Tax Problem FAQ: What is an Offer in Compromise?

The IRS Offer in Compromise program provides taxpayers that owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final settlement.

  • This program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
  • The Offer in Compromise program allows taxpayers to get a fresh start.
  • All back tax liabilities are settled with the amount of the Offer In Compromise.
  • All federal tax liens are released upon IRS acceptance of an Offer In Compromise and payment of the amount offered.

An Offer in Compromise filed based on the taxpayers inability to pay the IRS looks at the taxpayer’s current financial position and considers the taxpayers ability to pay as well as the taxpayers equity in assets. Based on these factors, an Offer amount is determined.

  • Taxpayers can compromise all types of IRS taxes, penalties and interest.
  • Even payroll taxes can be compromised.

If you qualify for the Offer In Compromise program you can save thousands of dollars in taxes, penalties and interest.

Why the Taxpayer Needs An Expert In Their Corner

  • On October 31, 2004 , the Los Angeles Times reported that the IRS National Acceptance rate for Offers In Compromise was less than 20%.
  • One month earlier, a letter from the U.S. Senate Committee on Finance authored by Senators Grassley and Baucus to the Secretary of the Treasury raised concerns about the IRS’s continued failure to efficiently and effectively administer the Offer In Compromise program…
    • …we have heard from many practitioners and interested parties that the IRS is more interested in managing Offer In Compromise inventory rather than getting to a resolution of tax debt and giving the taxpayer a fresh start.
    • …we are also troubled by the apparent failure of the Treasury and the IRS to fully utilize the flexibilities provided in the effective tax administration provision.
    • …the Chief of Appeals had indicated that 86% of all Offers In Compromise are appealed.
    • …it is our understanding that the IRS first processes the DATC (Doubt as to Collectability) component before determining whether the taxpayer actually owes the tax, in whole or in part…please explain the IRS rationale for this processing approach.
    • …the IRS calculates the ability to pay, in part by computing the monthly installment payment the taxpayer can pay for the remainder of the statutory collection period…please explain the IRS’s basis for decision , particularly in light of the IRS’s policy…that an Offer In Compromise is a viable collection alternative to a protracted Installment Agreement.
  • Bottom line is that even though the Mission Statement of the IRS has been amplified to refocus the organizations efforts on service to the taxpayer, it is still the mission of the IRS to collect tax.

The Importance of the Firm’s Track Record

  • Due to the complexities of negotiating an Offer In Compromise, The Tax Consulting Firm’s track record is your best indicator of how that firm will manage your case.

Tax Resolution Services’ Track Record is arguably the best in the nation!

For more information, check out our Offers in Compromise Frequently Asked Questions and IRS Guidelines.

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.

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.

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.

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.

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.

Can taxes be settled by offering pennies on the dollar?

  • 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.

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.

Application Fee

What is an Offer In Compromise user or application fee?

  • 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.
  • 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 Offer In Compromise application is submitted for consideration.

How much is the application fee and when does it begin?

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

Who has to pay the application fee?

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

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

What method of payment does the IRS accept?

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

Can I send cash as payment for the application fee?

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

Can I send one check to cover both the application fee and Offer In Compromise amount?

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

Can a tax practitioner who represents a number of clients and files multiple Offer In Compromise combine several application fees into one check?

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

What happens if I submit an application fee and find that I have insufficient funds in my account to cover the check?

  • If the IRS receives notification of insufficient funds, the IRS will immediately stop processing the Offer In Compromise, and the Offer in Compromise will be returned to the taxpayer without any further consideration.

Will payment of the application fee reduce the Offer In Compromise amount?

  • The application fee is in addition to the amount listed on the Offer In Compromise.
  • However, when the IRS determines the acceptable amount of an Offer In Compromise 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 Offer In Compromise application fee, payment of the fee will reduce the acceptable amount of the Offer In Compromise.
  • The taxpayer therefore pays no more for an Offer In Compromise with the fee than the taxpayer would have paid without the fee.

Will the application fee create an additional financial hardship on taxpayers who are already having payment problems?

  • Because payment of the fee reduces the acceptable Offer In Compromise 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.
  • In most cases, the IRS exempts taxpayers whose income is at or below the poverty level from paying this fee.

What happens to my fee if the Offer In Compromise is not considered processible?

  • The application fee will be returned to the taxpayer if the Offer In Compromise is determined not to be processible.

How do I know if I qualify for the income exception?

  • The IRS has developed a worksheet to assist taxpayers in determining whether they qualify for the income exception.
  • If they determine that they qualify, taxpayers must complete the “Income Certification for Offer in Compromise Application Fee,” and attach it along with the worksheet at the time of submission.

What do I need to do if the Offer In Compromise Application Fee Worksheet shows that I qualify for the income exception?

  • Taxpayers must sign and date “Income Certification for Offer in Compromise Application Fee.”
  • If a taxpayer is submitting a joint Offer In Compromise with a spouse, the spouse must also sign the certification.
  • The Income Certification must be attached to the Offer In Compromise.

What happens if I submit the Offer In Compromise and the IRS later says I made an error and do not qualify for the poverty guideline exception?

  • The IRS will return the Offer In Compromise to the taxpayer without any further processing.

Does the poverty guideline exception apply to businesses?

  • 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.

What happens if I do not submit the Offer In Compromise application fee with the Offer In Compromise?

  • Unless the taxpayer has submitted an Offer In Compromise under the doubt as to liability provision showing a poverty guideline certification, the IRS will return the Offer In Compromise as not processible.

How is the application fee collected?

  • The application fee is collected when a taxpayer submits an Offer In Compromise.
  • The general rule is that the IRS needs as many Offer In Compromises as there are entities seeking to compromise.
  • A check or money order in the amount of $150 must be attached to each Offer In Compromise.

This assumes that the taxpayer does not meet one of the exceptions for paying the application fee:

  • The Offer In Compromise is filed solely under doubt as to liability.
  • The Taxpayer’s total monthly income falls at or below income levels based on the DHSS poverty guideline levels.

How many Offers In Compromise must I complete if my spouse and I are submitting one offer to compromise the same joint liability? How many application fees must be attached?

  • A married couple owing the same joint income tax liability may file only one Offer In Compromise listing the joint liability. One fee of $150 should be attached to the Offer In Compromise.
  • A married couple opting to file separate Offers In Compromise for the same joint liability may do so, but two $150 fees will be required.

This assumes that the taxpayer does not meet one of the exceptions for paying the application fee:

  • The Offer In Compromise is filed solely under doubt as to liability.
  • The Taxpayer’s total monthly income falls at or below income levels based on the DHSS poverty guideline levels.

When a married couple owes a joint liability and one spouse also owes an individual (non-joint) liability, how many Offers In Compromise are required?

  • Two Offers In Compromise 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 Offer In Compromise.

This assumes that the taxpayer does not meet one of the exceptions for paying the application fee:

  • The Offer In Compromise is filed solely under doubt as to liability.
  • The Taxpayer’s total monthly income falls at or below income levels based on the DHSS poverty guideline levels.

How many Offers In Compromise are required from a married couple who owe joint income tax, plus the husband owes an individual year before he was married and a business liability, and the wife owes an individual year with her prior spouse? How many application fees will be required?

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

  • The husband should file one Offer In Compromise listing the joint income tax, the individual year he owes before the marriage and his business liability, and attach a $150 application fee to the Offer In Compromise.
  • The wife should file an Offer In Compromise listing the joint income tax and the individual year that she owes with her prior spouse, and attach a $150 application fee to the Offer In Compromise.
  • It does not matter that the joint liability will appear on both offers.

This assumes that the taxpayer does not meet one of the exceptions for paying the application fee:

  • The Offer In Compromise is filed solely under doubt as to liability.
  • The Taxpayer’s total monthly income falls at or below income levels based on the DHSS poverty guideline levels.

How many Offers In Compromise are required if you have an individual who owes tax and who also owes a partnership debt as a general partner or corporate debt from a closely held corporation? How much would the application fee be?

  • In this situation, two Offers In Compromise will be required.
  • One for the individual liability, and the other for the partnership or corporate liability.
  • A check or money order for $150 must be attached to each Offer In Compromise, for a total of $300.
  • The IRS cannot combine individual tax on an Offer In Compromise application with taxes owed by a partnership or corporation.

This assumes that the taxpayer does not meet one of the exceptions for paying the application fee:

  • The Offer In Compromise is filed solely under doubt as to liability.
  • The Taxpayer’s total monthly income falls at or below income levels based on the DHSS poverty guideline levels.

What will happen if the IRS accepts an Offer In Compromise for processing, along with the $150 application fee, but then requests additional Offers In Compromise be submitted with additional $150 fees, and the taxpayer fails to respond?

  • Taxpayers are required to submit one fee for each Offer In Compromise submitted for processing.
  • Failure to submit additional Offers In Compromise with the corresponding $150 application fee when requested, will cause the IRS to return the offer without any further consideration.
  • The $150 application fee will be retained.

What happens to the Offer In Compromise and the application fee after I send it to the IRS?

  • The $150 is retained until the IRS determines whether the Offer In Compromise is processible.

Are there any instances when the application fee will be applied against the amount of the Offer In Compromise or refunded to me after the Offer In Compromise has been accepted for processing?

Yes. The fee will be applied against the amount of the offer or, if the taxpayer requests, returned to the taxpayer if:

  • If the IRS accepts an Offer In Compromise based on effective tax administration (ETA).
  • If the IRS accepts an Offer In Compromise based on a determination of doubt as to collectability with special circumstances.

What if my Offer In Compromise is not accepted, will the application fee be refunded to me?

No. The IRS will retain the fee when:

  • The taxpayer’s initial Offer In Compromise amount is too low – based on the IRS evaluation of the taxpayer’s financial condition – and the taxpayer is given the opportunity to increase it.
  • If the taxpayer does not increase the Offer In Compromise amount, or show special circumstances, the IRS will reject the Offer In Compromise.
  • The taxpayer fails to submit additional financial documents to assist in the IRS review.
  • If the taxpayer fails to respond, and/or submit the requested information, the Offer In Compromise will be returned without further consideration.
  • The taxpayer chooses to withdraw the Offer in Compromise.

Processing Your Offer In Compromise

What happens if an Offer In Compromise is submitted using the wrong forms?

  • The Offer In Compromise forms and “Collection Information Statements” are necessary to conduct an Offer In Compromise investigation.
  • Failure to submit these documents will cause considerable delay in the process.
  • Taxpayers wanting to pursue the Offer In Compromise as a way to satisfy their tax liability will have to submit the forms in order to have the Offer In Compromise reconsidered.

Will the submission of an inaccurate Offer In Compromise affect the timely disposition of my case?

  • Yes. The IRS’ procedures require that a taxpayer be contacted in writing and provided a one-time opportunity to correct the error(s), and/or update the financial statement.
  • Failure to correct the error(s) and/or respond results in the Offer In Compromise being returned to the taxpayer without any further actions on the part of the IRS.

What happens if I miscalculate my Offer In Compromise or do not offer an amount equal to my reasonable collection potential?

  • This will result in processing delays and could be grounds for the IRS ultimate decision to reject an Offer In Compromise.
  • The IRS is observing a large upsurge of receipts in which the offered amount is clearly much lower than the reasonable collection potential illustrated on the taxpayer’s financial statement.
  • In a significant number of cases, the taxpayer’s financial statements show that the taxpayer has a clear ability to satisfy the liability in full, or via an installment agreement during the course of the collection statute, and the taxpayer cites no special circumstances.
  • The IRS reviews Offers In Compromise for fraudulent intent.
  • Submitting an Offer In Compromise with false information, or making a false statement to an IRS employee, is considered an indicator of fraud and may subject the taxpayer to civil or criminal penalties.

What are the National and Local Standards and how are they considered in evaluating an Offer In Compromise?

  • Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability.
  • Allowances for food, clothing and other items, known as the National Standards, apply nationwide, except for Alaska and Hawaii , which have their own tables.
  • Taxpayers are allowed the total National Standards amount for their family size and income level, without having to supply supporting documentation.
  • Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location.

Unlike the National Standards, the taxpayer is allowed the lesser of the amount actually spent or the standard.

Offer In Compromise Determinations

What happens if the IRS accepts an Offer In Compromise?

If an Offer In Compromise is accepted, the following guidelines apply:

  • The taxpayer must pay the Offer In Compromise amount in accordance with the acceptance agreement.
  • The IRS will keep any tax refund, including interest due, as the result of an overpayment of any tax or other liability for the tax period extending through the calendar year the IRS accepts the Offer In Compromise.
  • A taxpayer may not designate a refund and/or overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the Offer In Compromise is based on Doubt as to Liability only.
  • The taxpayer will waive their right to contest in court or otherwise, the amount of the tax liability.
  • If a Notice of Federal Tax Lien has been filed against a taxpayer, the IRS will release the lien once all payment terms of the Offer In Compromise are satisfied.
  • The taxpayer must remain in compliance with filing and payment of all tax returns for a period of five years from the date the Offer In Compromise is accepted or until the Offer In Compromise is paid in full, whichever is longer.
  • Failure to pay the Offer In Compromise on time, and/or to remain in compliance during the five-year period or until the Offer In Compromise is paid in full, whichever is longer, will result in the Offer In Compromise being declared in default..

What happens if the IRS does not accept an Offer In Compromise?

  • Once the IRS determines it cannot accept an Offer In Compromise, the taxpayer will be advised of the reasons behind the decision.
  • The taxpayer will be afforded another opportunity to submit additional information that might cause the IRS to reconsider its preliminary decision to reject the offer.
  • The exception to this is when the taxpayer has an ability to satisfy the liability in full and has not pointed to special circumstances.

How much interest am I going to pay if my Offer In Compromise is accepted?

  • Interest will not accrue on the taxpayer’s accepted Offer In Compromise amount from the date of acceptance until the Offer In Compromise is paid.
  • Interest and penalties will continue to accrue on the unpaid tax liability while the Offer In Compromise is under consideration.

Will I be entitled to receive tax refunds if my Offer In Compromise is accepted?

  • The IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year the IRS accepts an Offer In Compromise.

Can I designate any payments once my Offer In Compromise is accepted?

  • No. Refunds and overpayments may not be designated as estimated tax payments for the following year.
  • This condition does not apply if the Offer In Compromise was accepted under doubt as to liability only.

Is a tax lien released when an Offer In Compromise is accepted?

  • The IRS releases a Notice of Federal Tax Lien when all of the Offer In Compromise payment terms are satisfied.
  • For an immediate release of a lien, a taxpayer can submit payment using a certified check and include a request letter.

What happens if I do not meet all the terms of my accepted Offer In Compromise?

  • The IRS may default the Offer In Compromise and reinstate the entire tax liability, less all payments and credits received.

What happens if I default my Offer In Compromise?

The IRS may take the following actions:

  • Immediately file suit to collect the entire unpaid balance of the Offer In Compromise
  • Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of the Offer In Compromise
  • Disregard the amount of the Offer In Compromise and apply all amounts already paid under the Offer In Compromise against the original amount of the tax liability
  • File suit or levy to collect the original amount of the tax liability, without further notice

The IRS will not default an agreement when taxpayers have filed a joint Offer In Compromise with your spouse or ex-spouse, as long as you have kept, or are keeping, all the terms of the agreement, even if your spouse or ex-spouse violates the future compliance provision.

What happens if I do not file my tax return or pay my taxes next year?

The Offer In Compromise will be defaulted.

  • An Offer In Compromise requires future compliance for a period of five (5) years from the date of acceptance of the Offer In Compromise, or until the offered amount is paid in full, whichever is longer.
  • Compliance is the timely filing and paying of all required returns and taxes.

More Tax Help, IRS News and Tax Relief Tips:

  1. Tax Problem FAQ: What is an IRS Installment Agreement?
  2. IRS Tax Relief: Seven Common Income Tax Relief Myths That Can Get You into IRS Trouble
  3. There’s Still Hope if You Didn’t File Your Taxes: You Can Still Get Income Tax Relief and Avoid IRS Penalties
  4. Retire Your IRS Back Taxes Forever: How Tax Resolution Services Helped Save a Taxpayer $130,000
  5. Delinquent and Unfiled Tax Returns? 8 Steps to Resolving Them

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