IRS Offer In Compromise

  • Completing and processing the IRS Power of Attorney
  • Processing IRS financial forms
  • Negotiating with the IRS until final acceptance or rejection of the IRS Offer in Compromise
  • Determining balances outstanding with the IRS by year and amount
  • Identifying any tax returns that remain outstanding
  • Reviewing the status of your account, including Collections, Revenue Officer involvement, Installment agreement, or Uncollectible status
  • Confirming assessment dates for each year with an outstanding balance
  • Identifying any liens filed for each year, if applicable

Tax Law Highlights for Individual Taxpayers Filing an Offer in Compromise (IRS Form 656)

Summary of Key Points

  • The offer in compromise program allows qualifying taxpayers to settle tax debt for less than the full amount owed.
  • Eligibility is based on financial hardship, doubt as to collectibility, or exceptional circumstances.
  • IRS Form 656 outlines strict documentation requirements, payment options, and compliance rules.
  • Recent procedural updates emphasize accurate financial disclosure, timely estimated tax payments, and ongoing filing compliance.
  • Taxpayers must demonstrate that their offer represents the maximum amount the IRS can reasonably expect to collect.

Understanding the Purpose of an Offer in Compromise

An offer in compromise is a powerful tax resolution tool that allows an individual taxpayer to settle outstanding federal tax liabilities for less than the full balance. The IRS considers an offer when paying the full amount would create significant financial hardship or when the taxpayer’s financial profile shows that the IRS is unlikely to collect the full debt within the statutory period.

IRS Form 656 is the official document used to submit an offer in compromise. It requires detailed financial disclosures, supporting documentation, and a clear explanation of the taxpayer’s circumstances. While the process can feel complex, understanding the tax law framework behind the program helps taxpayers make informed decisions and prepare a strong submission.

Eligibility Requirements and Compliance Standards

Before the IRS will consider an offer in compromise, the taxpayer must meet several compliance conditions. These requirements are not optional. They are essential to ensuring the IRS will process the offer.

Key Eligibility Standards

  • All required tax returns must be filed.
  • All estimated tax payments for the current year must be made.
  • Taxpayers with employees must have all federal tax deposits paid in full.
  • The taxpayer cannot be in an open bankruptcy proceeding.

These compliance rules reflect the IRS position that an offer in compromise is a privilege reserved for taxpayers who demonstrate a commitment to meeting their ongoing tax responsibilities.

Grounds for Submitting an Offer in Compromise

The IRS accepts offers under three primary grounds. Understanding these categories helps taxpayers determine which basis best fits their situation.

1. Doubt as to Collectibility

This is the most common basis for an offer in compromise. The IRS evaluates whether the taxpayer’s assets, income, and future earning potential are insufficient to pay the full tax liability before the collection statute expires. If the IRS determines that full collection is unlikely, it may accept a reduced settlement.

2. Doubt as to Liability

This basis applies when there is a legitimate dispute about whether the tax is owed. It is less common for individual taxpayers filing Form 656, but it remains an important option when the underlying assessment is in question.

3. Effective Tax Administration

This category applies when the taxpayer technically has the ability to pay the full amount, but doing so would create exceptional economic hardship or would be unfair or inequitable. These cases require strong documentation and compelling facts.

Financial Disclosure Requirements

A central component of the offer in compromise process is the detailed financial disclosure required on IRS Form 433-A (OIC). This form provides the IRS with a complete picture of the taxpayer’s financial situation.

Required Financial Information Includes

  • Monthly income from all sources
  • Monthly living expenses
  • Bank account balances
  • Real estate ownership and equity
  • Vehicle ownership and equity
  • Retirement accounts
  • Business interests
  • Personal assets

The IRS uses this information to calculate the taxpayer’s reasonable collection potential. This calculation determines whether the offer amount is acceptable.

Payment Options for an Offer in Compromise

Taxpayers submitting an offer in compromise must choose one of two payment methods. Each option has different financial and procedural implications.

1. Lump Sum Cash Offer

  • Requires a twenty percent initial payment submitted with Form 656.
  • Remaining balance is paid in five or fewer installments within five months of acceptance.
  • Often results in a lower total offer amount because the IRS receives payment more quickly.

2. Periodic Payment Offer

  • Requires the taxpayer to make monthly payments while the IRS reviews the offer.
  • Remaining balance is paid over a period of six to twenty four months after acceptance.
  • Beneficial for taxpayers who cannot afford the upfront twenty percent payment.

IRS Review Process and Timelines

Once the offer is submitted, the IRS conducts a thorough review. This process can take several months. During the review, the IRS may request additional documentation, clarification, or updated financial information.

Important Review Considerations

  • The IRS will verify all financial disclosures.
  • The IRS may contact third parties to confirm asset values or income.
  • The taxpayer must remain fully compliant with all filing and payment obligations during the review period.
  • If the IRS does not make a determination within two years, the offer is automatically accepted by law.

Common Reasons Offers Are Rejected

Understanding why offers are rejected helps taxpayers avoid preventable mistakes.

Frequent Rejection Reasons

  • Failure to file all required tax returns
  • Failure to make estimated tax payments
  • Understated income or omitted assets
  • Overstated living expenses
  • Offer amount below the IRS reasonable collection potential
  • Incomplete documentation

A well prepared offer in compromise anticipates these issues and addresses them proactively.

Post Acceptance Requirements

Acceptance of an offer in compromise is not the end of the process. The IRS imposes strict post acceptance compliance rules.

Five Year Compliance Rule

For five years after acceptance, the taxpayer must:

  • File all required tax returns on time
  • Pay all taxes in full and on time
  • Avoid new tax liabilities

Failure to comply can result in the IRS reinstating the original tax debt.

Conclusion and Key Takeaways

  • An offer in compromise allows qualifying taxpayers to settle tax debt for less than the full amount owed.
  • IRS Form 656 requires detailed financial disclosure and strict compliance with filing and payment rules.
  • Eligibility is based on financial hardship, doubt as to collectibility, or exceptional circumstances.
  • Accurate documentation and realistic offer amounts significantly improve the likelihood of acceptance.
  • Long term compliance is essential to maintaining the benefits of an accepted offer in compromise.