How to File an IRS Offer in Compromise

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The IRS levies taxes for the United States government.
The IRS levies taxes for the United States government. (Image: Thinkstock/Comstock/Getty Images)

Taxpayers having significant difficulties paying off tax debts can make an offer in compromise (OIC) to the IRS. This is an amount that is less than your total tax debt, paid to the IRS in lieu of full payment. This OIC can be made by taxpayers and businesses with large tax bills. The process of application requires a detailed accounting of income, bills and day-to-day expenses.

Download Form 656-B, "Offer in Compromise Booklet" or Form 656-L, "Offer in Compromise (Doubt as to Liability)" from the IRS website. Read and complete the worksheets and forms necessary for an offer. Form 656-L is intended for taxpayers who wish to dispute a tax debt due to new evidence, failure of a tax examiner to consider previous evidence or misinterpretation of the law.

File all tax returns you are required to file for the previous years and the current year. Make all estimated tax payments if required. Make all required federal tax deposits for the current quarter if you run a business with employees.

Gather all information regarding your income, assets, debts and daily living expenses. The IRS wants a detailed account of your income and expenses to determine what kind of offer you are able to make for the tax debt.

Complete Form 433-A (OIC), "Collection Information Statement for Wage Earners and Self-Employed Individuals," or Form 433-B (OIC), "Collection Information Statement for Businesses."

Complete Form 656-B or Form 656-L, as appropriate.

Attach required documentation to the forms. This includes copies of your most recent pay stubs or earnings statements; bank statements from the previous three months; your most recent statement of income from other sources of income, such as pensions, Social Security and child support; investment and retirement account statements; mortgage statement for your home; statements for other loans, such as an auto loan; profit and loss statement for your business, if applicable; and a list of notes receivable and accountant's depreciation schedules, if applicable.

Attach any required documentation in support of special circumstances, such as a major illness.

Attach power of attorney, if you want your attorney or CPA to represent you to the IRS.

Attach an initial payment on the offer in compromise. This is based on three payment options. The lump-sum cash offer requires an initial payment of 20 percent of the total offer. The short-term periodic-payment offer requires the first payment of several to complete the OIC, which are made over a period of 24 months. The deferred periodic-payment offer also requires the first payment with the OIC.

Attach the $150 application fee. If you meet the IRS low-income certification guidelines you won't be required to send an application fee, send an initial payment or make regular payments during review of your offer.

Make copies of all of the paperwork for your personal records.

Send all forms, payment and documentation to the appropriate IRS Center that is listed on page 23 of the Form 656 booklet, "Offer in Compromise."

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