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Offer in Compromise

By: Samantha Porter
Updated: 3/24/2021 

One option for taxpayers to resolve their tax debt is by applying for an Offer in Compromise (“OIC”). This option, which is not available for everyone, allows a taxpayer to settle their tax debt for less than the full amount owed. This option is best for those taxpayers who cannot pay the full tax liability, or for those who would suffer a financial hardship from paying will not reasonably be able to pay their tax debt in full within ten years.  This article provides a thorough overview, but more information can be found at irs.gov/payments/offer-in-compromise. If a taxpayer is working with legal representation or a certified tax preparer, he or she should consult with their representative before beginning the OIC process.

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What is an OIC and Do I Qualify?

By definition, and OIC is an agreement between a taxpayer and the [IRS] that settles a taxpayer’s tax liabilities for less than the full amount owed. An OIC should not be a taxpayer’s first repayment option, and those who are able to pay his or her full tax liability through an installment agreement or other means generally do not qualify. In addition, the applicant must have filed all tax returns, made all the required estimated tax payments for the current year, and made all the required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

There are three reasons that the IRS may accept an OIC. First is doubt as to liability. To meet the criteria, there must be a genuine dispute as to the existence or amount of the correct tax debt under law. If a taxpayer is completing an OIC for this reason, he or she should complete Form 656-L. The second reason an OIC can be accepted is due to doubt as to collectability. This doubt exists in any case where the taxpayer’s assets and income are less than the full amount of the liability. If a taxpayer is completing an OIC for this reason, he or she should complete Form 656-B. The third and final reason the IRS may accept an OIC is based on effective tax administration. Under this reasoning, there is no doubt as to the tax being legally owed and that the full amount can be collected but requiring payment in full would either create an economic hardship or, due to exceptional circumstances, would be unfair or inequitable.

The IRS offers an Offer in Compromise Pre-Qualifier Tool in order for taxpayers to determine if they may qualify for an OIC. This tool will ask the taxpayer questions about his or her filing status, basic info about the household, questions about his or her assets, income, and expenses, and the potential proposal. The tool will then recommend whether or not the taxpayer may be eligible for an OIC. It is important to note that this tool cannot provide a definite answer.

The IRS will always have the final say on accepting an OIC.

It is also important to note that if a taxpayer’s case is currently in an open bankruptcy proceeding, he or she is not eligible to apply for an offer. Additionally, if the taxpayer has an open audit or outstanding innocent spouse claim, he or she should wait for those issues to be resolved before submitting an offer.

What is the Application Process?

All of necessary forms for the OIC can be found in the Offer in Compromise Booklet, Form 656-B. This booklet details all of the steps a taxpayer needs to take in order to prepare the OIC. All OIC applications require a $205 application fee. However, if an individual taxpayer meets the Low-Income Certification guidelines, he or she is not required to send any money with your offer. The guidelines can be found in section 2, page 2 of the Form 656. The application itself must include the following:

  • Form 656, Offer in Compromise
  • Completed and signed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable
  • Completed and signed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable
  • $205 application fee, unless taxpayer meets the Low-Income Certification Guidelines
  • Initial offer payment based on the payment option you choose, unless you meet Low-Income Guidelines

All of the above-mentioned forms are explained in detail below, as well as linked to copies. It is important to note that offers will not be considered complete without the completed Form 433-A (OIC), 433-B (OIC) (if applicable) and supporting documents.

If the taxpayer and the taxpayer’s spouse have joint tax debt(s) and you and your spouse are also responsible for separate tax debt(s), both parties will need to send in a separate Form 656. If a taxpayer’s spouse or ex-spouse does not want to be a part of the offer, the taxpayer may submit a Form 656 to compromise your responsibility for the joint tax debt. Each Form 656 will require the $205 application fee and initial payment unless the individual meets the Low-Income Certification.

When completing the application packet, the process can be broken down into seven steps. The process is lengthy and can be time consuming. The steps are laid out below. A brief overview of each step follows.

  • Step 1 – Gather Three Months of Income/Expense Documentation and Asset Information
  • Step 2 – Fill out Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals
  • Step 3 – Fill out Form 433-B (OIC), Collection Information Statement for Businesses
  • Step 4 – Attach Required Documentation
  • Step 5 – Fill out Form 656, Offer in Compromise
  • Step 6 – Include Initial Payment and $205 Application Fee
  • Step 7 – Mail the Application Package

Application Steps

Step 1 – Gather Your Information

To begin calculating an offer amount, the applicant will need to gather information about his or her financial situation, including cash, investments, available credit, assets, income, and debt. He or she should also gather information about the household’s gross income and average expenses. In gathering the household income, the taxpayer should include all those in addition to him or herself who contribute money to pay household expenses, such as rent, utilities, insurance, and groceries. The IRS generally does not consider tuition for private schools, college expenses, charitable contributions, and other unsecured debt payments in their calculations.

Step 2 – Fill out Form 433-A (OIC)

This form should be completed if the applicant is an individual wage earner, or operate or operated as a sole proprietor, a disregarded single member LLC taxed as a sole proprietor before 2009 or are authorized to submit an offer on behalf of an estate of a deceased individual. This form should also be completed if the applicant is married but living separately from his or her spouse. A written explanation of any special circumstances that affect your financial situation can be provided with this form. This can be done in the form of a narrative explaining the applicant’s unique situation and explaining why he or she cannot pay.

Step 3 – Fill out Form 433-B (OIC)

This form should be completed if the OIC is for a business that is a corporation, partnership, LLC classified as a corporation, single member LLC taxed as a corporation, or other multi-owner/multi-member LLC. This form helps to determine an appropriate offer based on assets, income, expenses, and future earning potential. This form is not typically used by our clients.

Step 4 – Attach Required Documents

Forms 433-A (OIC) and 433-B (OIC) require supporting documents. Each form provides a list of the required documents needed. The applicant should not send original documents. 

Step 5 – Fill out Form 656

This form identifies the tax years and type of tax the applicant would like to compromise. This is the form the taxpayer will use to identify the offer amount and the payment terms.

Step 6 – Include Initial Payment and Application Fee

The initial payment can be made by check, cashier’s check, or money order. The first payment is based on the payment option the applicant selected. Generally, the initial payment will not be returned, but instead applied to the debt, if the offer is not accepted. The application fee should be paid on a separate check, cashier’s check, or money order from the initial payment. Payments for the application and the initial payment should be made to “United States Treasury”. Initial payments and application fees can also be made through the Electronic Federal Tax Payment System.

Step 7 – Mail the Application Package

The completed package should be mailed to the appropriate IRS facility. A list of the facilities and addresses can be found in the OIC booklet. The applicant should make sure to make a copy to keep for his or her records before mailing the package.

What are the Payment Options?

There are two payment options for OICs. The payment option that an applicant chooses will affect what the initial payment is.

  • Lump Sum Cash – initial payment is 20% of the total offer amount; offer acceptances are provided in written confirmation; remaining balance is due in five or fewer payments
  • Periodic Payments – initial payment is first monthly payment; remaining balance is paid in monthly installments; if offer accepted, pay monthly until offer is paid in full

What Happens After I Mail the Application?

The IRS will contact the taxpayer after receiving and reviewing the offer application. It is important that the taxpayer replies promptly to any requests for additional information. Failure to reply to any additional information requests will result in the return of the offer without appeal rights.

There are a number of factors that are examined by the IRS to determine if the offer will be accepted. The IRS will consider each taxpayer’s unique set of facts and circumstances, including ability to pay, income, expenses, and asset equity. This information can be determined by the Forms themselves, but also the additional documentation submitted, and the explanation of circumstances found on Form 656.

After the application is submitted and while it is being evaluated, there are a few important things to note. The non-refundable payments and fees will be applied to the tax liability. The taxpayer is able to specify a specific tax year and tax debt for these payments. A Notice of Tax Lien may be filed. However, all other collection activities are suspended for this time. In addition, the legal assessment and collection period is extended. While the IRS is evaluating the offer, the taxpayer should make all required payments associated with the offer. However, the taxpayer is not required to make payments on an existing installment agreement. The offer will automatically be accepted if the IRS does not make a determination within two years of the IRS receipt date.

If the taxpayer fails to make the required monthly payments while the offer is being evaluated the offer will be returned without appeal rights.

If your offer is accepted

Once the offer is accepted, the taxpayer must continue to timely file all required tax returns and timely pay all estimated tax payments and federal tax payments that become due in the future. Failure to file and pay any tax obligation that become due within five years after the taxpayer’s offer is accepted may result in the offer becoming defaulted. If the offer defaults, the taxpayer is liable for the original tax debt, less any payments made, and all accrued interest and penalties. It is important to note that an offer does not stop the accrual of interest and penalties. The offer may also be defaulted if the taxpayer fails to promptly pay any tax debts assessed after acceptance of the offer for any tax year prior to acceptance that were not included in the original offer. These requirements, as well as additional terms, are included in detail in Section 7 of Form 656.

It is also important to note that any refund that are due to the taxpayer within the calendar year that the offer is accepted will be applied to the taxpayer’s debt. Additionally, federal tax liens are not released until the offer terms are satisfied.

If your offer is rejected or returned:

If the offer is rejected, the taxpayer has 30 days from the date on the rejection letter to appeal the rejection using the Request for Appeal of Offer in Compromise, Form 13711.

If the taxpayer agrees with the rejection, he or she can send full payment of the tax debt to avoid additional interest and penalty or request an installment agreement.

If the offer was returned, not rejected, the taxpayer should review the letter for the reason(s) the offer was returned. If the reason for the return is rectified, a new offer can be submitted with the application fee and required initial payment.

Frequently Asked Questions

  1. How do I know if an OIC is the best option for me?
    You can use the Offer in Compromise Pre-Qualifier Tool to see if you may qualify for an OIC. If you are working with a tax professional or attorney, you should also speak with them to see if it is an option for you.

  2. What is the low-income certification and how do I know if I qualify?
    The low-income certification makes it so an applicant is not required to submit any payments of the application fee upon submission or during the consideration of the offer. You can qualify for the low-income certification if your adjusted gross income (AGI), as determined by your most recently filed income tax return, is less than or equal to the amount shown in the chart on Form 656, section 1, based on your family size and where you live. Taxpayers who do not qualify based on the AGI may also request a waiver based on their current household’s gross income from Form 433 (OIC) x 12.

  3. What happens if miscalculate my offer, or it is not a high enough offer?
    The IRS figures the correct offer amount. If the IRS determines this amount is higher than your offer, and you have no special circumstances, the IRS will give you an opportunity to increase your offer amount. If you do not increase the amount, the offer will be rejected. If the IRS finds that you can pull the full liability, you can request an installment agreement. The IRS reviews OICs for possible fraudulent intent, and if you submit an OIC with false information, or make a false statement to an IRS agent, you may be subject to civil or criminal penalties.

  4. I already have an installment agreement. Do I need to keep paying towards that while my offer is being processed?
    No, you do not need to make any payments towards the installment agreement while the offer is being processed. If the offer is not accepted and you have not incurred any additional tax debt, your installment agreement will be reinstated with no additional fee.

  5. Will the IRS file a lien?
    The IRS may file a Notice of Federal Tax Lien (NFTL) during the offer process. This lien is to notify creditors that you owe a tax debt; however, a NFTL will not normally be filed until a final decision has been made on the offer.

  6. The IRS filed a lien on my account. Can this lien be removed?
    If the offer is accepted and once the agreed offer is paid in full, the lien will be released.

  7. I have a levy on my account. Can that be released?
    There is no requirement to release a levy that was served prior to the offer submission. A levy may be able to be removed if it was placed on your account after the IRS received date of the OIC.

  8. How do I determine if I should file under Doubt as to Liability versus Doubt as to Collectability?
    If you genuinely disagree with the existence or amount of the tax debt under the law, then you should file under Doubt as to Liability. If you agree with the amount due, but cannot pay the full amount, you should file under Doubt as to Collectability.

  9. I’m currently in bankruptcy, can I file an offer?
    No, an offer cannot be considered while there is an open bankruptcy. Once it is discharged and closed, you may file an offer.

  10. Do all the required tax returns need to be filed before submitting an offer?
    Yes, you must file all tax returns you are legally required to file for personal or business taxes. If you have a valid extension and have made all required payments, you are considered current for unfiled returns.

  11. Do I need to be up to date with my estimated tax payments before submitting an offer?
    Yes, you must be up to date.

  12. Where do my payments get applied?
    You may designate which tax debt you would like to apply your offer payment(s) to in writing when the offer is submitted or when the payment is made. You may not designate the application fee, or any payment after the IRS accepts your offer. In the absence of any written designation, the IRS will apply the offer payment in the best interest of the government.

  13. What method of payment does the IRS accept?
    You can either pay with a check or money order made payable to the United States Treasury or online through the Electronic Federal Tax Payment System. 

  14. I am paying with a check/money order. Who do I make it out to?
    Checks and money orders should be made out to United States Treasury.

  15. Can I pay the application fee and the initial payment with the same check/money order?
    No, you cannot. The application fee and the initial payment must be made on two separate checks or money orders.

  16. After I file my periodic payment offer including the application fee and initial payment, where do I send my future required periodic payments?
    You will receive a letter that includes Form 656-PPV, which should be completed and attached to the payment. This will direct you where to send future payments. You can also make the payments through the Electronic Federal Tax Payment System by selecting “Offer in Compromise – Subsequent Periodic Payment”.

  17. My offer wasn’t accepted. Will I get my payments back?
    Offer payments that must be sent with the offer are not refundable. If you send MORE than the required amount AND designate the payment as a deposit on Form 656 the payment in excess of the required amount is refundable.

  18. What happens if I paid the initial payment on a periodic payment offer but fail to submit subsequent payments while the offer is under investigation?
    The IRS will try to contact you to provide you with one opportunity to pay the missing amount. If you do not make the payment, the offer will be withdrawn and returned to you without appeal rights. All payments that have already been received will be applied to your tax liabilities. The IRS will also keep the application fee.

  19. Can I have an extension on my offer terms?
    Offer terms cannot be extended or changed once the offer is accepted.

  20. Can I have an extension on offer payments after my offer has been accepted?
    A one-time extension may be granted on an offer payment within a 24-month period. You should contact the monitoring examiner to request the extension.

  21. Why didn’t I receive my tax refund?
    As part of the accepted offer agreement, the IRS will keep any refund, including interest, for taxes due through the calendar year that the offer was accepted.

  22. Is the refund part of the offer payment?
    No, the refund that is retained is applied to the overall tax debt and is not considered a payment toward your accepted offer amount.

  23. Can my future refunds be applied toward my offer balance?
    Your future refunds can be applied to your offer balance with a signed written consent.

  24. How do I get a lien removed?
    The lien will be released if your offer is accepted and the agreed offer is paid in full. The IRS electronically releases liens to the county where the lien was filed. The county is responsible for release of the information to the credit bureaus.

  25. How long does it take for liens to be released?
    The timeframe for lien release differs based on the method of payment:
    • Cashier check or money order – immediately upon receipt
    • Personal or business check – 30 days after receipt
    • Debit card – 100 days after receipt
    • Credit card – 120 days after receipt

  26. I finished making my offer payments. Now what?
    You must continue to file and pay all of your taxes on time for the timeframe noted in the offer contract including any Collateral Agreement signed as part of the accepted offer.

  27. What happens if the offer defaults?
    The IRS may levy or file suit to collect the entire balance of the offer or an amount equal to the original tax debt less any payments received. All penalties and interest will be reinstated. Liens and levy may be placed on the account.

  28. What happens if I don’t meet all the terms of my accepted OIC?
    The IRS may default the OIC and reinstate the entire tax liability, less any payments received.

  29. How much interest am I going to have to pay if my offer is accepted?
    Interest will continue to accrue until the offer is accepted. Once the OIC is accepted, no additional interest will be added to your tax debt or accepted offer amount.

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