Eligibility for an Offer in Compromise

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It sounds great. Make an offer to the Internal Revenue Service (IRS) to erase your entire tax bill! It is not that simple. If you can afford to pay the tax debt, you will be required to do so. By not paying the tax bill, you can incur a larger tax bill: one that includes penalties and interest! Not to mention, the IRS can place a tax lien or levy on any or all of your properties or bank accounts to collect the entire tax bill.

So, why would the IRS accept an offer that is less than the taxes owed? In a previous blog, we discussed that eligibility for an Offer in Compromise is determined by being able to pay the tax bill, with or without placing a financial hardship on the taxpayer. There is also the question of doubt of whether the taxpayer owes the tax bill. There might have been an error on the IRS part, or an error in reporting income, or …?

Before you can apply for an Offer in Compromise, you must meet a certain set of IRS requirements. You must make sure that all your tax documents have been filed on time in addition to these requirements. Furthermore, you should not have any past due penalties remaining on any previous tax debt.

Here are some additional requirements that must be met or your application for an Offer in Compromise will be denied:

  • All tax returns you are legally required to file have been filed. (Your Offer in Compromise will be immediately rejected otherwise.)
  • All required estimated tax payments have been made for the current year.
  • You must have received a bill for at least one tax debt that you include in your Offer in Compromise.
  • If you are a business owner with employees, all required federal tax deposits for the current quarter have been made.
  • You must not be able to pay the full tax debt through a payment installment plan with any current or future assets.
  • You must not have any open bankruptcy cases.

Before the Process:

  1. To apply for an Offer in Compromise, you will complete IRS Form 656.
  2. It is important to consider your “reasonable collecting potential” when setting up an offer. Do not overestimate or underestimate the offer.
  3. For the IRS, “reasonable collecting potential” means your offer must be at least equivalent to not only your current assets but your anticipated assets and income with your basic living expenses deducted from that amount.

The Process Itself:

  1. Both the IRS and you must agree that there is no possible way that you can pay the tax debt amount in full without potentially experiencing financial hardship.
  2. Even if the amount offered is significantly less than the full amount owed, you must offer the maximum amount you can afford without experiencing financial hardship.
  3. The IRS accepts the offer as the most you can reasonably pay without incurring financial hardship.
  4. You must decide whether you want to pay the full amount at once or make payment installments.
  5. The debt is considered “paid in full” once you pay the entire amount agreed to with the IRS.


Although anyone can apply for an Offer in Compromise, the question is: should they? The application process is complicated, involving a lot of math and completing forms, not to mention corresponding with the IRS. This is best left to an expert. Call us today. We can advise you as to whether an Offer in Compromise is in your best interests. There may be a better option that fit your needs. Call us now.

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