable income or a clear payment plan can result in inconsistencies and rejection.
• Forgetting that the IRS retains tax refunds during the year of an accepted OIC.
• Ignoring how the IRS’s Reasonable Collection Potential impacts your offer amount and chance of acceptance.

Tips for Choosing the Best Option for Your Situation

• Carefully assess your cash flow, savings, and assets before submitting an offer.
• Keep in mind the IRS compliance requirement for five years after OIC acceptance; missing payments can cause breakdown of the agreement.
• Use the IRS OIC Pre-Qualifier tool online to simulate different payment scenarios.
• Consult a tax expert to build a payment strategy tailored to your financial profile.

What Happens If You Can’t Keep Up with Payments?

Failing to maintain payments on your accepted offer risks default, meaning the IRS can reinstate your full original tax debt with penalties and interest. If you encounter difficulties, the IRS may allow renegotiation or transition to an installment agreement. Staying in contact with the IRS and compliant with filings is essential to protect your OIC.

Frequently Asked Questions

What are the IRS Offer in Compromise payment options?

There are two: Lump Sum Cash Offer, requiring payment in five or fewer installments, and Periodic Payment Offer, with monthly payments during and after IRS review.

Do I have to pay 20% upfront for an OIC?

A 20% down payment is required with the application for Lump Sum Cash Offers. Periodic Payment Offers require the first monthly payment with the application.

Which is better: lump sum or periodic payments?

Both have benefits; a lump sum usually results in a lower offer but needs more cash upfront, while periodic payments spread costs over time but typically cost more overall.

What happens if I default on OIC payments?

The IRS can cancel the offer and reinstate your full tax liability, including penalties.

Does the IRS keep my tax refund if I choose an OIC?

Yes, during the compliance period, any tax refund you’re eligible for generally goes toward your tax debt.

If you are considering an Offer in Compromise and want expert advice, book a free profit and cash flow analysis with Mohamed Karmous, franchise accounting expert and restaurant accounting advisor at QMK Consulting. Located in New York City, QMK Consulting specializes in franchise accounting tailored to your business needs. Let our experts help you navigate IRS options, optimize your finances, and move toward financial freedom.

Contact QMK Consulting today to schedule your complimentary profit and cash flow analysis. Take control of your financial future with the support of experienced professionals.

For more detailed guidance on how to get your Offer in Compromise accepted by the IRS, read the following post:

How to Get IRS to Accept Your Offer in Compromise

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