IRS Offer in Compromise Pre-Qualifier Tool—Is It Accurate?

If you’ve got more tax debt than you can reasonably pay off, you’ve likely considered many options. You may have looked into payment plans, only to realize that the minimum payment is too much for you. You may have applied for extensions, later realizing that you were just delaying the inevitable. If you truly can’t afford to pay in full, an Offer in Compromise may be your best move. An Offer in Compromise allows you to settle your tax debt for less than you actually owe.

Obviously, the IRS would rather collect payment in full—this means that if you want your offer to be accepted, it needs to reflect what you are genuinely able to pay. That’s where the Offer in Compromise Pre-Qualifier tool comes in. The IRS developed this to allow taxpayers to find out quickly if their offer is likely to be accepted. However, this should not be the only tool you use to make your final decision about whether or not to apply. Learn more about the Pre-Qualifier, how it may help you, and where it falls short.

Understanding the Offer in Compromise

If you’re considering an Offer in Compromise as a way to settle your tax debt, you should have already exhausted all other options that may be available to you. If the IRS looks at your financial status and determines that you could reasonably pay your tax debt with an installment agreement, an Offer in Compromise is likely not a viable option for you. 

However, an Offer in Compromise has benefits for both parties. It allows taxpayers to square away their tax debt without fear of levies or liens, and it ensures that the IRS is able to collect at least some of what it is owed. It also prevents the IRS from spending unnecessary time and money on collection efforts that would be unsuccessful due to a taxpayer’s financial standing.

There are several basic qualifications you must meet before you can even be considered. You must not be in the middle of bankruptcy proceedings, you must have filed all required federal tax returns, you must have made required estimated tax payments, and if you are a business owner, you must have made all required tax deposits for the last three quarters.

The OIC Pre-Qualifier Tool

The Offer in Compromise Pre-Qualifier tool helps you see if you’re likely to get approved for an OIC. It’s useful for those who are overwhelmed by their tax options and want to know if it’s worth the time spent on a full application. In some cases, people consider an Offer in Compromise when they have substantial assets or equity in their assets—in these situations, the tool can clarify that those assets will be used in their calculations and save them the time they’d spend filling out a full application that’s likely to be rejected. 

Filling out the Pre-Qualifier may show you other ways you may be able to pay your tax debt off. While no one wants to clear out their home equity or sell their vehicles to pay off the IRS, the IRS may expect you to do that before it accepts an Offer in Compromise.

You aren’t required to fill out the Offer in Compromise Pre-Qualifier before you apply. However, you may find that doing so streamlines the process. The information you need to gather for the Pre-Qualifier is essentially the same documentation you’ll need for the actual application.

How to Use the Pre-Qualifier Tool

The Pre-Qualifier is easy to access and use, and you don’t even have to provide any identifying information. First, you verify that you are not in the middle of bankruptcy proceedings, that you have filed all federal tax returns and paid estimated tax payments, and that you made required tax deposits if you have employees.

The next screen gathers basic information about your ZIP code, state and county, the size of your households, and the amount of tax debt you have. The tax debt you are trying to settle must be within ten years of the most recent tax year.

Next, be prepared to give specific information on your finances. You’ll need to provide information on:

• Total balance of all bank accounts
• The market value of your home and the amount you owe on your home
• Equity in your first vehicle
• Equity in your second vehicle
• Equity in your retirement account
• Other equity held in real property
• Other assets that may have equity
• Stocks, bonds, and other investments

The next screen gathers information on every source of monthly income your family has. This includes not just the taxpayer filing, but income sources from everyone within the household who contributes to expenses. You’ll have to fill out gross wages, interest and dividends, distributions from partnerships and other businesses, rental income, business income, child support received, alimony received, and additional income.

Of course, your financial well-being isn’t just a matter of what you bring in. Your expenses are also important. The next screen asks for information on rent or mortgage, utilities, how many vehicles you have, loan payments on those vehicles, public transportation costs, health and life insurance premiums, taxes, court-ordered payments, and child/dependent care costs. After you provide that information, the Pre-Qualifier tool will make its decision.

The tool is looking for a situation in which you have so little expendable money after your basic expenses are paid that payment in full is not possible. If the IRS believes that it cannot collect from you, they are more likely to accept an Offer in Compromise.

Interpreting the Results

The Pre-Qualifier tool will sum up the information on the final screen, outlining your tax debt, equity, income, monthly expenses, and leftover income. Using that, it will tell you if you are likely or unlikely to be eligible for an Offer in Compromise. It also explains that if you cannot pay any of your tax debt, they may move you to Currently Not Collectible status until your financial situation improves.

Your next steps may depend on the outcome of your Pre-Qualifier application. If you may be eligible, you can move forward with Form 656, Form 433-A if you are an individual or Form 433-B if you are a business, and your reasonable offer. When you submit your offer, you must pay a $205 application fee unless you meet the low-income guidelines set by the IRS. During the application process, you will need to choose either a lump sum payment or periodic payments lasting between six and 24 months. 

With your application, you submit either 20% of your total offer amount or the first monthly payment of your periodic payment offer. While your Offer in Compromise is being considered, continue making the monthly payments that would be required under your periodic payment plan. If the IRS rejects your offer, they will keep the downpayment and apply it to your tax debt.

The application packet for an Offer in Compromise requires considerable documentation, including recent paystubs, proof of income from other sources, lender statements, and bank statements. Send copies of these documents, never the originals.

Alternative Options and Considerations

If the Pre-Qualifier tool told you that you are unlikely to qualify for an Offer in Compromise, that doesn’t mean you have to give up. The Pre-Qualifier tool is simply an introductory look at your finances and tax debt—there are many factors it does not consider, and you may still qualify after you go through the entire application process.

Even if an Offer in Compromise is not a valid option for you, there may be other options available to you. First, an Offer in Compromise may not be a good choice if your financial situation is serious enough that you cannot pay anything toward your debt. In that case, it may be time to look into Currently Not Collectible status. While this does not stop interest from accruing on your account, it does give you a temporary break from collection actions while you work to get to a better financial standing.

If the initial assessment from the Pre-Qualifier tool shows that you have significant monthly income left over, you may want to revisit the payment plans offered by the IRS. Although it can be discouraging to pay tax debt off for six years, doing so keeps you in good standing with the IRS and allows you to pay your tax debt in full. Keep in mind, however, that the Pre-Qualifier Tool doesn’t assess everything. Sometimes, the IRS will take extenuating circumstances into account. For instance, if you have health problems that increase your monthly expenses, the IRS revenue officer who reviews your OIC application can take that into account, but the Pre-Qualifier generally cannot consider that type of information.

The Offer in Compromise Pre-Qualifier tool can be a helpful way to look over your financial status and figure out if the IRS is likely to accept your offer. But it’s important to remember that it does not give you a final decision—the IRS looks at an extensive amount of information when you actually apply for an Offer in Compromise, and it’s impossible to put all of that into a quick pre-screening tool.

That’s why you should always consult a tax attorney before writing off an option entirely. For example, perhaps your current income makes you look like you’re able to pay your taxes in full—but you know that you are losing your job in the next one to two months. You may be in the midst of family court proceedings that are likely to increase your outgoing child support payments. Perhaps you cosigned a loan years ago that the primary borrower has stopped payments on, and you now have to come up with an additional $500 per month to save your credit. There are many scenarios in which a Pre-Qualifier may state that you don’t qualify, but guidance from a tax professional produces a different result. For a more thorough look at the information the IRS uses to make its decision, you can look into the forms you must fill out to request an Offer in Compromise.

Frequently Asked Questions

Is the Offer in Compromise Pre-Qualifier tool accurate?

The Pre-Qualifier screening is accurate to a degree, but it is not perfect. It only looks at a small sliver of your financial information. If it looked at everything the IRS considered, it would be as time-consuming as the actual application process. The goal isn’t to give you a final answer—it’s just to guide your decision-making.

Can I apply even if the Pre-Qualifier says I’m likely not eligible?

There is nothing stopping you from applying if the Pre-Qualifier says you may not be eligible for an Offer in Compromise. In fact, you don’t even have to use the Pre-Qualifier tool before applying. However, you may find it helpful to talk to a tax attorney before moving forward with the long and detailed application process.

Why are OIC offers rejected and how does the Pre-Qualifier help?

There are several reasons that an Offer in Compromise may be rejected. Most commonly, the IRS believes that your financial status allows you to pay more than what you’re offering. The Pre-Qualifier’s breakdown of your income, expenses, and leftover expendable money can help you make a more realistic offer. The Pre-Qualifier can also help you avoid rejection caused by unfiled tax returns, current bankruptcy filings, and unpaid estimated taxes by asking you those questions upfront.

What does the OIC Pre-Qualifier tool cost?

The tool is free to use and does not require personal identifying information such as your name, SSN, or contact information.

What can I do if I don’t qualify for an Offer in Compromise?

You may apply for temporary Currently Not Collectible status, apply for an installment agreement, or discuss other options with an experienced tax attorney.

Does the Offer in Compromise Pre-Qualifier tool affect my credit score or my standing with the IRS?

No. One of the benefits of this tool is that you don’t have to identify yourself, so the information you enter remains private.

What can I do if I disagree with the Compromise Pre-Qualifier tool’s determination?

The Pre-Qualifier tool is just a basic algorithm, so there is no need to take action if you disagree with its final determination. You can just move forward with your Offer in Compromise application.

Let us help. At W Tax Group, we help taxpayers like you find solutions that fit their financial situation and provide peace of mind. Call us at 877-500-4930 or reach out online to schedule a consultation now.