An offer in compromise is an agreement between a taxpayer and a taxing authority — such as the IRS — to settle the taxpayer’s tax debt for less than they owe.
Learn what an offer in compromise is and how it works.
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Offer in Compromise Definition and Example
An offer in compromise is a settlement that a taxpayer makes with the government to pay a certain amount of money to the government to cover their back taxes.
- Acronym: OIC
For example, if someone owes $50,000 to the IRS, and they qualify for an offer in compromise, they could settle their tax debt for some lower amount (such as $10,000) through an offer in compromise.
Related: 6 Best Tax Relief Companies
How Does an Offer in Compromise Work?
Individuals and businesses in the United States are subject to income taxes at the federal level and potentially at the state and local levels as well.
While most of these individuals and businesses pay their taxes in full, a large minority do not — often for years.
And not only can these taxpayers owe significant back taxes over several years, but they also face the accrual of substantial penalties and interest over the years.
In an effort to get these taxpayers back into the tax system, the IRS as well as some states allow them to make an offer in compromise to settle their back taxes as well as the associated penalties and interest.
Not everybody, however, qualifies for an offer in compromise; for most offers in compromise, the taxpayer must generally show that they do not have the wherewithal to pay their tax debt in full before the government’s time limit to collect the debt runs out.
Types of Offers in Compromise
There are three types of offers in compromise at the federal level:
- Doubt As to Collectibility Offer in Compromise: This kind of offer in compromise is the most popular kind of offer in compromise. With this kind of offer in compromise, the taxpayer is making the argument to the IRS — based on their current financial situation — that they do not have the ability to pay their back tax debt and that the amount they are offering is the most they should reasonably be expected to pay.
- Doubt As to Liability Offer in Compromise: This kind of compromise involves the taxpayer proving to the government that they don’t actually owe the tax — or at least not all the tax — the government believes they owe.
- Effective Tax Administration Offer in Compromise: This rare kind of offer in compromise involves the taxpayer making the argument to the government that on the basis of concepts such as public policy and economic fairness they should not have to pay the tax that they owe.
State offer in compromise programs vary, but most states have some variation of the doubt as to collectibility offer in compromise and the doubt as to liability offer in compromise.
Note, however, that because states are generally more aggressive with tax collections and because they generally have longer time limits to collect on tax debt, it is often easier to get a federal offer in compromise approved than a state offer in compromise.
How to Get an Offer in Compromise in 8 Steps
At a high level, you get an offer in compromise by submitting certain forms to the taxing authority to whom you are in debt.
States have their own forms, but for sake of example, let’s take a look at the process for getting a federal offer in compromise.
Step 1: Get in compliance.
In order for the IRS to entertain the notion of an offer in compromise, you must be in compliance with your tax returns.
Believe it or not, this doesn’t mean you have to have filed all of your required tax returns throughout your entire life; it simply means you must have filed the last six years of tax returns to the extent required.
Also, because one of the IRS’s main goals with the offer in compromise program is to get people back in the tax system, it will want to see that you are current on making your tax payments for the current tax year.
The IRS may be willing to work with you on your back taxes, but it doesn’t want you to keep making the same mistake.
Note that if your offer in compromise is accepted, you must be a squeaky-clean taxpayer for at least the following five years or else you may default on your offer and owe all your back taxes again (less what you paid in your offer).
Step 2: Make sure you qualify.
First, you need to determine which type of offer in compromise you intend to submit and make sure you qualify for that offer type.
For all types of offers in compromise, you cannot currently be in bankruptcy.
And assuming you’re attempting to submit the most common type of offer in compromise — doubt as to collectibility — you need to first make sure you qualify based on your financial circumstances.
I’d recommend watching the video below on the offer in compromise formula — if you work through the formula, you’ll understand whether or not you qualify for a doubt as to collectibility offer in compromise and know what your offer amount will be.
As an alternative, you can hire a professional tax relief company to analyze your situation and submit your offer in compromise for you.
Step 3: Complete the appropriate forms.
The table below shows the forms you have to complete for each of the different kinds of federal offers in compromise.
| Offer in Compromise Type | Attach Forms |
|---|---|
| Doubt as to Collectibility | Form 656, Form 433-A (OIC), Possibly Form 433-B |
| Doubt As to Liability | Form 656-L |
| Effective Tax Administration | Form 656, Form 433-A (OIC), Possibly Form 433-B |
Step 4: Attach the necessary documentation.
In addition to the forms listed above, here is a list of other documents you may need to attach to your offer in compromise package before mailing it to the IRS:
- Copies of your most recent pay stub, earnings statement, etc., from each employer
- Copies of the most recent statement for each investment and retirement account
- Copies of the most recent statement, etc., from all other sources of income
- Copies of individual complete bank statements for the three most recent months
- Copies of business complete bank statements for the six most recent months
- Copies of the most recent statement from lender(s) on loans showing monthly payments, loan payoffs, and balances
- List of accounts receivable or notes receivable, if applicable
- Verification of delinquent state or local tax liability showing total delinquent state or local taxes and amount of monthly payments, if applicable
- Copies of court orders for child support or alimony payments claimed in monthly expense section
- Copies of trust documents if applicable
- Documentation to support any special circumstances
- Form 2848 if you would like an attorney, CPA, or enrolled agent to represent you and you haven’t previously submitted this form to the IRS
Note that the above list is directly from the IRS’s offer in compromise instruction booklet (Form 656-B).
Step 5: Attach any necessary payments.
Unless you qualify for low-income certification, you will need to submit at least one and perhaps two checks or money orders payable to the United States Treasury.
The first payment is your application fee of $205 (this figure is adjusted periodically by the IRS).
The second payment is your 20% down payment if you are making a lump-sum cash offer.
Step 6: Mail in your offer in compromise package.
Your offer in compromise package — consisting of the forms, documentation, and payments described above — will be mailed to one of two locations.
If you live in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington, mail your offer in compromise package to:
Memphis IRS Center COIC Unit
P.O. Box 30803, AMC
Memphis, TN 38130-0803
If you live in Alaska, Alabama, Arkansas, Connecticut, the District of Columbia, Delaware, Florida, Georgia, Iowa, Illinois, Indiana, Kansas, Louisiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Montana, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Virginia, Vermont, Wisconsin, West Virginia, Wyoming, or a foreign country, mail your offer in compromise package to:
Brookhaven IRS Center COIC Unit
P.O. Box 9007
Holtsville, NY 11742-9007
Step 7: Respond to any IRS inquiries.
Unfortunately, the IRS’s offer in compromise processing time is quite lengthy; it can be at least six months before you hear anything from then.
That said, you can probably be sure that the IRS will get back to you before 24 months have gone by — if they haven’t, your offer in compromise is automatically accepted!
When the IRS does get back to you, however, make sure to respond promptly to any inquiries they have for you.
Step 8: Hope for the best.
Remember, an offer in compromise is not guaranteed, but keep a positive attitude and hope for the best as you wait for the IRS to make a final decision on your offer in compromise.
Alternatives to an Offer in Compromise
If you don’t qualify for an offer in compromise, there are other tax debt relief options for you to deal with your tax debt, including:
- Installment Agreement: This is an agreement with the IRS to pay off your tax debt over time. While most installment agreements are “full payment,” meaning that you will end up paying all you owe to the IRS (including penalties and interest), others are “partial payment,” meaning that you will end up paying less than you owe to the IRS over the course of your payment plan.
- Currently Not Collectible Status: This is a status the IRS can place you in if you can show extreme financial hardship. While you are in this status, you are not expected to make payments to the IRS, and the IRS’s 10-year clock to collect your tax debt continues to run.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
