Offer in Compromise

If you can’t pay your full tax debt, or if paying it all would create a financial hardship for you, an offer in compromise (OIC) may be an option. An OIC is an agreement between you and the IRS, where the IRS agrees to accept less than the full amount you owe.

There are two main reasons the IRS may agree to accept less than the full amount you owe:

  • Doubt as to Collectability: This means you don’t have enough income or assets to pay your debt in full.
  • Effective Tax Administration:  You can pay your full debt, but it would create an economic hardship, or would be unfair or inequitable.

Another reason the IRS may accept payment of less than the full amount of tax owed is doubt as to liability (that is, you don’t believe you owe the tax, or you don’t believe the amount is correct). 

NOTE: You can’t submit an offer if your debt has been established by a final court decision or judgment about the tax or the amount.

Offer in Compromise Payment Options

There are two kinds of payment options for an offer in compromise — you must select one of them and include payment with your offer. The amount of the first and following payments will depend on the total amount you offer and which payment option you choose.

  • Lump Sum Offer: Generally requires you to pay 20% of the total amount you are offering when you submit the offer. You’ll need to pay the rest in 5 (or fewer) payments, within 5 (or fewer) months of the date the IRS accepts the offer.
  • Periodic Payment Offer:  Generally, you’ll make the first payment when you submit the offer and the rest within 24 months, according to the terms of your proposed offer.

For the IRS to accept an offer, you have to file all tax returns due and be current with estimated tax payments or withholding. If you own a business and have employees, you must file all returns and be current on all your federal tax deposits.

NOTE: If you or your business is currently in an open bankruptcy proceeding, you’re not eligible to apply for an offer. Any resolution of your debts generally must take place within the context of your bankruptcy proceeding.

After the IRS notifies you that it has accepted your offer and you pay the reduced amount you’ve agreed to, your entire tax debt is considered resolved as long as you fulfill the terms of the offer agreement. 

If the IRS rejects your offer, it will not return the application fee or any other payments made with the offer. The IRS will apply these non-refundable fees and payments to your tax liability. (For more possible outcomes, see How will this affect me? below)

The offer in compromise process can be lengthy. Keep close track of the dates —if your offer is not rejected, returned, or withdrawn within two years of the date the IRS receives it, then the offer is deemed accepted.

Review the tax debt to make sure you owe it

If you feel you do not owe tax or the amount is incorrect

If the tax you owe is a result of an audit that you didn’t know about or were not able to present any information for, you might be able to get an audit reconsideration. If you made a mistake on your return, filing an amended return may remove the debt. Most options are easier and less time consuming than submitting an offer in compromise, so it’s worth seeing if there is anything else you can do to resolve the debt before filing an offer.

If you’ve exhausted other options, and you think an offer is the best action, you can submit IRS Form 656L, Offer in Compromise (Doubt as to Liability). Include a written statement explaining in detail why you believe the IRS is in error, and attach supporting documentation. There is no application fee for this type of offer, but you must include an offer of more than $0.

If the amount is owed and correct

  • First, review all the other options that might be available to you. Some of these will have lower fees and can be easier and faster to obtain.
  • Before submitting an application, use the IRS Offer in Compromise Pre-Qualifier Tool to see if you may be eligible to make an offer in compromise. This tool is only a guide. You can still discuss questions you have about filing an offer by contacting the IRS.
  • If you decide to submit an offer, you’ll need to give the IRS complete financial information. Make a list of your income, expenses, assets and any debts owed against those assets. Follow the instructions in IRS Form 656B Booklet, Offer in Compromise Booklet, to prepare and file your offer.

Before you decide to submit an Offer in Compromise, you should be aware of several things:

You’ll have to pay an application fee of $186 and make offer payments (based on the method you choose) with your offer submission, unless you meet certain low income guidelines, which are in the IRS OIC Booklet.

If the IRS rejects your offer, it will not return the application fee or any other payments made with the offer. The IRS will apply these non-refundable fees and payments to your tax liability.   

The IRS usually has ten years from the date of assessment to collect a tax debt. However, filing an offer will extend the time the IRS has to collect all of your debt.

While the IRS generally puts other collection activities (such as a levy on your wages or bank account) on hold while your offer is pending, the IRS may still file a Notice of Federal Tax Lien to protect its lien interest in any property you own and to notify other creditors of that interest.

If you’re not current with return filing or tax payment obligations, the IRS may return your offer. File any federal tax returns due before you submit an OIC.

The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2013 and you file your 2013 Form 1040 on April 15, 2014 showing a refund, the IRS will apply your refund to your tax debt. The refund is not considered a payment toward your offer.

The IRS is required to explain how it calculates your ability to pay and how much it could potentially collect from you. You’ll receive correspondence and be able to contact the offer examiner or specialist assigned to you.

If the IRS rejects your offer, you have the right to appeal the rejection, but must do so within 30 days of the date of the rejection letter. To appeal a rejection, use IRS Form 13711, Request for Appeal of Offer in Compromise.

If the IRS accepts your offer, you’ll need to abide by the terms you agreed to, and stay current with filing and paying your taxes for five years after that.

Submitting an offer does not guarantee the IRS will accept your offer. It starts the process of evaluating your situation, your ability to pay, and the amount you are offering. You can submit an offer on taxes owed individually and for your business.

Make sure you don't owe taxes next year

If your offer is accepted but you don’t file and pay all taxes on time for the 5 years after the acceptance, the OIC will terminate and you'll owe your full debt (not the reduced amount of the offer).

Here are some ways to make sure you can pay your taxes: 

  • Increase your tax withholding from your pay, by filing Form W-4, Employee's Withholding Allowance Certificate, with your employer.
  • Increase the amount of estimated taxes you pay.

Learn more about tax withholding: Tax Withholding

IRS Form 656B Booklet, Offer in Compromise Booklet -  Offer in Compromise

If you disagree with the IRS decision to reject your offer in compromise, you can appeal that decision within 30 days by filing IRS Form 13711, Request for Appeal of Offer in Compromise.

I can't pay my taxes

The right to pay no more than the correct amount of tax

The right to appeal an IRS decision in an independent forum. If you disagree with the IRS decision to reject your offer in compromise, you can appeal that decision within 30 days by filing IRS Form 13711, Request for Appeal of Offer in Compromise.

The right to finality

The right to a fair and just tax system

Have a different tax issue?  Browse common issues and situations at Get Help.

Is your tax problem more complex?  If your issue is causing you financial hardship, you have tried repeatedly and are not receiving a response from the IRS, or you feel your taxpayer rights are being violated, consider contacting TAS.

Do you feel that you need help from a tax professional but can’t afford one? You may be eligible for representation from an attorney, CPA, or enrolled agent associated with a Low Income Taxpayer Clinic.

Last modified July 12, 2016
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