Editor’s Note: This post was originally published in February 2023 and has been updated in 2024 for accuracy and comprehensiveness.

The IRS is rarely in a forgiving mood, but under the right circumstances, you might be able to earn their forgiveness for part of your tax debt.

The Fresh Start initiative started in 2011 for individuals and small businesses. It expanded its program by offering more flexibility in its Offer in Compromise terms. 

The Offer in Compromise is the only true debt forgiveness plan the federal government provides. Nearly every other program that purports to save you from tax debt is, at best, a temporary stay of payment.

Now, you don't need to get down on your knees and beg in front of the Internal Revenue Service building in Washington, DC. But, you need to jump through a few hoops to prove your eligibility for an offer.

An Offer in Compromise Quick Shot

An offer in compromise lets you settle your tax debt for less than what you owe. However, it’s only an option if you can show you cannot ever pay off your entire tax liability or that doing so would create financial hardship.

If you are eligible and the IRS accepts your offer, you may pay less than 20% of the original tax debt. The IRS is pretty stingy with its acceptance of offers in compromise, and you have no guarantee on how much of your debt you must promise to pay.

To apply, business owners with employees must make federal tax deposits for the current and past two quarters. Individuals must have filed all required tax returns and completed all estimated tax payments. Also, you cannot be in bankruptcy proceedings.

Suppose you meet the federal government's low-income certification guidelines. In that case, you don't need to pay the application fee or make monthly installment payments. At the same time, you wait for the agency's decision.

The IRS makes its decision based on your ability to pay, income, expenses, and asset equity. The agency only approves an offer if it feels the amount is the most it can expect to collect within a reasonable time. Because acceptance is so stringent, you should explore all other avenues of tax payment before applying for an offer in compromise.

Applying for an Offer in Compromise

Before applying for an offer in compromise, you can determine your potential eligibility with the offer in compromise pre-qualifier tool the IRS offers. 

The tool asks if you have filed all your tax returns and made your estimated tax payments in the first set of questions. It also asks if you are in open bankruptcy proceedings. Also, you should have a valid extension if you are applying for the offer for the current tax year.

To apply, use the most current version of Form 656-B Offer In Compromise booklet. Then complete the following:

• Form 433-A (OIC) or 433-B (OIC) individual or business forms 
• Gather all required documentation for the above forms
• A separate Form 656 for each individual and business tax debt, including corporate, LLC, and partnerships
• The application package for the offer in compromise

Then you pay the $205 application fee and your initial payment for each Form 656. The application fee and initial payment are not refundable. The money will go towards your tax debt if the IRS does not approve your application.

Finally, you can select one payment option. Either offer a lump sum cash payment or ask for a periodic payment.

If you decide on the lump sum option, be prepared to submit an initial payment equal to 20% of the total offer amount. If the offer is accepted, you will receive a written confirmation. Then you must pay the remaining balance in five or fewer payments.

The period payment option allows you to submit the first monthly payment with your application. Upon acceptance, you continue to make monthly payments until your tax debt is paid in full.

The Process

Even though you apply for an offer in compromise, the IRS may file a Notice of Federal Tax Lien  on your property, which is not released until the terms are satisfied. However, it does suspend all other collection activities. You can stop payments on an existing installment agreement for the tax debt that is the basis for y our offer.

Applying for an offer extends the legal assessment and collection period, so the 10-year statute of limitations is pushed out further.

The IRS accepts your offer automatically if it doesn't decide within two years of the receipt date of your offer. The two years are not included in any appeal period.

If the IRS rejects your offer in compromise, you may appeal the decision within 30 days using a Request for Appeal of Offer in Compromise Form 13711. The IRS Independent Office of Appeals provides additional assistance with appealing your rejected offer.

What If You Are Not Eligible for an Offer in Compromise?

If your offer is rejected or you find you are not eligible, you have a couple of options to help reduce your tax burden or delay payments.

If you are facing debt due to the actions of your spouse, look into the Innocent Spouse defense. It lets you off the hook for a spouse’s tax problems if you didn’t know about a tax liability for return errors or didn’t play a role in them. Therefore, you avoid sharing the tax bill, but you must offer valid documentation supporting your claim. 

Innocent Spouse is not forgiveness. It merely ensures the liability doesn’t fall on you.

You might pursue Currently Not Collectible (CNC) status if you absolutely, positively cannot pay your tax debts. You must show your circumstances prevent you from paying due to financial hardship. People who experience natural disasters can qualify for Currently Not Collectible.

A CNC is temporary. As soon as the IRS believes you can pay, you will receive a tax bill, including interest and penalties.

Bottom Line

An offer in compromise is the only forgiveness mechanism the IRS offers for your tax debt. You must pay a fee, fill out forms, and gather documentation to support your request. If the IRS rejects your offer, you forfeit your fee and any initial payment, and you must find another way out of your tax problems. 

If you believe you qualify for an Offer in Compromise, contact Top Tax Defenders to help you with the details.