The offer in compromise is the most talked-about and most misunderstood IRS program. It is real, and some taxpayers do settle for less than they owe. But it is built for people who cannot pay, not for people who would rather pay less. Knowing the line between those two is the difference between a useful application and a lost fee.
What an offer in compromise is
According to the IRS, an offer in compromise may let you settle your tax debt for less than you owe if you cannot pay in full or if paying in full would cause financial hardship. The IRS considers your income, expenses, and the equity in your assets. If the IRS concludes that the amount you offer is the most it can reasonably expect to collect in a reasonable period, it may accept.
Who is eligible
- You generally cannot get an offer accepted if you can pay your debt in full through a payment plan or by using equity in your assets.
- You must have filed all required tax returns.
- You must have made required estimated tax payments for the current year.
- You cannot be in an open bankruptcy proceeding.
- If you are an employer, you must have made required federal tax deposits for the current quarter and the prior two quarters.
The IRS provides a Pre-Qualifier Tool to check eligibility and prepare a preliminary proposal. It is a useful first step, though it does not guarantee acceptance.
What it costs to apply
The IRS states that every application requires an application fee and an initial payment, unless the applicant meets the low-income guidelines. The IRS currently lists the application fee as $205, and says only individuals can qualify for the low-income exemption, which means businesses do not. For a lump sum offer, the IRS says to pay 20% of the offer amount with the application and the rest in five or fewer payments after acceptance. For a periodic payment offer, you make an initial payment with the application and continue payments during review. These figures can change, so confirm them on IRS.gov before you apply.
How the process works
- 1Make sure all returns are filed and current-year payments and deposits are on track.
- 2Gather financial information about income, expenses, assets, and liabilities. Businesses typically also provide business financial statements.
- 3Calculate what you can reasonably offer using the IRS's methods, and decide on lump sum or periodic payments.
- 4Submit the application. The IRS says businesses and others without an individual online account can apply with Form 656-B, and can pay through a Business Tax Account or by mail.
- 5Respond to IRS requests for more information while it evaluates your offer.
- 6If accepted, meet every term of the agreement. If rejected, you can appeal.
While your offer is pending
- Most collection activity is suspended, and the collection period is extended.
- The IRS may file a notice of federal tax lien.
- You must keep making required offer payments, but you do not need to pay an existing payment plan for the same balance.
- The IRS says that if it does not accept or reject the offer within two years of receiving it, not counting appeal time, the offer is automatically approved.
If the offer is accepted or rejected
Accepted offers require you to meet the terms listed in the offer agreement, and the IRS says liens are not released until the offer is paid in full. Some information about accepted offers becomes public. If an offer is rejected, you lose the application fee, payments are applied to your debt, and you can appeal through the IRS Independent Office of Appeals. Staying in compliance for the following years is a condition of keeping the benefit.
When an offer is a poor fit
- You can pay the full balance over time with a payment plan.
- You have significant equity in assets that could be used to pay.
- You are behind on current-year estimates or payroll deposits.
- The real issue is penalties, which may be handled through abatement. See IRS penalty abatement.
- You are looking for a shortcut without full financial disclosure.
Alternatives to compare
Before filing an offer, compare it with a payment plan, penalty relief, and a temporary hold. Our overview of small business tax debt relief explains each option, and IRS payment plans covers monthly arrangements. If your hardship is severe, see currently-not-collectible status.
Calculating an offer depends on detailed financial analysis. A poorly prepared offer can cost the application fee and delay other solutions. Consider speaking to a qualified representative before you apply.
Our IRS resolution service can assess whether an offer is realistic for your situation. To get help with your business tax situation, bring your latest notices and a summary of your finances. No outcome is guaranteed.
