For some taxpayers facing IRS collection activities, an offer in compromise presents an opportunity to stop collection actions like wage garnishments and negotiate a final resolution to outstanding tax debts.
What is an offer in compromise?
An offer in compromise is an agreement between a taxpayer and the IRS, under which the IRS accepts a lesser amount of money than what is owed to satisfy an outstanding tax liability. The IRS may accept offers in three circumstances: (1) there is genuine doubt as to whether the IRS correctly determined the amount of tax due; (2) there is doubt that the amount due is collectible in light of the taxpayer's income and assets; and (3) requiring full payment of the tax liability would create an economic hardship or be unfair and inequitable in light of some type of exceptional circumstance. OICs based on the second scenario--doubt as to the amount being collectible--are most common and are therefore the focus of the subsequent questions and answers.
How will the IRS determine whether I qualify for an offer in compromise?
You may request an offer in compromise through Form 656. To qualify for an offer in compromise, a taxpayer must generally demonstrate he/she is unable to fully pay the amount of his/her liability. The taxpayer must then propose terms of an offer under which the IRS will receive at least the amount it could reasonably expect to collect from the taxpayer by pursuing collection opportunities. The IRS will consider your income, basic and necessary living expenses you incur each month, money you have in your accounts, and the equity you have in cars, homes, and other assets in determining your ability to pay the tax debts and its ability to collect from you. You must disclose all of this information to apply for an offer on Form 433-A.
How much of my tax liability will I pay under an offer in compromise?
The answer to this question will differ greatly from taxpayer to taxpayer. Some taxpayers may have offers accepted under which they pay very little of their underlying tax liabilities; other taxpayers may pay close to the full amounts of their liabilities. Your outcome is dependent on the specific facts of your case. Your monthly expenses for living expenses like food, clothing, housing, utilities, transportation, and medical care will be measured against local and national standards. Leftover income after these expense allowances is then multiplied by a set period of time, and this amount becomes part of the total offered to the IRS to settle the debt. You will also be expected to contribute the "quick sale value" of equity you hold in your car, home, or other assets to the amount of the offer, which is generally around 80% of the item's value.
What do I need to apply for an offer in compromise?
Along with the offer forms detailing your income, expenses, and assets, you must submit an application fee and an initial offer payment. Depending on the terms of the offer you propose, this initial payment is either 20 percent of your offer amount or the first of several, smaller monthly installments you may make while your offer is under consideration. Low-income individuals may qualify for a waiver of the application fee and the first payment requirements.
Can an offer in compromise be changed or rejected after the IRS agrees?
Yes. The IRS can change or even suspend its agreement with you if you fail to follow a set of conditions. This includes making agreed payments, continuing to file returns and pay taxes for following years, and permitting the IRS to keep any refunds for the period of time around the offer's acceptance.