An offer-in-compromise is an agreement between a taxpayer and the IRS whereby the IRS agrees to settle the taxpayer’s tax liability for less than the full amount owed. The IRS will generally agree to enter into an offer-in-compromise when it believes the potential to collect the full amount from the taxpayer is low.
In order to obtain an offer-in-compromise, the taxpayer must propose the terms of settlement to the IRS by completing Form 656 Offer in Compromise. In that form, the taxpayer must disclose the nature and value of his or her assets. Additionally, the taxpayer must propose one of three payment options: 1) a lump sum cash offer which must be paid in five or fewer installments, 2) a short-term periodic payment offer where the payments are made within 24 months, or 3) a deferred periodic payment offer where the payments are made within the statutory period to collect. The Form 656 must be submitted along with a $150 application fee and the first payment as proposed in the form.
The IRS is not required to accept the terms of settlement as proposed by the taxpayer. Rather, the IRS may reject the offer outright or may negotiate a different amount or different terms of repayment.