Offer in Compromise: What It Is and Who Can Apply

An offer in compromise (OIC) is an agreement between a taxpayer and the IRS. It settles a tax debt for less than the full amount owed. The IRS may accept an offer if you cannot pay the full amount, or if paying it in full would cause financial hardship. IRS: Offer in compromise

An OIC is not the right step for everyone. The IRS generally will not accept an offer if you can pay the debt in full through a payment plan, or by using the equity in your assets. Look at other payment options first. IRS: Topic no. 204, Offers in compromise

Who can apply

You must meet several basic conditions. You must have filed all required tax returns. You must have made the required estimated tax payments for the current year. You cannot be in an open bankruptcy. If you have employees, you must have made the required federal tax deposits for the current quarter and the two quarters before it. IRS: Topic no. 204

Check your eligibility before you apply. The IRS offers a pre-qualifier tool that checks eligibility and helps you prepare a preliminary offer. Using the tool does not mean the IRS will accept an offer. IRS: Topic no. 204

The three reasons the IRS may accept an offer

• Doubt as to liability. There is a genuine dispute about whether you owe the tax, or how much you owe. This uses Form 656-L.
• Doubt as to collectibility. Your assets and income are less than the full amount owed. This uses Form 656 and collection information forms.
• Effective tax administration. There is no doubt the tax is owed and can be collected, but paying in full would cause economic hardship, or would be unfair because of exceptional circumstances.

The IRS lists these grounds in Topic no. 204. Publication 594 describes them too. IRS: Publication 594, The IRS Collection Process

How offer payments work

You can offer a lump sum, or periodic payments. A lump sum offer is paid in 5 or fewer installments, within 5 or fewer months after acceptance. A periodic payment offer is paid in 6 or more monthly installments, within 24 months after acceptance. Either way, the IRS requires a payment with the offer. Those payments are generally nonrefundable, and the IRS applies them to your tax liability. IRS: Topic no. 204

In most cases, an application payment is also required. Low-income individuals may qualify for an exception. The Low-Income Certification in Form 656 explains the test. IRS: Form 656-B, Offer in Compromise Booklet

While the offer is pending

The IRS generally suspends collection while an offer is pending. The suspension also covers 30 days after a rejection, and any timely appeal of a rejection. The IRS keeps any refund, including interest, for returns filed through the date it accepts the offer. IRS: Topic no. 204

If the offer is accepted or rejected

If the IRS accepts an offer, you must meet all of its terms. For offers based on collectibility or effective tax administration, you must file all returns and pay all taxes on time for 5 years from acceptance. If you do not, the IRS can treat the offer as in default and collect the original debt, less payments made, plus interest and penalties. IRS: Topic no. 204

If the IRS rejects an offer, a letter explains the reason. You can appeal to the IRS Independent Office of Appeals within 30 days of the date of that letter. A returned offer is different. The IRS sends it back when a required item is missing, and there is no appeal. Once the problem is fixed, the offer can be submitted again. IRS: Topic no. 204

Liens and public records

The IRS does not release a federal tax lien until an accepted offer is paid in full. Some information about an offer may be listed in the IRS public inspection file. IRS: Offer in compromise

Steps to take

1. Confirm that every required tax return is filed and that current estimated payments are made.
2. Look at other options first, such as a payment plan (installment agreement).
3. Use the pre-qualifier tool, and read the Form 656-B booklet.
4. Gather the financial records that the IRS asks for on its collection information forms.
5. If an offer is rejected, read the letter and note the 30-day appeal window.

General information, not advice about your situation.

Sources: Sources: IRS, Offer in compromise (https://www.irs.gov/payments/offer-in-compromise); IRS, Topic no. 204, Offers in compromise (https://www.irs.gov/taxtopics/tc204); IRS, Publication 594, The IRS Collection Process (https://www.irs.gov/pub/irs-pdf/p594.pdf); IRS, Form 656-B, Offer in Compromise Booklet (https://www.irs.gov/pub/irs-pdf/f656b.pdf) This is general information, not advice about your specific return.

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