Offer in Compromise or Payment Plan? How to Choose

You have probably heard the ads: settle your IRS debt for pennies on the dollar. The real program behind those ads is the offer in compromise. For the right person it can be the best option. But applying when you do not qualify can cost you money and time. Here is how it compares with a payment plan.

The basic difference

A payment plan, or installment agreement under Internal Revenue Code section 6159, lets you pay what you owe over time. Interest and penalties keep accruing until the balance is paid (IRM 5.14.1.1.1). In most plans you pay the full amount.

An offer in compromise under section 7122 is an agreement to settle your tax debt for less than the full amount. The Internal Revenue Manual (IRM 5.8.1.1) says the IRS will accept an offer when it is unlikely the tax can be collected in full and the amount offered reflects the reasonable collection potential.

The three grounds for an offer

The IRM (5.8.1; 5.8.2) describes three bases for an offer:

• Doubt as to collectibility. There is doubt the tax can ever be paid in full. This is the most common type.
• Doubt as to liability. There is doubt the tax is correct. No application fee or upfront payment is required for this type (IRM 5.8.1.13).
• Effective tax administration. There is no doubt the tax is correct and could be paid, but requiring full payment would create an economic hardship or raise public policy or equity concerns.

The key number: reasonable collection potential

For a collectibility offer, the IRM (5.8.1) says the offer amount generally must equal or exceed your reasonable collection potential. The IRM defines that as the amount that could reasonably be collected from you. In general terms, the IRS looks at the equity in your assets and at what your income could pay after allowable living expenses. Section 7122(d)(2) requires the IRS to use national and local allowances so you keep adequate means for basic living expenses.

The IRM (5.8.1) also says that, unless there are unusual circumstances, the IRS will not accept an offer if the total tax can be paid in full as a lump sum, through installment payments over the remaining collection period, or by other means. That rule is the dividing line between an offer and a payment plan.

Side by side

	Payment plan	Offer in compromise
What you pay	Usually the full balance plus interest and penalties	An agreed amount, often less than the balance
Who qualifies	Most people who are current on filing	People who cannot pay in full, or who have a liability or hardship basis
Upfront cost	A setup fee, $29 to $178 depending on method (IRM 5.14.1.2)	$205 application fee plus 20% of a lump-sum offer, or the first installment of a periodic offer
Levy protection	While pending and in effect (IRC 6331(k)(2))	While pending and 30 days after rejection, plus appeal (IRC 6331(k)(1))
Collection statute	Keeps running while the plan is in effect (IRM 5.14.1.2)	Suspended while the offer is pending (IRC 6331(k)(3))
Ongoing obligation	Stay current until paid	Stay compliant for five years after acceptance (IRM 5.8.1)

What an offer costs up front

Application fee

The fee for an offer submitted on or after April 27, 2020, is $205 (26 CFR 300.3(b)(1)). No fee is charged for a doubt as to liability offer or for a qualifying low-income taxpayer. Except in limited cases, the fee is not refunded if the offer is accepted, rejected, withdrawn, or returned after it was accepted for processing (26 CFR 300.3(b)(3)). Confirm the current fee on IRS.gov before you apply.

Payment with the offer

Section 7122(c) requires a payment with most offers:

• Lump-sum offers (paid in five or fewer installments) must include 20% of the offer amount (section 7122(c)(1)(A)). The IRM (5.8.1.13) says lump-sum offers are paid within five months of acceptance.
• Periodic payment offers must include the first proposed installment (section 7122(c)(1)(B)). The IRM (5.8.1.13) says these are paid over 6 to 24 months, and you must keep making the payments while the IRS evaluates the offer. Under section 7122(c)(1)(B)(ii), missing one may be treated as withdrawing the offer.

These payments are generally nonrefundable. The IRM (5.8.1.13) says they are treated as payments of tax and will not be returned even if the offer is later returned, withdrawn, terminated or rejected. They are returned only in limited situations where the offer is found not processable. If your offer is rejected, the money stays applied to your debt.

Low-income waiver

Under section 7122(c)(3), an individual whose adjusted gross income does not exceed 250% of the applicable poverty level does not pay the application fee or the upfront payments. The IRM (5.8.1.12) says business taxpayers other than sole proprietors do not qualify.

What happens while an offer is pending

• No levy. Section 6331(k)(1) bars a levy while the offer is pending, for 30 days after a rejection, and during an appeal filed within those 30 days. The IRM (5.8.1.16) notes two limits: the IRS does not have to release a levy served before you submitted the offer, and if the offer is returned, withdrawn or terminated, it is no longer pending and the IRS may levy.
• Liens are still possible. The IRM (5.8.1.16) says there is no prohibition on filing a Notice of Federal Tax Lien while an offer is pending, though a lien filing request usually waits until a final decision unless collection is in jeopardy.
• The collection clock pauses. The collection period is suspended while the offer is pending, for 30 days after rejection, and during an appeal (sections 6331(k)(3) and 6331(i)(5)).
• The 24-month rule. Under section 7122(f), an offer is deemed accepted if the IRS does not reject it within 24 months after you submit it. Time when the liability is disputed in court does not count. The IRM (5.8.1.13) says the 24-month clock stops once the IRS issues a decision letter, whether that is a rejection, return, withdrawal, termination or acceptance.

Before you apply

The IRS will return an offer without considering it in several situations (IRM 5.8.2.4.1). The most common are:

• You are in bankruptcy. An offer will not be considered while you are in bankruptcy.
• You have unfiled returns. Required returns must be filed, generally looking back six years. See why unfiled returns come first.
• Your payments are not current. The IRS checks estimated tax and federal tax deposit compliance and will ask for current estimated payments during case building.

If the offer is rejected, you can appeal to the IRS Independent Office of Appeals (section 7122(e)).

After an offer is accepted

Acceptance gives you a fresh start, as long as you stay in compliance with all filing and payment requirements for five years after acceptance (IRM 5.8.1). A debt being paid on time under an accepted offer is also excluded from passport certification (section 7345(b)(2)(A)). For offers accepted on or after November 1, 2021, the IRS says refund recoupment is not included in the offer terms (IRM 5.19.7.10), but a refund that becomes available before acceptance can still be applied to your debt under section 6402(a).

How to choose

A payment plan is usually the better fit if:

• You can pay the full balance over time before the collection statute expires. Try the payment plan calculator.
• You owe $50,000 or less and qualify for a Simple Payment Plan (formerly called a streamlined installment agreement) with no financial statement (IRM 5.14.5.2).
• You have significant equity in a home, retirement account or other assets.

An offer in compromise may be worth a closer look if:

• Your equity plus what your income could pay over the remaining collection period is clearly less than what you owe.
• Your situation is unlikely to improve, because of age, health or a permanent drop in income.
• You can raise the offer amount and pay it within the offer terms.

If you cannot pay anything now, read currently not collectible status. If you can pay something but not the full balance, also compare a partial payment installment agreement.

Getting help

An offer in compromise turns on careful math, and the upfront payment is generally kept if the offer fails. Before you send money with Form 656, have your numbers reviewed by someone who works with these cases. You can reach our office through GetIRSHelp.com or at (813) 229-7100.