What Is an IRS Offer in Compromise: Settling Taxes for Less
An offer in compromise is when the IRS lets you pay off your federal tax debt for less than you owe. Many states (but not all) will also let you compromise on your taxes. An IRS Offer in Compromise allows a taxpayer to make an offer for less than the total amount owed on their tax bill. If the IRS accepts the offer, you pay less than you owe, and the IRS wipes clean the rest of the tax debt.
To help you determine if the IRS compromise program is right for you, this guide covers the basics, and it has links to resources with more details. More importantly, we provide an interview with Peter Salinger, a ex-IRS Revenue Officer Manager and Appeals Settlement Officer (one of the professionals you can find on TaxCure) who worked for the IRS for 30 years and reviewed over 2,000 Offers in Compromise.
You must meet certain requirements to qualify for an Offer in Compromise. The Internal Revenue Service will only settle tax debt for less than you owe if you meet the qualification criteria. The following statements must be true for you to qualify:
- You have received a bill for the taxes you want to settle.
- You aren't in an active bankruptcy case.
- You have filed all your required tax returns.
- You have paid all of your required estimated tax payments.
- You have made all of your required federal tax deposits.
On top of that, you also must meet the eligibility criteria for the specific type of offer you want. There are three main situations where you might qualify to settle your tax bill for less than the full tax liability, and they each have different requirements.
Types of Offers in Compromise
These are the three options you can use if you want to apply for an offer in compromise.
- Doubt as to Collectibility (DATC) — This is the most common option. It applies when you can't afford to pay your full IRS tax debt.
- Effective/Fair Tax Administration — You may be able to afford to pay in full or pay a larger offer, but the IRS accepts a smaller offer to be equitable. This option applies in cases where it would be unfair to require you to pay the IRS tax debt in full.
- Doubt as to Liability (DATL) — This applies when you believe that you don't really owe the full tax bill, and the IRS agrees to waive the part of the bill that you don't owe.
How to Apply for an IRS Offer in Compromise?
If you meet the qualification criteria, you can apply for an offer in compromise. You must send the right forms and supporting documentation to the IRS. You also need to make an offer. A tax attorney or tax expert can help you narrow in on an offer amount that is likely to get accepted. They can also help you with the paperwork.
Requesting an IRS Offer in Compromise requires a lot of paperwork. Furthermore, you must file everything correctly if you want your offer to be approved. Check out the above link to look at the forms you need to file and to learn more about them.
This resource includes details on when to use IRS Form 656-B and how to complete this form when requesting an offer in compromise. This form will identify the tax years and tax types that you would like to compromise. This form also provides details on your offer amount along with the payment terms you are seeking. You should apply with this form if you're applying based on doubt as to collectibility or effective tax administration.
If you're applying with Form 656-B, you also need to include a lot of financial information. The application booklet has the forms you should fill out. If you're an individual, you fill out 433-A. Businesses should fill out Form 433-B. In a lot of cases, you may need to do both of these forms.
If there is legitimate doubt about the tax amount owed, you may be able to reduce your taxes through an offer in compromise based on doubt as to liability. The normal offer in compromise program people use is when there isn't a doubt to the liability, but there is an inability to pay the balance.
To file for an offer in compromise for doubt as to liability, you must use IRS form 656-L. This resource explains this OIC program, how to apply for it, and when to look at other alternatives.
The IRS forms aren't the only documents you need to apply for an offer in compromise. You also need to provide supporting documents. If you apply because you can't afford to pay, you need to include three months' worth of account statements plus proof of all the numbers you put on your application. If you apply based on doubt as to liability, you need to include documents that show you owe less than you do.
Submitting an Offer
When you apply for an IRS offer in compromise, you have to submit an offer. There is a specific part of the application where you note your offer and how you want to pay it. There are more details on the payment options below. You need to make your offer carefully if you want the IRS to approve your application. The optimal offer varies based on your situation and the type of offer in compromise program you apply for.
How Much Should I Offer the IRS?
Here are some tips on how much you should offer to pay on your tax debt based on the different types of programs.
Doubt as to collectibility — The IRS only accepts offers if they are for more than the IRS would get in any other situation. In other words, your offer needs to be more than the IRS could collect through wage garnishments or seizing assets. You will need to take your monthly income, expenses, assets, debts, and future income into account when calculating this offer.
Effective tax administration — The IRS will accept your offer if it's fair and requiring you to pay more would lead to economic hardship. You also have to take your finances into account when choosing the offer amount.
Doubt as to liability — Your offer should reflect the amount that you believe that you truly owe. With this program, you're asking the IRS to settle the part of the tax bill that you believe that you really don't owe. You don't have to take your monthly income or future income into account for this option.
What Is the Minimum Offer Amount on an OIC?
The IRS doesn't have a set minimum offer amount. The minimum amount for you varies based on your situation. That said, you certainly don't want to offer more than you need to. When you work with a tax pro, they can help you narrow in on the sweet spot for your offer.
Special Circumstances When Applying for an IRS Offer
The IRS's OIC requirements are very specific. In particular, the agency has very specific expense allowances that it allows you to use when calculating your offer. For instance, the IRS has certain amounts that it thinks people should spend on housing, transportation, and utilities.
If you're spending a lot more than the allowed amount, the IRS won't let you take those expenses into account when calculating how much you can afford to pay. However, if you have special circumstances that require you to spend more, you can explain that in your application.
What Happens After the IRS Accepts Your Offer?
If the IRS accepts your offer, you must make the payment within the time frame specified in your offer. After your payment, you are in good standing, and you don’t owe anything else for the tax period where your tax debt was settled. However, you will need to stay in tax compliance for five years going forward, or the IRS can rescind the offer and demand full payment if you don't stay compliant.
If the IRS accepts your Offer in Compromise, there are two main payment options. When you apply, you choose the method that works best for your situation. You can opt to pay off the offer in a lump sum or what some call a cash offer, you have to pay the offer within five months or if you do a defferred payments offer or periodic payments offer, then you have to pay it off within 24 months.
You also have to send an initial payment with your application if you apply based on doubt as to collectibility. There is also an application fee. If you apply based on doubt as to liability, you don't have to send an initial payment or the application fee. Check out this resource to learn more about how the different payment options work and how they affect your offer amount.
What Happens If the IRS Rejects Your Offer?
If the IRS rejects your offer, the full tax liability is due. You should make arrangements to pay off the tax debt. For instance, you may need to set up monthly payments or look for another resolution option. Alternatively, if you don't agree with the reason for the rejection, you can appeal.
The IRS may return your offer if you don't meet the requirements or haven't provided the right information. If you submit everything and the IRS doesn't agree with the offer, it can reject your application, but luckily, you can appeal. Look at this resource to check out the reasons why an IRS Offer in Compromise may be rejected, and learn how to appeal a rejection.
Even if you read all the resources above, you'll probably still have questions about the offer in compromise program. This is one of the most appealing IRS programs because it can help you to save so much money on your tax bill, but it's also one of the most confusing programs. Follow the above link to look at answers to the most common questions about the IRS’s OIC program.
As of November 1, 2021, the IRS has updated its OIC policies to make the process easier for taxpayers. In the past, the IRS kept tax refunds from taxpayers who had been approved for an OIC in the same calendar year.
For example, if someone was approved for an OIC on their 2017 and 2018 taxes in 2020 and they earned a refund when they filed their 2020 tax return, the IRS had the right to keep that refund. Under the new rules, the IRS will no longer keep these refunds.
However, the IRS can still keep refunds that you earn while the application is pending. However, if a taxpayer is experiencing financial hardship, they can ask the IRS to not keep the refund. Then, the IRS will look at the exact amount of money the taxpayer needs for their hardship, and the IRS will send the taxpayer that amount of money from the refund. The IRS can keep the rest of the refund.
Other Things to Know About IRS Offers in Compromise
Still, have more questions about what an IRS offer in compromise is? Again, it's when the IRS agrees to let you settle your tax bill for less than you owe. This can happen if you can't afford to pay, it would be unfair to make you pay, or you don't really owe the tax bill. Here's a breakdown of some more details.
How the IRS Decides Whether to Accept an Offer in Compromise
As explained above, there are different criteria for each type of offer in compromise. The IRS looks to see if you meet the criteria. Then, the agency decides whether or not to accept your offer. If the IRS thinks you can pay more, you legitimately owe the tax, and it would be fair to make you pay it, the agency probably won't accept your offer.
The IRS rejects most offers. Only 30.7% of all offers were accepted in 2021. This means that the IRS rejected almost 70% of applications. Generally, you can only get approved if you have serious financial issues and you can't afford to pay more than your offer.
There is no time in the recent past that the IRS has accepted more than half of the applications to this program. The highest acceptance rate was in 2016, and it was just 42.8%, meaning the agency rejected 57.2% of all applications. If you want to boost your chances of success, you should work with a tax professional who has experience with this program.
Other Options: Alternatives to the OIC Program
If you don't qualify for an OIC, you should look into other options. The IRS has many different programs to help taxpayers get caught up on back taxes. Depending on your situation, you may want to look into the following programs:
- Hardship Status — If you can't afford to pay but you don't meet all of the offer in compromise criteria.
- Innocent Spouse Relief — If the tax debt is due to your spouse or former spouse's actions and you didn't know that they understated or underpaid the tax or it would be unfair to hold you responsible for other reasons.
- Monthly Payment Plans — If you can afford to make monthly payments on your tax debt.
- Penalty Abatement — If you want to ask the IRS to remove penalties from your account. This can be used in conjunction with the other resolution options.
When you contact a tax professional to talk about your account. They can help you determine which of these alternatives might be the best option for your situation.
What Is an Offer in Compromise on State Taxes?
A state tax offer in compromise is when the state agrees to let you pay off your state taxes for less than you owe. Some states offer a version of an offer in compromise program similar to the IRS. Others have offers in compromise programs with different rules and requirements. Some states do not offer an offer in compromise at all.
Each state agency has its own tax resolution solutions. Want to know if your state lets people settle taxes for less than they owe? Then, check out the links below. They have details on the resolution options for back taxes in each state.
- Arizona Offer in Compromise
- Arkansas Offer in Compromise
- California FTB Offer in Compromise
- Colorado Offer in Compromise
- Connecticut Offer in Compromise
- Georgia Offer in Compromise
- Illinois Offer in Compromise
- Indiana Offer in Compromise
- Iowa Offer in Compromise
- Maryland Offer in Compromise
- Massachusetts Offer in Compromise
- Michigan Offer in Compromise
- Minnesota Tax Compromise
- Mississippi Offer in Compromise
- Missouri Offer in Compromise
- New Jersey Closing Agreement
- New York Offer in Compromise
- North Carolina Offer in Compromise
- Ohio Offer in Compromise
- Oklahoma Offer in Compromise
- Pennsylvania Tax Forgiveness
- South Carolina Offer in Compromise
- Tennessee Offer in Compromise
- Wisconsin Offer in Compromise
- Virginia Offer in Compromise
When you hire a tax professional to help you, they start by talking about your situation. They help you determine if you might qualify for this program, and if it looks likely, they help you apply. If this doesn't appear to be the ideal option for your situation, the tax professional will help you consider other options.
When to Hire a Tax Expert to Help You
Wondering if you should hire a tax expert to help you apply for an offer? In most cases, the answer is yes, but if you're feeling brave, you can always try to submit the OIC application on your own. Here are some signs that you should consider calling a pro to help you.
- You have never applied for an offer in compromise in the past. Tax pros are experienced with this program. They deal with these applications on a regular basis and know how to complete them correctly.
- Your last offer was rejected. A tax pro can help you review your rejected application and help you decide how to apply again.
- You have a professional file your tax return. If you don't normally prepare your own tax returns, the paperwork required for this program might be too intense for you.
- You want to get the lowest offer possible. Again, a tax professional can help you find the Goldilocks spot. They can help you narrow in on an offer that is as low as possible for your budget but high enough to get accepted by the IRS.
- You disagree with the tax bill. Arguing a disagreement with a tax liability can be tricky. Tax experts have intimate knowledge of the tax codes, and they use their knowledge to your advantage.
- You're tired of dealing with the IRS. The IRS can be exhausting. When you hire a tax pro, they deal with the IRS on your behalf.
Licensed professionals such as Enrolled Agents, CPAs, or Tax Attorneys can prepare all of the documents you need for an Offer in Compromise. They can help you negotiate a settlement where you pay less than you owe. If you are looking for a list of tax professionals with an offer in compromise experience, you can find experienced tax professionals here, or you can start your search below.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.