How to Get an Offer in Compromise Approved in 10 Steps
However, the IRS rejects more offers than it accepts. According to a report by the IRS Taxpayer Advocate Service, the IRS accepts approximately 44% of offers in compromise submitted on behalf of individuals and rejects 56%.
That said, there are some things you can do to increase your odds of getting an offer in compromise approved.
Here’s how to get an offer in compromise approved, step by step.
Offers in Compromise Are Not Guaranteed
Offers in compromise are never guaranteed to be accepted by the IRS, and you should run — don’t walk! — from any company that immediately starts selling you on settling your tax debt for “pennies on the dollar” without first doing a full investigation and analysis of your situation.
And although nothing is guaranteed, following the steps provided in this article can maximize your chances of your offer in compromise being accepted by the government.
Table of Contents
1. Make sure you meet the basic requirements.
Before the IRS will even look at your offer in compromise to either accept it or reject it, they will first check to make sure that you have met the three preliminary requirements:
- You must have filed all of your tax returns for the past six years to the extent required. This means that you may have to file some back tax returns if you’ve gotten behind on your filing requirements.
- You must be current on your estimated taxes or withholding for the current tax year.
- You must not currently be in bankruptcy.
So make sure you meet these requirements before submitting your offer in compromise.
2. Make sure you’re submitting the right kind of offer in compromise.
There are three different kinds of offers in compromise, and it’s important that you submit the right one.
The first kind of offer in compromise is the doubt as to collectibility offer in compromise.
With this kind of offer in compromise, you’re making a case to the IRS that — based on your current financial situation — you cannot afford to pay what you owe them.
This is the most common kind of offer in compromise submitted.
The kind of offer in compromise is submitted using Form 656 and Form 433-A (OIC).
The second kind of offer in compromise is the doubt as to liability offer in compromise.
With this kind of offer in compromise, you’re making a case to the IRS that you don’t actually owe what they think you owe them.
This kind of offer in compromise is submitted using Form 656-L.
The third kind of offer is the effective tax administration offer in compromise.
With this kind of offer in compromise, you’re making a case to the IRS that even though you can pay what you owe them, you shouldn’t have to on grounds of public policy, equity, and/or economic hardship.
This kind of offer in compromise is submitted using Form 656 and Form 433-A (OIC).
3. Time your offer smart.
There are several timing issues that come into play when maximizing your odds of your offer in compromise being accepted.
Example #1: Consider waiting until after the three-year dissipated asset lookback has passed.
For example, something the IRS carefully considers when reviewing offers in compromise is whether or not the taxpayer has “dissipated” any assets in the three years preceding the submission of the offer in compromise.
If you know how the offer in compromise math works, you know that there are two components to a taxpayer’s offer amount: the income component and the asset component.
Naturally, some taxpayers think it’s cute for them to transfer an asset or two — such as real estate — to someone else (usually a close family member) in order to reduce the asset component of their offer in compromise calculation.
Other examples of dissipated assets from the IRS’s perspective are selling some stock to pay for a vacation or refinancing your home to pay for your child’s wedding.
So if you’ve done anything that might not pass the dissipated asset “sniff test” of an IRS offer examiner, consider waiting to submit your offer until three years have passed from the potential dissipation event.
Example #2: Consider waiting until closer to your CSED if you are showing positive income on your Form 433-A (OIC).
The Form 433-A (OIC) — discussed in the next step — is the form you use to calculate your offer in compromise amount to the IRS.
If you show positive income on the Form 433-A (OIC), the IRS may argue that you could simply pay that amount to them every month in an installment agreement until your tax debt falls off due to the CSED(s).
This is the case even if the “offer math” makes sense according to the Form 433-A (OIC). We’ve seen this happen time and time again — the IRS offer examiner will simply say that it is not in the best interest of the government to accept the taxpayer’s offer in compromise and that the only resolution they will accept is an installment agreement in the amount of their positive monthly income as calculated for installment agreement purposes.
What's a CSED?
CSED stands for collection statute expiration date. It is the date on which the IRS can no longer collect on a particular tax debt.
Typically, the CSED for a given tax is 10 years after it is assessed, but it can be extended either by taxpayer agreement or by various tolling events.
4. Do the Form 433-A (OIC) carefully.
Many taxpayers who submit their own offer in compromise make the mistake of filling out the Form 433-A (OIC) like they would fill out a mortgage application.
But the IRS actually has special rules pertaining to how to calculate the amounts you use on the Form 433-A (OIC).
If you don’t follow these rules, the IRS may reject your offer in compromise, and if you don’t know how to use these rules to your advantage, your offer may be accepted — but it may be too high, meaning you left thousands of dollars on the table.
For an in-depth look at what those rules are, read my article on how much to offer in compromise to the IRS.
5. Make financial moves to make yourself a better candidate.
Now, you may work through the Form 433-A (OIC) and conclude that you aren’t a very strong offer in compromise candidate or that the offer in compromise you qualify for is too high.
In this case, there may be some things you can do to make yourself a better offer in compromise candidate and simultaneously put yourself in a better financial situation.
There are countless examples of such strategies, but one thing you can do is use any excess cash you have to pay down loans on assets that don’t have equity for offer in compromise purposes anyway.
Let’s say you have $10,000 in the bank, and your monthly living expenses are $4,000 per month. You also get an exclusion of $1,000 of cash in the bank, per the Internal Revenue Manual. In this case, your usable cash for offer in compromise purposes is $5,000; you would have to include this amount in your offer amount.
However, let’s say that you have a car that’s worth $20,000 and you owe $18,000 on it. For offer in compromise purposes, you have no includable equity for offer in compromise purposes for this vehicle, and that’s because you get to multiply the fair market value by 80%, which gets you to $16,000, and from that you can subtract the loan balance of $18,000, which gets you to negative $2,000, and from that you can subtract $3,450 — which is just an amount the IRS gives you; it’s right on the Form 433-A (OIC) — which gets you to negative $5,450.
Now, you can’t report negative assets on your Form 433-A (OIC); it doesn’t work that way; as is, you’d just report this vehicle as having no equity for offer in compromise purposes.
However, because we did that math there, we know that you could pay down this vehicle by up to $5,450, and you could still report zero equity in it for offer in compromise purposes.
So you have $10,000 in the bank; of that, $5,000 is applicable to your offer in compromise; why not take that $5,000 and instead of giving it to the IRS as part of your offer in compromise, why not put it toward your car loan?
If you did that, let’s do the math. You now have zero in includable cash for offer in compromise purposes, and you now have a car that is worth $20,000 that you owe $13,000 on. So let’s do the vehicle math.
$20,000 times 80% is $16,000. Subtract the $13,000 loan, and you get $3,000, which gets zeroed out by the $3,450 exclusion the IRS gives you for your vehicle.
So that’s just one example of how you can make money moves to make you a better offer in compromise candidate and in fact reduce your offer in compromise amount.
6. Understand the Form 656.
While Form 433-A (OIC) is used to calculate your offer in compromise amount, Form 656 is the actual contract between you and the government to settle your tax debt.
It is vitally important that you read and understand the Form 656 just like you would any other contract.
For example, here are some things stated in Form 656 that catch some taxpayers off guard because they simply didn’t read the form itself:
- Unless you designate how you want your offer in compromise payments applied by tax year, the IRS will apply them in the best interest of the government — which usually means they will apply it to the oldest year first because the oldest year generally has the closest CSED. This will generally only matter if your offer in compromise is rejected, but it’s still important to keep in mind.
- If a taxpayer accidentally pays the IRS more than the accepted offer in compromise amount, the IRS will not return that money but will apply it to the taxpayer’s debt.
- The IRS has the right to contact third parties in the consideration of the offer in compromise.
7. Include all required documentation and payments.
Be sure to submit a complete offer package to the IRS. This includes:
- Signed Form 433-A (OIC)
- Signed Form 656
- A complete copy of any tax return filed within the 12-week period before you are submitting your offer
- Copies of your most recent pay stubs
- Copies of your most investment and retirement accounts
- Copies of three months’ worth of personal bank statements
- Copies of six months’ worth of business bank statements
- Copies of any statements from lenders
- Copies of court orders proving the amount of child support or alimony payments claimed in your offer
- A check or money order made payable to “United States Treasury” for your initial offer in compromise payment unless you qualify for low-income certification
- A separate check or money order made payable to “United States Treasury” for your $205 application fee unless you qualify for low-income certification
8. Mail your offer to the right place.
There are two IRS facilities that process offers in compromise — one in Memphis, Tennessee and the other in Holtsville, New York — and the one you send it to depends on where you live.
The table below shows you the exact address where you should submit your offer in compromise application package.
|If You Live In:||Mail Your OIC To:|
|AZ, CA, CO, HI, ID, KY, MS, NM, NV, OK, OR, TN, TX, UT, WA||Memphis IRS Center COIC Unit|
P.O. Box 30803, AMC
Memphis, TN 38130-0803
|AK, AL, AR, CT, DC, DE, FL, GA, IA, IL, IN, KS, LA, MA, MD, ME, MI, MN, MO, MT, NC, ND, NE, NH, NJ, NY, OH, PA, PR, RI, SC, SD, VA, VT, WI, WV, WY, or a foreign country||Brookhaven IRS Center COIC Unit|
P.O. Box 9007
Holtsville, NY 11742-9007
9. Reply promptly to the IRS.
After you submit your offer in compromise, you will have to wait some time — currently, between 7-12 months — before the IRS will review your offer.
However, once the IRS reviews your offer, chances are good that they will have some questions for you about it.
It’s vitally important that you respond to IRS inquiries accurately and timely.
If you truly qualify for an offer in compromise, and you’ve submitted in correctly, and you comply with the IRS’s requests in consideration fo your offer, chances are very good that your offer in compromise will be accepted!
After your offer in compromise is accepted by the IRS, you still have obligations to meet.
If you do not meet these obligations, your offer in compromise will default, and you will owe all the taxes again — less, of course, the amounts you paid to the IRS during the offer in compromise process (which they will keep).
These obligations are, for the five years following your offer acceptance:
- Filing all required tax returns timely
- Paying all estimated tax payments timely
- Paying in your full tax balance timely by its original due date
10. Consider hiring a tax professional.
Obviously, as the owner of a tax relief company, I have an interest in helping taxpayers file their offers in compromise since that’s my business.
But I’m not just saying this in self-interest; every week we talk to taxpayers who tried to submit an offer in compromise to the IRS, only to have it rejected after months of waiting.
If you’d like to book a call with Choice Tax Relief to discuss your tax situation, call 866-8000-TAX.