How the IRS decides
Most offers are based on doubt as to collectibility: the IRS agrees to accept less when it's unlikely to collect the full amount within the time it has left to collect. The IRS calculates your reasonable collection potential, which is roughly the equity in your assets plus a set number of months of your future disposable income, using its own allowable expense standards. If your offer is at least that amount, it may be accepted.
Offers can also be based on doubt as to liability (you don't actually owe the tax) or effective tax administration (you could pay, but doing so would create economic hardship or be unfair given exceptional circumstances).
What it takes to apply
- Form 656 and a detailed financial statement, Form 433-A (OIC) for individuals or 433-B (OIC) for businesses, with supporting documents
- A $205 application fee and an initial payment: 20% of the offer for a lump-sum offer, or the first proposed payment for a periodic-payment offer. Qualifying low-income taxpayers don't pay either.
- Compliance: all required tax returns filed and current-year estimated payments made
- You can't be in an open bankruptcy proceeding
What to know before you file
- The IRS generally keeps any refunds for the year your offer is accepted, plus payments you made with the offer.
- An accepted offer requires you to stay compliant, filing and paying on time, for five years.
- The ten-year collection period is paused while the offer is being considered.
- If the IRS hasn't decided within 24 months of receiving your offer, it is generally considered accepted.
Beware of "pennies on the dollar" promises
Whether you qualify comes down to a calculation the IRS makes from your financial statement. Anyone who promises a specific result before reviewing your finances is selling, not advising. We run the numbers first, and if an offer isn't the right fit, we'll tell you and recommend what is.
Frequently asked questions
How much will the IRS accept?
Generally at least your reasonable collection potential: the equity in your assets plus a multiple of your monthly disposable income as the IRS calculates it. We estimate this before you apply.
How long does an Offer in Compromise take?
Often many months. If the IRS hasn't made a decision within 24 months of receiving it, the offer is generally deemed accepted.
Does the IRS stop collection while my offer is pending?
Generally, the IRS won't levy while an offer is being considered, but a federal tax lien may still be filed, and the collection period is paused.
What if my offer is rejected?
You can appeal within 30 days. Depending on why it was rejected, an installment agreement or other option may be the better path.