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The latest statistics on an offer in compromise indicate that less than 1 in 7 is accepted. When looking at an OIC, IRS looks not only at what your income is now but looks at what they project your income will be in the future. If you have little income now, but they believe it will increase in the future they generally will not accept an OIC.
If for example you are disable now and the anticipation is that you would not be able to return to work then they are more likely to accept. If you have something that shows that in the long term the likelihood is that your income will not increase, you may find that the OIC is accepted.
In looking at an OIC, IRS has specific guidelines it must look at for expenses. They will not take into account excessive debt or expenses. If your family size is such that your amount to allocate for food for the month is $250, then that is all you get. They look at all living expenses that way - you either get what you spend or what the law allows them to allocate.
If you cannot currently pay the IRS, but anticipate you will be able to in the future you could consider asking to go into uncollectible status. That means the debt sits out there, with interest and penalties accruing but no collection activity is taken. Once a year or so, IRS will verify the income to determine if you should come out of uncollectible status and be required to start making payments. This option might give you the ability to have some time to pay off other debt, reduce your everyday living expenses, or increase your income.
Certainly, your best option is to be set up to make installment payments that you pay over time to get the debt paid off.
It does happen - the amount is reduced. However, IRS will not look at credit card bills when reviewing an offer in compromise. That is unsecured debt and they have priority in payment over them.
The foreclosure might actually work against you since you will have less in living expenses - that does partially depend on if your living expenses were higher or lower than the statistics that IRS uses in its calculations.
It is not the debt that IRS looks at, it is the income. And, it is not just current income it is what IRS sees as the potential for future income. If IRS looks at your income, applies its "normal" living ratios and sees you have income available to pay your debt to them they will require you to pay the tax bill.
I do not mean to say that IRS never does an OIC, they do. It is just there is very specific criteria for determining if it falls within the parameters that they use.