An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through an installment agreement.
In most cases, the IRS will not accept an OIC offer in compromise unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
Taxpayers should beware of promoters’ claims that tax debts can be settled through the Offer in Compromise program for “pennies on the dollar.”
Three Types of OICs
The IRS may accept an OIC based on three grounds:
1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Exceptional Circumstances (Effective Tax Administration) – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
OIC Payment Options
In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. Taxpayers may choose between two payment options to pay their accepted offer in compromise:
1. Payment Option 1 – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.
2. Payment Option 2 – Payable in non-refundable installments and in more than five months. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
Payments and Application Fees
When filing an OIC, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment. All payments should be made by check or money order made payable to the United States Treasury. Practitioners who file multiple OICs at the same time should not combine application fees for multiple clients.
Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.
EXCEPTION: Taxpayers submitting an OIC for an individual and meeting the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compromise), will not be required to send the $150.00 application fee, the initial payment, or make any periodic payments during the evaluation of their offer.
The OIC application fee reduces the assessed tax or other amounts due. The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or the offer is submitted by an individual meeting Low Income Certification guidelines on the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.
The objective of the Offer in Compromise (OIC) program is to accept an OIC when it is in the best interest of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
If you are unable to pay your tax liability in a lump sum or through an installment agreement and you have exhausted your search for other payment arrangements, you may be a candidate for an OIC.
In order for your OIC to be considered, you must meet the following requirements:
• You are not a debtor in an open bankruptcy proceeding
• Include the $150 application fee
• Submit one of the following payments with the offer:
o Payment Option 1 – 20 percent payment of the offer amount
o Payment Option 2 – The first monthly payment
EXCEPTION: If you are submitting an individual offer and meet the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compromise), you will not be required to send the $150.00 application fee, the initial payment, or make any periodic payments during the evaluation of your offer.
Low Income Exemption and Guidelines
The application fee and any payment required with the offer is waived if an individual (not a corporation, partnership or other entity) taxpayer’s income falls at or below IRS Low Income Guidelines. The Form 656, Offer in Compromise (page 2 Section 4) contains a Low Income Certification chart to assist you in determining whether you are eligible for the low income exemption. Qualifying taxpayers are also exempt from making any OIC payments while the offer is being investigated.
Once you have determined that you are eligible for the low income exemption, you must check the appropriate box on the Form 656, Section 4 and mail it to the IRS for consideration.
How to File an Offer in Compromise
The Form 656-B, Offer in Compromise Booklet (PDF) contains information about filing an offer in compromise and all forms necessary to file an offer in compromise.
When submitting an offer in compromise (OIC), you must use the most current version of Form 656, Offer in Compromise (PDF), or Form 656-L, Offer in Compromise (Doubt as to Liability) (PDF), depending on the basis of the OIC. You should file Form 656 when there is doubt that the liability could be collected in full through a lump sum or an installment agreement and file Form 656-L when it is believed that the tax liability is incorrect. You may not file offers concurrently claiming both that the tax liability is incorrect along with an inability to pay the liability.
How Many Forms 656 and Application Fees are Required?
The general rule when determining how many offers and application fees are necessary is “one fee and form per entity”. The Form 656-B contains information to assist you in determining the number of Forms 656 and application fees required.
A married couple owing the same joint income tax liability may file only one Form 656 listing the joint liability. One fee of $150 should be attached to the Form 656. A married couple opting to file separate offers to compromise the same joint liability may do so, but two $150 application fees will be required.
When a married couple owes a joint liability and one spouse also owes an individual (non-joint) liability, two OICs and two application fees are needed.
A divorced, separated or married couple living apart may still file one From 656 listing their joint liability and pay only one $150 fee as long as all the taxes owed are joint liabilities. Taxpayers in these situations that opt to file separate offers must pay a $150 application fee for each offer that is submitted for consideration.
Note: These examples assume that you do not meet one of the exceptions for paying the application fee: the OIC is filed under doubt as to liability or you meet the Low Income guidelines outlined on Form 656, page 2 Section 4.
Keys to Success in the Offer in Compromise Program:
1. Explore all collection options before submitting an offer in compromise
2. Complete the checklist located in the Form 656-B, Offer in Compromise Booklet, page 23.
3. Submit all required documentation
4. Complete all items on Form 656, Offer in Compromise
5. Include all required fees and payments
6. Be current with all filing and paying requirements (estimated taxes and federal tax deposits) and remain current
7. Respond promptly to all requests for additional information
8. Complete all items on Form 433-A (OIC) and/or Form 433-B(OIC).
Where to File Form 656
Residents of: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin or Wyoming:
Memphis Internal Revenue Service
Center COIC Unit
PO Box 30803 AMC
Memphis, TN 38130-0804
Residents of: Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, West Virginia, or have a foreign address:
Brookhaven Internal Revenue Service
Center COIC Unit
PO Box 9007
Holtsville, NY 11742-9007
Where to File Form 656-L (Doubt as to Liability)
Brookhaven Internal Revenue Service
PO Box 9008
Holtsville, NY 11742-9008
In addition to accessing the Form 656 and Form 656-L online, you may obtain the forms by calling the IRS toll free number (800) 829-3676 or by visiting your local IRS office.
Our firm provides nationwide tax help and offer in compromise tax solutions, we offer a free confidential consultation at 1-877-788-2937.
We provide OIC-offer in compromise tax services in all 50 states including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.