Tax problems / Offer in compromise
Offers in compromise.
An offer in compromise lets the IRS accept less than the full balance. It is a genuine program with a defined test, and for the right taxpayer it is transformative. It is also the most oversold product in the tax industry, because the test is arithmetic and most people who are sold an offer do not pass it. The honest first step is running the numbers.
The test
How the IRS decides
Reasonable collection potential is the whole question
The IRS compares what you offer against what it believes it could collect: the net realizable equity in everything you own, plus a multiple of your monthly income after allowable expenses. If that figure exceeds the balance, the offer is rejected regardless of circumstances. If it is well below the balance, the offer is usually accepted.
Allowable expenses are standardized, not actual
Housing, utilities, food, clothing, transportation, and out-of-pocket health costs are measured against national and local standards, not against what you actually spend. Private school tuition, credit card minimums, and generous car payments are typically disallowed. This is where most self-prepared offers fail: the taxpayer’s real budget and the IRS’s allowable budget are different documents.
The multiple depends on how you pay
A lump sum offer, payable in five or fewer installments, uses a smaller multiple of monthly disposable income than a periodic payment offer paid over the remaining collection period. A lump sum offer is usually the lower total number, if the cash can be raised.
There are three grounds, and one of them dominates
Doubt as to collectibility covers nearly all accepted offers. Doubt as to liability applies where the tax itself is wrong and is usually better handled through examination or appeals channels. Effective tax administration is narrow, for cases where collection is possible but would be inequitable, typically involving serious illness or exceptional hardship.
You have to be compliant to be considered
All required returns must be filed, current-year estimated payments or federal deposits must be up to date, and they must stay that way. An offer submitted with unfiled years is returned rather than considered. See unfiled tax returns.
How the process runs
From assessment to acceptance.
- Model itCalculate reasonable collection potential against the balance.
- Get compliantFile everything outstanding and set current-year payments correctly.
- Prepare the packageForm 656 plus the collection information statement and full documentation.
- Work the reviewRespond to the examiner, and appeal a rejection where the numbers support it.
Practical realities
What to expect
It takes months, and the clock stops while it does
Review commonly runs many months. While the offer is pending, the collection statute is suspended, levy action generally pauses, and the IRS may still file a lien. An offer that is not rejected within 24 months of submission is deemed accepted by statute, which is a genuine protection though not a strategy.
There is an application fee and an initial payment
An application fee and a nonrefundable initial payment accompany the offer, with both waived for taxpayers who certify as low income under the published guidelines. Payments made with the offer are applied to the balance if the offer is rejected, not returned.
Acceptance comes with five years of strings
An accepted offer requires filing and paying on time for the next five years. A default reinstates the full original liability, less payments made, with penalties and interest. Refunds for the year the offer is accepted are generally kept by the IRS.
Most people are better served by something else
If the collection potential exceeds the balance, the practical routes are an installment agreement, currently-not-collectible status where paying anything would create hardship, or penalty relief that reduces the balance directly. Those work for far more people than offers do. See installment agreements and penalty abatement.
Be skeptical of settlement advertising
The IRS publishes its acceptance figures, and they do not resemble the claims in radio advertising. A firm that quotes a settlement amount before reviewing your assets, income, and expenses is quoting a fee, not an outcome.
This page is general information about how the rules work, not tax or legal advice for a specific situation. Facts change outcomes. Talk with the firm before acting on anything here.
Questions
Common questions
Can I really settle for pennies on the dollar?
Sometimes, and only when the arithmetic supports it. Taxpayers with little equity, modest income relative to allowable expenses, and a large balance can settle for a small fraction. Taxpayers with home equity, retirement accounts, or meaningful disposable income generally cannot, whatever an advertisement suggests.
Does home equity count even though I need somewhere to live?
Yes, equity in a primary residence is included in collection potential, at a discounted quick-sale value rather than market value. It is one of the most common reasons an otherwise sympathetic offer fails.
Do retirement accounts count?
Generally yes, at their value net of tax and any early withdrawal penalty, and in some circumstances as an income stream instead. The treatment depends on whether you can access the funds and whether they are already being drawn.
What happens if my offer is rejected?
You can appeal within 30 days, and appeals succeed often enough to be worth pursuing where the disagreement is about valuation or allowable expenses. If the rejection stands, collection resumes and the usual alternatives remain available. Payments already made stay applied to the balance.
Will an offer stop a wage levy?
A pending offer generally suspends new levy action, and existing levies are often released on submission, though release is not automatic. If a levy is in place, that is addressed directly rather than left to the offer process.
Run the numbers before anyone takes a fee.
We will calculate your collection potential honestly and tell you whether an offer is viable. If it is not, there are other routes, and we will say so rather than sell you the application.