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How to Determine Whether you Qualify for an Offer in Compromise?

Application Fee

Processing Your OIC

Offer Determinations


General

What is an Offer in Compromise?

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service ( IRS ) that resolves the taxpayer's tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise for one of the following reasons:

NOTE: Unless the taxpayer files an OIC claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.

(REVISED 8/2004) What are the requirements for an OIC?

In order to be considered for an OIC, a taxpayer must meet all of the following requirements:

Taxpayers must comply with all federal tax filing and paying requirements for a period of five years following acceptance of their OIC, or until the OIC is paid in full, whichever is longer. This also includes making required estimated tax payments and federal tax deposits.

(REVISED 8/2004) How do I complete an OIC?

First obtain a Form 656, Offer in Compromise package (Version 7/2004). The package includes information and instructions for completing the form, as well as a worksheet that can be used to calculate an amount to offer. Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses (Version 5/2001), are included in the Form 656 package and may need to be completed as well depending upon each individual situation. Taxpayers will need to review and include amounts for items such as housing and utilities from the Collection Financial Standards, and Necessary Expenses, to complete their collection information statement(s).

NOTE: For corporations and partnerships, Form 433-A may be requested from corporate officers and individual partners.

When does a Form 433, Collection Information Statement, need to be completed?

Collection Information Statement(s) are required for doubt as to collectibility and effective tax administration OICs, and doubt as to liability involving Trust Fund Recovery Penalty assessments.

Are the forms available on-line?

Yes. The forms needed to complete an OIC are available on-line. Also, forms may be obtained by calling 1-800-829-3676 or by visiting a local IRS office.

(REVISED 8/2004) What forms are submitted to request an effective tax administration OIC?

To receive consideration on this basis, a taxpayer must submit:

If a taxpayer requests consideration on the basis of effective tax administration, the IRS must first establish that no doubt as to liability and no doubt as to collectibility conditions exist. Hence, an OIC filed under effective tax administration can only be considered once the IRS determines that the tax liability is correct and collectible in full.

Once the IRS begins the process of processing the OIC under the effective tax administration guidelines, it will consider such issues as the taxpayer's overall history of filing and paying taxes, as well as the overall impact on voluntary compliance.

I qualify for an installment agreement, can I still submit an OIC?

If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an OIC. If an OIC is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an OIC under the effective tax administration provision.

The IRS recently levied my bank account. Will the levy proceeds be returned if I file an offer in compromise?

The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OIC was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an OIC, but which were not received at the time the OIC was submitted. Refer to OIC Contractual Terms, Item (f).

Can I stop sending payments as part of my approved installment agreement once I file an offer in compromise?

No. Installment agreement payments must be continued while the OIC is being considered. Installment agreement payments will not be applied against the amount you offered. Refer to OIC Contractual Terms, Item (f).

Can taxes be settled by offering pennies on the dollar?

OICs must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt. A consumer alert has been issued advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar." The IRS cautions that the OIC program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying taxes.

Can I file an offer in compromise to delay collection action?

Once it is determined an OIC was filed solely to hinder and/or delay collection actions, the IRS will return the OIC without any further consideration. Taxpayers will not be afforded the right to appeal this decision.


Application Fee

What is an offer in compromise user or application fee?
Federal agencies are authorized to establish charges for services provided by the agency, called "user fees." The U.S. Office of Management and Budget encourages agencies to implement these fees to recover the cost of providing special services to some recipients that others do not use. Accordingly, the IRS has established a user fee that will recover part of the cost of processing and reviewing offer in compromise requests. The IRS has chosen to call it an "application fee" because the fee is required when an OIC application is submitted for consideration.

How much is the application fee and when does it begin?
The application fee for submitting an OIC is $150 and will be required on all offers that are postmarked November 1, 2003 , and thereafter.

Who will have to pay this application fee?

All taxpayers who submit a Form 656, "Offer in Compromise," postmarked November 1, 2003 , and thereafter, must pay the $150 fee, except in two instances:

What method of payment does the IRS accept?

A check or money order made payable to the United States Treasury.

Can I send cash as payment for the application fee?

No. Taxpayers must send a check or money order for $150 made payable to the United States Treasury.

Can I send one check to cover both the application fee and OIC amount?

No. Taxpayers must initially pay the application fee. After the IRS accepts the offer, the IRS will notify the taxpayer to promptly pay any unpaid amounts that become due under the terms of the offer agreement.

Can a tax practitioner who represents a number of clients and files multiple OICs combine several application fees into one check?

No. Checks that combine application fees for several offers will not be accepted, and the offers will be returned. Each Form 656 must have a separate check attached.

What happens if I submit an application fee and find that I have insufficient funds in my account to cover the check?

If we receive notification of insufficient funds, the IRS will immediately stop processing the Form 656 and the OIC will be returned to the taxpayer without any further consideration.

Will payment of the application fee reduce the OIC amount?

The application fee is in addition to the amount listed on Form 656, Item 7. However, when the IRS determines the acceptable amount of an OIC based on doubt as to collectibility, it considers the value of all of the taxpayer's assets. Because some of the taxpayer's assets were used to pay the OIC application fee, payment of the fee will reduce the acceptable amount of the OIC. The taxpayer therefore pays no more for an OIC with the fee than the taxpayer would have paid without the fee.

Will the application fee create an additional financial hardship on taxpayers who are already having payment problems?

Because payment of the fee reduces the acceptable OIC amount, most taxpayers will not experience any additional financial hardship as a result of the fee. However, for some taxpayers the $150 fee may exceed their ability to pay. The IRS believes that the exception to the fee for taxpayers whose income is at or below poverty will protect such taxpayers. The IRS intends to monitor this issue and adjust the amount of the exception if it appears there are a number of taxpayers who cannot pay even the amount of the fee for an OIC.

(REVISED 8/2004) What does the IRS review when I submit my OIC, Form 656?

The IRS first reviews an OIC to see if it is "processable." Processable is the term the IRS applies to those OICs that have met certain criteria. An OIC is processable if the taxpayer:

What happens to my fee if the OIC is not considered processable?

The application fee will be returned to the taxpayer if the OIC is determined not to be processable.

(REVISED 8/2004) Why does the IRS require the July 2004 version of Form 656, “Offer in Compromise” package?

The July 2004 version of the Form 656 package was redesigned in order to assist taxpayers in the correct preparation of an OIC application, as well as reduce the burden associated with the process. The package contains the offer in compromise, instructions, Forms 433-A and 433-B, and a worksheet to help calculate the offer amount. A new addition is a processability checklist that helps taxpayers determine if they meet the eligibility requirements to submit an offer. The forms prompt taxpayers to attach necessary financial documents needed in the processing of the offer.

(REVISED 8/2004) How do I know if I qualify for the income exception?

The IRS developed an “Offer in Compromise Application Fee Worksheet” found in the Form 656 package to assist taxpayers in determining whether they qualify for the income exception. If they determine that they qualify, taxpayers must complete Form 656-A “Income Certification for Offer in Compromise Application Fee,” and attach it along with the worksheet to the Form 656 at the time of submission.

(REVISED 8/2004) What do I need to do if the OIC Application Fee Worksheet shows that I qualify for the income exception?

Taxpayers must sign and date Form 656-A, "Income Certification for Offer in Compromise Application Fee." If a taxpayer is submitting a joint OIC with a spouse, the spouse must also sign the certification. The Income Certification must be attached to Form 656. It is recommended that the Application Fee Worksheet also be submitted.

What happens if I submit the Form 656-A and the IRS later says I made an error and do not qualify for the poverty guideline exception?

The IRS will return the OIC to the taxpayer without any further processing.

Does the poverty guideline exception apply to businesses?

No. The exception for taxpayers with total monthly incomes falling at or below income levels based on DHSS poverty guidelines only applies to individuals. It does not apply to other entities, such as corporations or partnerships.

What happens if I do not submit the OIC application fee with the OIC Form 656?

Unless the taxpayer has submitted an OIC under the doubt as to liability provision, or attached Form 656-A, showing a poverty guideline certification, the IRS will return the Form 656 as not processable.

How is the application fee collected?

The application fee is collected when a taxpayer submits a Form 656. The general rule is that the IRS needs as many Forms 656 as there are entities seeking to compromise. A check or money order in the amount of $150 must be attached to each OIC.

[NOTE: This assumes that the taxpayer does not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

How many Forms 656 must I complete if my spouse and I are submitting one offer to compromise the same joint liability? How many application fees must be attached?

A married couple owing the same joint income tax liability may file only one Form 656 listing the joint liability. One fee of $150 should be attached to Form 656. A married couple opting to file separate offers to compromise the same joint liability may do so, but two $150 fees will be required.

[NOTE: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

How many Forms 656 should be filed when the taxpayers are divorced, separated, or/married, but living apart? How many fees must be attached in these situations?

A divorced, separated, or married couple living apart may still file one Form 656 listing their joint liability and pay only one $150 fee, as long as all the taxes owed are joint liabilities. Taxpayers in these situations that opt to file separate offers must pay a $150 application fee for each offer that is submitted for consideration.

[NOTE: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

When a married couple owes a joint liability and one spouse also owes an individual (non-joint) liability, how many Forms 656 are required?

Two OICs are needed. One for the joint liability and another one for the individual (non-joint) liability. A check or money order for $150 should accompany each Form 656.

[NOTE: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

How many Forms 656 are required from a married couple who owe joint income tax, plus the husband owes an individual year before he was married and a business liability, and the wife owes an individual year with her prior spouse? How many application fees will be required?

In keeping with the “one fee per entity” rule:

It does not matter that the joint liability will appear on both offers.

[NOTE: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

How many Forms 656 are required if you have an individual who owes tax and who also owes a partnership debt as a general partner or corporate debt from a closely held corporation? How much would the application fee be?

In this situation, two Forms 656 will be required. One for the individual liability, and the other for the partnership or corporate liability. A check or money order for $150 must be attached to each offer, for a total of $300. The IRS cannot combine individual tax on an offer application with taxes owed by a partnership or corporation.

[NOTE: This assumes that the taxpayers do not meet one of the exceptions for paying the application fee: 1) OIC filed solely under doubt as to liability, or 2) total monthly income falls at or below income levels based on the DHSS poverty guideline levels.]

What will happen if the IRS accepts an OIC for processing, along with the $150 application fee, but then requests additional Forms 656 be submitted with additional $150 fees, and the taxpayer fails to respond?

Taxpayers are required to submit one fee for each Form 656 taken in for processing. Failure to submit additional Form 656 with the corresponding $150 application fee when requested, will cause the IRS to return the offer without any further consideration. The $150 application fee will be retained.

What happens to the Form 656 and application fee after I send it to the IRS ?

The $150 is retained until the IRS determines whether the Form 656 is processable.

Are there any instances when the application fee will be applied against the amount of the offer or refunded to me after the OIC has been accepted for processing?

Yes. The fee will be applied against the amount of the offer or, if the taxpayer requests, returned to the taxpayer if:

  1. If the IRS accepts an OIC based on effective tax administration ( ETA ).
  2. If the IRS accepts an OIC based on a determination of doubt as to collectibility with special circumstances.
What if my OIC is not accepted, will the application fee be refunded to me?

No. The IRS will retain the fee when:

  1. The taxpayer's initial OIC amount is too low - based on the IRS evaluation of the taxpayer's financial condition - and the taxpayer is given the opportunity to increase it. If the taxpayer does not increase the OIC amount, or show special circumstances, the IRS will reject the Form 656;
  2. The taxpayer fails to submit additional financial documents to assist in the IRS review. If the taxpayer fails to respond, and/or submit the requested information, the OIC will be returned without further consideration; or
  3. The taxpayer chooses to withdraw the Form 656.
Where can I find more information on the OIC application fee?

For additional information, see the OIC application fee final regulations and Form 656-A, "Income Certification for Offer in Compromise Application Fee."


Processing Your OIC

What happens if an OIC is submitted using the wrong forms?

The Form 656 and/or Forms 433 "Collection Information Statements" are necessary to conduct an offer investigation. Failure to submit these documents will cause considerable delay in the process. Taxpayers wanting to pursue the OIC as a way to satisfy their tax liability will have to submit the forms in order to have the OIC reconsidered.

Will the submission of inaccurate Form 656 and Forms 433-A/B affect the timely disposition of my case?

Yes. The IRS ' procedures require that a taxpayer be contacted in writing and provided a one-time opportunity to correct the error(s), and/or update the financial statement. Failure to correct the error(s) and/or respond results in the OIC being returned to the taxpayer without any further actions on the part of the IRS .

What are the common errors when preparing an offer in compromise?

The following are key items that require the IRS to request corrections and delay the processing of OICs:

What happens if I miscalculate my OIC or do not offer an amount equal to my reasonable collection potential?

This will result in processing delays and could be grounds for the IRS ultimate decision to reject an OIC. The IRS is observing a large upsurge of receipts in which the offered amount is clearly much lower than the reasonable collection potential illustrated on the taxpayer's financial statement. Furthermore, in a large number of these cases, the financial statement also shows that the taxpayer has a clear ability to satisfy the liability in full, or via an installment agreement during the course of the collection statute, and the taxpayer cites no special circumstances.

The IRS reviews OICs for indications of fraudulent intent. Submitting an OIC with false information, or making a false statement to an IRS employee, is considered an indicator of fraud and may be subject to civil or criminal penalties.

What are the National and Local Standards and how are they considered in evaluating an OIC?

Collection Financial Standards are used to help determine a taxpayer's ability to pay a delinquent tax liability.

Allowances for food, clothing and other items, known as the National Standards, apply nationwide, except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.

Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. Unlike the National Standards, the taxpayer is allowed the lesser of the amount actually spent or the standard.


OIC Determinations

What happens if the IRS accepts an OIC?

If an OIC is accepted, the following will apply:

The taxpayer must remain in compliance with filing and payment of all tax returns for a period of five years from the date the OIC is accepted or until the OIC is paid in full, whichever is longer. Failure to pay the OIC on time, and/or to remain in compliance during the five-year period or until the OIC is paid in full, whichever is longer, will result in the OIC being declared in default..

What happens if the IRS does not accept an OIC?

Once the IRS determines it cannot accept an offer, the taxpayer will be advised of the reasons behind the decision. The taxpayer will be afforded another opportunity to submit any other information that might cause the IRS to reconsider it preliminary decision to reject the offer. The exception to this is when the taxpayer has an ability to satisfy the liability in full and has not pointed to special circumstances.

How much interest am I going to pay if my OIC is accepted?

Interest will not accrue on the taxpayer's accepted OIC amount from the date of acceptance until the OIC is paid. Interest and penalties will continue to accrue on the unpaid tax liability while the OIC is under consideration.

Will I be entitled to receive tax refunds if my OIC is accepted?

As additional consideration beyond the amount of the taxpayer's offer, the IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year the IRS accepts an OIC. Refer to OIC Contractual Terms, Item (g).

Can I designate any payments once my OIC is accepted?

No. Refunds and overpayments may not be designated as estimated tax payments for the following year. This condition does not apply if the OIC was accepted under doubt as to liability only. Refer to OIC Contractual Terms , Item (g).

Is a tax lien released when an OIC is accepted?

The IRS releases a Notice of Federal Tax Lien when all of the OIC payment terms are satisfied. For an immediate release of a lien, a taxpayer can submit payment using a certified check and include a request letter.

What happens if I do not meet all the terms of my accepted OIC?

The IRS may default the OIC and reinstate the entire tax liability, less all payments and credits received.

(REVISED 8/2004) What happens if I default my OIC?

The IRS may take the following actions:

NOTE: The IRS will not default an agreement when taxpayers have filed a joint OIC with your spouse or ex-spouse, as long as you have kept, or are keeping, all the terms of the agreement, even if your spouse or ex-spouse violates the future compliance provision.

What happens if I do not file my tax return or pay my taxes next year?

The OIC will be defaulted. An OIC requires future compliance for a period of five (5) years from the date of acceptance of the OIC, or until the offered amount is paid in full, whichever is longer. Compliance is the timely filing and paying of all required returns and taxes.