IRS Offer in Compromise Frequently Asked Questions

Offer in Compromise frequently asked questions

1. What is an Offer in Compromise?

An Offer in Compromise is a tax settlement method offered by the IRS. Consequently,  it allows taxpayers to settle their tax debt for less than they owe. In fact, the IRS only accepts these offers if it believes that the taxpayer cannot make the payment in full or through a payment plan. Furthermore, the IRS also must believe that the offer is equal to or greater than the amount the agency could expect to collect from the taxpayer.

2. What are the qualifications for an Offer in Compromise?

There are three different ways that a taxpayer can qualify for an Offer in Compromise.

  • Doubt as to Collectibility
  • Doubt as to Liability
  • Effective Tax Administration

Check out this link for more details on qualifications and requirements for an Offer in Compromise.

3. What forms do I need to request an Offer in Compromise?

Requesting an Offer in Compromise is complicated and requires lots of documentation. The requirements vary based on whether you owe individual or business tax.

  • IRS Form 656-B – Offer in Compromise booklet for doubt as to collectibility or based on effective tax administration. It contains Form 656, 433-A (OIC) and 433-B (OIC).
  • You need three months of documentation on just about every expense and income source. This includes pay stubs, credit card statements, housing, investments, transportation, day care expenses, tax returns, etc. Photocopies will suffice as the IRS does not want originals.
  • If you are applying for an OIC because you have serious doubts that you owe a certain amount or anything at all to the IRS, then you will need to use IRS Form 656-L.

Check this link for more details on required documentation.

4. Should I use a licensed tax professional to help?

Yes. The process is fairly complex and a tax professional can greatly increase your chances of an offer acceptance. Remember, if a licensed tax professional does not believe you are a good candidate for an Offer in Compromise, they will help you find the next best option for you to resolve your taxes with the IRS.

Find out more on how a tax professional can help you with an Offer in Compromise.

5. Can anyone qualify for an Offer in Compromise?

No. It is actually unlikely that the IRS accepts an Offer in Compromise filing. In fact, in 2016, the IRS accepted only 42.8% of OICs requested.  Therefore, the IRS will only accept those people that it thinks are highly deserving of it. Before considering this type of filing be sure to read through the requirements in detail to see if you meet them.

6. I submitted my offer. How long does the IRS take to make a decision?

Typically, it takes six to nine months on average for the IRS to respond. Staff, funding, and the time of the year the OIC is submitted all influence the decision process.  If more than two months have passed, you should check with the IRS to see how the process is moving along. It is common for the IRS to take up to six months to make a decision.

If the IRS doesn’t respond to you within two years, your offer is automatically approved.

7. What if my offer was rejected and I don’t agree with the decision?

If you don’t agree with the IRS’s decision, you have the right to appeal the decision. Sometimes, the IRS issues a rejection because of a lack of information. If you have more details, you should definitely appeal. You have 30 days from the denial to appeal.

8. I owe state taxes as well. Will the State accept my Offer in Compromise?

The IRS does not handle state taxes. Unfortunately, if you want to apply for an Offer in Compromise on your state taxes, you have to do that separately. Not all states offer this type of settlement, and the ones that do, typically have different ways of determining if you qualify. As a result, if the IRS accepts your offer, that increases the chance that the state will accept an Offer in Compromise, but it is not guaranteed.

9. Is it expensive to have a professional help with an Offer in Compromise filing?

The fees for this type of filing can range from $2,500 to $6,000.  Many factors influence the price you will pay for assistance with an Offer in Compromise. First of all, the company or professional you select will be a factor. Second, pricing depends on the complexity of the tax issues and the amount of time required to prepare the documents and handle negotiations on your behalf. Therefore, the costs are only justified if your offer is accepted and you saved a lot more money in taxes than you paid in fees.

For more details, refer to our section on Offer in Compromise payment agreement options.

10. Will the IRS file a tax lien after I submit my offer?

The IRS may file a Notice of Federal Tax Lien during consideration of your offer. Moreover, the IRS will release the tax lien 30 days after payment terms are met and the payment verified.

For more details, refer to our section on Offer in Compromise payment agreement options.