An Offer in Compromise lets you reach a contractual agreement with the IRS to pay less than you owe, often substantially less. However, not all taxpayers qualify. An Offer in Compromise hinges on factors such as the taxpayer’s age, income, health, assets, and liabilities. These items are evaluated to determine a taxpayer’s eligibility for an Offer in Compromise and the amount the IRS will accept under that Offer.

How does an offer in compromise work?

The IRS, at its discretion, may accept less than full payment of your tax debts if there is doubt as to whether the IRS could ever collect the full amount of tax debt (Doubt As To Collectability) or if there is doubt as to whether you are actually liable for the tax debt (Doubt As To Liability):

Doubt as to Collectability

This means that doubt exists as to whether the taxpayer has sufficient assets and income to ever pay the full amount of taxes owed to the IRS. The taxpayer does not doubt that he or she actually owes the outstanding balance of tax debts. The main factor when the IRS makes their "Doubt as to Collectability" determination is the taxpayer's personal financial profile (income, expenses, and assets). The IRS sets strict guidelines for income, allowable expenses (such as housing, living, and transportation expenses), and the available equity in personally owned assets.

Doubt as to Liability

Doubt as to Liability may be available if the amount the IRS seeks to collect from you is inaccurate or you're not responsible for the tax debt.

If there's doubt as to your liability there are often easier ways to deal with the situation than submitting an Offer in Compromise. You may wish to simply file an amended tax return, request innocent spouse or injured spouse relief, request penalty abatement, or request an audit reconsideration.

Effective Tax Administration

This is a more recent ground for acceptance of an Offer In Compromise by the IRS. The taxpayer is claiming that some exceptional circumstances exist such that paying the tax debt would pose a serious economic hardship, would be unfair, and would be inequitable to the taxpayer.

In such a situation the IRS wants to get as much as possible and they may believe that 14 cents on the dollar is as good as they can obtain from the taxpayer. It is very difficult to have an Offer In Compromise based on Effective Tax Administration accepted by the IRS.

Requirements For Your Offer In Compromise To Be Processed By The IRS

An overwhelming majority of Offers In Compromise are rejected outright by the IRS without their even being reviewed: they are classified as "unable to process." An Offer In Compromise is deemed "unable to process" when the document package submitted to the IRS is missing any of the required forms, backup documentation, payment, or request for a fee waiver.

The requirements for your Offer In Compromise to be deemed "ready to process" by the IRS are you:

  • Must have filed all federal tax returns that you are required to file (you’ll find this to be true in all dealings with the IRS);
  • Must pay the $150 Offer in Compromise application fee, or request a fee waiver;
  • Must not have an open bankruptcy case;
  • Must have filed payroll tax returns and made on-time deposits of payroll taxes for the prior two quarters (for business taxpayers only);
  • Must be current with estimated taxes and/or income tax withholding for the current year; and
  • Must submit IRS Forms 656, 433-A, and/or 433-B, along with all required supporting documentation

Although not a requirement for processing, the taxpayer must also indicate to the IRS where the money they'll use to pay the Offer In Compromise will come from. The IRS is lenient in terms of where the money comes from, be it selling your home, borrowing from friends, or refinancing a mortgage, they simply want you to let them know where it's coming from.

Requirements Once Your Offer In Compromise Has Been Accepted By The IRS

Once your Offer In Compromise has been accepted you're not off the hook. Pursuant to the Offer In Compromise, you've agreed to:

  • Pay the offer amount in the Offer in Compromise. Payment terms for an Offer in Compromise are typically in one of two ways: Cash (usually 20% with submission of offer and 80% within ninety days of acceptance), or Short-Term Deferred Payment (24 monthly payments starting with the submission of your offer);
  • File your tax returns on-time and pay your taxes on-time for the next five years;
  • Let the IRS keep any tax refunds, payments, and credits applied to your tax debts prior to submitting your Offer in Compromise; and
  • Let the IRS keep any tax refunds that would have been payable to you during the calendar year that your Offer in Compromise is approved.

If you don't fulfill the terms of the Offer in Compromise contract, the IRS can (and probably will) revoke the Offer in Compromise and reinstate the full amount of your tax liability.