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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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

The application fee for submitting an OIC is $150 and will be required on all offers that are postmarked November 1, 2003, and thereafter.

All taxpayers who submit a Form 656, “Offer in Compromise,” postmarked November 1, 2003, and thereafter, must pay the $150 fee, except in two instances:

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

A check or money order made payable to the United States Treasury.

No. Taxpayers must send a check or money order for $150 made payable to the United States Treasury.

No. Taxpayers must initially pay the application fee. After the IRS accepts the offer, the IRS will notify the taxpayer to promptly pay any unpaid amounts that become due under the terms of the offer agreement.

No. Checks that combine application fees for several offers will not be accepted, and the offers will be returned. Each Form 656 must have a separate check attached.

If we receive notification of insufficient funds, the IRS will immediately stop processing the Form 656 and the OIC will be returned to the taxpayer without any further consideration.

The application fee is in addition to the amount listed on Form 656, Item 7. However, when the IRS determines the acceptable amount of an OIC based on doubt as to collectibility, it considers the value of all of the taxpayer’s assets. Because some of the taxpayer’s assets were used to pay the OIC application fee, payment of the fee will reduce the acceptable amount of the OIC. The taxpayer therefore pays no more for an OIC with the fee than the taxpayer would have paid without the fee.

Because payment of the fee reduces the acceptable OIC amount, most taxpayers will not experience any additional financial hardship as a result of the fee. However, for some taxpayers the $150 fee may exceed their ability to pay.  The IRS believes that the exception to the fee for taxpayers whose income is at or below poverty will protect such taxpayers. The IRS intends to monitor this issue and adjust the amount of the exception if it appears there are a number of taxpayers who cannot pay even the amount of the fee for an OIC.

The IRS first reviews an OIC to see if it is “processable.” Processable is the term the IRS applies to those OICs that have met certain criteria. An OIC is processable if the taxpayer:

  • Used the most current versions of Form 656, “Offer in Compromise” and Forms 433-A and 433-B, “Collection Information Statements.” The most current versions are: Form 656 (7/2004) and Forms 433-A and 433-B (5/2001);
  • 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.

The application fee will be returned to the taxpayer if the OIC is determined not to be processable./p>

The July 2004 version of the Form 656 package was redesigned in order to assist taxpayers in the correct preparation of an OIC application, as well as reduce the burden associated with the process. The package contains the offer in compromise, instructions, Forms 433-A and 433-B, and a worksheet to help calculate the offer amount. A new addition is a processability checklist that helps taxpayers determine if they meet the eligibility requirements to submit an offer.  The forms prompt taxpayers to attach necessary financial documents needed in the processing of the offer.

The IRS developed an “Offer in Compromise Application Fee Worksheet” found in the Form 656 package to assist taxpayers in determining whether they qualify for the income exception.  If they determine that they qualify, taxpayers must complete Form 656-A “Income Certification for Offer in Compromise Application Fee,” and attach it along with the worksheet to the Form 656 at the time of submission.

Taxpayers must sign and date Form 656-A (fill-in format) “Income Certification for Offer in Compromise Application Fee.” If a taxpayer is submitting a joint OIC with a spouse, the spouse must also sign the certification. The Income Certification must be attached to Form 656. It is recommended that the Application Fee Worksheet also be submitted.

The IRS will return the OIC to the taxpayer without any further processing.

No. The exception for taxpayers with total monthly incomes falling at or below income levels based on DHSS poverty guidelines only applies to individuals. It does not apply to other entities, such as corporations or partnerships.

Unless the taxpayer has submitted an OIC under the doubt as to liability provision, or attached Form 656-A, showing a poverty guideline certification, the IRS will return the Form 656 as not processable.

The application fee is collected when a taxpayer submits a Form 656.  The general rule is that the IRS needs as many Forms 656 as there are entities seeking to compromise. A check or money order in the amount of $150 must be attached to each OIC. 

[Note: This assumes that the taxpayer does not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

A married couple owing the same joint income tax liability may file only one Form 656 listing the joint liability. One fee of $150 should be attached to Form 656. A married couple opting to file separate offers to compromise the same joint liability may do so, but two $150 fees will be required.

[Note: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

A divorced, separated, or married couple living apart may still file one Form 656 listing their joint liability and pay only one $150 fee, as long as all the taxes owed are joint liabilities. Taxpayers in these situations that opt to file separate offers must pay a $150 application fee for each offer that is submitted for consideration.

[Note: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

Two OICs are needed. One for the joint liability and another one for the individual (non-joint) liability. A check or money order for $150 should accompany each Form 656.

[Note: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

In keeping with the “one fee per entity” rule:

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