Is an Offer in Compromise Right for You?

(copied directly from the IRS website)

Should the IRS determine that a taxpayer is unable to pay the liability in a lump sum or through an installment agreement, and has exhausted the search for other payment arrangements, the last option would be to file an offer in compromise. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements. See IRS Policy Statement P-5-100 for the complete OIC policy statement.

In order to be considered for an OIC, a taxpayer must have met all of the following requirements:

• Used the most current versions of  Form 656, "Offer in Compromise" dated July 2004 (PDF) and Forms 433-A and 433-B, "Collection Information Statements," dated May 2001;
• Submitted the $150 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee," with the Form 656;
• Filed all required federal tax returns;
• Filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and is current with deposits for the quarter in which the offer in compromise was submitted; and
• Is not a debtor in a bankruptcy case.

What Taxpayers Should Know About Filing an OIC

Application Fee Required for OIC - Federal agencies are authorized to implement fees to defray the administrative costs associated with providing a specialized service to a limited segment of taxpayers. In November 2002, the Internal Revenue Service announced the proposal to charge a fee that would help recover part of the cost of processing offer in compromise (OIC) requests. An OIC allows taxpayers to settle their tax liabilities for less than the full amount.

During the comment period on the proposed fee that ended on February 4, 2003, and a public hearing, the IRS received numerous comments and suggestions on the proposed application fee. These comments were considered and the final regulations were announced on August 15, 2003.

The final regulations established a $150 application fee that began on November 1, 2003. Taxpayers who submit an OIC postmarked on or after November 1, 2003, must submit the fee using a check or money order made payable to the United States Treasury. Cash payments will not be accepted.

All taxpayers who submit a Form 656, "Offer in Compromise" must now pay a $150 application fee, except in two instances:

1. The OIC is submitted based solely on "doubt as to liability;" or
2. The taxpayer's total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The Form 656 package (Revision 7/2004) contains an OIC Application worksheet which was designed to assist taxpayers in determining whether they qualify for the income exception.  If income exception is met, a taxpayer must complete Form 656-A (PDF) “Offer in Compromise Application Fee Instructions and Certification” and submit with the Form 656 in lieu of the $150 fee at the time of submission.  The worksheet should also be included with these documents. Taxpayers should refer to Form 433-A, “Collection Information Statement for Individuals,” found in the Form 656 package, to assist in determining if they qualify for the income exception. 

Statute of Limitations for Collection is Suspended - The statute of limitations for collection of a tax debt is suspended while an OIC is "pending," or being reviewed.  The offer in compromise is pending starting with the date an authorized IRS employee determines the Form 656, "Offer in Compromise," can be processed.  The OIC remains pending until an authorized IRS employee accepts, rejects, returns, or acknowledges withdrawal of the offer in writing.  If a taxpayer appeals an OIC that was rejected, the IRS will continue to treat the OIC as pending until the Appeals Office accepts or rejects the OIC in writing.

Taxpayers Must File and Pay Taxes - In order to avoid defaulting an OIC once it is accepted by the IRS, taxpayers must remain in compliance in the filing and payment of all required taxes for a period of five years, or until the offered amount is paid in full, whichever is longer.  Failure to comply with these conditions will result in the default of the OIC and the reinstatement of the tax liability.

Federal Tax Liens are Not Released - If there is a Notice of Federal Tax Lien on record prior to the OIC being submitted, the lien is not released until the terms of the offer in compromise are satisfied, or until the liability is paid, whichever comes first.

OIC will affect refunds, installment agreements and levies - Read the contractual terms that must be met when applying for an offer in compromise.

Next, learn how to File an Offer in Compromise .