Latest Facts & News Hook

  • The current acceptance rate for OICs is 36.55%, indicating that slightly over one-third of submissions are approved.
  • New digital submission options via IRS Online Account
  • Enhanced financial documentation requirements for high-income applicants
  • Increased scrutiny on asset valuation methods

Getting the IRS to accept less than you owe can feel impossible unless you know the rules and the right steps. With new IRS changes, stricter reviews, and more digital tools in 2025, the Offer in Compromise process is tougher but also more accessible if you’re prepared. 

This blog post gives you clear answers, real strategies, and the latest updates on how to get an offer in compromise approved so you can build the strongest case for settling your tax debt for less.

What Is an Offer in Compromise?

An Offer in Compromise (OIC) is a deal you can make with the IRS to settle your tax debt for less than the full amount you owe. The IRS only considers this if you truly can’t pay your full tax bill or if paying it all would create a serious financial hardship for you. In simple terms, it’s a way to clear your tax debt for a smaller amount, but only if you meet strict requirements.

What Counts as Financial Hardship?

You need to prove to the IRS that you can’t pay your full tax debt. The IRS looks at:

  • Your income and expenses
  • The value of your assets (like your home, car, or savings)
  • Your debts and liabilities
  • Any special situations, like medical issues or unemployment

If you meet these rules and can show real financial hardship, you may qualify for an Offer in Compromise. 

However, remember that the IRS will review your application closely and may request additional information before making a decision. Understanding how to get an offer in compromise approved starts with presenting a complete and truthful picture of your financial hardship.

Offer in Compromise Eligibility Requirements

To apply for an Offer in Compromise, you must meet all of these requirements:

  • You have filed all required tax returns.
  • You have made all estimated tax payments for the current year.
  • You are not in an open bankruptcy case.
  • If you own a business with employees, you have made all required federal tax deposits for the current and past two quarters.

What Documents Do You Need to Apply?

Before you apply, gather these documents to show your financial situation:

  • Form 656: The main Offer in Compromise application (one for each tax debt type).
  • Form 433-A (OIC): Collection Information Statement for individuals and self-employed.
  • Form 433-B (OIC): Collection Information Statement for businesses.
  • Proof of income: Recent pay stubs, Social Security, pension, or benefit statements.
  • Bank statements: Last three months for all accounts.
  • Proof of expenses: Bills for rent/mortgage, utilities, insurance, child care, etc.
  • Proof of assets: Car titles, mortgage statements, investment account statements.
  • Medical bills or disability records: If claiming hardship.
  • Unemployment records: If unemployed.
  • List of debts: Credit card statements, loan balances, and monthly payments.
  • Legal documents: Divorce decrees, court orders, or other relevant paperwork.
  • IRS payment voucher: If making a down payment.
  • Copy of your most recent tax return.

Mastering IRS Form 656 for Your Offer in Compromise

IRS offer in compromise form 656 is the main form you need to fill out when you want to apply for an Offer in Compromise (OIC). This form informs the IRS of your identity, the taxes you owe, and the amount you are offering to pay. It also allows you to choose how you want to pay, either in a single lump sum or through a payment plan.

Form 656 is for both individuals and businesses. You must list all the tax years or periods you want to include in your offer. The form also requests your personal information, details about your business (if applicable), and the reason for making the offer.

In short, Form 656 is your official application for an OIC. It provides the IRS with all the basic details it needs to begin reviewing your request.

Note →

There is only one main form for the Offer in Compromise, which is Form 656. You may see something called “Form 656-B,” but that’s just the name of the booklet that provides instructions and includes all the necessary forms for the application. You don’t fill out a Form 656-B itself. There is also no Form 656-A for this process. Just remember: you fill out Form 656, and you can use the 656-B booklet to help you understand and complete your application.

Section-by-Section Guide to IRS Form 656

Filling out IRS Form 656 is a key step when you want to apply for an Offer in Compromise (OIC). Here’s a simple and complete breakdown of each section, so you know exactly what to expect and what to fill out, based on the latest IRS form.

Section 1: Individual Information (Form 1040 filers)

Fill out this section if you are an individual, self-employed, or personally responsible for certain business taxes (like the Trust Fund Recovery Penalty or excise tax).

  • Enter your first name, middle initial, and last name.
  • Provide your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
  • If this is a joint offer, include your spouse’s full name and SSN or ITIN.
  • Write your home physical address (street, city, state, ZIP code, and county).
  • If your mailing address is different or you use a P.O. box, enter that as well.
  • Indicate if this is a new address since your last filed tax return, and if you want the IRS to update its records.
  • If you are a sole proprietor, you can include your Employer Identification Number (EIN).
  • List all the tax years or periods you want to include in your offer, for example, 1040 income tax years, Trust Fund Recovery Penalty periods (include business name), 941 quarterly periods, 940 annual periods, or other federal taxes (specify type and period).
  • If you need more space, you can attach a separate sheet titled “Attachment to Form 656” and make sure to sign and date it.
  • If you qualify as low income, check the Low-Income Certification box to request a waiver of the $205 application fee.
  • Don’t forget to sign and date this section before moving on.

Important Notes:

  • Only fill out Section 1 if you are applying as an individual. If you are submitting an offer for a business, skip to Section 2.
  • If you and your spouse have both joint and separate tax debts, each person must submit a separate Form 656 for their share.

This section helps the IRS know precisely who you are, what taxes you want to settle, and if you qualify for any special fee waivers. Double-check all your details to avoid delays.

Section 2: Business Information (Form 1120, 1065, etc., filers)

Fill out this section if you are submitting an offer for a business, such as a corporation, partnership, LLC, or LLP.

  • Enter the legal name of your business as it appears on IRS records.
  • Provide the Employer Identification Number (EIN) for the business.
  • Write the business address, including street, city, state, ZIP code, and county.
  • If your business mailing address differs from your physical address, include it as well.
  • Fill in the name, title, and daytime phone number of the person the IRS should contact about this offer.
  • List all the business tax periods you want to include in your offer, for example, 1120 corporate income tax years, 941 quarterly employment tax periods, 940 annual federal unemployment tax periods, or other business tax types (specify type and period).
  • If you need more space for tax periods, attach a separate sheet titled “Attachment to Form 656” and make sure to sign and date it.
  • The person authorized to sign for the business (such as an owner, officer, or partner) must sign and date this section before moving on.

Important Notes:

  • Only fill out Section 2 if you are submitting an offer for a business. If you are applying as an individual, use Section 1 instead.
  • There is no application fee waiver for businesses.

Section 3: Reason for Offer

Everyone must fill out this section, whether you are an individual or a business.

  • Check the box that matches your reason for submitting the offer:
    • Doubt as to Collectibility: You cannot pay the full amount you owe.
    • Effective Tax Administration: You can technically pay, but doing so would create an economic hardship or be unfair for other reasons.
  • If you select “Effective Tax Administration,” check whether it is due to economic hardship or other exceptional circumstances.
  • Provide a clear explanation of your situation if you select this option.

Section 4: Payment Terms

This section allows you to choose how you would like to pay your offer amount.

  • Lump Sum Cash:
    • You agree to pay your complete offer in five or fewer payments.
    • You must send 20% of your offer amount with your application.
  • Periodic Payment:
    • You will pay your offer in 6 to 24 monthly payments.
    • Send the first month’s payment with your application.
    • Continue making monthly payments while the IRS reviews your offer.
  • If you qualify for Low-Income Certification, you do not need to send an upfront payment or make monthly payments during the review.

Section 5: Designation of Payment and Electronic Federal Tax Payment System (EFTPS)

This section is for telling the IRS how to apply your payments.

  • You can choose which tax year or debt your payment should go to, or let the IRS decide.
  • If you pay electronically using EFTPS, write down the payment date and the confirmation (EFT) number.
  • Ensure that electronic payments are made on the same day you submit your application.
  • If you want to split payments between different tax periods, you can note that here.

Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements

This section covers how you will fund your offer and confirm that you meet IRS rules.

  • Indicate to the IRS the source of the funds for your offer (e.g., savings, family assistance, sale of an asset, or a loan).
  • Check the boxes to confirm you have filed all required tax returns.
  • Confirm you have made all estimated tax payments for the current year.
  • If you are a business owner, ensure that all federal tax deposits are up to date.
  • Make sure to check every box that applies to demonstrate that you meet the IRS filing and payment requirements.

Section 7: Offer Terms

This section explains the terms and conditions for your offer.

  • Read through the terms carefully.
  • This section describes your responsibilities and the IRS’s rights if your offer is accepted.
  • It explains what happens if you withdraw your offer or want to appeal a decision.
  • The IRS can contact other people to check your information.
  • You agree to stay current with all tax laws in the future if your offer is accepted.

Section 8: Signatures

You must sign and date the form after reviewing everything.

  • If you are filing jointly, your spouse must also sign and date.
  • For businesses, an authorized person (such as an owner, officer, or partner) must sign and include their title.

Section 9: Paid Preparer Use Only

This section is for someone who helped you fill out the form (like a tax professional).

  • If you used a paid preparer, they must complete and sign this section.
  • If you filled out the form yourself, skip this section.

Crafting a Winning Offer in Compromise Letter

A strong Offer in Compromise (OIC) letter is your opportunity to clearly demonstrate to the IRS why it should accept your offer. This letter is not about filling out the forms; it’s about telling your story honestly, providing proof, and making it easy for the IRS to say “yes.” 

Here’s how to craft a letter that stands out, based on official IRS guidance and real case examples:

  1. Be Clear and Direct

Start your letter by stating that you are submitting an Offer in Compromise. Clearly mention the tax years or periods you want to settle and the amount you are offering.

  1. Tell Your Story Honestly

Briefly explain why you cannot pay the full tax debt. Use simple, real-life details:

  • Mention any job loss, health problems, or other hardships.
  • Be specific, but do not exaggerate.
  1. Connect Your Situation to IRS Rules

Show that your case fits the IRS’s reasons for accepting an OIC:

  • Doubt as to Collectibility: You simply do not have enough income or assets to pay the full debt.
  • Effective Tax Administration: Paying in full would cause serious hardship, even if you technically could pay.

Mention which reason applies to you and keep your explanation short and clear.

  1. Back Up Every Claim with Proof

List the documents you are sending with your letter:

  • Pay stubs, bank statements, medical bills, unemployment records, or any other proof of hardship.
  • Make sure these match the information on your Form 433-A (OIC) or 433-B (OIC).
  1. Show You’re Serious About Compliance

Let the IRS know you are committed to following tax rules in the future; for example, add, “If my offer is accepted, I will file all future tax returns on time and pay any taxes owed.”

  1. Be Polite and Professional

End your letter by thanking the IRS for its time and offering to provide any additional information they may need, small gestures like this show cooperation and professionalism, and they can help you get closer to how to get an offer in compromise approved.

Sample Offer in Compromise Letter Template

Below is a sample offer in compromise letter to the IRS you can adapt to your situation. It follows the structure of the IRS Form 7249 (Sample) and includes replaceable fields, along with suggestions to strengthen your request:

[Your Name]
[Your Address]
[City, State ZIP]
[Social Security Number or EIN]
[Date]Internal Revenue Service
Offer in Compromise UnitSubject: Offer in Compromise for Tax Years [List Years]Dear IRS Officer,I am submitting this Offer in Compromise to settle my tax debt for the years [list tax years or periods]. I am offering $[offer amount] as a compromise amount, to be paid [in a lump sum/through monthly payments].

State your reason for the offer clearly. Choose either “Doubt as to Collectibility” or “Effective Tax Administration” and briefly explain your hardship.

Due to [brief explanation of hardship, such as job loss, medical expenses, or business downturn], I am unable to pay the full amount owed. My current financial situation, as shown in the attached Form 433-A (OIC)/433-B (OIC) and supporting documents, demonstrates that I do not have the means to pay more.

Note →
Reference the key documents you are attaching. This builds credibility and shows you are organized, as shown below.

I have included the following documents to support my offer:

  • Recent pay stubs and/or income statements
  • Bank statements for the past three months
  • Proof of monthly expenses (rent, utilities, insurance)
  • Medical bills and/or unemployment records (if applicable)
  • Any other relevant documents

Show willingness to comply in the future. This reassures the IRS you won’t fall behind again.

If my offer is accepted, I am committed to filing all future tax returns on time and paying any taxes owed.

Thank you for considering my offer. If you need more information or documents, I am happy to provide them.

Sincerely,
[Your Name]
[Signature, if mailing a paper letter]

Negotiation Tactics to Strengthen Your Letter

  • Be truthful and specific: Use real numbers and facts from your forms and documents.
  • Stay concise: The IRS appreciates clear, direct communication.
  • Match your story to your paperwork: Make sure everything in your letter lines up with the details in your Form 656 and Form 433-A/B (OIC).
  • Highlight special circumstances: If you have unique hardships (disability, dependent care, etc.), mention them and attach proof.

Calculating Your Reasonable Collection Potential (RCP)

The IRS uses something called “Reasonable Collection Potential” (RCP) to figure out if your Offer in Compromise is fair. RCP is the total amount the IRS thinks it can collect from you, based on your assets and your income after covering basic living expenses. Your offer must be at least as much as your RCP, or the IRS will likely reject it.

How the IRS Calculates RCP?

Here’s the simple formula the IRS uses:

RCP = Value of Your Assets + (Monthly Allowable Expenses) × Months
  • Value of Your Assets: This means what your house, car, bank accounts, and other things you own are worth (after subtracting any loans).
  • Monthly Income: All the money you bring in each month.
  • Allowable Expenses: The IRS has strict rules about what counts as a “necessary” expense (see below).
  • Months: Use 12 months if you’re offering to pay in 5 months or less (lump sum). Use 24 months if you want to pay over 6–24 months (payment plan).

Tip: You can use the IRS Offer in Compromise Pre-Qualifier Tool to estimate your RCP and see if you might qualify.

Allowable Expense Standards for 2025

The IRS only lets you count certain expenses as “allowable” when figuring out your RCP. These are based on national and local standards and are updated every year.

National Standards

Family Size Food, Housekeeping, Apparel, Personal Care, Misc. (per month)
1 $839
2 $1,481
3 $1,753
4 $2,129
Each add’l +$394

Local Standards

  • Housing & Utilities: Varies by county and state. The IRS provides a chart for your area.
  • Transportation: Varies by region. For example, car ownership is about $662/month for one car.
  • Health Care: $84/month per person under 65, $149/month per person 65 and older.

Exceptions

If you have special circumstances, like high medical bills or living in a high-cost city, you can claim more, but you must provide proof (like bills or doctor’s letters).

Strategic Offer Amount Formulation

One of the key parts of how to get an offer in compromise approved is submitting an offer that the IRS considers fair. That means using the RCP formula and being realistic:

    1. Figure Out Your Asset Value: Add up what you own and subtract any loans.
    2. Calculate Your Disposable Income: Subtract allowable expenses from your monthly income.
  • Pick Your Payment Plan:
    • Lump sum: Multiply disposable income by 12.
    • Payment plan: Multiply disposable income by 24.
  1. Add It Up: Your offer = Asset value + (Disposable income × months).

Tip: If you can’t afford the minimum offer, explain your special situation in detail and attach proof. The IRS may accept less if you show real hardship.

The OIC Submission Process: Step-by-Step

Submitting your Offer in Compromise (OIC) is the final step after you’ve gathered your documents and filled out all the necessary forms. Here’s how to move forward:

Step 1: Review Your Completed Forms and Documents

As covered in theWhat Documents Do You Need to Apply?” section, make sure you have completed all required forms (like Form 656 and Form 433-A/B (OIC)) and gathered every supporting document listed. Double-check that everything is accurate, signed, and up to date.

Step 2: Assemble Your Application Package

Assemble your forms and documents in the order suggested in the blog above. Make sure your name and SSN/EIN are included on every page, as previously advised, to prevent any information from being lost.

Step 3: Choose Your Submission Method

You can submit your OIC package by mail or online:

  • By Mail: Send your application to the IRS address listed in the Form 656 Booklet for your state. Using certified mail or a tracking service is a good idea.
  • Online: If you are an individual, you can now apply and upload your documents through your IRS Online Account.

Step 4: Include the Required Fees and Initial Payment

As explained in the “Fee Structures and Payment Options” section above:

  • Most applicants must include a $205 application fee (unless you qualify for the low-income waiver).
  • For a lump-sum offer, include 20% of your total offer amount.
  • For a periodic payment plan, include your first monthly payment.
  • If you qualify for the low-income waiver, you do not need to send any payments with your application.

Tip: If mailing, send separate checks for the application fee and the initial payment, or pay electronically and note your payment details on the form.

Step 5: Track Your Submission and Respond to IRS Requests

After submitting, keep copies of everything for your records. The IRS will send you a letter confirming receipt of your package and may request additional information if needed. Respond quickly to any IRS requests to avoid delays.

IRS Negotiation Tactics and Case Management

Getting your Offer in Compromise (OIC) approved often means working with the IRS through negotiations, requests for more information, and sometimes counteroffers. Here are practical strategies to help you respond effectively and keep your case moving forward.

Common IRS Counteroffer Scenarios

The IRS may not always accept your first offer. Here’s how to handle common negotiation points:

  1. Asset Valuations: The IRS might value your home, car, or other assets higher than you do. If this happens, provide recent appraisals, photos, or repair estimates to support your lower value. For vehicles, show mileage and condition reports. For homes, include local sales comparisons or evidence of needed repairs.
  2. Expense Allowances: If the IRS disallows some of your claimed expenses, point to the IRS’s own allowable expense standards and provide receipts, bills, or contracts. For special situations (like high medical bills), attach clear proof and a short explanation.
  3. Offer Amount: If the IRS suggests a higher settlement, review their calculations. If you disagree, politely explain your reasoning and provide updated documents if your situation has changed.

Post-Submission Timeline: What to Expect

After you send your Offer in Compromise, here’s what usually happens:

  1. Initial Check (2–4 weeks): The IRS looks to see if your forms and documents are complete. If anything is missing, they’ll send it back.
  2. Assigned to Examiner: If your package is complete, an IRS examiner will be assigned to your case and may contact you for more information.
  3. Review Period (6–12 months): The IRS reviews your financial details, checks your documents, and determines if additional proof is needed. Most cases take approximately 6–12 months, but some may be faster or slower.
  4. Decision: The IRS will send you a letter with their decision. If your offer is accepted, you’ll follow the payment plan you chose. If rejected, you can appeal within 30 days.

During the process:

  • The IRS usually stops collection actions, but interest still adds up.
  • You don’t have to make payments on any old payment plans while your OIC is being reviewed.

Tracking Your Application Status

  • IRS Online Account: Log in to your IRS Online Account to check for updates or upload documents if asked.
  • IRS Phone Lines: Call 800-829-1040 (individuals) or 800-829-4933 (businesses) to ask about your OIC status. Have your info ready.
  • Mail Notices: Watch for letters from the IRS about your OIC. Reply quickly if they ask for more information.

If you need in-person help, call 844-545-5640 to make an appointment at your local IRS office.

When Everything Is in Place, You’re Ready

If you’ve followed all the steps above, gathered every document, filled out the forms correctly, and explained your situation honestly, you’ve done everything the IRS asks for. With your application complete and organized, your chances of getting approved are as strong as they can be. Stay patient, respond quickly to any IRS requests, and remember, being thorough and truthful is the best way to move forward.

Top 5 Reasons for OIC Rejection and Fixes

Here are the most common reasons the IRS rejects an Offer in Compromise and how you can fix them:

  1. Offer Amount Is Too Low

The IRS thinks you can pay more based on your assets and income.

Fix: Use the IRS formula for Reasonable Collection Potential and offer at least that amount.

  1. Missing or Incomplete Documents

If you forget to include forms, bank statements, or proof of expenses, your offer can be denied.

Fix: Double-check your checklist and ensure you have sent all required documents.

  1. Not Filing All Tax Returns or Not Paying Estimated Taxes

If you haven’t filed all your tax returns or kept up with estimated payments, the IRS will reject your offer.

Fix: File all missing returns and make any required payments before you apply.

  1. Hiding Income or Assets

If the IRS determines that you have left out income or assets, they will deny your offer and may even conduct an audit.

Fix: Be honest and list everything you own and earn.

  1. You Can Afford a Payment Plan

If the IRS decides you can pay your debt in full over time, they won’t accept your offer.

Fix: Only apply if you truly cannot pay the full amount, even through a payment plan.

Keep in mind that if your offer is rejected, read the IRS letter carefully. Fix the problem, gather any missing documents, and you can submit a new offer or appeal within 30 days.

Give Yourself the Best Chance at Getting Approved

Figuring out how to get an Offer in Compromise approved can make a big difference, but it’s not simple. The IRS approves only about 36% of applications each year, and the chances are even lower if you apply on your own. Working with an experienced tax professional can significantly improve your odds.

Still, not all services are trustworthy. Some companies promise to “settle your tax debt for pennies on the dollar” without doing any real financial review. In a well-known blog post named “What Do Offers In Compromise And Aluminum Siding Have In Common?,” Offer in compromise tax attorney Anthony Verni draws a comparison between these practices and the aluminum siding scams of the 1980s, aggressive sales tactics with little substance. The IRS has even listed these schemes in its annual “Dirty Dozen” tax scams.

That’s why every Offer in Compromise we prepare is built on complete financial analysis, honest guidance, and a deep understanding of IRS rules so you get the best possible chance of getting approved without false hope, shortcuts, or partial reviews.

If you’re serious about resolving your tax debt the right way, contact us today to get started.

FAQs

Q1: What is the lowest offer the IRS will accept? 

A: The IRS usually won’t accept less than what they think they can collect from you, based on your income, expenses, and assets. This is called your Reasonable Collection Potential (RCP). In some cases, if you have special financial hardships, they may accept a lower amount.

Q2: Can I include payroll taxes in an OIC?

A: Yes, but only certain types. If you own a business, you can include payroll taxes in your Offer in Compromise. But trust fund taxes (like withheld income and Social Security taxes from employees) are usually not eligible.

Q3: How long does an approved OIC stay on my record?

A: An accepted OIC becomes public record for one year. It also stays in the IRS system, but it doesn’t go on your credit report. You must stay compliant with tax rules for the next five years, or your offer may be revoked.

Q4: Will an OIC stop wage garnishment immediately?

A: In most cases, yes. When you submit a valid OIC, the IRS usually pauses wage garnishments and other collection actions while they review your offer.

Q5: Can I negotiate payment terms after OIC acceptance?

A: No, once your OIC is accepted, you must follow the agreed payment terms. If you miss payments or don’t follow tax rules for five years, the IRS can cancel the agreement.

After many years, I decided to watch Tin Men again. It is a 1987 movie starring Danny DeVito and Richard Dreyfuss, both of whom are aluminum siding salesman in Baltimore in the late sixties.  They run  multiple scams, including “Life Magazine” and “This Job is Free,” as a means of  ripping off unsuspecting homeowners.  In the end, the Home Improvement Commission revokes each actor’s license to sell aluminum siding.

Just as with aluminum siding, Offers in Compromise (“OIC’s”) have been used to scam unsuspecting individuals out of their hard earned money.  Many Tax Resolution Companies (“TRC’s”) use aggressive sales and deceptive trade practices to convince taxpayers into parting with their hard earned money. TRC’s have recently drawn the attention of the Internal Revenue Service and are now included in the IRS “Dirty Dozen” scams.

These TRC’s use radio and television advertisements as well as print media to reach customers.  The Companies routinely promise taxpayers that their tax woes can go away for pennies on the dollar. To reinforce this claim TRC’s often cite prior success stories with such claims as: “We resolved a $342,000 federal tax debt for $750.00 for one of our client’s.” In addition, the slick advertisements often claim that the TRC has attorneys, CPA’s and enrolled agents on its staff. More often than not, these claims are grossly exaggerated, and in some cases, outright lies.

The TRC’s often use sales people, many of whom never completed a 1040 in their life, much less an OIC. The sales associate is provided with a script and sales pitch.  The initial call generally culminates in the sales associate telling the prospective client that their debt can be settled for pennies on the dollar. In cases where the prospective client demonstrates a reluctance to move forward a TRC will sometimes bring in a “closer.”

Following the sale pitch, the unsuspecting consumer is asked to sign an engagement letter and pony up either the entire fee or a large deposit with a commitment to pay the balance at some future date.  As an inducement, some TRC’s will even offer monthly payment plans requiring either a credit card or ACH authorizations.

The foregoing all takes place without any financial analysis  having taking place, without regard to the remaining time on the statute of limitation for collections, and without regard to the taxpayer’s prior history, if any, with the IRS.

The above practices create false hope and unrealistic expectations on the part of those who take the bait.  While some TLC’s are ethical and provide an honest assessment of the Taxpayer’s chances for success for acceptance of an OIC, many do not.

The typical follow up by the TRC will include securing transcripts on behalf of the client and then barraging the client with document requests and questions.  After receiving the information from the client, the client is then informed that they no do not qualify for an OIC or in that they have failed to comply with the terms of the engagement letter. In more egregious cases, the TRC simply does nothing and keeps the client’s money.

In either case, the client has not only lost whatever money he or she paid the TRC, but is also still saddled with the tax debt.

An understanding of the mechanics and the rules related to an OIC is necessary before considering an OIC.

Currently, there are three types of Offers in Compromise including Doubt as to Collectability (“DATC”), Doubt as to Liability (“DATL”) and Effective Tax Administration (“ETA”). The discussion below is limited to DATC cases, since DATC OIC’s represent the overwhelming majority of cases submitted. The other two are taken up in separate blog posts.

An OIC based upon DATC occurs when a taxpayer does not have the financial ability to pay the full amount of the tax liability. In these cases, the taxpayer’s assets and income are insufficient to liquidate than the full amount of the liability.

The OIC procedures permit a taxpayer to settle his or her unpaid taxes for an amount which is less than the face amount of the tax, penalties and interest.  This form of settlement should be distinguished from an installment agreement, which requires the taxpayer to pay the full amount owed in installments over a time period or a partial pay installment agreement, both of which are discussed in separate blog posts.

OIC’s have been in existence since 1992 and are authorized under 26 U.S.C. § 7122 (a). However, it has been reported that the acceptance rates for OIC’s has declined since 2014 and is now estimated at somewhere between thirty and thirty five percent (See National Taxpayer Advocate, Erin M. Collins, “2022 Annual Report to Congress.” At Figure 1.2.6 “Offers in Compromise, Installment Agreements, and the Que, FY’s 2019-2022 (2023).

The IRS Policy on Offers in Compromise, which was approved on January 30, 1992 and is memorialized in its Policy Statement states in relevant part:

“The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government” (See I.R.S.  Policy Statement P-5-100).

The Policy Statement, however, makes clear that Offers in Compromise will be carefully scrutinized:

“The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.”

Treas. Reg. Section 301.7122-1(c)(1) provides that the IRS is tasked with determining whether the taxpayer has the ability to pay.  The Regulations further provide that in DATC cases the IRS will permit the taxpayer to retain “sufficient funds to pay basic living expenses”  Treas. Reg. Section 301.7122-1(c)(2).

The IRS decision to accept or reject a DATC OIC is based upon the concept of reasonable collection potential (“RCP”).  The Internal Revenue Manual  Section 5.8.5.1.6 defines RCP as “the amount that can be collected from all available means, including administrative and judicial collection remedies.”

In calculating the RCP the IRS will consider:

  1. The amount collectible from the taxpayer’s net realizable equity in his or her assets. (quick sale value of the taxpayer’s asset less any liens that are senior to the IRS);
  2. The taxpayer’s expected future income after taking into account necessary living expenses;
  3. The amount collectible from any third party; and
  4. The taxpayer’s income or assets that are available to the taxpayer but beyond the reach of the IRS.

Additionally, the taxpayer’s history with the IRS may have an impact on his or her chances for success. In particular, the IRS may consider an OIC from a habitually delinquent taxpayer as a dilatory tactic or an attempt to impede or defeat any collection efforts on the part of the IRS.

In consideration of the Government accepting less than the face amount of tax, penalties and interest, the taxpayers must file his or her tax returns and also must remain compliant with the U.S. Tax Laws for five years following the acceptance of the OIC.

There are occasions where special circumstances exist when submitting a DATC OIC, which justify a deviation from the strict OIC rules.   In these instances, the Taxpayer cannot fully satisfy the tax liability even though assets exist, which, if liquidated, could satisfy the debt in its entirety.  These special circumstances include, but are not limited to, the liquidation of a pension by an elderly taxpayer, which would impair his or her ability to meet monthly living expenses or the sale of a home which would require the taxpayer to rent a dwelling.

The foregoing circumstances may also be used to submit an ETA OIC on the basis of economic hardship. The taxpayer bears the burden when submitting an ETA OIC of demonstrating compelling circumstances exist, that accepting the ATA OIC does not undermine public confidence and that acceptance of the offer is justified even though it would represent a divergence in the policy applied to similarly situated taxpayers.

In situations, where an OIC is not an option, there are other alternatives a taxpayer can consider including an installment agreement, partial pay installment agreement or being placed in uncollectible status.

A decision to submit an OIC should only be made after careful consideration and evaluation of all the facts. Any such decision should also include the advice of a competent and experienced tax advisor and complete financial and personal inventory.  When considering an OIC it is best to use the services of a tax attorney.  While there are reputable TRC’s out there, you are taking a chance that the $2,500 or $3,500 you spend with a TRC will be money wasted.

When assessing your potential for acceptance of an OIC, it is important to carefully review your particular situation, since each case is fact sensitive. Failure to properly evaluate your current and future financial situation will almost always result in an OIC being rejected. Additional factors that need to be considered are your age and health, your employment and marital status, the existence of other secured and unsecured creditors, your current and future earning potential as well as the remaining time under the statute of limitations for collection of the outstanding taxes.

From the many horror stories I have heard and read about, many TRC’s do not undertake the proper analysis prior to signing up a taxpayer.   They are simply doing “Life Magazine.”

How to Make an Appeal to the IRS: What You Need To Know

irs appeals are made at their headquarters. The Internal Revenue Service in washington d.c.Tax cases fall into two categories: 

First, where there is no dispute over the amount of tax that is due, the only remaining question is how the taxpayer will satisfy the outstanding liability. The taxpayer can pay the amount in full, enter into an Installment Agreement or submit an Offer in Compromise. Where the taxpayer is suffering from financial hardship, it may be possible to be placed in uncollectible status.

The second type of tax case involves a dispute between the IRS and the taxpayer. A taxpayer, with the assistance of an attorney, should consider each of the various methods for resolving a tax dispute and select the method that makes most sense. The Appeals process is one such method for handling disputes with the IRS, but by no means the exclusive method. The following is a brief discussion of the Appeals process and the basic rules of engagement.

The IRS Office of Appeals (“Appeals”) is tasked with the responsibility of resolving tax controversies without recourse to litigation. The Appeals Mission Statement provides that resolution of tax disputes should be fair and impartial both to the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. I.R.M.8.1.1.1 (1) (10/23/07).

The cornerstone for the preservation of the integrity in the Appeals process is independence. In this regard, Congress reaffirmed its commitment to “ensure an independent appeals function” within the IRS.  RRA’98 § 1001(a) (4). In order to avoid undue influence or even the appearance of impropriety, exparte communications between Appeals and other IRS employees are prohibited.

IRS Appeals hear taxpayer disputes in a number of ways and may conduct a hearing at one of its campuses or field offices in person. Appeals may also hear taxpayer disputes by way of correspondence or telephonically.

Jurisdiction for Appeals is very broad and may cover a variety of matters, including deficiency determinations, collections, penalty abatements and trust fund recover penalties.  Taxpayer disputes are segregated into docketed and non-docketed cases.

An Appeal is typically generated in response to a proposed audit or examination adjustment. After the examiner completes the audit or consideration of a refund request, the taxpayer will be given the opportunity to file a protest with Appeals. Typically, Exam will issue what is known as a 30 day letter,”unless the statute of limitations has less than nine months to go until expiration. In such cases, Exam will not issue a 30 day letter since Appeals will not accept a case with less than six months left on the statute of limitations.  When faced with the expiration of the statute of limitations, however, it is not uncommon for Appeals to solicit Form 872 from the taxpayer as a means of extending the statute.

In most cases, the taxpayer will need to file a formal written protest with Appeals. Smaller cases involving $25,000 or less may be subject to a small case request process that does not require a formal protest letter.

In cases where there is less than nine months left on the statute of limitations and the taxpayer refuses to sign an extension of the statute of limitations (Form 872), Exam will issue a Notice of Deficiency, which is sometimes referred to as a”90 day Letter.” The issuance of a 90 day letter will toll the statute of limitations. In addition, the filing of a tax court petition with the U.S. Tax court will further toll the statute of limitations until 150 days after the Tax Court Decision is final.

If the taxpayer wants to contest a revenue agent’s proposed adjustments, the taxpayer can:

  1. File a protest, resulting in a non-docketed Appeals case;
  2. Pay the proposed deficiency, file a claim for refund and, if that claim is denied, file a protest at that time;
  3. Request early referral under Rev. Proc. 99-28;
  4. File a Tax Court petition in response to a statutory Notice of Deficiency (90 day letter) and go to Appeals in docketed status; or
  5. Request Fast Track (Rev. Proc. 2003-40 for LB&I taxpayers and Announcement 2006-61 for SB/SE taxpayers).

The protest letter is filed with the examining agent within 30 days of receipt of the 30 day letter.  If the taxpayer needs additional time, an extension may be granted, but any request by the taxpayer should be made in writing.  In response to the taxpayer’s protest letter, the Agent will prepare a written response. The Agent will send both the protest letter and the Agent’s response, together with the case file to Appeals.

Thereafter, Appeals will contact the taxpayer to schedule a conference, generally within 60-90 days of the taxpayer’s filing of the protest letter.

In preparation for the Appeals conference, the taxpayer should be prepared to discuss the factual disputes, applicable law, and any additional research or the facts that need to be developed.

Following the initial conference, Appeals will expect the taxpayer to make the first settlement offer.  In developing a settlement offer the taxpayer needs to be realistic. He must determine the maximum concession he is willing to make, while at the same time gauging what Appeals would likely accept. If the taxpayer is sincerely interested in settling, the offer has to be reasonable.

Appeals will attempt to bring about a settlement based upon what the probable outcome would be if the parties were to litigate. In cases where there is substantial uncertainty as to how a court would decide the matter, the parties will be expected to make concessions to reflect the strength or weakness of each position. In some cases, the parties will agree on a split issue settlement, where the parties stipulate to a percentage or dollar amount of the adjustment or the tax that is due.

There are certain instances where filing an Appeal may not be advisable, particularly where there are sensitive issues and where there is a possibility that Appeal may uncover additional issues.

If the parties are unable to successfully negotiate a settlement, the taxpayer, in non-docketed cases, has the option of going to non-binding mediation, as an additional step in which to try and settle the case. It is important to note that mediation is not an available alternative in collection cases or in cases where the taxpayer did not act in good faith.

In addition to non-binding mediation, a taxpayer may elect to arbitrate following unsuccessful Appeals negotiations. The arbitrators are selected from an approved list of arbitrators. Unlike mediation, an arbitration decision is binding and considered final.

The takeaway here is that the Appeals process is one alternative available to the taxpayer as a means of resolving a tax dispute. It is by no means, however, the exclusive method for addressing a tax dispute. A decision to file an Appeal should only be made after thoughtful consideration and discussions with an experienced tax attorney for purposes of identifying the relevant and material facts of the case, assessing the taxpayer’s strengths and weaknesses, and developing an Appeal’s strategy designed to bring about the best possible outcome.

trust fund recovery penaltyMany business owners believe that operating as a Corporation protects them from personal liability.

While oftentimes this is true, if a corporation does not pay income tax withholding and withheld Social Security, the IRS can and will pursue the collection of those taxes from the corporation’s officers, directors, stockholders, key employees.

The IRS does this though the Trust Fund Recovery Penalty.

The Trust Fund Recovery Penalty, also known as the 100% penalty because one hundred percent of the withheld income tax and Social Security tax can be assessed against a responsible officer, employee, director or stockholder, is authorized under section 6672 of the Internal Revenue Code. The penalty applies The code provides that any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Who is Liable?

The IRS will usually seek collection of unpaid trust fund taxes from the corporate officers, directors or stockholders of the corporate entity. Those individuals will most likely meet the two requirements of section 6672 – “willfulness” and “responsibility.”

The IRS must determine:

  1. Determining whether the person was a responsible person within the meaning of §6671(b) and
  2. Whether the person’s failures to collect, account for, and pay over the trust fund taxes was “willful” as defined by the courts.

Before the IRS can proceed with asserting the Trust Fund Recovery Penalty, they must determine who is a “reasonable” officer, employee, director or stockholder.  The definition of a reasonable person is very broad.  There are no tax regulations that define the term “responsible person.” Courts have defined the term to mean any of the following:

  • Officer or Employee of a Corporation
  • Partner or employee of a partnership
  • Corporate Director or shareholder
  • Another corporation
  • Employee of a sole proprietorship
  • Surety lender
  • Any person with sufficient status, duty and authority to avoid the default on payment.
  • Any person with ultimate authority over expenditure of funds

Most frequently the courts have held that the responsible person for TFRP purposes is the one  e one with the ability to sign checks on behalf of the corporation, or to prevent a check’s issuance or to control the disbursement of payments. Godfrey v. U.S., 748 F2d 1568 (1984); Kalb v. U.S., 505 F2d 506 (1974); Gold v. U.S., 671 F2d 492 (1981); Calderone v. U.S., 799 F2d 254 (1986).

The reasonable person must have also acted willfully to fail to collect, account for and pay over the trust fund taxes as defined by the courts. Again there is no single definition of willful in the IRC.  The courts have defined the term through their decisions as the voluntary, conscious and intentional act of preferring other creditors over the United States.

An easy solution to the 100% penalty is an Offer in Compromise. Usually, the tax liability is so large; taxpayers cannot afford to pay it. Offers are accepted to reduce tax liability, even the 100% penalty where there is doubt as to liability or doubt as to ability to pay the tax liability.  Please see a legal tax professional with any questions or concerns you may have. It is always best to approach IRS issues with the advice and guidance of a tax professional.