Offer In Compromise Frequently Asked Questions

What is an Offer in Compromise?

An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service 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.

Unless the taxpayer files an Offer In Compromise 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 Offer In Compromise qualifies for public policy or equity considerations.

They must show that their circumstances are compelling enough to justify acceptance of their Offer In Compromise compared to other taxpayers in similar circumstances.

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What do you have to do to be eligible for an Offer In Compromise?

To be eligible for an Offer In Compromise, all returns that are due must first be filed.

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When does a Collection Information Statement need to be completed?

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

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If I qualify for an installment agreement, can I still submit an Offer In Compromise?

If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an Offer In Compromise.

If an Offer In Compromise is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an Offer In Compromise 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 Offer In Compromise was submitted.

The IRS may also keep any proceeds from a levy that was served prior to the submission of an Offer In Compromise, but which were not received at the time the Offer In Compromise was submitted.

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Can taxes be settled by offering a fraction of what is owed?

The Offer In Compromise 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.

The Offer In Comprise 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 Offer In Compromise was filed solely to hinder and/or delay collection actions, the IRS will return the Offer In Compromise without any further consideration.

Taxpayers will not be afforded the right to appeal this decision.

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Are partial payments required with Submission of an Offer In Compromise?

Effective, July 17, 2006, the IRS has mandated a requirement that any lump-sum (90 day terms) offer must be accompanied by the payment of a non-refundable 20% deposit of the offer amount. For this purpose, a lump-sum offer in compromise is any offer of payment made in five or fewer installments.

Any periodic payment offer in compromise (24 month short term deferred) must be accomplished by the payment of the amount of the first installment. The IRS will treat any failure to make an installment due under a periodic payment offer in compromise while the offer is being evaluated by IRS as a withdrawal offer.

Both the 20% deposit on lump-sum offers and payments on the periodic installment offers are in addition to the $150.00 user application fee.

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