Ads promising to settle IRS debt for "pennies on the dollar" are everywhere. The real program behind those ads, the Offer in Compromise, does exist, but the IRS accepts offers only when the numbers support them. Here is how it actually works.
1. What an Offer in Compromise is
An Offer in Compromise is an agreement with the IRS to settle a tax debt for less than the full amount owed. The IRS can accept an offer when there is doubt the full amount can ever be collected, when there is doubt the tax is actually owed, or, in limited cases, when collecting the full amount would create economic hardship or be unfair.
2. How the IRS decides what to accept
For most offers, the IRS calculates your "reasonable collection potential": the equity in your assets plus what it expects it could collect from your future income after allowable living expenses. An offer generally needs to equal or exceed that figure. The IRS uses its own expense standards, which may be lower than what you actually spend.
3. Basic eligibility
Before the IRS will consider an offer, you generally must have filed all required tax returns, made any required estimated payments for the current year, and not be in an open bankruptcy proceeding. Business owners with employees must also be current on payroll tax deposits.
4. Filing the offer
Offers are submitted on IRS Form 656 with detailed financial statements and supporting documents. An application fee and an initial payment are generally required unless you qualify for the low-income waiver. With a lump-sum offer, the initial payment is 20% of the amount offered; with a periodic payment offer, you make monthly payments while the IRS reviews it.
5. While the offer is pending
The IRS generally does not levy while an offer is under review, but interest continues to accrue, and the time the IRS has to collect is extended while the offer is pending. The IRS may also file a federal tax lien. Reviews often take many months, and the IRS will usually ask for additional information.
6. If the offer is accepted or rejected
If the offer is accepted, you must pay the agreed amount and stay in compliance with filing and payment obligations for five years, or the IRS may reinstate the original debt. If the offer is rejected, you can generally appeal the decision to the IRS Independent Office of Appeals within 30 days.
Before you submit an offer
- Use the IRS Offer in Compromise Pre-Qualifier tool on irs.gov to see whether an offer is realistic.
- Be wary of companies that promise a settlement amount before reviewing your finances.
- Make sure all required returns are filed first.
- Disclose all assets and income accurately; the IRS verifies the information.
- Consider whether an installment agreement or other option fits your situation better.
Get help from someone who has seen it from the inside
As a former IRS Appeals Officer and IRS attorney, Bernie McCarthy has seen how the IRS evaluates offers from the inside. He can review whether an offer makes sense for you and prepare it for submission. Learn more about our offers in compromise services.
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This article provides general information, not legal advice for your situation.