What Is an IRS Offer in Compromise? Ultimate Guide by a CPA!Tax Relief
The only thing scarier than being thousands of dollars in debt is being thousands of dollars in debt to the IRS.
As the most powerful collection agency in the world — with formidable powers such as the authority to levy and seize your property — the IRS doesn’t play games.
In some circumstances, however, the IRS is willing to work with taxpayers to settle their tax debt — and this is where an offer in compromise might come in.
Do you want professional assistance with your offer in compromise? My name is Logan Allec. I’m a CPA with a Masters Degree in Taxation. My team and I can get you the relief from the IRS that you deserve. If you’d like to work together, shoot me an email at [email protected]
What Is an Offer in Compromise?
An offer in compromise is an agreement between a taxpayer and the IRS that settles a taxpayer’s tax liabilities for less than the full amount they owe to the IRS.
This is where the name comes from: you, the taxpayer, are making an offer to compromise with respect to your outstanding tax debt.
Why Does the IRS Allow Offers in Compromise?
You may be wondering why an agency as powerful as the IRS would even entertain the notion of collecting less than they are owed.
Well, the IRS understands that not all taxpayers will be able to pay their tax debt in their lifetime and so they want to give them the opportunity to get in compliance rather than just let taxpayers die with their debt.
Rather than scaring taxpayers into hiding under a rock, the IRS would rather be paid what they can — even if it’s less than the total amount of tax owed — as quickly as they can.
So What’s the Catch?
Now, as enticing and taxpayer-friendly as an offer in compromise sounds, there is of course a catch.
And that catch is that not all taxpayers who owe the IRS money will qualify for an offer in compromise.
If you want a basic explanation of how to qualify for an offer in compromise as well as the three different kinds of offers in compromise, watch the video below!
Who Qualifies For an Offer in Compromise?
There are two types of requirements that must be met when it comes to submitting an offer in compromise and getting the IRS to accept it.
The first set of requirements — I call them the “baseline” requirements — must be met before you even submit your offer in compromise. If you don’t meet these requirements, the IRS will not even consider your offer in the first place; it will be returned to you as unprocessable.
The second set of requirements has to do with your tax liability — if your tax liability doesn’t fall into one of three categories, the IRS will reject your offer.
Let’s go through each of these sets of requirements.
Before you even submit your offer, you must meet some baseline requirements.
Note that meeting these requirements does not mean your offer will be accepted; it simply means that the IRS will review your offer.
Baseline Requirement #1: Tax Return Compliance
You must be in compliance with respect to your tax return filings.
Does this mean that you must have filed a tax return for every year in which you had a filing requirement?
Thankfully, no. According to IRS Policy Statement 5-133, you only need to have filed the most recent six years of tax returns to be considered compliant.
This wasn’t always the IRS’ position — there was a time when the IRS ignored Policy Statement 5-133 and insisted that you must have filed a tax return for every year in which you had a filing requirement. But thankfully those days are gone, and you only have to have filed the most recent six years.
If you are not in compliance with respect to the last six years’ of tax returns at the time the IRS receives your offer, they will generally give you 30 days to get in compliance with these tax returns.
Substitute for Return
Sometimes, if you haven’t filed a tax return for a particular year, the IRS will file their own tax calculation for you — based on third-party information such as W-2s and 1099s — so that they can determine and assess your tax. This IRS-generated tax calculation is called a substitute for return (SFR). Note that for purposes of determining tax return compliance, SFRs count; that is, if the IRS has filed an SFR for you for a given tax year, you do not have to file a tax return for that year in order to be compliant for that year.
Of course, SFRs generally leave out many deductions that would otherwise lower your tax liability for that year. So should you file tax returns for the years that the IRS filed an SFR if doing so would reduce your tax liability for that year? If you’re pursuing an offer in compromise, it actually won’t help you much if at all because with an offer in compromise you are settling based on what you can pay, not what you owe.
In fact, letting an SFR with a high tax liability stand and not replacing it with a tax return could very well make the IRS more likely to accept your offer because the high tax liability could give the appearance that you will never be able to pay off what you owe.
Baseline Requirement #2: Estimated Taxes Compliance
You must be current on your estimated taxes for the current year.
I recommend that when you submit your offer you enclose a copy of the check you used to pay your estimates for the year along with copies of the estimated tax vouchers.
Similar to the tax return compliance requirement, if you are not in compliance with your estimated taxes at the time the IRS receives your offer, they will generally give you 30 days to get in compliance with your estimated taxes.
Businesses submitting an offer in compromise must have timely filed and paid all employment tax returns for the current quarter. There’s certainly some strategy to deploy here. For example, if your business is not in employment tax compliance for the current quarter, it may make sense for you to wait until the first month of the next quarter to submit your offer.
Baseline Requirement #3: Not in Bankruptcy
If you’re in bankruptcy, don’t bother filing an offer in compromise.
The IRS will simply not consider it (despite the fact that bankruptcy courts have asked the IRS to consider offers in compromise as part of a bankruptcy).
The bankruptcy code has an automatic stay on collection, which applies to IRS collection efforts as well.
And since the IRS considers an offer in compromise a collection activity, they will not even look at your offer if you’re in bankruptcy — they will return it to you as unprocessable and take any money you paid in with your offer, crediting it to your balance due.
Offer in Compromise Types
The “baseline” requirements above are just that — baseline requirements. They are the requirements you must meet in order for the IRS to even entertain your offer in compromise.
Assuming you’ve met the baseline requirements, your offer must fit into one of three categories.
The table below shows the three ways that taxpayers can qualify for an offer in compromise.
|Offer in Compromise Type||Who Qualifies||Form Used|
|Doubt as to Collectibility||Taxpayers who can show that it is doubtful that the IRS will be able to collect the amount of tax they owe before the statute of limitations on collections runs out||Form 656|
|Doubt As to Liability||Taxpayers who may not actually owe the tax that the IRS claims they owe||Form 656-L|
|Effective Tax Administration||Taxpayers who can show that paying the tax they owe in full would create an economic hardship for them or would be unfair and inequitable due to exceptional circumstances||Form 656|
Below, I describe each of the ways to qualify for an offer in compromise as well as how to do each one.
Doubt As to Collectibility Offer in Compromise
Doubt as to collectibility is by far the most common type of offer in compromise both submitted to and accepted by the IRS.
With a doubt as to collectibility offer in compromise, you are showing the IRS that the amount they could expect to collect from you before the 10-year statute of limitations on collections expires — this is known as your reasonable collection potential (RCP) — is less than the amount you owe.
If the IRS accepts your offer in compromise, then you are required to pay the IRS the amount of your reasonable collection potential, either over a period of five months or twenty-four months.
Important: If you want an in-depth look at exactly to calculate your offer in compromise, be sure to read my article on how much you should offer in compromise to the IRS.
Doubt As to Liability Offer in Compromise
The doubt as to liability offer in compromise is for those taxpayers who can show that they do not actually owe the tax the IRS has assessed on them.
This may sound far-fetched, but it’s important to keep in mind that the IRS does make mistakes.
I’ve seen doubt as to liability offers in compromise accepted for the following reasons:
- The actual statute of limitations ran out, but the IRS calculated the statute incorrectly.
- The tax was never actually assessed or was improperly assessed.
- The penalty was never actually assessed or was incorrectly assessed.
- The tax was not actually due.
- The tax was actually paid but the IRS did not post the payment correctly.
- The taxes were discharged in bankruptcy.
- The IRS was going after the wrong taxpayer — this happens more often than you might think, especially for taxpayers with common names.
Note that if the IRS has previously adjudicated your tax liability, that is, the IRS has already explicitly decided that the liability assessed is proper (such as through appeals), don’t bother filing a doubt as to liability offer in compromise in an attempt to get them to change their mind.
You use Form 656-L to submit a doubt as to liability offer in compromise.
Effective Tax Administration Offer in Compromise
The effective tax administration offer in compromise is for taxpayers who:
- owe the tax (and are therefore not eligible for a doubt as to liability offer in compromise),
- have the means to pay the tax (and are therefore not eligible for a doubt as to collectibility offer in compromise, but
- can show that paying the tax would expose them to economic hardship
Typically — though not always — this economic hardship has to do with some kind of health problem. Sure, you have the $100,000 in the bank to pay off your tax liability, but you need that money to pay for a life-saving surgery or treatment not covered by your insurance.
Essentially, the effective tax administration offer in compromise is about the IRS saving face: They don’t want the publicity that comes along with taking money from a taxpayer in a dire, typically life-threatening situation.
Note that effective tax administration offers in compromise require a higher level of approval than the two other kinds of offers; while the other two kinds of offers can be approved by the two IRS offer units, effective tax administration offers typically need approval from the IRS’ national office in Washington, D.C.
Submitting Your Offer in Compromise
Now that you have completed your offer in compromise, you need to assemble it and submit it to the IRS. Here’s what you have to do.
Assembling Your Offer in Compromise Package
A complete offer in compromise package includes the following documents:
- Form 656 for doubt as to collectibility and effective tax administration offers
- Form 656-L (for doubt as to liability offers)
- Form 433-A (OIC)
- Form 433-B if you are reporting business income from a corporation or LLC on Form 433-A
- Supporting documentation for positions taken; at the very least, include year-to-date pay stubs, the last three months’ worth of bank statements, and financials for Schedule C activities. Note that the IRS will take offers without all supporting documentation and will request anything they need. My general approach with the IRS is to send the bare minimum and let them ask for what they need.
- Any payments you are submitting with your offer, including your required offer payment and the $205 user fee. Note that the IRS recommends sending one check for the offer payment and another for the $205 user fee.
Note that if you qualify as “low-income”, you do not have to include any payments with your offer in compromise, nor do you have to make monthly payments.
Please refer to the low-income certification table below. You qualify if your adjusted gross income as indicated on your most recently-filed tax return (Form 1040) or the annualized amount of your household’s gross monthly income for offer in compromise purposes is equal to or lesser than than the amount shown in the table below for your family size and location.
|Size of Family Unit||48 Contiguous States, D.C., U.S. Territories||Alaska||Hawaii|
Where to Mail Your Offer in Compromise
Once you have completed your offer in compromise package, make a copy of it to keep in your records.
Then mail the offer in compromise to the appropriate IRS facility below.
|If You Live In:||Mail Your OIC To:|
|AZ, CA, CO, HI, ID, KY, MS, NM, NV, OK, OR, TN, TX, UT, WA||Memphis IRS Center COIC Unit|
P.O. Box 30803, AMC
Memphis, TN 38130-0803
|AK, AL, AR, CT, DC, DE, FL, GA, IA, IL, IN, KS, LA, MA, MD, ME, MI, MN, MO, MT, NC, ND, NE, NH, NJ, NY, OH, PA, PR, RI, SC, SD, VA, VT, WI, WV, WY, or a foreign country||Brookhaven IRS Center COIC Unit|
P.O. Box 9007
Holtsville, NY 11742-9007
What To Do If Your Offer Is Accepted
After you submit your offer, all you can do is wait (as well as make your required monthly payments, if applicable).
Eventually, the IRS will send you a letter stating that they have either accepted or rejected your offer in compromise.
I’ll talk about what to do if your offer is rejected in a minute, but if the IRS accepts your offer in compromise, congratulations!
The worst is behind you, but there are still some things you have to do so that your offer will not be cancelled by the IRS. Here they are:
- You must pay the offer amount in accordance with the terms of your offer, either within five months for a lump sum cash offer or within 24 months for a periodic payment offer.
- You must remain in compliance with the filing and payment of all tax returns for a period of five years from the date the offer in compromise is accepted, including any extensions. And this includes estimated taxes as well. So you have to be a good little taxpayer, ideally longer than this, but at least for five years after the acceptance of your offer.
If you do not meet these requirements, your offer will default, and you will once again owe the original amount of taxes, penalties, and interest less any amounts you’ve paid in.
Also, unless you submitted a doubt as to liability offer, the IRS will keep any tax refund, including interest due to you, for the calendar year in which the IRS accepts your offer in compromise, so you may want to adjust your withholding or whatever you need to do to minimize that tax refund. Note that this refund retained is not considered a payment toward your accepted offer amount, this is on top of your offer amount.
What To Do If Your Offer Is Rejected
If your offer in compromise is rejected — meaning that your offer was in fact processable and the IRS reviewed it but rejected it — what can you do?
At this point, there are a few options available to you:
- Administrative appeal using Form 13711 within 30 days from the date on the reject letter
- Submit another offer, but make sure it’s substantially different (i.e. more) than the rejected offer.
- Tax Court Petition
- Installment Agreement (either full-pay or partial-pay)
Offer in Compromise FAQs
Below are some of the most popular questions clients ask about the offer in compromise process.
I sent in payment with my offer in compromise. What if the IRS rejects my offer?
Most of the time, taxpayers are required to make a payment along with their offer in compromise.
But what if the IRS rejects the offer? Do you get the payment back?
In most cases, the answer is no. The IRS considers any payment provided with an offer in compromise as a non-refundable payment of tax.
"There shall be deposited with the Treasurer of the United States in a deposit fund account sums offered in compromise." IRC 7809(b)
How much does it cost to submit an offer in compromise?
The current user fee to submit an offer in compromise is currently $205.
You do not have to pay this fee if you are making an offer in compromise due to doubt as to liability.
Note that this amount reduces the assessed tax, though you can’t designate is (the IRS will).
How are payments applied in an offer in compromise?
When you send in any payment to the IRS — including the one you submit with your offer in compromise — you have the right to designate a payment to the tax year(s) of your choosing.
"The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer." IRC 7122(c)(2)(A)
If you don’t designate your payment to a particular tax year or years, the IRS will designate it however it wants, in the best interest of the government.
Of course with an offer in compromise, you typically don’t care where the government designates your payment since you are settling for the entire amount you owe.
How long does an offer in compromise take?
How long an offer in compromise takes depends on the dollar amount.
Small, low-dollar-amount (potentially streamlined) offers in compromise can get done within a few months.
But for larger tax liabilities and more complex situations, it may take six months to a year to get it done.
The good news, of course, is that once your offer in compromise is processable (i.e. you meet the baseline requirements stated above), the IRS will stop collections activity.
Will the IRS remove an existing lien while an offer in compromise is being processed?
Most of the time, the IRS will not remove an existing lien while an offer in compromise is being processed.
The lien will likely stay in place until the offer is accepted and then you (or the professional you’re working with) can get the lien removed.
If you do nothing, the IRS will likely remove it after you’ve paid in your entire offer amount, either within five months or 24 months.
There might be an exception to getting the lien removed before your offer is accepted if you can show that the lien is causing you economic hardship, but this is pretty difficult to do.
Can the IRS file a new federal tax lien on your property while they are considering your offer?
Yes, the IRS can technically file a new federal tax lien on your property while they are considering your offer.
While the IRS stops collection activity while reviewing your offer, they do not consider the filing of a federal tax lien a collection activity.
However, the IRS in general does not do this in practice.
I’m currently on an installment agreement with the IRS. When can I stop paying on that after I submit my offer?
You can stop paying on your installment agreement once the IRS has begun reviewing your offer in compromise.
This is because an offer in compromise stops enforced collection action immediately when the IRS deems it processable and begins reviewing it.
However, if the IRS returns your offer as unprocessable, there is no respite for your installment agreement payments.
I’m currently paying on an accepted offer in compromise with the IRS. Can I submit a new offer?
Yes, if your circumstances have drastically changed, you can submit a new offer in compromise to see if the IRS will accept a reduced offer.
Does interest continue to accrue after I submit my offer?
Yes, interest continues to accrue after you submit your offer in compromise. Interest stops accruing on the date the IRS accepts your offer.
Beyond “the numbers”, are there any factors that could hurt my ability to get an offer in compromise?
Yes, there are. The IRS can hold some actions taken by you against you, such as:
- Failing to file tax returns or pay tax for a number of years (but they generally overlook this as long as you get in compliance under the six-year rule)
- Deliberately avoid tax payment
- Being a tax protestor (though they can’t technically call someone a tax protestor anymore)
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in 2017. 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.