Podcast Summary: How Tax Works – "Offers in Compromise (OIC)"

Host: Matthew Foreman, Co-Chair, Falcon Rappaport & Berkman LLP
Episode Date: December 22, 2025
Episode Number: 42

Episode Overview

In this episode of "How Tax Works," host Matthew Foreman focuses on Offers in Compromise (OIC)—a pathway that allows taxpayers to settle their federal tax debts for less than what is owed. Matt demystifies the process, walks through the relevant IRS forms, and shares practical insights on qualification, application, and variations at the state level, drawing from years of hands-on experience. The episode aims to make the complex landscape of OICs accessible and actionable for practitioners and curious listeners alike.

Key Discussion Points & Insights

1. OICs: Purpose and Policy

• Definition: The IRS, under IRC §7122, is permitted (but not required) to settle unpaid taxes, interest, and penalties for less than the total owed if it’s in the best interest of both the taxpayer and the government.
• Policy Goals:
  • Collect as much as possible, as soon as possible, as cheaply as possible—for the government, not the taxpayer [(04:50)].
  • Provide a “fresh start” for taxpayers and enable future compliance [(04:55)].
  • Collect funds that might otherwise not be collectible.

“It has to be in the best interest of both the taxpayer and the government. Give the taxpayers a fresh start and enable taxpayers to comply with tax law. If you owe money, you are not compliant.” – Matthew Foreman [05:00]

2. Forms & Application Mechanics

• Primary Forms:
  • Form 656: The actual Offer in Compromise
  • Form 433 Series: Collection Information Statements
    • 433-A (Wage earners/self-employed)
    • 433-B (Businesses)
• Major Tips:
  • Always use the correct version of Form 433; otherwise, the IRS will reject the application but it’s an easy fix [(09:30)].
  • 433-A is the most common—essentially a balance sheet and statement of cash flows for individuals.
  • Key asset reductions (to reflect liquidity): e.g., IRAs/401ks, real estate, autos generally given 20% valuation deduction [(12:00)].

“They want you to have a thousand dollars in your bank account. IRA, real estate, automobiles are a reflection of the fact that they're illiquid and they really don't want you to take money out of your IRA and 401k.” – Matthew Foreman [12:25]

• Expenses & Income:
  • Income minus (federal/state) taxes and “reasonable” capped expenses (collection standards, based on location and household size).
  • Offer amount is based on net assets and overall cash flow [(14:00)].

3. Types of Offers & Grounds for Acceptance

A. Doubt as to Collectibility

• Most common basis: The taxpayer simply cannot pay; it’s “just math” [(20:25)].
• Typically successful for lower-income or asset-poor taxpayers.

“This one's really just math. You can vary from the math to lower the amount a bit, especially with illiquid or retirement assets. But there are collection standards.” – Matthew Foreman [20:30]

B. Effective Tax Administration (ETA)

• Economic Hardship: Taxpayer could technically pay, but full payment would cause significant hardship [(22:00)].
• Public Policy/Equity: Full collection would be fundamentally unfair or erode public confidence in tax system.
• Matt references main sources:
  • Treas. Reg. 301.7122-1(b)(3), Lane v. Commissioner (TC Memo 2013-121) – Economic Hardship
  • Bogart v. Commissioner (TC Memo 2014-46) – Public Policy/Equity
• Key Hardship Factors: Age, employment, dependents, ability to earn due to illness/disability, assets unable to be liquidated, impact on dependents.

“Senior citizens, illness and dependents are the big factors. And that's where you're successful on this.” – Matthew Foreman [29:35]

C. Doubt as to Liability

• Rare; only when taxpayer believes they don’t actually owe the tax (due to procedural/deadline issues). Not covered in depth.

D. Important Statute

• IRS gets two years to accept or reject OIC; if not, it’s automatically accepted [(18:30)].
• There is litigation over what counts toward those two years—listeners are advised to “stay quiet and wait.”

“Just like, be careful, be quiet about it. You don't have to say anything. And then once it's accepted, because they didn't pay attention, you just pay.” – Matthew Foreman [18:50]

4. Offer Submission & Negotiation Strategies

• Payment Terms:
  • Initial plus 5 payments over 5 months, OR up to 24-month installment plan.
  • Sometimes a 60–72 month payment plan (without OIC) is better if client can’t do lump sum and has stable income/assets [(16:55)].
• Explanation Required: Why is OIC justified? Explain hardship or policy rationale in detail.
• IRS Booklet 656B: Recently updated, contains all forms and guidance. Critical tool for practitioners.

5. What Disqualifies Applicants?

• History of tax noncompliance.
• Deliberate action to avoid taxes.
• Encouraging others to evade tax.
• The IRS will reject any OIC undermining future tax compliance (per Treas. Reg. 301.7122-1(c)(3)(i–iii)), and “and” really means “or” here [(27:10)].

6. Appeals & Next Steps

• If OIC is rejected:
  • Appeal through IRS Independent Office of Appeals, and from there to Tax Court (not District Court).

“You can only really go to Tax Court.” – Matthew Foreman [32:55]

7. Variations at the State Level

• Every state has some OIC mechanism; rules and timelines vary.
• New York State:
  • No pure math requirement, slower process (14+ months typical), often accepts original tax amount.
  • “Scuttlebutt”: NY accepts offered amount if it matches original tax, but response is slow [(36:05)].
• New Jersey:
  • No formal OIC, but a similar process by another name; can move faster for pragmatic reasons (e.g., selling a house to resolve liens).
• Connecticut:
  • If federal OIC is accepted and terms are similar, state will accept automatically.
• Many states consider outcome of federal OICs; some are compelled to mirror them.

“Connecticut, it is automatic. They will automatically take it. And they will do that if you did it [federally].” – Matthew Foreman [38:02]

Notable Quotes & Memorable Moments

• On Lean OIC Offers:

  “A lot of my pro bono tax clients offer dual OICs and they offer $25. The first OIC I ever had accepted legal aid at the time was $26. It was her lucky number.” – Matthew Foreman [06:15]

• On Practicality:

  “Taxes are less important than buying food and paying for heat. Anyone who says otherwise is just an awful human being.” – Matthew Foreman [28:50]

• On Strategic Patience:

  “The IRS isn’t paying attention. I know someone who had one get missed and it was accepted for that reason.” – Matthew Foreman [18:40]

• On Public Policy OICs:

  “If collecting the full liability would undermine the public confidence that tax laws are being administered fairly and equitably, that’s [the] Bogart [standard].” – Matthew Foreman [26:20]

Timestamps for Key Segments

• Intro & Administrative Updates – 00:00–03:50
• OIC Purpose & Definitions – 03:50–06:00
• Forms and Asset Calculations (433 & 656) – 09:00–16:30
• Types of OICs and Grounds for Acceptance – 17:00–23:00
• Key Citations for Economic Hardship & Public Policy – 23:00–28:00
• Factors for OIC Approval (Hardship, Policy, Compliance) – 28:00–32:00
• Appeals Process – 32:00–33:15
• State-Level OICs – 33:15–40:00

Episode Tone

Matt’s delivery is informal, practical, and candid, offering both detailed technical explanations and the benefit of lived experience. He often weaves in humor and dry wit, making dense tax topics accessible and less intimidating for listeners.

Summary Prepared For: Listeners seeking a comprehensive, actionable understanding of the Offer in Compromise process at both federal and state levels.
Excludes: Ads, intros, and non-content segments.
Contact/Feedback: Matt invites questions, comments, and topic suggestions via email at his FRB address.