May 10, 2021

Offer in Compromise: What Is It and How to Make One

An IRS tax audit can go one of two ways: either the auditor finds everything in order as documented, or there is a financial discrepancy—usually not in your favor, either. Owing a few hundred or even a couple thousand dollars may not be awful, but what if your worst fears are realized and you suddenly owe thousands of dollars—maybe millions– in back taxes to the IRS? More money than you can possibly afford to pay…?

Offer in Compromise

For individuals, owing back taxes that exceed a few hundred or a few thousand dollars could spell financial ruin. The impact to your life could be tremendous. There is an old adage that says, “You can’t squeeze water from a stone.” Simply put, if you can’t pay it, it might behoove the IRS to consider a lesser amount. Enter, the “offer in compromise.”

An “offer in compromise” is a document you may use to make a formal financial offer to the IRS that settles your tax obligations. The IRS accepts two versions:

  • Offer in Compromise when you are unable to make payments or pay in full for back taxes owed.
  • Offer in Compromise when you disagree with the auditor’s findings and are unwilling to pay the amount the IRS demands. This is a “Doubt as to Liability” document.

An “Offer in Compromise” sounds great, right? Here’s the answer to your prayers for the back taxes you owe. Unfortunately, the burden of proof is yours to prove you legitimately are unable to financially repay all that you owe in back taxes. You can pay some of it, but not all. And you will prepare an offer in compromise to suggest the amount you can pay.

Does an Offer in Compromise Make Sense?

Frankly if you gypped the IRS out of money it’s owed, then you should make good on it. But honest mistakes do happen. Even dishonest ones. And the IRS makes mistakes, certainly. To legitimately qualify to use an offer in compromise you must be able to provide financial proof of your inability to make full repayment, either in a lump sum or through a payment process.

Making an Offer in Compromise

The website maintains all the forms and documentation you need to file a formal offer in compromise. Beware of businesses outside the IRS selling services related to filing offers in compromise. If you need assistance navigating this negotiation, you may consult with a tax attorney.

Tip: Check local and regional bar associations for tax attorneys that work pro bono.

Remember, there are two types of Offers in Compromise and you may download them through the IRS website. Read all the instructions carefully before submitting them and complete the worksheet in the Offer in Compromise Booklet, (Form 656-B) to make sure you are eligible to be considered.

Your application requires you submit an application fee and a percentage of your initial tax payment.

For detailed instructions and current Offer in Compromise applications, visit the website.