Offer in Compromise
If you can’t pay your tax debt in full, or if paying it all will create a financial hardship for you, an offer in compromise (OIC) may be an option.
An OIC (also known as an offer) is an agreement between you and the IRS, where the IRS agrees to accept less than the full amount you owe.
There are two main reasons the IRS may agree to accept less than the full amount you owe:
- Doubt as to Collectability: This means you don’t have enough income or assets to pay your balance in full.
- Effective Tax Administration: You can pay all your balance due, but it would create an economic hardship, or would be unfair or inequitable.
Another reason the IRS may accept payment of less than the full amount you owe is doubt as to liability (that is, you don’t believe you owe the tax, or you don’t believe the amount is correct).
NOTE: You can’t submit an offer if your debt has been established by a final court decision or judgment about the tax or the amount.
Offer payment options
There are two kinds of payment options for an offer — you must select one of them and include payment with your offer. The amount of the first and following payments will depend on the total amount you offer and which payment option you choose.
- Lump Sum Offer: Generally, you'll be required to pay 20 percent of the total amount you're offering when you submit the offer. You’ll need to pay the rest in five or fewer payments, within five or fewer months of the date the IRS accepts the offer.
- Periodic Payment Offer: Generally, you’ll make the first payment when you submit the offer and the rest within 24 months, according to the terms of your offer.
For the IRS to accept an offer, you must file all tax returns due and be current with estimated tax payments or withholding. If you own a business and have employees, you must file all returns and be current on all your federal tax deposits.
NOTE: If you or your business is currently in an open bankruptcy proceeding, you’re not eligible to apply for an offer. Any resolution of your debts generally must take place within the context of your bankruptcy proceeding.
After the IRS notifies you it has accepted your offer and you pay the reduced amount you’ve agreed to, your entire tax debt is resolved if you fulfill the terms of the offer agreement.
If the IRS rejects your offer, it won't return the application fee or any other payments you made with the offer. The IRS will apply the non-refundable fee and payments to your tax liability. You have the right to appeal, if the IRS rejects your offer. For more possible outcomes, see the How will this affect me? section below.
The offer in compromise process can be lengthy. Keep close track of the dates — if the IRS doesn't reject, return, or you withdraw your offer within two years of the date the IRS receives it, then the offer is deemed accepted.
Submitting an offer doesn't guarantee the IRS will accept your offer. It starts the process of evaluating your situation, your ability to pay, and the amount you're offering. You can submit an offer on taxes owed individually and for your business.
Review the tax debt to make sure you owe it
If you feel you don't owe the tax or the amount is incorrect
If the tax you owe is from an audit you didn’t know about or weren't able to present any information for, you might be able to get an audit reconsideration. If you made a mistake on your return, filing an amended return may remove the debt. Most options are easier and less time consuming than submitting an offer, so it’s worth seeing if there is anything else you can do to resolve the debt before filing an offer.
If you’ve exhausted other options, and you think an offer is the best action, you can submit IRS Form 656L, Offer in Compromise (Doubt as to Liability). You should include a written statement explaining in detail why you believe the IRS is in error, and attach supporting documentation. There is no application fee for this type of offer, but you must include an offer of more than zero dollars.
If you owe the amount and it is correct
- First, review all the other options that might be available to you. Some of these will have lower fees and can be easier and faster to obtain.
- Before submitting an application, use the IRS Offer in Compromise Pre-Qualifier Tool to see if you may be eligible to make an offer. This tool is only a guide. You can still discuss questions you have about filing an offer by contacting the IRS.
- If you decide to submit an offer, you’ll need to give the IRS complete financial information. Make a list of your income, expenses, assets and any debts owed against those assets. Follow the instructions in IRS Form 656B Booklet, Offer in Compromise Booklet, to prepare and file your offer.
Before you decide to submit an Offer in Compromise (offer), you should be aware of several things:
Submitting an offer doesn't guarantee the IRS will accept your offer. It starts the process of evaluating your situation, your ability to pay, and the amount you're offering. You can submit an offer on taxes owed individually and for your business.
You’ll have to pay an application fee of $186 and make offer payments (based on the method you choose) with your offer submission, unless you meet certain low-income guidelines, which are in the IRS OIC Booklet.
Your offer may not be processable
The IRS will use the criteria below to determine if it can process and investigate your offer. If the offer meets one of the criteria, the IRS won't process your offer and will return it to you. The IRS will send you a letter explaining why it could not process your offer and will return your application fee. Any payments you submitted with your offer will also be returned, except for criteria number seven. If your offer is not processed due to unfiled tax returns, any offer payments will be applied to the amount you owe.
The IRS will not process your offer if:
1. You are currently in bankruptcy.
2. You didn't pay the application fee.
3. You did not pay the required initial payment with your offer.
4. You don't have a balance due.
5. The IRS can’t enforce your tax debts because the time the IRS has to collect has expired.
6. Your case is in the jurisdiction of the Department of Justice.
7. You have past due federal tax returns.
After the IRS processes your offer
If the IRS processes but closes your offer without accepting it, it will not return your application fee or any other payments you made with the offer. The IRS will apply these non-refundable fees and payments to the amount you owe.
The IRS usually has ten years from the date of assessment to collect a tax debt. However, filing an offer will extend the time the IRS has to collect all your debt.
While the IRS generally puts other collection activities (such as a levy on your wages or bank account) on hold while your offer is pending, the IRS may still file a Notice of Federal Tax Lien to protect its lien interest in any property you own and to notify other creditors of that interest. You have the right to appeal any lien or levy collection actions. Please refer to the What are my Rights? section below.
The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts your offer. For example: If the IRS accepted your offer in 2013 and you file your 2013 IRS Form 1040 on April 15, 2014 showing a refund, the IRS will apply your refund to your tax debt. The refund isn't a payment toward your offer.
The IRS is required to explain how it calculates your ability to pay and how much it could potentially collect from you. You’ll receive correspondence and be able to contact the offer examiner or specialist assigned to you.
If the IRS rejects your offer
If the IRS rejects your offer, you have the right to appeal the rejection, but must do so within 30 days of the date of the IRS's rejection letter. To appeal a rejection, use IRS Form 13711, Request for Appeal of Offer in Compromise.
If the IRS accepts your offer
If the IRS accepts your offer, you’ll need to abide by the terms you agreed to, and stay current with filing and paying your taxes for five years after that.
If the IRS returns your offer
The IRS may return your offer after it is processed, if you don’t timely file your tax returns, make estimated tax payments, properly adjust your tax withholding or make federal tax deposits. In addition, the IRS may return your offer, if your application fee or offer payment is dishonored, or if you don't provide information the IRS requested. If the offer is returned, you won’t be able to an appeal. However, IRS will send you a notice providing you 30 days from the date of the notice to respond to the IRS asking for reconsideration of the decision to return the offer.
Make sure you don't owe taxes next year
If the IRS accepts your offer but you don’t file and pay all taxes on time for the five years after the acceptance, the offer will terminate and you'll owe your full debt (not the reduced amount of the offer).
Here are some ways to make sure you can pay your taxes
- Increase your tax withholding from your pay, by filing IRS Form W-4, Employee's Withholding Allowance Certificate, with your employer.
- New Tax Reform implementation changed the way the IRS calculates your federal tax. The IRS encourages everyone to perform a quick “paycheck checkup” to ensure you have the right amount withheld.
- You may use the IRS withholding calculator to figure your federal income tax and withholding. The withholding calculator is a tool on IRS.gov designed to help you determine how to have the right amount of tax withheld from your paychecks.
- When you use the withholding calculator, it will help you determine if you need to adjust your withholding and submit a new IRS Form W-4, Employee’s Withholding Allowance Certificate, to your employer.
- Increase the amount of estimated taxes you pay.
Browse common tax issues and situations at Get Help.
If your IRS problem is causing you financial hardship, you've tried repeatedly and aren't receiving a response from the IRS, or you feel your taxpayer rights aren't being respected, consider contacting the Taxpayer Advocate Service (TAS).
You may be eligible for representation from an attorney, certified public accountant (CPA), or enrolled agent (EA) associated with a Low Income Taxpayer Clinic (LITC). LITCs also provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language.