What is an Offer in Compromise (OIC), and on what basis might it be approved?

• A. A penalty reduction agreement.
• B. A repayment schedule for full amount with no settlement.
• C. A settlement of tax debt for less than the full amount when the taxpayer cannot pay the full amount.
• D. A settlement of tax debt for less than the full amount when the taxpayer cannot pay the full amount; approval is based on the taxpayer’s ability to pay, income, expenses, and asset equity.

Answer: (D)

An Offer in Compromise is the IRS agreement to settle a tax debt for less than the full amount when paying the entire balance isn’t feasible. The decision to approve an offer rests on the taxpayer’s ability to pay, considering current income, allowable living expenses, and the equity in assets—the IRS weighs what it could realistically collect (the reasonable collection potential). If the offered amount matches what could be collected under those financial conditions, the offer is approved. This isn’t a penalty reduction or a simple payment plan; it’s a settlement based on true financial ability.