FS-2006-22, July 2006
Effective July 16, 2006, a new federal law
will change the way the offer in compromise (OIC) program
operates and its role in the Internal Revenue Service collection
process. In general, this means that:
• Taxpayers submitting lump-sum offers must make a 20 percent
nonrefundable, up-front payment to the IRS;
• Taxpayers submitting a periodic-payment OIC must make a
nonrefundable, up-front payment, plus any other proposed
payments that may be due, while the IRS is evaluating the offer;
• An OIC application is deemed accepted if the IRS fails to act
upon it within two years.
Most taxpayers file tax returns and pay what they owe on time.
If a taxpayer does not pay, the IRS sends the taxpayer a bill.
This begins the collection process. Along with the bill, which
is called a notice, the IRS automatically sends Publication 1,
Your Rights as a Taxpayer, and Publication 594, Understanding
the Collection Process. These publications explain the various
options and rights taxpayers have in dealing with the IRS.
Some taxpayers believe they cannot pay what they owe. However,
taxpayers should consider liquidating assets (such as bank
accounts, financial investment accounts, cars, boats, real
estate, life insurance and 401(k) plans) to satisfy their tax
debts. Taxpayers should also attempt to get a loan, if possible,
to pay what they owe. Loan costs may be lower than the
combination of interest and penalties imposed by the Internal
Revenue Code (IRC). See
“How Can I Save Money by Paying My Taxes."
The IRS recognizes that sometimes taxpayers are unable to pay.
Taxpayers who are unable to pay what they owe should contact the
IRS as soon as possible. There are a number of payment solutions
the IRS may be able to offer to the taxpayer including:
• Extension of Time to Pay — Taxpayers may be eligible for a
short extension of time to pay of up to 120 days. Taxpayers
should request an extension if they would be able to pay their
taxes in full within the extended timeframe.
• Installment Agreement — In FY 2005, 2.6 million taxpayers paid
their tax bills in monthly payments. Installment agreements paid
directly from a bank account or payroll deduction from wages
eliminate the need to mail payments and save postage costs, as
well. By insuring that the IRS receives payments on time, these
automatic payment methods also help taxpayers avoid defaulting
on their installment agreements.
• Delaying Collection — If the IRS determines that a taxpayer is
unable to pay, it may delay collection until the taxpayer's
financial condition improves.
• Offer in Compromise — Some taxpayers are able to settle their
tax bill for less than the amount they owe by submitting an
offer in compromise. However, the criteria for accepting an
offer are strict and relatively few offers are accepted each
An offer in compromise may be considered only after all other
payment options have been exhausted.
Taxpayers who are unable to pay their taxes in full and who have
explored the various options should use the checklist in the
Form 656, Offer in Compromise,
package to determine if they are eligible for an offer in
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),
section 509, made major changes to the IRS OIC program. These
changes affect all offers received by the IRS on or after July
16, 2006. The postmark date on the offer is irrelevant.
TIPRA section 509 amends IRC section 7122 by adding a new
subsection (c) “Rules for Submission of Offers-in-Compromise.”
A taxpayer filing a lump-sum offer must pay 20% of the offer
amount with the application (IRC 7122(c)(1)(A)). A lump-sum
offer means any offer of payments made in five or fewer
A taxpayer filing a periodic-payment offer must pay the first
proposed installment payment with the application and pay
additional installments while the IRS is evaluating the offer
(IRC section 7122(c)(1)(B)). A periodic-payment offer means any
offer of payments made in six or more installments.
Taxpayers can avoid delays in processing their OIC applications
by making all required payments in full and on time. Failure to
pay the 20 percent on a lump-sum offer, or the first installment
payment on a periodic-payment offer, will result in the IRS
returning the offer to the taxpayer as nonprocessable (IRC
section 7122(d)(3)(C) as amended by TIPRA).
The 20 percent payment for a lump-sum offer and the installment
payments on a periodic-payment offer are “payments on tax” and
are not refundable deposits (IRC section 7809(b) and
Treasury Regulation 301.7122-1(h)).
Taxpayers must specify in writing when submitting
their offers how to apply the payments to the tax, penalty and
interest due. Otherwise, the IRS will apply the payments in the
best interest of the government (IRC section 7122(c)(2)(A)).
The OIC application fee reduces the assessed tax or other
amounts due. A taxpayer may not specify how to apply the $150
Taxpayers failing to make installment payments on
periodic-payment offers after providing the initial payment will
cause the IRS to treat the offer as a withdrawal. The IRS will
return the offer application to the taxpayer (IRC section
A lump-sum offer accompanied by a payment that is below the
required 20 percent threshold will be deemed processable.
However, the taxpayer will be asked to pay the remaining balance
in order to avoid having the offer returned. Failure to submit
the remaining balance will cause the IRS to return the offer and
retain the $150 application fee.
Taxpayers filing periodic-payment offers must submit the full
amount of their first installment payment in order to meet the
processability criteria. Otherwise, the IRS will deem the offer
as unprocessable and will return the application to the taxpayer
along with the $150 fee.
Under the new law, taxpayers qualifying as low-income or filing
an offer solely based on doubt as to liability qualify for a
waiver of the new partial payment requirements. Taxpayers
qualifying for the low-income exemption or filing a
doubt-as-to-liability offer only are not liable for
paying the application fee, or the payments imposed by TIPRA
A low-income taxpayer is an individual whose income falls at or
below poverty levels based on guidelines established by the U.S.
Department of Health and Human Services (HHS). Taxpayers
claiming the low-income exception must complete and submit the
Income Certification for Offer in Compromise Application Fee
worksheet, along with their Form 656 application package.
The IRS will deem an OIC “accepted” that is not withdrawn,
returned, or rejected within 24 months after IRS receipt. When
calculating the 24-month timeframe, the IRS will disregard any
time periods during which a liability included in the OIC is the
subject of a dispute in any judicial proceeding (IRC section
7122(f) as amended by TIPRA).
FAQs for New OIC Rules
656, Offer in Compromise (PDF 2.63MB)
9465, Installment Agreement Request
Publication 594, Understanding the IRS Collection Process