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IRS Tax Settlement Through Offer In Compromise

The IRS may compromise the taxpayer’s back tax liability in most civil or criminal cases before referral to the Department of Justice for prosecution or defense. The Attorney General or a delegate may compromise any tax case after the referral. However, the IRS may not compromise certain criminal liabilities arising under internal revenue laws relating to narcotics, opium, or marijuana. Interest and penalties, as well as tax, may be compromised (Code Sec. 7122; Reg. §301.7122-1). IRS Offers-in-compromise are submitted on Form 656 accompanied by a financial statement on Form 433-A for an individual taxpayer or Form 433-B for a business taxpayer (if based on inability to pay) (Reg. §601.203(b)). A taxpayer who faces severe or unusual economic hardship may also apply for an offer-in-compromise by submitting Form 656. If the IRS accepts an offer-in-compromise, the payment is allocated among tax, penalties, and interest as stated in the collateral agreement with the IRS. If no allocation is specified in the agreement and the amounts paid exceed the total tax and penalties owed, the payments will be applied to tax, penalties, and interest, in that order, beginning with the earliest year. If the IRS agrees to an amount that does not exceed the combined tax and penalties, and there is no agreement regarding allocation of the payment, no amount will be allocated to interest.


A $150 user fee is required for many offers-in-compromise (Reg. §300.3). Taxpayers must normally pay the user fee at the time a request to compromise is submitted. No user fee is imposed with respect to offers:

(1) that are based solely on doubt as to liability, or
(2) that are made by low-income taxpayers (i.e., taxpayers whose total monthly income falls at or below income levels based on the U.S. Department of Health and Human Services poverty guidelines).

If an offer is accepted to promote effective tax administration or is accepted based on doubt as to collectability and a determination that collecting more than the amount offered would create economic hardship, the fee will be applied to the amount of the offer or, upon the taxpayer’s request, refunded to the taxpayer. The fee will not be refunded if an offer is withdrawn, rejected or returned as non-processible. The IRS treats offers received by taxpayers in bankruptcy as non-processible, even though two district courts have held that the IRS must consider such offers (R.H. Macher, DC Va., 2004-1 ustc ¶50,114 (Nonacq.); W.K. Holmes, DC Ga., 2005-1 ustc ¶50,230). However, one district court and one bankruptcy court have held in favor of the IRS on this issue (1900 M Restaurant Associates, Inc., DC D.C., 2005-1 ustc ¶50,116; W. Uzialko, BC-DC Pa., 2006-1 ustc¶50,297).

The IRS has issued detailed procedures for the submission and processing of offers-in-compromise (Rev. Proc. 2003-71).

Partial Payment Requirement. Taxpayers are required to make nonrefundable partial payments with the submission of any offer-in-compromise (Code Sec. 7122(c)). Taxpayers who submit a lump-sum offer (any offer that will be paid in five or fewer installments) must include a payment of 20 percent of the amount offered. Taxpayers who submit a periodic payment offer must include payment of the first proposed installment with the offer and continue making payments under the terms proposed while the offer is being evaluated. Offers that are submitted to the IRS without the required partial payments will be returned to the taxpayer as non-processible. However, the IRS is authorized to issue regulations waiving the payment requirement for offers based solely on doubt as to liability or filed by low income taxpayers. Pending the issuance of regulations, the IRS has announced that it will waive the payment requirement for such offers (Notice 2006-68).

The required partial payments are applied to the taxpayer’s unpaid liability and are not refundable. However, taxpayers may specify the liability to which they want their payments applied. Additionally, the user fee (see above) is applied to the taxpayer’s outstanding tax liability. Any offer that is not rejected within 24 months of the date it is submitted is deemed to be accepted by the IRS. However, any period during which the tax liability to be compromised is in dispute in any judicial proceeding is not taken into account in determining the expiration of the 24-month period (Code Sec. 7122(f)).


Call us at 877-788-2937 for a confidential free consultation.

We negotiate tax settlements through offer-in-compromise 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.

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