An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It’s an option if you can’t pay your full tax liability or if doing so would cause you financial hardship. What’s considered by the IRS in allowing an offer in compromise?
- Ability to pay.
- Asset equity.
The IRS says that it generally approves an offer in compromise when the amount offered represents the most the agency can expect to collect within a reasonable period. The agency advises that you explore all other payment options before submitting an offer in compromise.
The IRS has posted an OIC Pre-Qualifier that confirms your eligibility and prepares a preliminary proposal. You’ll also find step-by-step instructions in the Offer in Compromise Booklet, as well as Form 656-B for submitting an offer. Your completed offer package will include:
- Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms.
- Form 656(s) — individual and business tax debt (Corporation/LLC/Partnership) must be submitted on separate Form 656.
- The $205 application fee (nonrefundable).
- The initial payment (non-refundable) for each Form 656.
Your initial payment will vary, based on your offer and the payment option you choose:
- Lump-sum cash — An initial payment of 20% of the total offer amount. If your offer is accepted, you’ll receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
- Periodic payment — Monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until you’ve paid in full.
If you meet the Low Income Certificate guidelines and your offer is being evaluated, there’s no application fee or initial payment required. You won’t need to make monthly installments either. Your application package will fill you in with more details.
Understanding the process
While your offer is being evaluated:
- Your non-refundable payments and fees are applied to the tax liability — you may designate payments to a specific tax year and tax debt.
- A notice of Federal Tax Lien may be filed.
- Other collection activities are suspended.
- The legal assessment and collection period is extended.
- Make all required payments associated with your offer.
- You aren’t required to make payments on an existing installment agreement.
- Your offer is automatically accepted if the IRS doesn’t make a determination within two years of the IRS receipt date.
If your offer is accepted:
- You must meet all the Offer Terms listed in Section 7 of Form 656, including all required tax returns and making all payments.
- Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt.
- Federal tax liens aren’t released until your offer terms are satisfied.
- Certain offer information is available for public review by requesting a copy of a public inspection file.
If your offer is rejected:
- You may appeal a rejection within 30 days using Request for Appeal of Offer in Compromise, Form 13711.
- The IRS Independent Office of Appeals provides additional assistance on appealing your rejected offer.
The process can get complex, and an OIC might not be your only or even your best option. If you’re having tax problems, work closely with a qualified financial professional.
Flowers Rieger & Associates, PLLC
6125 E. Grant Road
Tucson, AZ 85712