FAQ – Offer in Compromise

What is an offer in compromise?

The offer in compromise is the term that describes the IRS’s program for evaluating offers to settle unpaid tax balances.

Why does the IRS settle unpaid taxes?

The IRS’s policy goal for the offer in compromise program is to collect what is potentially collectible at the earliest possible time and at the lowest cost to the IRS. It is also intended to provide taxpayers with a fresh start toward voluntary compliance.

What are the basis for settling a tax debt with an offer?

There are three different types of offers. The offer based on doubt as to collectibility is the most common. As the name implies, this offer is based on the idea that you cannot full pay the tax liability before the collection statute expires.

The doubt as to liability offer is also common. This offer allows you to challenge the amount of the tax before the IRS collects it. It is used when there is an error on your return or by the IRS in computing the amount of tax due. These offers can be accepted even if the taxpayer can full pay the liability.

The effective tax administration offer is less common. This offer can be submitted based on special circumstances, such as hardship. The IRS is instructed to accept these offers if doing so would promote effective tax administration. They can be accepted even if the taxpayer can full pay the liability.

How do I submit an offer in compromise?

The offer in compromise is submitted to the IRS on a Form 656. The form itself is accompanied by supporting paperwork. Importantly, if there are special circumstances, the paperwork needs to include a detailed explanation. Ideally the paperwork and explanation will comply with the most current IRS guidance and court cases.

How does the IRS review the offer in compromise?

The IRS applies its guidelines in reviewing any offer you submit. This is set out in the IRS’s Internal Revenue Manual, published guidance, and court cases.

The IRS Office of Chief Counsel, the IRS’s attorneys, have to review and comment on any offer for a balance in excess of $50,000.

What else do I need to know about the offer in compromise?

The offer in compromise prevents the IRS from levying on your assets while the offer is being considered by the IRS. This is true if the IRS takes two months or even a year or more to review your offer.

The offer in compromise stops the running of the collection statute. If your offer is accepted, the terms of the program require that you keep current and not have additional tax problems for five years. Tax problems during this time could void your settlement.

It should also be noted that there is generally no ability to litigate the IRS’s decision to reject your offer.