Who qualifies for an Offer in Compromise?
The IRS looks at your income, your expenses and the equity in what you own. It says it generally will not accept an offer if you can pay the debt in full through a payment plan or from your asset equity (IRS: Offer in Compromise). Before you can apply at all, you must:
- Have filed all required tax returns.
- Have made the estimated tax payments you were required to make.
- Not be in an open bankruptcy.
- If you are an employer, have made the required federal tax deposits for the current quarter and the last two.
The IRS also runs a free Offer in Compromise Pre-Qualifier tool that gives you a first read.
What does an Offer in Compromise cost?
Every application carries a $205 IRS application fee and a first payment, unless you meet the low-income qualifications (IRS: Offer in Compromise). You choose one of two ways to pay:
- Lump sum. Pay 20% of your offer amount when you apply, then the rest in five or fewer payments if it is accepted.
- Periodic payment. Make the first payment when you apply and keep paying monthly while the IRS reviews it.
If the IRS rejects the offer, it keeps the application fee and applies your payments to your balance. You can appeal a rejection to the IRS Independent Office of Appeals.
What happens while the IRS reviews my offer?
Once the IRS confirms you are eligible, it suspends most collection activity, extends the time it has to collect, and may file a notice of federal tax lien. You keep making your offer payments during the review. If the IRS has not accepted or rejected your offer within two years of receiving it (not counting time in appeal), the offer is automatically accepted (IRS: Offer in Compromise).
If it is accepted, you must keep to the terms in Section 7 of Form 656, and the IRS does not release federal tax liens until the offer is paid in full.