Not being able to pay your debts can be scary. And when your creditor is the IRS, you might be especially nervous about making ends meet. To alleviate some of your tax debt burden, consider applying for an offer in compromise.
You must apply for an offer in compromise through the IRS. But before applying, weigh your options—the IRS does not accept all applications. In fact, the IRS rejects approximately 60% of offers in compromise applicants.
Familiarize yourself with the IRS offer in compromise process and qualifications to improve your chances of acceptance.
What is an offer in compromise?
Offers in compromise (OIC) allow taxpayers to settle their tax debt with the IRS at a lower price than what they owe.
An offer in compromise is typically a last-ditch effort for taxpayers who have already explored other payment options, like an installment agreement. Installment agreements let you make monthly tax payments, but you are still liable for your full tax debt.
To settle with the IRS, you need to submit an official application. In your application, provide personal and financial information and make an offer amount.
Businesses and individuals who want to apply for an offer in compromise must meet IRS eligibility requirements.
Do you meet the IRS eligibility requirements?
Before applying, verify that you are eligible. The IRS requires that you:
- Have filed all required tax returns
- Are not in an open bankruptcy proceeding
You might be able to use the IRS offer in compromise pre-qualifier tool to determine eligibility and calculate your preliminary offer.
The pre-qualifier tool is a guide, not an offer in compromise application. To get started, you must answer some questions and input personal and financial information.
You cannot use the IRS offer in compromise pre-qualifier tool if your business is structured as a partnership or corporation.
When does the IRS accept a business offer in compromise?
Even if you meet the eligibility requirements, the IRS can decline your offer in compromise.
When reviewing an offer in compromise, the IRS looks at your ability to pay, income, expenses, and asset equity.
The IRS typically declines offers if the taxpayer can afford to pay what they owe.
Here are some reasons that the IRS may accept your offer in compromise:
- Doubt as to liability: Do you think your tax debt is genuinely incorrect? If you think you should owe nothing or less than what the IRS says, the IRS may accept an offer of compromise.
- Doubt as to collectibility: Do you earn and have less than what you owe? The IRS may accept a compromise if your assets and income are less than your tax liability.
- Effective tax administration: Would paying your tax debt in full create an economic hardship? You might receive an accepted offer if paying your liability is unfair due to exceptional circumstances.
Offer in compromise guidelines
Ready to learn about the OIC tax settlement program? After verifying that you are eligible, you can begin the application process.
Keep in mind that after submitting your offer, the IRS can take up to two years to make a determination.
While you wait for a determination, the IRS suspends collection activities. And, you do not need to make payments on an existing installment agreement.
If the IRS accepts your OIC, they will keep tax refunds for tax periods that extend through the calendar year. For example, if the IRS accepts your OIC in 2019, you cannot receive a refund on your 2019 tax return. The refund does not go toward your tax debt.
To submit your offer in compromise, you must file the appropriate forms and choose a payment option. After filing, you will receive your IRS determination.
Filing the offer in compromise form
The forms you must file depend on two things:
- Why you are submitting your OIC
- Whether you are filing as an individual, business, or both
If you are submitting an OIC based on doubt as to collectibility or effective tax administration, you must file Form 656, Offer in Compromise.
You must also file Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, Form 433-B (OIC), Collection Information Statement for Business, or both.
File Form 433-A (OIC) if you are:
- A sole proprietor
- A single-member LLC taxed as a sole proprietor
- An individual wage earner
- Someone submitting an offer on behalf of a deceased individual’s estate
File Form 433-B (OIC) if you are a:
- Single or multi-member LLC taxed as a corporation
- Multi-member LLC classified as a partnership
The IRS’s Form 656 Booklet contains Forms 656, 433-A (OIC), and 433-B (OIC).
If you are submitting an OIC based on doubt as to liability, only file Form 656-L, Offer in Compromise (Doubt as to Liability).
All taxpayers submitting an OIC should also include copies of supporting documents to back up their claims.
Most taxpayers must include an application fee of $186.
However, you do not need to pay the application fee if you’re submitting your OIC because you doubt your liability. Also, if you’re an individual (e.g., sole proprietor) who qualifies for the low-income exception, you do not need to submit the application fee.
Choosing a payment option
Taxpayers with an accepted offer in compromise generally make installment payments to pay down their reduced tax debt. You must choose your payment plan when you apply.
The IRS offers two payment options: lump sum cash and periodic payment plans.
Both payment options require an initial payment when you apply, in addition to your application fee. Separate your application fee from your initial payment.
Although the payment is nonrefundable, the IRS applies the amount to your total tax bill if they reject or return your OIC.
Lump sum cash
If you pursue the lump sum cash payment option, you can either pay your offer amount in one large sum or in installment payments.
Under the lump sum cash option, you must make five or fewer installments within five or fewer months after the IRS accepts your offer.
Your initial payment is 20% of your total offer amount. So if your offer is $40,000, you would include an initial payment of $8,000.
Taxpayers who pursue the periodic payment option make six or more monthly installments within 24 months after the IRS accepts your offer.
When applying, your initial payment is your first proposed installment payment.
|Payment Options||Number of Installments||Time to Make Payments||Nonrefundable Payment at the Time of Application|
|Lump sum cash||Less than 6||Less than 6 months after OIC acceptance||20% of the offer amount|
|Periodic payment||6 or more||Within 24 months after acceptance||First proposed installment payment|
Receiving your IRS determination
The IRS can accept, return, or reject your offer in compromise.
If the IRS accepts your OIC, you must abide by the terms and conditions. Failing to comply with tax laws and make timely payments for your new tax debt could end up costing you more than your original liability. The IRS can cancel your OIC and charge you for your original debt, plus interest and penalties.
What if you don’t hear from the IRS within two years of submitting your OIC? If the IRS does not make a determination within two years, your OIC is automatically accepted.
The IRS might return your offer in compromise if you are ineligible or made a mistake when applying. A return is not a rejection.
The IRS might return your offer in compromise if you:
- Didn’t submit the necessary information
- Filed for small business bankruptcy
- Didn’t include the application fee or nonrefundable payment
- Did not file your tax returns
- Didn’t pay current tax liabilities when the IRS was reviewing your offer
If the IRS returns your OIC, you cannot appeal the decision. However, you can resubmit your OIC once you are eligible and/or correct your application.
The IRS notifies you by mail if they reject your offer in compromise. Notifications explain why offers are rejected and provide instructions for appealing the decision.
If you decide to appeal a rejection, you must do so within 30 days. File Form 13711, Request for Appeal of Offer in Compromise, to appeal.
Are you unsure whether you should appeal or not? The IRS provides an online self-help tool to help you decide.
Offers in compromise require significant financial information. Avoid scrambling at the last minute by keeping updated books. Use Patriot’s online accounting software to track income, expenses, and receivables. Ready for your free trial?
This article has been updated from its original publication date of April 9, 2019.
This is not intended as legal advice; for more information, please click here.