Offer in Compromise Review of Sites

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayer's tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise for one of the following reasons:

Doubt as to Liability: Doubt exists that the assessed tax is correct.
Doubt as to Collectibility: Doubt exists that the taxpayer could ever pay the full amount of tax owed. The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income.

Note: Unless the taxpayer files an OIC claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.

Effective Tax Administration: There is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances.

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(REVISED 8/2004) What are the requirements for an OIC?

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

Used the most current version of Form 656, "Offer in Compromise," dated July 2004 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.

Taxpayers must comply with all federal tax filing and paying requirements for a period of five years following acceptance of their OIC, or until the OIC is paid in full, whichever is longer. This also includes making required estimated tax payments and federal tax deposits.

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(REVISED 8/2004) How do I complete an OIC?

First obtain a Form 656, Offer in Compromise package (Version 7/2004). The package includes information and instructions for completing the form, as well as a worksheet that can be used to calculate an amount to offer. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses (Version 5/2001), are included in the Form 656 package and may need to be completed as well depending upon each individual situation. Taxpayers will need to review and include amounts for items such as housing and utilities from the Collection Financial Standards, and Necessary Expenses, to complete their collection information statement(s).

NOTE: For corporations and partnerships, Form 433-A may be requested from corporate officers and individual partners.

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When does a Form 433, Collection Information Statement, need to be completed?

Collection Information Statement(s) are required for doubt as to collectibility and effective tax administration OICs, and doubt as to liability involving Trust Fund Recovery Penalty assessments.

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Are the forms available on-line?

Yes. The forms needed to complete an OIC are available on-line. Also, forms may be obtained by calling 1-800-829-3676 or by visiting a local IRS office.

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(REVISED 8/2004) What forms are submitted to request an effective tax administration OIC?

To receive consideration on this basis, a taxpayer must submit:

The July 2004 version of Form 656, "Offer in Compromise"
The May 2001 version of the "Collection Information Statement" (Form 433-A and/or Form 433-B)
A detailed written narrative must be documented on Form 656, Item 9. The narrative must explain the exceptional circumstances and why payment of the tax liability in full would either create an economic hardship or demonstrate why there is compelling public policy or equity considerations sufficient to support an acceptance recommendation. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances.

If a taxpayer requests consideration on the basis of effective tax administration, the IRS must first establish that no doubt as to liability and no doubt as to collectibility conditions exist. Hence, an OIC filed under effective tax administration can only be considered once the IRS determines that the tax liability is correct and collectible in full.

Once the IRS begins the process of processing the OIC under the effective tax administration guidelines, it will consider such issues as the taxpayer's overall history of filing and paying taxes, as well as the overall impact on voluntary compliance.

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I qualify for an installment agreement, can I still submit an OIC?

If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an OIC. If an OIC is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an OIC under the effective tax administration provision.

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The IRS recently levied my bank account. Will the levy proceeds be returned if I file an offer in compromise?

The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OIC was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an OIC, but which were not received at the time the OIC was submitted. Refer to OIC Contractual Terms, Item (f).

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Can I stop sending payments as part of my approved installment agreement once I file an offer in compromise?

No. Installment agreement payments must be continued while the OIC is being considered. Installment agreement payments will not be applied against the amount you offered. Refer to OIC Contractual Terms, Item (f).

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Can taxes be settled by offering pennies on the dollar?

OICs must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt. A consumer alert has been issued advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar." The IRS cautions that the OIC program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying taxes.

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Can I file an offer in compromise to delay collection action?

Once it is determined an OIC was filed solely to hinder and/or delay collection actions, the IRS will return the OIC without any further consideration. Taxpayers will not be afforded the right to appeal this decision.

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Application Fee

What is an offer in compromise user or application fee?

Federal agencies are authorized to establish charges for services provided by the agency, called "user fees." The U.S. Office of Management and Budget encourages agencies to implement these fees to recover the cost of providing special services to some recipients that others do not use. Accordingly, the IRS has established a user fee that will recover part of the cost of processing and reviewing offer in compromise requests. The IRS has chosen to call it an "application fee" because the fee is required when an OIC application is submitted for consideration.