WHAT YOU NEED TO KNOW
What is an Offer?
An Offer in Compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a fresh start. The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay.
Submitting an application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay.
This booklet will lead you through a series of steps to help you calculate an appropriate offer based on your assets, income, expenses, and future earning potential. The application requires you to describe your financial situation in detail, so before you begin, make sure you have the necessary information and documentation.
Are You Eligible?
Before your offer can be considered, you must (1) file all tax returns you are legally required to file, (2) have received a bill for at least one tax debt included on your offer, (3) make all required estimated tax payments for the current year, and (4) make all required federal tax deposits for the current quarter if you are a business owner with employees. Your offer will be immediately returned without consideration if you have not filed all tax returns you are legally required to file.
Note: If it is determined you have not filed all tax returns, any initial payment sent with your offer will be applied to your tax debt and your offer will be returned along with your application fee. You cannot appeal this decision.
Bankruptcy, Open Audit or Innocent Spouse Claim:
If you or your business is currently in an open bankruptcy proceeding, you are not eligible to apply for an offer. Any resolution of your outstanding tax debts generally must take place within the context of your bankruptcy proceeding.
If you are not sure of your bankruptcy status, contact the Centralized Insolvency Operation at 1-800-973-0424. Be prepared to provide your bankruptcy case number and/or Taxpayer Identification Number.
If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.
For any additional questions see www.irs.gov. Offer in Compromise FAQs.
Can You Pay in Full?
Generally, the IRS will not accept an offer if you can pay your tax debt in full or through an installment agreement and/or equity in assets.
Note: Adjustments or exclusions, such as allowance of $1,000 to a bank balance or $3,450 against the value of a car, are only applied after it is determined that you cannot pay your tax debt in full.
Your Future Tax Refunds:
The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2018 and you file your 2018 Form 1040 on April 15, 2019 showing a refund, IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer.
Doubt as to Liability:
If you have a legitimate doubt that you owe part or all of the tax debt, complete and submit a Form 656-L, Offer in Compromise (Doubt as to Liability). The Form 656-L is not included as part of this package. To request a Form 656-L, visit www. irs.gov or a local IRS office or call toll-free 1-800-TAX-FORM (1-800-829-3676).
Note: Do not submit both a Doubt as to Liability offer and an offer under
Doubt as to Collectibility or Effective Tax Administration at the same time. Any doubt you owe part or all of the tax debt must be resolved before sending in an offer based on your ability to pay.
Notice of Federal Tax Lien:
A lien is a legal claim against all your current and future property. When you don’t pay your first bill for taxes due, a lien is created by law and attaches to your property. A Notice of Federal Tax Lien (NFTL) provides public notice to creditors and is filed to establish priority of the IRS claim versus the claims of other creditors. The IRS may file a NFTL while your offer is being considered. You may be entitled to file an appeal under the Collection Appeal Program (CAP) before this occurs.
Note: A Notice of Federal Tax Lien (NFTL) will not be filed on any individual shared responsibility payment under the Affordable Care Act.
Trust Fund Taxes:
If your business owes trust fund taxes, responsible individuals may be held liable for the trust fund portion of the tax. Trust fund taxes are the money withheld from an employee's wages, such as income tax, Social Security, and Medicare taxes. You are not eligible for consideration of an offer unless the trust fund portion of the tax is paid or the Trust Fund Recovery Penalty determination(s) has/have been made on all potentially responsible individual(s). However, if you are submitting the offer as a victim of payroll service provider fraud or failure, the trust fund assessment discussed above is not required prior to submitting the offer.
Your Rights as a Taxpayer:
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. Explore your rights and our obligations to protect them. For more information on your rights as a taxpayer, go to http://www.irs.gov/ Taxpayer-Bill-of-Rights.
Other Important Facts:
Penalties and interest will continue to accrue during consideration of your offer.
After you file your offer, you must continue to timely file and pay all required tax returns, estimated tax payments, and federal tax payments. Failure to meet your filing and payment responsibilities during consideration of your offer will result in your offer being returned. If your offer is accepted, you must continue to stay current with all tax filing and payment obligations through the fifth year after your offer is accepted (including any extensions).
Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.
An offer cannot be accepted for processing if the IRS has referred your case, or cases, involving all of the liabilities identified in the offer to the Department of Justice (DOJ). In addition, the IRS cannot compromise any restitution amount ordered by a court or a tax debt that has been reduced to judgment.
The law requires the IRS to make certain information from accepted offers available for public inspection and review. These public inspection files are located in designated IRS Area Offices.
The IRS may levy your assets up to the time the IRS official signs and acknowledges your offer as pending. In addition, the IRS may keep any proceeds received from the levy. If your assets are levied after your offer is submitted and pending evaluation, immediately contact the IRS person whose name and phone number are listed on the levy.
If you currently have an approved installment agreement, you will not be required to make your installment agreement payments while your offer is being considered. If your offer is not accepted and you have not incurred any additional tax debt, your installment agreement with the IRS will be reinstated with no additional fee.
PAYING FOR YOUR OFFER
Application Fee: Offers require a $186 application fee.
Exception: If you are an individual and meet the Low-Income Certification guidelines, you are not required to send any money with your offer. You are considered an individual if you are seeking compromise of a liability for which you are personally responsible, including any liability you incurred as a sole proprietor or any Form 941 liability incurred prior to January 1, 2009 as a disregarded single member LLC.
Payment Options: You must select a payment option and include the payment with your offer. The amount of the initial payment and subsequent payments will depend on the total amount of your offer and which of the following payment options you choose:
Lump Sum Cash: This option requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in 5 or fewer payments within 5 or fewer months of the date your offer is accepted.
Periodic Payment: This option requires the first payment to be paid with the offer and the remaining balance paid in monthly payments within 6 to 24 months, in accordance with your proposed offer terms.
Note: Under this option, you must continue to make monthly payments while the IRS is evaluating your offer. Failure to make these payments will cause your offer to be returned. There is no appeal. Total payments must equal the total offer amount.
Exception: If you are an individual and meet the Low-Income Certification guidelines, you will not be required to send the initial payment or make the required monthly payments while your offer is being considered.
Generally, payments made on an offer will not be returned. You, however, may make a deposit, as described in Form 656, Section 5. Deposits may be returned. If your offer is accepted, your payments made during the offer process, including any money designated as a deposit, will be applied to your offer amount.
If you do not have sufficient cash to pay for your offer, you may need to consider borrowing money from a bank, friends, and/or family. Other options may include borrowing against or selling other assets.
Note: You may not pay your offer amount with an expected or current tax refund, money already paid, funds attached by any collection action, or anticipated benefits from a capital or net operating loss. If you are planning to use your retirement savings from an IRA or 401k plan, you may have future tax debt as a result. Contact the IRS or your tax advisor before taking this action.
HOW TO APPLY:
Application Process
The application must include:
• Form 656, Offer in Compromise
• Completed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable
• Completed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable
• $186 application fee, unless you meet Low-Income Certification
• Initial offer payment, unless you meet Low-Income Certification
Note: Your offer(s) cannot be considered without the completed and signed Collection Information Statement(s), Form 433-A (OIC) and/or 433-B (OIC).
If You and Your Spouse Owe Joint and Separate Tax Debts
If you and your spouse have joint tax debt(s) and you and/or your spouse are also responsible for separate tax debt(s), you will each need to send in a separate Form 656. You will complete one Form 656 for yourself listing all your joint and any separate tax debts and your spouse will complete one Form 656 listing all his or her joint tax debt(s) plus any separate tax debt(s), for a total of two Forms 656.
If you and your spouse or ex-spouse have a joint tax debt and your spouse or ex- spouse does not want to be part of the offer, you on your own may submit a Form 656 to compromise your responsibility for the joint tax debt.
Each Form 656 will require the $186 application fee and initial payment unless you are an individual and meet the Low-Income Certification guidelines. You are considered an individual if you are seeking compromise of a liability for which you are personally responsible, including any liability you incurred as a sole proprietor, or any Form 941 liability incurred prior to January 1, 2009 as a disregarded single member LLC.
If You Owe Individual and Business Tax Debt
If you have individual and business tax debt that you wish to compromise, you will need to send in two Forms 656. Complete one Form 656 for your individual tax debts and one Form 656 for your business tax debts. Each Form 656 will require the $186 application fee and initial payment.
Note: A business is defined as a corporation, partnership, or any business that is operated as other than a sole-proprietorship. An individual's share of a partnership debt will not be compromised. The partnership must submit its own offer based on the partnership's and partners' ability to pay.
If You Have Tax Debt From a Limited Liability Company (LLC)
Individuals or individuals operating as a disregarded single member LLC taxed as a sole proprietor with tax debts (including employment taxes) incurred before January 1, 2009 may be included on your individual Form 656. However, in those instances where an LLC incurred employment taxes on or after January 1, 2009 or excise taxes on or after January 1, 2008, two Forms 656 must be sent with a separate application fee and initial payment for each offer, even if the tax debts were reported under the same Tax Identification Number. One Form 656 will be for the individual tax debts while the second Form 656 will be for the LLC.