What Is an IRS Offer in Compromise?
An offer in compromise settles a tax debt for less than the full amount. The IRS generally accepts it only when the offer equals or exceeds your reasonable collection potential, meaning your asset equity plus future disposable income, or in limited cases of doubt about liability or exceptional circumstances. You apply with Form 656, financial statements, a fee and an initial payment unless you qualify as low income.
Ads promise to settle tax debts for "pennies on the dollar." In reality, offers in compromise are available to people who genuinely cannot pay in full, and many offers are rejected.
Grounds for an offer
Under 26 U.S.C. 7122 and IRS guidance:
- Doubt as to collectibility: you cannot pay the full amount within the collection period. Most offers are on this ground.
- Doubt as to liability: a genuine dispute about whether you owe the tax.
- Effective tax administration: you could pay, but doing so would create economic hardship or be unfair because of exceptional circumstances.
Reasonable collection potential
The IRS looks at the equity in your assets plus a multiple of your monthly disposable income after allowed living expenses. The offer usually must equal or exceed that amount. The IRS's online pre-qualifier tool helps estimate eligibility (IRS).
Requirements
- All required tax returns filed
- Current on estimated payments and withholding for this year
- Not in an open bankruptcy case
How to apply
- Complete Form 656 and the collection information statements (Form 433-A (OIC), and 433-B for businesses).
- Pay the application fee and initial payment, unless you meet the low-income certification (IRS).
- Choose a payment option: - Lump sum: include an initial payment of 20% of the offer; the balance is paid in up to five installments after acceptance. - Periodic payment: pay the first proposed installment with the application and keep paying monthly while the IRS considers it.
Initial payments are generally not refunded and are applied to the tax.
During review
Collection is generally suspended, but the 10-year collection period is also paused, interest accrues, and the IRS may file a lien. An offer is deemed accepted if the IRS does not decide within 24 months, excluding time in appeals.
After acceptance
You must file and pay taxes on time for five years, and the IRS keeps refunds for the year of acceptance. Breaking the terms can revive the full debt.
If rejected
You can appeal within 30 days or consider an installment agreement or currently not collectible status. See what to do if you owe back taxes.
A tax lawyer or other credentialed tax professional can evaluate whether an offer is realistic before you pay fees.
Sources
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This article is general legal information, not legal advice, and reading it does not create an attorney-client relationship. Laws differ by state and change over time; talk to a licensed attorney in your state about your situation.