Understanding the IRS Offer in Compromise

If you are behind on your taxes and cannot afford to pay the full amount owed, an offer in compromise may be an option. The IRS may accept an offer if it determines that collecting the full tax liability is unlikely even with additional time, collecting the full tax would create economic hardship or be otherwise unfair to you, or there is a legitimate dispute regarding the correctness of the tax debt.

The IRS encourages you to explore other payment options, such as installment agreements, before submitting a request for an offer in compromise. It also recommends using the Offer in Compromise Pre-Qualifier Tool to determine whether you meet the basic eligibility requirements and to estimate a preliminary offer amount.

To qualify, you must:

• File all required tax returns and make all required estimated payments
• Not be involved in an open bankruptcy proceeding
• Make required federal tax deposits if you are an employer

In reviewing your request, the IRS will evaluate your overall financial situation, including your income, expenses, assets and ability to pay. The IRS will also assess whether your offer reflects your reasonable collection potential — the amount it believes it can collect from you through available means.

Application process

To apply, use Form 656-B, Offer in Compromise Booklet, which includes instructions and required forms. Most applicants must also complete Form 433-A for individuals or Form 433-B for businesses to provide detailed financial information.

An application generally requires a nonrefundable application fee and an initial nonrefundable payment. If you submit more than one Form 656 — for example, to cover both individual and business liabilities — each form requires a separate fee and payment. You may submit your application by mail only to the address listed in the Form 656-B instructions.

Payment options

The amount of your initial payment depends on the payment option you select:

• Lump sum: Submit 20% of the total offer with your application. If it is accepted, pay the remaining balance in five or fewer payments.
• Periodic payments: Submit the first proposed installment with your application and continue making monthly payments while the IRS reviews your offer. If it is accepted, continue making payments until the offer amount is paid in full.

If you qualify under the low-income certification guidelines, you do not have to submit the application fee, the initial payment or ongoing monthly payments while your offer is under review.

What happens during review

While the IRS evaluates your offer:

• Application fees and payments are applied to your tax liability and are generally nonrefundable.
• The IRS may file a Notice of Federal Tax Lien.
• Other collection activity may be suspended.
• The statute of limitations for collection is suspended.

The statute of limitations for collections is also suspended for 30 days after a rejection and during any timely filed appeal.

If the IRS does not make a determination within two years of receiving your offer, the offer is generally deemed accepted. However, the two-year limit is suspended if any related appeal is pending.

If your offer is accepted or rejected

If your offer is accepted, you must comply with all terms, including filing required returns and making future payments on time. Federal tax liens are not released until the terms of the offer are satisfied. Certain information about accepted offers may be available for public inspection.

If your offer is rejected, you may appeal within 30 days by filing Form 13711, Request for Appeal of Offer in Compromise. The IRS Independent Office of Appeals will review your case.

Because the offer in compromise process is detailed and fact-specific, consulting a qualified tax professional can help you determine whether this option is appropriate and ensure that the application is complete and accurate.

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