Offer In Compromise FAQ

Have a question? Ask MyOfferInCompromise

Q: What is an Offer in Compromise?

A: An offer in compromise (OFFER IN COMPROMISE) 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 Collectibility: Doubt exists that the taxpayer could ever pay the full amount of tax owed. 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.

Unless the taxpayer files an OFFER IN COMPROMISE claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.

• 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 OFFER IN COMPROMISE qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OFFER IN COMPROMISE compared to other taxpayers in similar circumstances.

Q: What are the requirements for an OFFER IN COMPROMISE?

A: In order to be considered for an OFFER IN COMPROMISE, a taxpayer must meet all of the following requirements:

• Used the most current versions of Form 656, "Offer in Compromise," and Forms 433-A and 433-B, "Collection Information Statements" . The most current versions are dated May 2001;
• Submitted the $150 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 OFFER IN COMPROMISE, 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.

Taxpayers must comply with all federal tax filing and paying requirements for a period of five years following acceptance of their OFFER IN COMPROMISE, or until the OFFER IN COMPROMISE is paid in full, whichever is longer. This also includes making required estimated tax payments and federal tax deposits.

Q: I qualify for an installment agreement, can I still submit an OFFER IN COMPROMISE?

A: 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. If an OFFER IN COMPROMISE is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an OFFER IN COMPROMISE under the effective tax administration provision.

Q: The IRS recently levied my bank account. Will the levy proceeds be returned if I file an offer in compromise?

A: The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OFFER IN COMPROMISE was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an OFFER IN COMPROMISE, but which were not received at the time the OFFER IN COMPROMISE was submitted.

Q: Can I stop sending payments as part of my approved installment agreement once I file an offer in compromise?

A: No. Installment agreement payments must be continued while the OFFER IN COMPROMISE is being considered. Installment agreement payments will not be applied against the amount you offered.

Q: Can taxes be settled by offering pennies on the dollar?

A: OFFER IN COMPROMISE 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. The IRS cautions that the OFFER IN COMPROMISE 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.

Q: Can I file an offer in compromise to delay collection action?

A: Once it is determined an OFFER IN COMPROMISE was filed solely to hinder and/or delay collection actions, the IRS will return the OFFER IN COMPROMISE without any further consideration. Taxpayers will not be afforded the right to appeal this decision.

Q: What is an offer in compromise user or application fee?

A: 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 recipients 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 OFFER IN COMPROMISE application is submitted for consideration.

Q: How much is the application fee and when does it begin?

A: The application fee for submitting an OFFER IN COMPROMISE is $150 and will be required on all offers that are postmarked on or after November 1, 2003.

Q: What does the IRS review when I submit my OFFER IN COMPROMISE?

A: The IRS first reviews an OFFER IN COMPROMISE to see if it is "processable." Processable is the term the IRS applies to those OFFER IN COMPROMISEs that have met certain criteria. An OFFER IN COMPROMISE is processable if the taxpayer:

• Used the most current versions of Forms
• Submitted the $150 application fee,
• Filed all required federal tax returns;
• Filed and paid any required employment tax returns on time for the two quarters prior to filing the OFFER IN COMPROMISE, 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.

Q: What happens to my fee if the OFFER IN COMPROMISE is not considered processable?

A: The application fee will be returned to the taxpayer if the OFFER IN COMPROMISE is determined not to be processable.

Q: What if my OFFER IN COMPROMISE is not accepted, will the application fee be refunded to me?

A: No. The IRS will retain the fee when:

1. The taxpayer's initial OFFER IN COMPROMISE amount is too low - based on the IRS evaluation of the taxpayer's financial condition - and the taxpayer is given the opportunity to increase it. If the taxpayer does not increase the OFFER IN COMPROMISE amount, or show special circumstances, the IRS will reject the Form 656;
2. The taxpayer fails to submit additional financial documents to assist in the IRS review. If the taxpayer fails to respond, and/or submit the requested information, the OFFER IN COMPROMISE will be returned without further consideration; or
3. The taxpayer chooses to withdraw the Form 656.

Q: Will the submission of inaccurate Forms affect the timely disposition of my case?

A: Yes. Based on IRS studies, over half of the OFFER IN COMPROMISE forms and/or financial statements require corrections and/or inclusions on the part of the taxpayer. The IRS' procedures require that a taxpayer be contacted in writing and provided a one-time opportunity to correct the error(s), and/or update the financial statement. Failure to correct the error(s) and/or respond results in the OFFER IN COMPROMISE being returned to the taxpayer without any further actions on the part of the IRS.

Q: What are the common errors when preparing an offer in compromise?

A: The following are key items that require the IRS to request corrections and delay the processing of OFFER IN COMPROMISEs:

• Missing name, incorrect address (don't use P.O. Box) or missing social security number or employer identification numbers on Form 656, Items 1- 4.
• Tax liability periods/years missing on Form 656, Item 5.
• Tax periods included where no tax is due on Form 656, Item 5.
• No "offer to pay" amount shown on Form 656, Item 6.
• Appropriate offer amount not submitted on Form 656, Item 7.
• Form 656 has been altered (pen/ink changes made on the OFFER IN COMPROMISE).
• Form 2848, "Power of Attorney," not attached.

Q: What happens if the IRS accepts an OFFER IN COMPROMISE?

A: If an OFFER IN COMPROMISE is accepted, the following will apply:

• The taxpayer must pay the OFFER IN COMPROMISE amount as quickly as possible in accordance with the acceptance agreement.
• The IRS will keep any tax refund, including interest due, as the result of an overpayment of any tax or other liability for the tax period extending through the calendar year the IRS accepts the OFFER IN COMPROMISE. A taxpayer may not designate a refund and/or overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the OFFER IN COMPROMISE is based on Doubt as to Liability only.
• The taxpayer will waive their right to contest in court or otherwise, the amount of the tax liability.
• If a Notice of Federal Tax Lien has been filed against a taxpayer, the IRS will release it when the payment terms of the OFFER IN COMPROMISE are satisfied.

The taxpayer must remain in compliance with filing and payment of all tax returns for a period of five years from the date the OFFER IN COMPROMISE is accepted or until the OFFER IN COMPROMISE is paid in full, whichever is longer. Failure to pay the OFFER IN COMPROMISE on time, and/or to remain in compliance during the five-year period or until the OFFER IN COMPROMISE is paid in full, whichever is longer, will result in the OFFER IN COMPROMISE being declared in default..

Q: What happens if the IRS does not accept an OFFER IN COMPROMISE?

A: If an OFFER IN COMPROMISE is not accepted and a written rejection is issued, taxpayers will be provided an opportunity to withdraw it and discuss another payment method. Should taxpayers decline to consider this option, they will be afforded the right to file a written protest and discuss the merits of their OFFER IN COMPROMISE case with an Appeals Officer.

Q: How much interest am I going to pay if my OFFER IN COMPROMISE is accepted?

A: Interest will not accrue on the taxpayer's accepted OFFER IN COMPROMISE amount from the date of acceptance until the OFFER IN COMPROMISE is paid. Interest and penalties will continue to accrue on the unpaid tax liability while the OFFER IN COMPROMISE is under consideration.

Q: Will I be entitled to receive tax refunds if my OFFER IN COMPROMISE is accepted?

A: As additional consideration beyond the amount of the taxpayer's offer, the IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year the IRS accepts an OFFER IN COMPROMISE.

Q: Can I designate any payments once my OFFER IN COMPROMISE is accepted?

A: No. Refunds and overpayments may not be designated as estimated tax payments for the following year. This condition does not apply if the OFFER IN COMPROMISE was accepted under doubt as to liability only.

Q: Is a tax lien released when an OFFER IN COMPROMISE is accepted?

A: The IRS releases a Notice of Federal Tax Lien when all of the OFFER IN COMPROMISE payment terms are satisfied. For an immediate release of a lien, a taxpayer can submit payment using a certified check and include a request letter.

Q: What happens if I do not meet all the terms of my accepted OFFER IN COMPROMISE?

A: The IRS may default the OFFER IN COMPROMISE and reinstate the entire tax liability, less all payments and credits received.

Q: What happens if I default my OFFER IN COMPROMISE?

A: The IRS may take the following actions:

• Immediately file suit to collect the entire unpaid balance of the OFFER IN COMPROMISE
• Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of this OFFER IN COMPROMISE
• Disregard the amount of the OFFER IN COMPROMISE and apply all payments made under the OFFER IN COMPROMISE against the original amount of the tax liability
• File a Notice of Federal Tax Lien on any tax periods not previously covered by a lien
• File suit or levy to collect the original amount of the tax liability

The IRS will not default an agreement when taxpayers have filed a joint OFFER IN COMPROMISE with your spouse or ex-spouse, as long as you have kept, or are keeping, all the terms of the agreement, even if your spouse or ex-spouse violates the future compliance provision.

Q: What happens if I do not file my tax return or pay my taxes next year?

A: The OFFER IN COMPROMISE will be defaulted. An OFFER IN COMPROMISE requires future compliance for a period of five (5) years from the date of acceptance of the OFFER IN COMPROMISE, or until the offered amount is paid in full, whichever is longer. Compliance is the timely filing and paying of all required returns and taxes.