IRS: Offers in Compromise

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles a taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means generally won't qualify for an OIC in most cases.

To qualify for an OIC, the taxpayer must have filed all tax returns, have received a bill for at least one tax debt included on the offer, made all required estimated tax payments for the current year, and — if the taxpayer is a business owner with employees — made all required federal tax deposits for the current quarter and the two preceding quarters.

In most cases, the IRS won't accept an OIC unless the amount offered is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay. It includes the value that can be realized from the taxpayer's assets — such as real property, automobiles, bank accounts, and other property — plus anticipated future income less certain amounts allowed for basic living expenses.

Reasons for the Offer

The IRS may accept an OIC based on one of the following reasons:

• Doubt as to liability — a compromise meets this criterion only when there's a genuine dispute as to the existence or amount of the correct tax debt under the law.
• Doubt as to collectibility — this exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
• Effective tax administration — there is no doubt the tax is legally owed and could be collected, but requiring payment in full would either create an economic hardship or be unfair and inequitable because of exceptional circumstances.

Forms to Use

When submitting an OIC based on doubt as to collectibility or effective tax administration, taxpayers must use the most current Form 656 (Offer in Compromise) and submit Form 433-A (OIC) for wage earners/self-employed individuals and/or Form 433-B (OIC) for businesses. A taxpayer submitting an OIC based on doubt as to liability files Form 656-L instead. The forms are available in the Offer in Compromise Booklet, Form 656-B.

Application Fee

In general, a taxpayer must submit the application fee stated on Form 656 (don't combine it with other tax payments). There are two exceptions: no fee is required if the OIC is based on doubt as to liability; and the fee isn't required if the taxpayer is an individual who qualifies for the low-income exception (adjusted gross income at or below 250 percent of the HHS poverty guidelines, by either of two methods described in Form 656).

Payment Options

Lump Sum Cash Offer — an offer payable in 5 or fewer installments within 5 or fewer months after acceptance. The taxpayer must include a nonrefundable payment equal to 20 percent of the offer amount, in addition to the application fee. The 20 percent is applied to the tax liability and is generally nonrefundable even if the offer is rejected.

Periodic Payment Offer — payable in 6 or more monthly installments within 24 months after acceptance. The taxpayer must include the first proposed installment with Form 656 and continue making installment payments while the IRS evaluates the offer. These amounts are nonrefundable and applied to the tax liabilities.

Suspension of Collection

Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period the OIC is pending, for 30 days immediately following a rejection, and for the period a timely-appealed rejection is being considered by the IRS Independent Office of Appeals.

Offer Terms

If the IRS accepts the offer, the taxpayer agrees to fully comply with the tax laws. The IRS will keep any refund, including interest, that might be due for tax returns filed through the date the IRS accepts the offer. The terms require the taxpayer to timely file all returns and pay all taxes for 5 years from the date of acceptance. If the taxpayer defaults, the IRS may collect the amounts originally owed (less payments made), plus interest and penalties.

Right to Appeal

If the IRS rejects an OIC, the taxpayer is notified by mail with the reason and detailed instructions on how to appeal to the IRS Independent Office of Appeals. The appeal must be made within 30 days from the date of the letter.

Return of an Offer

In some cases, an OIC is returned rather than rejected — for example, if the taxpayer didn't submit necessary information, filed for bankruptcy, failed to include a required fee or payment, hasn't filed required returns, or hasn't paid current liabilities. A returned offer has no right to appeal, but once cured, the offer may be submitted again.

Additional Information

Step-by-step instructions and all forms for submitting an OIC are in the Offer in Compromise Booklet, Form 656-B. You may use the Offer in Compromise Pre-Qualifier tool to confirm eligibility and prepare a preliminary proposal — though use of the tool does not guarantee acceptance.