IRS Offer In Compromise FAQs
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayer's tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise for one of the following reasons:
- Doubt as to Liability: Doubt exists that the assessed tax is correct.
- Doubt as to Collectability: Doubt exists that the taxpayer could ever pay the full amount in the remaining Collection Statute Expiration Date (CSED).
- Effective Tax Administration: There is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances.
What are the requirements for an OIC?
In order to be considered for an OIC, a taxpayer must meet all of the following requirements:
- Prepare and submit Form 656, Offer in Compromise, 433-A and 433-B, "Collection Information Statements;
- Submitted the required application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee," with the Form 656;
- Filed all required federal tax returns;
- Filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and be current with deposits for the quarters while the offer is pending;
- Not have filed as an open bankruptcy case.
Taxpayers must comply with all federal tax filing and paying requirements for a period of five years following acceptance of their OIC, or until the OIC is paid in full, whichever is longer. This also includes making required estimated tax payments and federal tax deposits.
How is the minimum offer amount determined?
The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income times a factor. The factor is determined by the type of offer (cash or deferred). The factor for a cash offer (must be paid in 5 month or less) is 12. The factor for a deferred offer (must be paid in 24 months or less) is 24.
How do I complete an OIC?
Note: While it is your right to do so, we do not recommend that taxpayer prepare an OIC submittal on the own. The acceptance rate for experienced Certified Tax Resolution Specialists is significantly higher than that of the general public. This is what we do, day in and day out!
First obtain a Form 656, Offer in Compromise package. The package includes information and instructions for completing the form, as well as a worksheet that can be used to calculate an amount to offer. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, are included in the Form 656 package and may need to be completed as well depending upon each individual situation. Taxpayers will need to review and include amounts for items such as housing and utilities from the Collection Financial Standards, and Necessary Expenses, to complete their collection information statement(s).
NOTE: For corporations and partnerships, Form 433-A may be requested from corporate officers and individual partners.
When does a Form 433, Collection Information Statement, need to be completed?
Collection Information Statement(s) are required for doubt as to collectability and effective tax administration OICs, and doubt as to liability involving Trust Fund Recovery Penalty assessments.
Are the forms available on-line?
Yes. Most forms are their uses are available on this website (See the Google Search Box at the top of the page). The forms needed to complete an OIC are available on-line. Also, forms may be obtained by calling 1-800-829-3676 or by visiting a local IRS office.
What forms are submitted to request an effective tax administration OIC?
Note: There is a very low acceptance rate for Effective Tax Administration Offer for trained professionals. They are almost unheard of for the do it yourselfer.
To receive consideration on this basis, a taxpayer must submit:
- Form 656, "Offer in Compromise"
- Collection Information Statement (Form 433-A and/or Form 433-B)
- A detailed written narrative must be documented on Form 656, Item 9. The narrative must explain the exceptional circumstances and why payment of the tax liability in full would either create an economic hardship or demonstrate why there is compelling public policy or equity considerations sufficient to support an acceptance recommendation. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances
If a taxpayer requests consideration on the basis of effective tax administration, the IRS must first establish that no doubt as to liability and no doubt as to collectibility conditions exist. Hence, an OIC filed under effective tax administration can only be considered once the IRS determines that the tax liability is correct and collectible in full is possible. Failure of either one of these conditions will cause denial of the offer for effective tax administration
Once the IRS begins the process of processing the OIC under the effective tax administration guidelines, it will consider such issues as the taxpayer's overall history of filing and paying taxes, as well as the overall impact on voluntary compliance.
I qualify for an installment agreement; can I still submit an OIC?
If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an Offer in Compromise- Doubt as to Collectability. If an OIC is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an OIC under the effective tax administration or doubt as to liability provision.
The IRS recently levied my bank account. Will the funds levied be returned if I file an offer in compromise?
The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OIC was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an OIC, but which were not received at the time the OIC was submitted.
Can I stop sending payments as part of my approved installment agreement once I file an offer in compromise?
Technically No! Installment agreement payments must be continued while the OIC is being considered. Installment agreement payments will not be applied against the amount you offered. This is where the experienced Certified Tax Resolution Specialist is invaluable!
Can taxes be settled by offering pennies on the dollar?
OICs must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt. A consumer alert has been issued advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar." The IRS cautions that the OIC program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying taxes.
Can I file an offer in compromise to delay collection action?
Absolute NOT! IF determined an OIC was filed solely to hinder and/or delay collection actions, the IRS will return the OIC without any further consideration. Taxpayers will not be afforded the right to appeal this decision.
What is an offer in compromise user or application fee?
Federal agencies are authorized to establish charges for services provided by the agency, called "user fees." The U.S. Office of Management and Budget encourages agencies to implement these fees to recover the cost of providing special services to some services that others do not use. Accordingly, the IRS has established a user fee that will recover part of the cost of processing and reviewing offer in compromise requests. The IRS has chosen to call it an "application fee" because the fee is required when an OIC application is submitted for consideration.
How much is the application fee?
The application fee for submitting an OIC is currently at $186 and does increase periodically.
Who will have to pay this application fee?
All taxpayers who submit a Form 656, "Offer in Compromise," except in two instances:
- The OIC is submitted based solely on "doubt as to liability;" or
- The taxpayer's total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
What method of payment does the IRS accept?
A check or money order made payable to the United States Treasury.
Can I send cash as payment for the application fee?
No. Taxpayers must send a check or money order made payable to the United States Treasury.
Can I send one check to cover both the application fee and OIC amount?
No. Taxpayers must initially pay the application fee. After the IRS accepts the offer, the IRS will notify the taxpayer to promptly pay any unpaid amounts that becomes due under the terms of the offer agreement.
What happens if I submit an application fee and find that I have insufficient funds in my account to cover the check?
If we receive notification of insufficient funds, the IRS will immediately stop processing the Form 656 and the OIC will be returned to the taxpayer without any further consideration.
Will payment of the application fee reduce the OIC amount?
The application fee is in addition to the amount listed on Form 656, Item 7. However, when the IRS determines the acceptable amount of an OIC based on doubt as to collectability, it considers the value of all of the taxpayer's assets. Because some of the taxpayer's assets were used to pay the OIC application fee, payment of the fee will reduce the acceptable amount of the OIC. The taxpayer therefore pays no more for an OIC with the fee than the taxpayer would have paid without the fee.
Will the application fee create an additional financial hardship on taxpayers who are already having payment problems?
Because payment of the fee reduces the acceptable OIC amount, most taxpayers will not experience any additional financial hardship as a result of the fee. However, for some taxpayers the fee may exceed their ability to pay. The IRS believes that the exception to the fee for taxpayers whose income is at or below poverty will protect such taxpayers. The IRS intends to monitor this issue and adjust the amount of the exception if it appears there are a number of taxpayers who cannot pay even the amount of the fee for an OIC.
What does the IRS review when I submit my OIC, Form 656?
The IRS first reviews an OIC to see if it is "processable." Processable is the term the IRS applies to those OICs that have met certain criteria. An OIC is processable if the taxpayer:
- Used the most current versions of Form 656, “Offer in Compromise” and Forms 433-A and 433-B, “Collection Information Statements."
- Submitted the application fee, or Form 656-A, “Income Certification for Offer in Compromise Application Fee” with the Form 656;
- Filed all required federal tax returns;
- Filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and is current with deposits for the quarter in which the offer in compromise was submitted; and
- Is not a debtor in a bankruptcy case.
What happens to my fee if the OIC is not considered processable?
The application fee will be returned to the taxpayer if the OIC is determined not to be processable.
How do I know if I qualify for the income exception?
We have developed a survey to help determine if you qualify. You can find this survey at Settle Your IRS Debt Now. Once completed we will send you an analysis of our findings.
What do I need to do if the OIC Application Fee Worksheet shows that I qualify for the income exception?
Taxpayers must sign and date Form 656-A (fill-in format) "Income Certification for Offer in Compromise Application Fee." If a taxpayer is submitting a joint OIC with a spouse, the spouse must also sign the certification. The Income Certification must be attached to Form 656. It is recommended that the Application Fee Worksheet also be submitted.
What happens if I submit the Form 656-A and the IRS later says I made an error and do not qualify for the poverty guideline exception?
The IRS will return the OIC to the taxpayer without any further processing.
Does the poverty guideline exception apply to businesses?
No. The exception for taxpayers with total monthly incomes falling at or below income levels based on DHSS poverty guidelines only applies to individuals. It does not apply to other entities, such as corporations or partnerships.
What happens if I do not submit the OIC application fee with the OIC Form 656?
Unless the taxpayer has submitted an OIC under the doubt as to liability provision, or attached Form 656-A, showing a poverty guideline certification, the IRS will return the Form 656 as not processable.
How is the application fee collected?
The application fee is collected when a taxpayer submits a Form 656. The general rule is that the IRS needs as many Forms 656 as there are entities seeking to compromise. A check or money order in the amount of $186 must be attached to each OIC.
See Who will have to pay this Application Fee.
How many Forms 656 must I complete if my spouse and I are submitting one offer to compromise the same joint liability? How many application fees must be attached?
A married couple owing the same joint income tax liability may file only one Form 656 listing the joint liability. One fee should be attached to Form 656. A married couple opting to file separate offers to compromise the same joint liability may do so, but two fees will be required.
See Who will have to pay this Application Fee.
How many Forms 656 should be filed when the taxpayers are divorced, separated, or/married, but living apart? How many fees must be attached in these situations?
A divorced, separated, or married couple living apart may still file one Form 656 listing their joint liability and pay only one fee, as long as all the taxes owed are joint liabilities. Taxpayers in these situations that opt to file separate offers must pay a separate application fee for each offer that is submitted for consideration.
See Who will have to pay this Application Fee.
When a married couple owes a joint liability and one spouse also owes an individual (non-joint) liability, how many Forms 656 are required?
Two OICs are needed. One for the joint liability and another one for the individual (non-joint) liability. A check or money order for each application must accompany each Form 656.
The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income.
How many Forms 656 are required from a married couple who owe joint income tax, plus the husband owes an individual year before he was married and a business liability, and the wife owes an individual year with her prior spouse? How many application fees will be required?
In keeping with the “one fee per entity” rule:
Stop the stress and resolve your problems!
Call 800-829-7483 for a FREE Consultation