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What is an Offer in Compromise?

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances.

A tax debt can be legally compromised for one of the following reasons: 

1. Doubt as to Liability - Doubt exists that the assessed tax is correct.
2. Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed.
3. Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.

Ten things you need to know about Offers in Compromise

  1. In order to qualify to file an OIC, you must have filed all of the tax returns you are required to file; however, you do not have to make payment on those filed returns. In the case of self-employed individuals, “compliance” means filing and full payment for two consecutive quarters.
  2. The settlement procedures depend on how much is collectible from you. It has nothing to do with how much you owe to the IRS . For example, a $4 million tax liability could be settled for $1,000 if you are only collectible for $1,000.
  3. For collectibility, the IRS looks at both assets and income.
  4. In analyzing income, the IRS is required to allow you to offset your income with reasonable and necessary living expenses (e.g., housing, food, transportation, heath care, court ordered payments, child care, etc.).
  5. The IRS will discount assets to their “quick sale” value. In the case of real estate, cars and other fixed assets, the IRS discount is at least 20% in almost all cases.
  6. If you disagree with an IRS determination by an Offer Specialist, the offer can be appealed to an IRS Office of Appeals. The appeal conference is informal.
  7. If the IRS is actively pursuing a collection action against you (either a levy, lien or garnishment of wages) , you can appeal that collection action in what is called a Collection Due Process Appeal. During that Appeal hearing, you can offer an Offer in Compromise or an Installment Agreement as an alternative to the collection action.
  8. All tax liabilities of individuals and corporations can be compromised, including payroll tax liabilities and tax liabilities for tax fraud, and any tax liability not dischargeable in bankruptcy.
  9. The Congress requires the IRS to have a “liberal acceptance” policy for offers in compromise. The legislative tax policy for offers-in-compromise is to give taxpayers a “fresh start.” The IRS adopts that tax policy.
  10. A tax liability can be settled, even if you are collectible for the full amount of that tax liability, if you can demonstrate “special circumstances” for those assets or income. This can be done if the settlement is important for “effective tax administration."

Offer in Compromise FAQ

Question: I am unable to pay my delinquent taxes. Will the IRS accept an Offer in Compromise?

Answer: You may qualify for an Offer in Compromise if you are unable to pay your taxes in full or if you are facing economic hardship or other special circumstances.

Note: Offer in Compromise Application Fee - Your offer must include the $150 application fee. If you are requesting a low-income exception of the fee, you must complete section 4 of the Form 656 (PDF), Offer in Compromise.

Offers received without the $150 fee or a completed section 4 of the Form 656 will not be accepted for processing. Please see Step 6 on Page 4 of the Form 656-B (PDF), Offer in Compromise Booklet, for more information on the application fee, and section 4 of the Form 656 (PDF) to determine if you qualify for the low-income exception. Please also see Steps 2 and 3 on Page 4 of the Form 656-B to determine whether your application must include either a completed Form 433-A (OIC) (PDF), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC) (PDF), Collection Information Statement for Businesses.

If you are not granted an Offer-in-Compromise and you are still unable to pay your delinquent taxes in full, you still may be eligible for an installment agreement. File Form 433-D (PDF), Installment Agreement, and pay a $105 user fee, which we have the authority to deduct from your first payment(s) ($52 for Direct Debit).

If you default on your installment agreement, you must pay a $45 reinstatement fee if we reinstate the agreement.

Collection Procedural Questions

FAQs for New Offer in Compromise Rules

Question: What kinds of interest and penalties will I be charged for filing and paying my taxes late?

Answer: Interest is compounded daily and charged on any unpaid tax from the due date of the return (without regard to any extension of time to file) until the date of payment.

The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months.

For current interest rates, go to News Release and Fact Sheet Archive and find the most recent Internal Revenue release entitled Quarterly Interest Rates or alternatively, search "quarterly interest rates" on our website, www.irs.gov.

In addition, if you didn't pay your tax on time, you'll generally have to pay a late payment penalty.

The late payment penalty is one-half of one percent of the tax (0.5%) owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent.

You will not have to pay the penalty if you can show reasonable cause for the failure.

The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Currently, if you filed a timely return and are paying your tax via an installment agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.

If you did not file on time and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause.

The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%.

The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax payments.

After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid.

The total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed.

If your return was over 60 days late, however, the minimum failure-to-file penalty is the smaller of $135 ($100 for returns required to be filed before January 1, 2009) or 100% of the tax required to be shown on the return.

Note: If you feel a penalty or interest is assessed in error, you may refer to Publication 1 (PDF), Your Rights as a Taxpayer.

Additional Information:

Publication 594 (PDF), Understanding the Collection Process

Tax Topic 653, IRS Notices and Bills, Penalties and Interest Charges

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