An Offer In Compromise is a way to settle your debt with the IRS. It is not based on “pennies on the dollar” or a percentage of your tax debt, contrary to what many advertisements state. It is purely based on your financial information. This guide covers filing an Offer In Compromise for personal taxes and business taxes that were personally assessed against you (ie: Payroll taxes). We also have a California FTB Offer In Compromise guide, New York State Offer In Compromise Guide and a Michigan Offer In Compromise guide. Soon we will be adding a California FTB settlement guide as well.
See our How Long Will An Offer In Compromise Take section if you want to see how long it will be. See our guide on getting your Offer In Compromise accepted for a basic rundown of the process. You may also want to view our rundown of the IRS Offer In Compromise formula before you start this, to see if you have a decent chance.
Here is a video rundown of the guide:
Update March 31, 2016: This may effect the filing of your Offer In Compromise. The IRS has lowered its Collection Financial Standards in many categories.
Update 6/4/2018: IRS forms updated to 2018 versions.
Considerations Before Proceeding On An Offer In Compromise
- You have more assets than the amount owed. In most cases this disqualifies you. There have been some exceptions to this. For example, we had a client who owned and lived in a home in Mexico he was unable to sell, but technically was worth more than the tax debt. The IRS still accepted an Offer In Compromise for $2000. The IRS does not have to accept it and this case had to be appealed to win. We tell our clients the possibilities when we proceed on their case, so just understand results in cases where there are assets are not always the same.
- You owe due to dissipated assets. These are assets that are sold and the funds are not used for payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or during a period of up to six months prior to or after the tax assessment. If it has been over three years since the asset was dissipated, it should not be used against you. Example: You cashed out a 401(K) early in 2016 and you bought a fancy car, but did not pay taxes on it. Now in 2018 you are trying to file an OIC to get out of it, the IRS will reject it. There are some exceptions and you should contact a tax attorney if you are uncertain.
- Current tax payments are behind. If you are still not withholding enough from your paycheck at a wage earning job the IRS may return your offer. Make sure you are taking the right amount out of your paycheck. Self employed individuals need to keep up on estimated tax payments. See our estimated tax payments guide for more info.
- Tax debts are expiring soon. Tax debts eventually expire. They call it the Collection Statute Expiration Date, or CSED. The IRS has ten year to collect from the date the tax is assessed in most cases. Filing an Offer In Compromise extends that time period. If a debt is expiring soon you might be better off letting it expire rather than extend the time. This can be a tough call, as with an accepted OIC you can usually get an IRS lien withdrawal. If prior years already and expired and liens were filed together, you might not get the withdrawal anyway. Currently Non Collectable status or a small payment plan might be your best option if your case is in collections.
- You are going to file bankruptcy. Bankruptcy is not your best option if you only owe tax debt or tax debt is the most significant debt you have. It can get you out of older personal income tax debt, but an Offer In Compromise is much better if you only have tax debt. Bankruptcy will not get you out of payroll debt, certain penalties, and debts where you created fraud or evaded taxes. There are other rules on this as well. But, if you have a lot of other debt and in the process of bankruptcy, see what it wipes out first before you go on with Offer In Compromise. The IRS will not proceed on collections while your bankruptcy is pending. See our post on Bankruptcy vs Offer In Compromise for more info.
The expiration date and Offer In Compromise timing can be hard to navigate. Seek the help of a qualified tax debt attorney if you get lost.
Proceeding On Your Offer In Compromise
1) Call the IRS and find out which tax returns are required to be completed. Sometimes they will require you to file earlier years, sometimes not. If they have already filed returns for you for older years, and you qualify for an Offer In Compromise, there is often no need to do the old returns unless your Offer gets rejected. This video explains why you should not always file unfiled tax returns. Send in all the tax returns the IRS is requiring before you send in your Offer.
2) Punch your income and expense figures into the IRS Offer in Compromise Calculator here: http://irs.treasury.gov/oic_pre_qualifier/. The calculator is not always right, but a good guide to see if you are totally off.
3) Download the IRS Form 656 and IRS Form 433-A(OIC). These are the parts of the IRS 656 Booklet that contains the needed forms for a personal Offer In Compromise. The IRS Form 433-B(OIC) is only needed if you have a corporation, partnership, or LLC. Fill it in on your computer, out of the browser, so it saves properly.
3) Fill out the Form 433-A(OIC) Form. See our IRS Form 433-A(OIC) Guide for details on how to fill out the IRS 433-A(OIC) Form and the best things to put in it.
4) Fill out the Form 656. See our IRS Form 656 Guide for details on how to fill out the IRS 656 Form and the best things to put in it.
5) Get all the information that is relevant to you on the 433-A(OIC) Checklist, which is on the page that you sign on that form and also listed at the bottom of our 433-A (OIC) Guide.
6) Do not fill out Form 433-B(OIC), unless you own an LLC or Corporation. This guide covers individual Offers In Compromise. We will soon offer a guide on business Offer In Compromise. It is strongly recommended to have a tax attorney help for business Offers in compromise.
6) Keep up on taxes for the current tax year. This means having your withholding set to the correct amount. If you are self employed, keep up on estimated tax payments. We recommend to pay monthly while your Offer is pending.. If you owe when you file, you have to pay in full as well.
The IRS is much more strict on estimated tax payments now for submitted settlements than it was in the early 2010s. If not current with estimated payments the IRS will send a letter back to you regarding it. They will want you to become current or prove that you now can pay less estimated tax payment than before. If you are making less than you did as of your last tax return you should submit a profit/loss statement showing your more recent income.
7) Make a copy of your entire packet that you are sending out.
8) Mail your application, down payment check, processing fee of $186 and supporting documents by certified mail with return receipt. Use paperclips and not staples. The IRS hates staples.
Addresses to mail it to:
9) If your Offer is accepted, file on time, make estimated tax payments, and pay any balance due in full for the next five years.
10) File for an IRS Lien Withdrawal. See our guide on how to get an IRS Lien Withdrawal. This works in most cases. When a lien was filed that contains both tax years included in the Offer In Compromise and tax years that expired to the Collection Statute Expiration date.
11) If you got your tax debt settled, let us know and leave a comment below!
The forms can be a bit confusing, but if followed line by line they can be completed. If you find it difficult to complete or not worth your time trying to figure it out, give us a call at (888) 515-4TAX, and have our tax lawyers do it for you!
This page does not constitute legal advice nor an attorney-client relationship. Proceed at your own risk.