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What is an "Offer in Compromise" (OIC)?

An “Offer in Compromise” is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise” federal tax liabilities by accepting less than full payment under certain circumstances. The Offer in Compromise application package, IRS form 656, was recently redesigned with new instructions, worksheet and checklist to make it easier for taxpayers to determine if they are eligible for the program and to prepare the necessary forms accurately. An offer in compromise may be considered only after payment options have been exhausted. If taxpayers are unable to pay their taxes in full, there are other payment options, such as monthly installment agreements, that must be explored before an offer in compromise can be submitted (Form 9465 Installment Agreement Request.)

Taxpayers who are unable to pay their taxes in full and who have explored the various options should consult the checklist in the Form 656 package to determine if they are eligible for an offer in compromise. The IRS will generally accept an offer in compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An OIC is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal of the IRS is to achieve collection of what is potentially collectable at the earliest possible time and at the least cost to the government.

 Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating a fresh start for the taxpayer and an expectation of compliance with all future tax filing and tax payment requirements.

Basic Requirements

The IRS will not consider offers in compromise where tax liabilities have not been assessed. This means that an offer in compromise cannot be submitted solely for a tax year or tax periods that has not been assessed. Here are some additional requirements:

1. All legally required tax returns to be filed must be submitted prior to submitting an Offer in Compromise. That includes all income tax, employment tax and excise tax returns. This also applies to all returns required to be filed by partnerships, limited liability companies or closely held sub chapter S corporations.
2. All taxpayers with employees must have made all required federal employment tax deposits for the current quarter.
3. Estimated tax payments must be up to date for the current year.
4. A completed and accurate Form 656 must be submitted. If the Form is prepared by a third party, the package must be signed by that person also, and Form 2848 (Power of Attorney) must be included with the Form 656.
5. A completed and accurate Form 433-A must be submitted to provide financial information based on doubt as to collectability and effective tax administration. Form 433-A must show all assets and income. This information is needed to evaluate the offer in compromise and must be accompanied with supporting documents.
6. The IRS may request additional information. It is very important to respond within the time frame given to avoid rejection and to avoid having your application returned without the right to appeal.

Three Possible Payment Plans

There are three payment plans the IRS may accept and agree to:

1. Lump Sum Cash Offer, This option requires the offer amount to be paid in five or fewer installments. Twenty percent of the total amount of the offer must be paid when Form 656 is submitted.
2. Short Term Periodic Payment, this option requires the offer amount to be paid within 24 months from the date the IRS receives the offer. The first payment must be submitted with Form 656.
3. Deferred Periodic Payment, this option requires paying the offer amount over the remaining statutory period for collecting the tax. The first payment must be submitted with Form 656.

Application Fees

1. Offer in Compromise must include payment of a $150 application fee with Form 656-A and Income Certification Application fee, if you are requesting an exception to the fee because of income. Form 656-A will not be accepted for processing without the fee.
2. Offer in Compromise must include a 20% payment for a Lump Sum Cash payment offer, or the first installment payment of the periodic payment offer.

If a taxpayer has an approved installment agreement with IRS and is currently making installment payments to IRS, then he or she may stop making those payments when submitting a periodic payment offer. This will allow making the payments under the required periodical payment guidelines. However, this procedure does not apply to the Lump Sum Cash offer. If the taxpayer submits a Lump Sum Offer and is currently making installment payments, then the taxpayer must continue to make the installment payments.

General Information

After the IRS receives the Offer in Compromise, there are additional steps or additional considerations that the Internal Revenue Service could demand. For example:

1. Pay a percentage of future earnings.
2. Waive certain present or future tax benefits.
3. A notice of Federal Tax Lien may be filed at any time while the offer is being considered. Releasing any of those liens will be done when all payment terms are satisfied.
4. If the taxpayer should default on the agreement after the IRS accepts the OIC, the IRS will reinstate the unpaid amount of the original tax liability.
5. If the offer is rejected, the IRS will keep the $150 application fee and any other payments.
6. The rejection can be appealed within thirty days.
7. The statute of limitation for assessment and collection of a tax debt is suspended while an OIC is pending, or being reviewed.

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