48.10 Offer in Compromise

If you are unable to pay a tax debt in full, you may be able to make an offer in compromise (OIC), but it should be considered a last resort. An OIC is an agreement between a taxpayer and the IRS in which the IRS accepts less than full payment of the outstanding tax liabilities as settlement of the tax debt.

However, the number of accepted offers has declined steadily according to the National Taxpayer Advocate, who believes that taxpayers are deterred from applying by the burdensome disclosure and other application requirements. There is a $150 application fee that the IRS will keep unless the offer cannot be processed. There also is a requirement to submit a nonrefundable payment with the offer on Form 656, and this has been strongly criticized as a major reason for reducing access to the OIC program.

There are two payment options. You can make an up-front payment on Form 656 equal to 20% of a lump-sum offer, with the balance payable in five or fewer installments within 24 months of IRS acceptance. Alternatively, you may choose the periodic payment option, which requires you to submit the first proposed payment with Form 656 and pay the rest of your offer within 24 months. You must make regular payments in accordance with your proposed offer while the IRS considers your application. These upfront payments are not refundable even if you withdraw the offer prior to IRS acceptance or the IRS rejects the offer; they will be applied to your tax debt. The only exception to the application fee and upfront payment requirements is for low-income individuals who certify that their income is below poverty guidelines; they do not have to make any payments while the IRS considers the offer. The IRS as well as the Treasury Department and Taxpayer Advocate have called on Congress for legislation to eliminate mandatory upfront payments.

Grounds for an Offer in Compromise.

The IRS has authority to settle or “compromise” for one of the following reasons: Doubt as to liability, doubt as to collectibility, and effective tax administration. Doubt as to liability means that doubt exists concerning the correctness of the IRS’s tax assessment. Doubt as to collectibility means that you may never be able to pay the full amount of tax owed. Even where there is no doubt that you owe the tax and you could manage full repayment, you can apply for an OIC on “effective tax administration” grounds if there are exceptional circumstances under which collection of the full tax would cause you economic hardship or would be unfair and inequitable.

Applying for an Offer in Compromise on Form 656.

You must submit an OIC on Form 656. The IRS will consider the OIC only after other payment options have been exhausted, including an installment agreement. You must make an upfront payment when you submit the OIC on Form 656, as discussed above. Form 656-B, the OIC booklet, includes an explanation of the OIC program and instructions for completing the form. The booklet also includes financial disclosure statements that must be attached to support an OIC based on doubt as to collectibility or effective tax administration. Wage earners and self-employed individuals must use Form 433-A, while partnerships and corporations use Form 433-B. In some cases, the IRS may request Form 433-A from corporate officers or individual partners. Form 656-B is available online at www.irs.gov or can be obtained by calling 1-800-829-3676.

If your offer is rejected, you will be given an opportunity to appeal the decision and to amend the offer.

Law Alert

Proposals To Eliminate Upfront Payment Requirement

With the support of the Administration and the National Taxpayer Advocate, proposals have been made in Congress to repeal the 2006 law requiring nonrefundable payments to be made with the OIC application but Congress has not acted on the proposals. Any legislative developments will be reported in the e-Supplement.

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Application fee.

A $150 application fee must be paid with Form 656 unless you certify in Section 4 of Form 656 that your total monthly income is at or below federal poverty guidelines. Section 4 has a table showing the monthly income limits based on family size.

Compliance conditions.

If the IRS accepts an OIC, you must pay the agreed-to amount in accordance with the acceptance agreement and must timely file and pay all required taxes for a period of five years from the acceptance date, or until the accepted amount is paid in full, whichever is longer. You may also be asked as part of the agreement to pay a percentage of your future earnings to the IRS. A failure to comply with the agreement causes default of the OIC and the reinstatement of the original liability.