Offer in compromise analysis before promises are made

The first step is to determine whether an offer can be processed. The IRS generally requires all legally required returns to be filed, current-year estimated payments to be made, and at least one bill to have been issued for a liability included in the offer. An employer must also be current with required federal tax deposits for the current quarter and the two preceding quarters.

A taxpayer or business in an open bankruptcy proceeding is not eligible to apply. An open audit, unresolved innocent-spouse claim, Department of Justice referral, or other account condition may also need attention before an offer can be investigated. The IRS offer pre-qualifier is useful for screening but does not guarantee acceptance.

• Confirm every required return and identify any missing filing
• Verify assessments, payments, penalties, and periods proposed for inclusion
• Review current estimated payments or business payroll-tax deposits
• Check for bankruptcy, examinations, appeals, litigation, or other pending matters

Most financial offers are based on doubt as to collectibility: the taxpayer agrees that the liability is correct but cannot fully pay it from assets and future income. Effective tax administration may apply in limited cases when the tax can be collected in full but doing so would create economic hardship or be unfair or inequitable because of exceptional circumstances.

Doubt as to liability is different. It applies when there is a genuine dispute about whether the tax is legally owed or whether the amount is correct and generally uses Form 656-L rather than the financial-disclosure package used for collectibility offers. The underlying liability issue should be evaluated before a separate offer based on ability to pay.

For most collectibility offers, the IRS compares the proposed amount with reasonable collection potential. In plain language, this is the amount the agency believes it can collect from available asset equity plus a measure of expected future income after certain allowable basic living expenses.

The calculation is broader than a checking-account balance or monthly surplus. It can require review of real estate, vehicles, cash, bank and investment accounts, retirement assets, business interests, receivables, digital assets, income sources, household contributions, secured debts, and future earning capacity. We explain the assumptions and test whether a proposed amount is supportable before filing.

Individuals, sole proprietors, and certain personally liable taxpayers generally use Form 433-A (OIC). Corporations, partnerships, and LLCs generally use Form 433-B (OIC). Individual and business liabilities may require separate Forms 656.

The records should be current, internally consistent, and reconcilable to tax returns and account history. We organize the disclosure, identify unexplained transfers or unusual items, document valuations and secured debts, and retain a complete copy of the application package.

• Filed returns, IRS notices, transcripts, and proof of current tax payments
• Bank, brokerage, retirement, loan, mortgage, and credit-account statements
• Wage statements, self-employment records, household income, and recurring expenses
• Real estate, vehicles, business assets, ownership interests, receivables, and digital assets
• Evidence supporting health, hardship, dependent, or other special circumstances

An offer is not necessarily the fastest or least costly path. Before filing, we compare it with full payment, an installment agreement, a partial-payment arrangement when applicable, or temporary currently-not-collectible treatment when hardship prevents payment. A genuine dispute about the assessment may call for a correction, appeal, audit reconsideration, or liability-based procedure instead.

Bankruptcy can affect tax debts and makes an applicant ineligible for an offer while the proceeding is open. Because bankruptcy and dischargeability are legal matters, that comparison must be coordinated with qualified counsel. The purpose is to choose a procedure supported by the facts—not simply the option with the lowest advertised payment.

A collectibility or effective-tax-administration package generally includes the current Form 656, Form 433-A (OIC) and/or Form 433-B (OIC), supporting documents, the current application fee, and an initial payment unless an exception applies. Payment requirements differ between lump-sum and periodic-payment offers, so the current Form 656-B instructions control.

The IRS first determines whether a submission is processable. During investigation, an examiner or offer specialist may request updated records, question valuations or expenses, and calculate a different offer amount. Responses and required payments must remain timely, and submitting an offer can extend the collection period.

A rejected offer generally may be appealed within 30 days using the rejection letter’s instructions. A returned offer is different and generally does not carry the same appeal rights. The specific decision letter should always control.

Acceptance is not the end of the obligation. The taxpayer must pay the accepted amount under the written agreement and remain current with required returns and tax payments for five years from acceptance, including applicable extensions. New unpaid liabilities or missed filings can place the agreement in default.

A post-acceptance plan should therefore cover withholding, estimated payments, federal tax deposits, future filing dates, and retention of payment confirmations. If an accepted offer defaults, the IRS may reinstate the original liability less qualifying payments and credits, together with applicable interest and penalties.