An Offer in Compromise (OIC) is a payment option that the IRS makes available to taxpayers. It allows you to pay your tax debt without “breaking the bank." In other words, you will be able to comfortably pay your debt without losing your house or your business or any other property you need for daily living. Hopefully, knowing this will alleviate some of your anxiety.
Applying for an OIC is not an easy process but well worth the time if you are serious about reducing your tax debt. There are very specific guidelines the taxpayer must meet in order to qualify for an OIC, which I have outlined in this chapter.
I will also go over the process in greater detail so you can see the various stages, and what the IRS looks for at each stage, including after they have received your offer.
Like all creditors, the government must contend with debtor inability to pay. They must also decide how to settle accounts when reasonable minds might differ on the amount owed. Businesses resolve their account receivable challenges with the standard procedure of negotiation and compromise.
The government also acknowledges the utility of this process; it promotes an equitable and efficient result for both the IRS and the taxpayer alike. Accordingly, the government has authorized the IRS to negotiate and settle taxpayer liability through the program of Offer in Compromise.
If you are considering an offer in compromise, it would not hurt to give me a call. I have worked with clients over the years to put together their OIC requests and have a good track record of success. Let me see if I could help raise the stakes in your situation.
Offer in Compromise: The Process for Making an Offer
In most cases, the IRS will suggest the offer in compromise option with a delinquent taxpayer when:
- Criminal proceedings are not contemplated
- An analysis of the taxpayer’s assets, liabilities, income, and expenses shows that payment of the entire tax liability is unlikely (this second factor does not apply to doubt as to liability cases).
Once the IRS has determined these two things, the IRS will bring the offer-in-compromise option to the taxpayer’s attention. The representative will discuss the benefits of an accepted offer and which forms must be filled out. The IRS directs its employees to provide the taxpayer with:
- Form 656 (Offer in Compromise)
- Publications 1 and 594
You may also find additional guidance for Form 656 in Form 656-B, also known as the Offer in Compromise Booklet.
Other important information which should be considered when contemplating an Offer-in-Compromise submission include the following:
- Taxes can not abated or tax liens released until the amount offered is paid in entirety
- The taxpayer must remain compliant with filing and payment requirements for five years after the IRS accepts the offer or until the amount offered is paid off, whichever is longer
- All refunds and credits available to the taxpayer before or during the year that the offer is accepted are waived
The IRS will not advise the taxpayer on the amount which might be offered; it is up to the taxpayer to initiate the first proposal. That said, the IRS warns taxpayers that the offer must be made in good faith. The IRS discourages the taxpayer from using the offer in compromise process as a fishing expedition or as a tactic to delay payment.
As a show of good faith, the taxpayer may submit some amount of payment with the completed Form 656. Once received, the IRS will treat this amount as a deposit. This amount will only apply to the liability once the offer has been accepted; unless the taxpayer gives written authorization to apply the payment irrespective of whether the offer is accepted.
Offer Terms and Partial Payment Requirement
A taxpayer may be eligible to offer one of the following payment options:
- Payment in lump sum
- Payment in installments
While the offer is considered by the IRS, the taxpayer is required to make partial payments as according to IRS Regulation §7122(c). The amount of partial payment required depends on the type of offer proposed by the taxpayer.
For the purpose of an offer in compromise, a lump sum cash offer includes single payments as well as amounts paid in five or fewer installments within a five-month period. If the taxpayer chooses to make a lump-sum offer, 20 percent of the offer must be submitted along with the application.
Alternatively, a taxpayer may elect an offer with payments made in installments. This is also referred to as a periodic payment offer. An installment plan refers to all offers where the payment schedule exceeds five monthly payments. However, all installment offers that the IRS accepts must be paid back within 24 months of the offer acceptance.
If the taxpayer selects an installment plan offer, the first installment payment is also required to be sent in with the offer. It is very important that the taxpayer complies with the terms of the self-imposed payment plan while the offer is under consideration. Otherwise, the IRS will treat the offer as withdrawn. See IRS Reg. §7122(c)(1)(B).
In either case, the advance payment will be applied against the offer if it is accepted, however it will not be refunded should the offer be rejected. Non-compliance with the above-stated requirements for either option will lead to a determination that the offer cannot be processed. Subsequently, the offer will be returned to the taxpayer and the IRS will be permitted to pursue immediate enforcement action. See IRS Reg. §7122(d)(3)(C).
Certain taxpayer’s may not be required to submit partial payment. These individuals include:
- Low-income taxpayers
- Taxpayers who have submitted offers based on doubt as to liability
Low-income earners are completely exempt from the partial payment requirement. For Offer-in-Compromise purposes, a low-income taxpayer is an individual with an adjusted gross income that is less than 250% of the applicable poverty line. See IRS Reg. §7122(c)(3).
With regard to taxpayers who have submitted an offer based on doubt as to liability, the partial payment requirement is only available to those who have submitted solely on this ground. These are optional waivers which are left to the discretion of the IRS. See IRS Reg. §7122(c)(2)(c) and §7122(d)(3)
Offers in Compromise Before Bankruptcy
This section only applies to those who are considering bankruptcy. If the taxpayer states that they will file a petition for bankruptcy during the offer investigation, the IRS must determine the likelihood that bankruptcy will be filed and what impact the possible filing would have on their ability to collect. In deciding whether the offer is reasonable, the IRS will consider whether the taxpayer has previously engaged in a bankruptcy proceeding or if any tax liabilities can possibly be discharged. Unless there are special circumstances which exist, the IRS will not accept less than the amount they anticipate recovering from a Chapter 7 bankruptcy.
Instructions for Form 656
The taxpayer submits an offer-in-compromise on Form 656 or an acceptable printed photocopy of the form. The taxpayer must provide his:
- Full name
- Social security or employee identification number
If the offer is for a joint liability, both taxpayer’s name and numbers must be added to Form 656. If more than one taxpayer jointly owes the same liability, they may (but are not required to) submit one form. However, those who owe both joint and individual liabilities must submit two offers. Taxpayers with substantial business interests may also be required to submit a Form 433-B for the business. IRM 188.8.131.52 (05-25-18).
Who Can File an Offer
For the majority of cases, either the taxpayer or a designated representative can file the offer in compromise. See CCA 200115031. However, in cases involving decedents or their estates, an authorized executor must file the offer along with evidence of their authority to do so. With regard to an offer-in-compromise filed for an affiliated group which files a consolidated return, any offer executed in these cases is considered to have been executed by each group member. Lastly, it is usually the person who is authorized to file a refund claim on behalf of the taxpayer who would also have the authority to file an offer-in-compromise for the taxpayer.
Where to Submit Your Offer
Depending on the state of the taxpayer’s residence, the taxpayer will submit to one of the following two process centers listed below.
If you reside in:
AZ, CA, CO, HI, ID, KY, MS, NM, NV, OK, OR, TN, TX, UT, WA
Mail your application to:
Memphis IRS Center COIC Unit P.O. Box 30803, AMC Memphis, TN 38130-0803 1-844-398-5025
If you reside in:
AK, AL, AR, CT, DC, DE, FL, GA, IA, IL, IN, KS, LA, MA, MD, ME, MI, MN, MO, MT, NC, ND, NE, NH, NJ, NY, OH, PA, PR, RI, SC, SD, VA, VT, WI, WV, WY, or a foreign address
Mail your application to:
Brookhaven IRS Center COIC Unit P.O. Box 9007
Holtsville, NY 11742-9007 1-844-805-4980
As briefly touched on earlier, Form 656 requires that the taxpayer indicate all unpaid taxes that the compromise offer should apply to. The taxpayer must check off the square according to the correct populated description which indicates the type of tax and the period or year that the liability arose. If you have mistakenly left out an outstanding liability, you can still make an amendment to include it. However, the amendment must be made before the IRS accepts the offer.
Amount of the Offer
The total amount that the taxpayer would like to offer must be indicated on Form 656. This is the entire amount that the taxpayer offers in settlement of his tax liability. If the taxpayer would like an amount submitted to be paid either on or sometime after notice of acceptance, the taxpayer must clearly indicate the following:
- The amount of any deposit
- The amount of any prior deposit which is to be applied to the offer
- The amount of any subsequent payment
- The date on which each payment should be paid
The amount sent in with the offer to cover the initial payment and application fee cannot be labeled a “deposit.” This is significant because this will result in a return of the offer without a right to appeal. The amount must appropriately indicate on Form 656 that it is to be used toward the taxpayer’s liability. The amount offered cannot include refunds owed to the taxpayer, an amount previously paid, or funds attached by a Notice of Levy. See IRM 184.108.40.206.3 (03-16-10).
As mentioned above, the taxpayer must submit a partial payment to the IRS while their offer-in-compromise is considered. See IRS Reg. §7122(c). Here are the partial amounts depending on the offer term selected:
- 20 percent of the amount proposed for lump-sum offers
- The first installment for those who have made installment offers
For more information on this, please see the Terms and Partial Payment section above.
Terms of Payment
The taxpayer must select the terms of the offer proposal on Form 656. As previously stated, there are two payment options to choose from: a lump-some cash offer or a periodic payment offer. Please see the section above titled Terms and Partial Payments for more information.
Basis for the Offer
The taxpayer must indicate on Form 656 the facts and reasons why the IRS should accept the offer. As discussed in detail above, the facts and circumstances must convince the IRS that one of the following circumstances apply to your case:
- Existence of a doubt as to liability
- Existence of a doubt as to collectibility
- Effective tax administration
If the taxpayer would like to make an offer with a basis in doubt as to collectibility or effective tax administration must also submit either of the following, depending on their applicability to the taxpayer:
- Form 433-A Financial Statement for Individuals
- Form 433-B Collection Information Statement for Businesses.
Be sure to check the national and local schedules that indicate the allowances that the IRS provides taxpayers. Again, the IRS also considers the facts and circumstances of the particular case.
The taxpayer must also submit the application fee along with the offer, otherwise it will not be processed. For all offers submitted after April 27, 2020, the user fee is $205. The IRS will take this fee into consideration when determining whether or not the offer is adequate. If the taxpayer attaches a partial payment with the offer, the fee will be applied toward the tax liability. §7122(c)
Similar to the partial payment exception, this fee is inapplicable to offers made by certain low-income earners and individuals who submit their offer based solely on doubt as to liability. §7122(c)(3). For guidelines on who might qualify for the low-income exception, please see the section above labeled Terms and Partial Payments.
The signature(s) required for Form 656 will vary with the parties involved:
- Corporations–– the corporation’s name should be printed on the first line and the authorized officer’s signature and title should be written on the second line
- Spouses with joint liability–– both spouses are required to sign
- Decedent’s Estate–– a qualified fiduciary of the estate may submit the offer
Implications of Form 656
Waiver of Taxpayer’s Claims for Refunds or Credits
When a taxpayer makes an offer-in-compromise, he essentially agrees to waive any refunds or credits he would receive as part of the settlement. Included in this waiver is the taxpayer’s right to any overpayments of tax, interest and penalties from previous periods up to the end of the year in which the offer is accepted.
Forfeiture of Option to File a Joint Return
A taxpayer who is married and files a separate return forfeits the option of filing a joint return with his spouse once the IRS has agreed to his compromise offer.
Under Bankruptcy law, some tax liabilities are dischargeable while others are not. If a tax liability was assessed within 240 days before the date on which the bankruptcy petition is filed, the liability is non-dischargeable. The 240 days is extended even further if the taxpayer makes an offer-in-compromise before filing a bankruptcy petition. The extension makes any tax assessed within 270 days plus the time during which the offer is pending, non-dischargeable. See 11 U.S.C. §507(a)(8). As a result, if the taxpayer is considering bankruptcy they should first take this into consideration.
Deemed Acceptance Rule
As long as a taxpayer submits partial payment with the offer, the IRS will be deemed to have accepted the offer if they do not reject it before the date that is 24 months after the date of the offer’s submission. However, this 24-month rule is suspended for any period in which the liability is litigated in court.
An offer in compromise is a workable solution for the taxpayer who is unable to pay their tax liability in full. You have the opportunity to pay a reduced amount to the IRS in either a lump sum or periodic payments and they will waive the rest of the debt.
Having your OIC accepted is pretty high stakes; I would not be transparent if I did not put this out there at the onset. The percentage of OICs that get accepted by the IRS is pretty low — with about 80 percent returned to the client or rejected.
If you want to propose an offer in compromise to the IRS, call me. I have helped clients successfully negotiate with the IRS so they can pay their taxes and remain financially solvent. It is well worth the investment to make sure that your request is meticulously prepared so you have the best chance of the IRS declaring it processible, which is the most difficult part. Once you get in the door, so to speak, you move on to agreeing on an amount.