Offer in Compromise (OIC) 12/13/14
IRS Post-Appeals mediation is available after unsuccessful Offers in Compromise and Trust Fund Recovery Penalties 1/27/15
An OIC is an agreement between the IRS and the taxpayer that settles a tax liability for less than full payment. Offers are authorized by Internal Revenue Code § 7122. Tax obligations that can be compromised include any civil or criminal case, including interest and penalties. The regulations provide some guidance, but much is left to IRS discretion.
The IRS will not investigate an offer for a tax year or tax period that has not been assessed.
An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer's income and assets to make a determination of the taxpayer's reasonable collection potential. OICs are subject to acceptance on legal requirements.
A new revision of the Form 656-B booklet, with forms and instructions for submitting an Offer in Compromise (OIC), will be available on IRS.gov in January, 2015. The use of earlier versions after January 1, 2015 will delay the processing of OIC applications. 8/13/14
An offer is NOT "pennies on the dollar", or the tax without penalties or interest, as is frequently advertised. See IRS warning on certain promoters. You must offer to pay the IRS the full "reasonable collection potential" (RCP) as determined by the IRS (e.g., the "quick sale value" (QSV) in your assets and "future income" based on potential installment payments).
Under Reg. § 301.7122-1(b), the circumstances in which the IRS may accept less than the full liability include:
Doubt as to liability
There is a genuine dispute that a liability exists or its amount. There is no doubt as to liability where a final court decision has been rendered. This basis is not common because you typically have several opportunities to convince the IRS you do not owe the tax. If you could not convince the IRS before that the liability is wrong, generally something new must be available. The amount of the offer must reasonably reflect the amount the IRS expects to collect through litigation, including an evaluation of the hazards or litigation (in the IRS' sole discretion). There is a separate form 656-L. Doubt as to Liability offers can no longer be filed concurrently to request consideration under a different basis.
Doubt as to collectability
Based on the taxpayer's income and assets, the IRS is unlikely to collect the full amount. The offer amount is what could be collected through other means (e.g., enforced collection, e.g., garnishment and levy), taking into consideration a taxpayer's basic living requirements, but the determination is individual and fact specific; or
Efficient tax administration ("ETA")
There is no doubt as to liability or collectability, but it would be a hardship (e.g., illness or inability to restore financial assets) or otherwise inappropriate to require full payment, and accepting the offer would promote future compliance, or because enforcing the full liability in the circumstances may serve to undermine public confidence that the tax laws are being fairly administered. For an ETA offer, a taxpayer must submit: 1) A collection information statement with all attachments, 2) A written narrative explaining the special circumstances and 3) supporting documentation.
Necessary Expenses — The allowable payments to support you and your family’s health and welfare and/or the production of income. This expense does not apply to businesses. If facts and circumstances of your situation indicate that using the scheduled allowance of necessary expenses is inadequate, the IRS will allow an adequate means for providing basic living expenses. It may be difficult to convince the IRS additional amounts are necessary and you must provide documentation that using national and local expense standards are inadequate to provide for basic living expenses. See IRS collection standards.
Expenses Not Generally Allowed — (unless you can prove that they are necessary for: 1) health and welfare or 2) production of income.):
- tuition for private schools
- public or private college expenses
- charitable contributions
- voluntary retirement contributions
- payments on unsecured debts such as credit card bills
- cable television charges and
- other similar expenses
Current Value — The amount expected from the sale of an asset (e.g., willing buyer and seller under no compunction). Determined from realtors, used car dealers, publications, furniture dealers, or other experts on specific types of assets.
Realizable Value — QSV minus secured debt with priority over a filed IRS Tax Lien.
As a result of the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297, "TIPRA", beginning July 17, 2006 a taxpayer must meet all of the following requirements:
- Taxpayer is not currently in bankruptcy
- $186 application fee ( 12/13/13), or a signed Form 656-A, "Income Certification" submitted.
- 20% payment with the lump sum offer, or a signed Form 656-A, "Income Certification" submitted.
- The 1st installment payment on a periodic payment offer, or a signed Form 656-A, "Income Certification" submitted.
A payment less than 20% on a lump sum offer is processable, but failure to submit the remaining balance on request will cause the IRS to return the offer and retain the $186 application fee.
If the full amount of the first installment payment (short term periodic, or deferred periodic offer) is not provided the the offer is not processable and the IRS will return the $186 application fee to the taxpayer.
If during investigation the initial offer amount is found to be insufficient, in most instances the taxpayer will be asked to increase the offer, and submit the corresponding 20% payment (lump sum cash offer), or the periodic payment (short term or deferred payment offer). Otherwise the IRS may reject the offer and credit taxpayer's account(s) with any payment(s) submitted with the original offer.
The IRS will deem an offer that is not withdrawn, returned, or rejected within 24 months after IRS receipt "accepted". If a liability included in the offer amounts is disputed in any judicial proceeding that time period is omitted from calculating the 24-month timeframe. It is unlikely that the IRS will "accept" an unacceptable offer by failing to act within 24 months.
Taxpayers must file all delinquent tax returns, and pay any required estimated tax payment for the current year. The IRS will notify taxpayers and provide 30 days to file delinquent returns or make the required estimated tax payments or the IRS will return the offer to the taxpayer.
Businesses with employees must have paid all required federal employment tax deposits for the current quarter. If not, the taxpayer will be provided with a reasonable amount of time to pay the deposits and on failing to do so the offer will be returned. In addition, the business will be expected to remain current on all filing and deposit requirements while the offer is being investigated.
If an offer is returned the $186 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.
An offer in compromise is made by filing form 656 (IRS form in Adobe "pdf" format)) offering an amount of money to settle this tax liability. An offer is based on doubt as to collectability must be accompanied by an extensive financial information form (433-A for individuals, Form 433-A (IRS form in Adobe "pdf" format), and form 433-B for a business, including self-employed and ownership of closely held entities, From 433-B (IRS form in Adobe "pdf" format)). A substantial number of attachments documenting the financial information are required, e.g., 3 months bank statements, utility receipts, etc.
Jointly with another person and both of you agree to submit an offer, send only 1 Form 656, and 1 $186 application fee (or Form 656-A, if applicable) and 1 20% deposit of the amount offered or 1st initial payment.
Jointly with another person and both of you submit separate offers, send 2 Form 656, and 2 $186 application fees (or Form 656-A, if applicable) and 2 20% deposits or 1st initial payments.
By yourself (such as employment taxes), and other liabilities with another person (such as income taxes), but only you are submitting an offer, then list all tax liabilities on 1 Form 656 and submit 1 $186 application fee (or Form 656-A, if applicable) and 1 20% deposit or 1st initial payment).
By yourself (such as employment taxes), and other liabilities jointly with another person (such as income taxes), and both of you agree to submit an offer, you must submit 1 offer for the separate liability and a 2nd offer for the joint liability, with 2 $186 application fees (or Form 656-A, if applicable) and 2 20% deposits or 1st initial payments.
You must respond within the time frame given to you by IRS or your offer will be rejected, the IRS will keep your $186 application fee as well as any payments you made with your offer such as the 20% payment or your 1st installment.
Federal tax lien is NOT released
If a Notice of Federal tax lien was filed prior to filing Form 656, the lien is not released until the offer terms are satisfied, or until the liability is paid, whichever comes first. A Notice of Federal tax lien may be filed during the course of an offer investigation regardless of the type of offer being considered.
The IRS will keep any tax refund 1) received during the year the offer is accepted and 2) for the year the offer is accepted even if received in a subsequent year. Taxpayer may not designate an overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the offer is based on Doubt as to Liability.
The IRS charges a $186 fee for offers submitted after January 1, 2014. The offer is rejected if the fee is not enclosed. The fee is not applied against the taxpayer's liability except for offers based on effective tax administration or doubt as to collectability with special circumstances. If the offer cannot be processed the fee is returned.The fee is not returned if the offer is rejected.
The fee is waived if the offer is submitted based on doubt as to liability or if the taxpayer's total monthly income is at or below the poverty level established under federal guidelines (250% of the 2006 HHS Poverty Guidelines). Form 656-A "Offer in Compromise Application Fee Instructions and Certification," certifying that taxpayer meets the poverty guidelines must be filed for a waiver of the fee.
A worksheet titled IRS OIC Monthly Low Income Guidelines Worksheet is designed to assist a taxpayer in determining eligibility for the low-income waiver in the Form 656 package.
Add for each additional person
It generally takes 6 to 12 months to process the offer. The IRS has reported that the percentage of offer cases resolved in less than 6 months was 38 percent in 2002 and 56 percent in 2003.
The IRS may not levy a taxpayer's property if an offer is pending (has been accepted for processing), or for 30 days after a rejection and while an appeal of the rejection is pending. The date of levy suspension begins when the IRS officially signs for and accepts the offer for processing.
Your offer amount must equal or exceed your "reasonable collection potential" amount and must exceed zero. The minimum offer amount based on doubt as to collectability is:
- the net realizable value in your assets (quick sale value that a taxpayer could reasonably expect from the sale of an asset if sold quickly, typically in 90 days or less), minus what the taxpayer owes to a secured creditor with priority over a filed Notice of Federal Tax Lien (credits cards are unsecured debt and do not count), PLUS
- the "future income" (not actual monthly payments) based on potential installment payments based on your income less necessary living expenses for 12 months ( previously 48 to 60 months), or the remainder of statutory period of collection if less (Actual installment payments are generally NOT part of the offer, which is typically "cash payment in full".)
"Special circumstances" may warrant a further downward adjustment.
"Income" in this context means all amounts (e.g., cash coming thorugh your hands, taxable or not, gifts, etc.) available each month for you to live on.
Other relevant factors include your age, health, education, employment history, current employment and earnings, and potential for future increase in income.
IRS revises calculation 5/24/12
The IRS will now calculate a taxpayer's reasonable collection potential looking only at 1 year of future income for offers paid in 5 or fewer months, down from 4 years, and 2 years of future income for offers paid in 6 to 24 months, down from 5 years. All offers must be fully paid within 24 months of the date the offer is accepted (Long deferred OICs apparenlty no longer available). IR-2012-53, May 21, 2012
[Congress is considering removing this requirement 6/6/09]
[President Obama's 2011 budget proposes removing the nonrefundable 20% down payment with the initial OIC application. 2/4/10]
Effective July 16, 2006, the TIPRA requires:
- a non-refundable 20% of the offer deposit accompany submission of "lump-sum" offers (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)), and
- the first installment accompany submission of periodic payment offers and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)).
A "periodic-payment" offer means any offer of payments made in 6 or more installments.
Only taxpayers qualifying for the (1) low-income exemption or (2) filing a doubt-as-to-liability offer do not have to pay the application fee, or the payments imposed by TIPRA section 509. IRS web site information on the revamped offer program 7/12/06 & 11/2/06
The Form 656 Offer in Compromise (Revision 2/2007) package contains a worksheet titled “IRS OIC Monthly Low Income Guidelines Worksheet” designed to assist taxpayers in determining whether they qualify for the income exception.
All offer payments (e.g., lump sum, short term, deferred periodic) are considered “payments on tax” and are not refundable deposits regardless of whether the IRS declares the offer not processable or later returns, rejects, withdraws, or terminates the offer as a result of its investigation. When this happens, the IRS will apply the payment(s) to the taxpayer’s outstanding tax liability.
Taxpayers must specify in writing when submitting their offers how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the payments in the best interest of the government (IRC section 7122(c)(2)(A)).
Taxpayers may designate the application of the required TIPRA payments in writing when the offer is submitted and must clearly specify how the partial payments are to be applied to a particular tax period(s) and to specific liabilities (e.g. income taxes, employment taxes, trust fund portions of employment, excise tax, etc.). Taxpayers may not designate how the $186 application fee is applied. The application fee reduces the assessed tax or other amounts due.
There are 2 types of payment terms:
An offer in which the offer amount must be paid in 5 or fewer installments on written notice of acceptance. 20% of the total amount of the offer must be paid with the Form 656.
Taxpayer must submit the 1st payment with the offer and continue to make regular payments while the offer is pending. The offer amount must be paid within 6 to 24 months from the date the IRS receives Form 656. Under this option, you must continue to make monthly payments while the IRS is evaluating your offer. Failure to make these payments will cause your offer to be returned. There is no appeal. Total payments must equal the total offer amount. EXCEPTION: If you are an individual or are operating as a sole proprietorship and your household income meets the Low Income Certification guidelines, you will not be required to send the initial payment or make the monthly payments during the evaluation of your offer.
Form 656-PPV, Offer in Compromise Periodic Payment Voucher, is a removable form to be used by a taxpayer to remit the required short term payments while the offer is under investigation.
NOTE: The address where you send your periodic payments is different from the address where you submit your offer form.
You should have a plan for where the funds for the offer will come from before submitting the offer (do not wait until the offer is accepted). Normally, if you could borrow from a bank you could pay your taxes, so funds for an offer are typically provided by a relative, etc. Part of the funds may come from borrowing home equity from a lender. It does not work well to save the funds for an offer because savings are an asset so the savings will increase the required offer amount.
If the IRS believes your current income in not at its full potential (e.g., you used to make more money than you do now and the IRS is concerned you will again make more money after they accept an offer), the IRS may require a "collateral agreement" to mitigate that risk, e.g., if your current income is $20,000, the IRS might demand 10% of income in excess of $28,000, 15% of income in excess of $35,000, etc. (these numbers are made up for an example and your schedule would depend on IRS discretion). Thus, the IRS shares any increase in income, but never more than the tax previously owed, including ongoing interest.
The IRS does not like collateral agreements and generally counter-offers to accept an increased offer amount without requiring a collateral agreement. It becomes an economic decision whether to accept the increased amount or lower amount with a collateral agreement.
- Do you think your income will increase sufficiently so that paying the increased offer amount is better than the collateral agreement ?
- Do you just want definite closure ?
- Have you have already offered as much as you can pay, and thus can not increase the offer ?
Another type of collateral agreement comes into play if more than 1 taxpayer is liable for the tax and not all of the liable taxpayers are participating in the offer, e.g., ex-spouses on joint income tax returns or other persons liable for trust fund recovery penalties. Only the taxpayer making the offer is relieved of liability. The IRS will never collect more than the full balance of tax owed from all persons liable.
Statute of Limitations for Assessment and Collection is Suspended
The statute of limitations for assessment and collection of a tax debt is suspended while an offer is "pending," or being reviewed. The OIC is pending on the date an authorized IRS employee determines the offer is ready for processing until the IRS accepts, rejects, returns or acknowledges withdrawal of the offer in writing, and, if a taxpayer requests an Appeals hearing for a rejected offer, until the Appeals office issues a determination in writing to accept or reject the offer.
A taxpayer who has an approved installment agreement payment plan with the IRS and is making payments under this plan may stop remitting the installment payments at the time that a short term or deferred periodic payment offer is filed. A taxpayer that submits a lump sum cash offer must continue to make the installment agreement payments until the offer is accepted. If it is not accepted, the installment agreement payments must continue.
In the last several years the IRS has begun including the value of "dissipated assets" in the amount required to be paid as part of an OIC. Examples include life insurance proceeds received, and refinancing of a mortgage, not paid over to the IRS at the time. This is true even if the event occurred many years prior to submitting the OIC, and the money may no longer be available for the taxpayer to pay with the offer. 3/28/07
Payment of the offer amount (plus amounts under a collateral agreement) totally and finally resolves the tax liability,
BUT, the offer is cancelled or void, the full liability plus interest (less any payments) is reinstated, and the IRS will attempt to collect the reinstated balance, IF you fail to:
During the next 5 years following acceptance, or until the offer is paid in full if longer, Taxpayers Must:
- timely file all returns and pay the tax shown, and
- pay quarterly estimated taxes, if required
the IRS first sends a notice that the offer is in default and will be terminated if the default is not cured within 30 days.
The law requires IRS to make certain information from accepted Offers in Compromise available for public inspection and review. These public inspection files are located in designated IRS Area Offices.
If the IRS rejects your it will notify you by mail and explain the reason for the rejection. The IRS will keep your $186 application fee and payments.
You have the right to appeal the rejection to the IRS Office of Appeals within 30 days from the date of the rejection letter. The letter will include detailed instructions on how to appeal the rejection.
The number of offers submitted dropped by 20% in the first 8 months of 2007, from 37,700 in FY 2006 to 30,300 in FY 2007. The number accepted dropped by 22%. [IRS National Taxpayer Advocate 2007 report to Congress] 7/26/07
# Nina E. Olson, National Taxpayer Advocate, 2/26/09 statement before the Subcommittee On Oversight Committee On Ways And Means U.S. House Of Representatives Hearing on tax compliance challenges facing financially struggling taxpayers 4/28/09
OIC figures for 2009 to date provided in an IRS telephone forum included: 43,989 submitted, 10% non-processible (down from 30%), 23% accepted, 25% rejected, 29% returned, average 6 month processing by central unit in Holtsville and average 9 months processing in the field for more complex situations. 7/14/09
^ Figures from taxpayer liason representative at Missouri Bar Tax Committee meeting 5/12/11