Offer in Compromise FAQ
What Is an Offer in Compromise?
An 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
What Are the Requirements For an Offer in Compromise?
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 0 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;
- 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.
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How Do I Complete an Offer in Compromise?
- First obtain a Form 656, Offer in Compromise package (Version 5/2001). 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 (Version 5/2001), are included in the Form 656 package and may need to be completed as well depending upon each individual
- Download Form 656 Offer in Compromise Package
When Does a Form 433, Collection Information Statement, Need To Be Completed?
Collection Information Statement(s) are required for doubt as to collectibility and effective tax administration Offer in Compromise, and doubt as to liability involving Trust Fund Recovery Penalty assessments.
What Forms Are Submitted To Request an Effective Tax Administration Offer in Compromise?
To receive consideration on this basis, a taxpayer must submit:
- The May 2001 version of Form 656, "Offer in Compromise"
- The May 2001 version of the "Collection Information Statement" (Form 433-A and/or Form 433-B)
- A detailed written narrative must be documented on Form 656, Item 9.
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 Offer in Compromise filed under effective tax administration can only be considered once the IRS determines that the tax liability is correct and collectible in full.
Once the IRS begins the process of processing the Offer in Compromise 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 Offer in Compromise?
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.
The IRS Recently Levied My Bank Account. Will the Levy Proceeds 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 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.
Can I Stop Sending Payments As Part of My Approved Installment Agreement Once I File an Offer in Compromise?
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.
Can Taxes Be Settled by Offering Pennies on the Dollar?
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.
Can I File an Offer in Compromise to Delay Collection Action?
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.
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 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.
How Much Is the Application Fee and When Does It Begin?
The application fee for submitting an Offer in Compromise is 0 and will be required on all offers that are postmarked on or after November 1, 2003.
Who Will Have to Pay This Application Fee?
All taxpayers who submit a Form 656, "Offer in Compromise," postmarked on or after November 1, 2003, must pay the 0 fee, except in two instances:
- The Offer in Compromise is submitted based solely on "doubt as to liability;"
- 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 for 0 made payable to the United States Treasury.
Can I Send One Check to Cover Both the Application Fee and Offer in Compromise 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 become due under the terms of the offer agreement.
Can a Tax Practitioner Who Represents a Number of Clients and Files Multiple Offer in Compromises Combine Several Application Fees into One Check?
No. Checks that combine application fees for several offers will not be accepted, and the offers will be returned. Each Form 656 must have a separate check attached.
What happens if I submit an application fee and find that I have insufficient funds in my account to cover the check?
If IRS receives notification of insufficient funds, the IRS will immediately stop processing the Form 656 and the Offer in Compromise will be returned to the taxpayer without any further consideration.
Will Payment of the Application Fee Reduce the Offer in Compromise 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 Offer in Compromise based on doubt as to collectibility, it considers the value of all of the taxpayer's assets. Because some of the taxpayer's assets were used to pay the Offer in Compromise application fee, payment of the fee will reduce the acceptable amount of the Offer in Compromise. The taxpayer therefore pays no more for an Offer in Compromise 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 Offer in Compromise amount, most taxpayers will not experience any additional financial hardship as a result of the fee. However, for some taxpayers the 0 fee may exceed their ability to pay.A^ 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 Offer in Compromise.
What Does the IRS Review When I Submit My Offer in Compromise, Form 656?
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 Form 656, "Offer in Compromise" and Forms 433-A and 433-B, "Collection Information Statements" effective 11/01/03. The most current versions are dated May 2001;
- Submitted the 0 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee," with the Form 656 (effective 11/01/03);
- 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;
- Is not a debtor in a bankruptcy case.
What Happens to My Fee If the Offer in Compromise Is Not Considered Processable?
The application fee will be returned to the taxpayer if the Offer in Compromise is determined not to be processable.
Why Does the IRS Require the May 2001 Version of Form 656, "Offer in Compromise" Package?
The May 2001 version of Form 656 was redesigned to be a complete package, containing the offer in compromise, instructions, Forms 433-A and 433-B, as well as a worksheet that helps to calculate the offer amount. It prompts taxpayers to attach necessary financial documents needed in the processing of the offer.
Do All Offer in Compromises Require an Application Fee?
All taxpayers who submit a Form 656, postmarked on or after November 1, 2003, must pay the 0 fee, except in two instances:
- If the Offer in Compromise is submitted based solely on doubt as to liability;
- The taxpayer's total monthly income falls at or below income levels based on the DHSS poverty guideline levels.
How Do I Know If I Qualify For the Poverty Guideline Exception?
The IRS has developed Form 656-A, "Offer in Compromise Application Fee Instructions and Certification," to help taxpayers determine whether they qualify for the poverty guideline exception. Taxpayers must complete the "Offer in Compromise Application Fee Worksheet," found in Form 656-A (fill-in format)to see if they qualify.
What Do I Need to Do If the Form 656-A Worksheet Shows That I Qualify for the Poverty Guideline 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 Offer in Compromise with a spouse, the spouse must also sign the certification. The Income Certification must be attached to Form 656 in lieu of sending the 0 application fee. 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 Offer in Compromise 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 Offer in Compromise Application Fee With the Offer in Compromise Form 656?
Unless the taxpayer has submitted an Offer in Compromise 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. A check or money order in the amount of 0 must be attached to the Offer in Compromise.
What Happens to the Form 656 And Application Fee After I Send It to the IRS?
The 0 is retained until the IRS determines whether the Form 656 is processable.
Are There Any Instances When the Application Fee Will Be Applied Against the Amount of the Offer or Refunded to Me after the Offer in Compromise Has Been Accepted for Processing?
Yes. The fee will be applied against the amount of the offer or, if the taxpayer requests, returned to the taxpayer if:
- If the IRS accepts an Offer in Compromise based on effective tax administration (ETA).
- If the IRS accepts an Offer in Compromise based on a determination of doubt as to collectibility with special circumstances.
What If My Offer in Compromise Is Not Accepted, Will the Application Fee Be Refunded to Me?
No. The IRS will retain the fee when:
- 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
- The taxpayer fails to submit additional financial documents to assist in the IRS review.A^ 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.
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What Happens If an Offer in Compromise Is Submitted Using the Wrong Forms?
The Form 656 and/or Forms 433 "Collection Information Statements" are necessary to conduct an offer investigation. Failure to submit these documents will cause considerable delay in the process. Taxpayers wanting to pursue the Offer in Compromise as a way to satisfy their tax liability will have to submit the forms in order to have the Offer in Compromise reconsidered.
Will the Submission of Inaccurate Form 656 and Forms 433-A/B Affect the Timely Disposition of My Case?
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.
What Are the Common Errors When Preparing an Offer in Compromise?
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.
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What Happens If I Miscalculate My Offer in Compromise Or Do Not Offer an Amount Equal to My Reasonable Collection Potential?
This will result in processing delays and could be grounds for the IRS ultimate decision to reject an Offer in Compromise. The IRS is observing a large upsurge of receipts in which the offered amount is clearly much lower than the reasonable collection potential illustrated on the taxpayer's financial statement. Furthermore, in a large number of these cases, the financial statement also shows that the taxpayer has a clear ability to satisfy the liability in full, or via an installment agreement during the course of the collection statute, and the taxpayer cites no special circumstances.
The IRS reviews Offer in Compromises for indications of fraudulent intent. Submitting an Offer in Compromise with false information, or making a false statement to an IRS employee, is considered an indicator of fraud and may be subject to civil or criminal penalties.
What Are the National And Local Standards And How Are They Considered in Evaluating an Offer in Compromise?
Collection Financial Standards are used to help determine a taxpayer's ability to pay a delinquent tax liability.
Allowances for food, clothing and other items, known as the National Standards, apply nationwide, except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.
Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. Unlike the National Standards, the taxpayer is allowed the lesser of the amount actually spent or the standard.
What Happens If the IRS Accepts an Offer in Compromise?
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..
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What Happens If the IRS Does Not Accept an Offer in Compromise?
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.
How Much Interest Am I Going to Pay If My Offer in Compromise Is Accepted?
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.
Will I Be Entitled To Receive Tax Refunds If My Offer in Compromise Is Accepted?
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.
Can I Designate Any Payments Once My Offer in Compromise Is Accepted?
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.
Is a Tax Lien Released When an Offer in Compromise Is Accepted?
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.
What Happens If I Do Not Meet All the Terms of My Accepted Offer in Compromise?
The IRS may default the Offer in Compromise and reinstate the entire tax liability, less all payments and credits received.
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What Happens If I Default my Offer in Compromise?
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.
What Happens If I Do Not File My Tax Return Or Pay My Taxes Next Year?
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.
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