An offer in compromise is an agreement under which the government accepts less than the full tax debt and forgives the rest. It is also the most oversold product in the tax business. The advertisements promising to settle any debt for pennies on the dollar leave out the one fact that decides every case: the government accepts an offer only when the offer equals what it could collect from you on its own.
The “Fresh Start program” in those advertisements is not a program you can apply to. It is the name the IRS gave, in 2011 and 2012, to a set of changes that loosened its own rules for offers, payment plans, and liens. Those changes are now simply the rules, and nobody has special access to them.
That makes an offer a math problem before it is anything else. This article explains how the number is calculated, what the application involves, and what you are agreeing to afterward, for both the IRS and the Franchise Tax Board.
It follows an offer in compromise in the order it progresses.
The Three Grounds for an Offer
- Doubt as to collectibility. You cannot pay the full amount before the government’s time to collect runs out. This is the basis for nearly all offers, and the rest of this article is about it.
- Doubt as to liability. You have a real dispute about whether you owe the tax at all. This is handled more like an audit appeal than a collection matter.
- Effective tax administration. You could technically pay, but collecting would be unfair or would leave you unable to meet basic living expenses. These offers are rare and are built on documented hardship.
Qualification
Calculating what the government could collect, which is the most it will accept.
Reasonable collection potential
The IRS calls the number “reasonable collection potential.” It has two parts. The first is the equity in what you own: real estate, vehicles, bank accounts, retirement accounts, and business assets, valued at what a quick sale would bring, less what is owed on them. The second is your future income: what is left each month after allowable living expenses, multiplied by 12 or 24 depending on how the offer will be paid.
Allowable expenses
The government does not use your actual budget. It uses published standards for food, housing, transportation, and health care, with actual amounts allowed only for certain items and only when documented. The difference between your real expenses and the allowed ones is where most offers are won or lost, and where we spend the most time.
The honest answer
When the calculation comes out near or above the balance owed, an offer will not be accepted and we say so. A payment plan, a temporary hold on collection, or simply waiting out the collection statute may serve you better. When the calculation comes out well below the balance, the case is worth pursuing.
Compliance
Getting into the position the government requires before it will consider an offer.
An offer is returned without review if the taxpayer is not in compliance. That means every required tax return is filed, the current year’s estimated payments or withholding are being made, and a business is current on its payroll tax deposits. Fixing compliance is often the first several weeks of the engagement.
The government checks compliance again before accepting and again during the five years after. A missed estimated payment during the review can end an otherwise sound offer, and a late-filed or unpaid return in the five years after acceptance can bring the entire original debt back.
The Application
Putting the financial picture on paper, completely and consistently.
The forms
An IRS offer is a financial statement listing every asset, debt, income source, and expense, with bank statements, pay stubs, and valuations attached, plus the offer form itself stating the amount and payment terms. The FTB has its own application, and an offer to the FTB is evaluated separately even when the IRS has accepted one.
Payment terms
An IRS offer is paid either in a lump sum within five months of acceptance, with a portion sent with the application, or in monthly payments over up to 24 months, with the first payment sent with the application and payments continuing during review. The choice changes the offer amount, and we model both.
Consistency
Every number on the application is checked against the bank statements that accompany it. A deposit that is not explained by the stated income, or an expense that does not appear in the statements, is the first thing the examiner will ask about.
The Review
Answering the offer examiner and protecting the number while the case is pending.
What happens to collection
While an IRS offer is pending, levies generally stop, though a lien may be filed. The time the government has to collect is paused during the review, which is one reason an offer is not filed casually.
The examiner’s investigation
An offer examiner verifies the application against the government’s own records, asks for updated statements, and may value assets differently or disallow expenses. The examiner then either recommends acceptance, proposes a higher amount, or rejects. Most of our work at this stage is responding to those positions with documentation.
Rejection and appeal
A rejected IRS offer can be appealed within 30 days to the Independent Office of Appeals, which reviews the calculation fresh. An offer that was returned rather than rejected, usually for a compliance or paperwork reason, can be corrected and resubmitted.
Timing
IRS review commonly takes six to twelve months. The law treats an IRS offer as accepted if the agency has not decided it within two years.
Acceptance
Paying the offer and keeping it in force.
Payment
The offer amount is paid on the terms accepted. Any lien is released once the offer is paid in full.
Five years of compliance
For five years after acceptance you must file every return on time and pay every tax when due. A default during that period reinstates the original debt, less what was paid.
What is forgiven
When the terms are met, the remaining balance for the years covered is permanently forgiven, and the liens are gone.
IRS and FTB Offers Compared
| Topic | IRS | Franchise Tax Board |
|---|---|---|
| Who decides | A centralized offer unit, with appeal rights. | The FTB’s offer program, which has more discretion and fewer formal appeal rights. |
| Who qualifies | Anyone whose collection potential is below the balance. | Primarily taxpayers who cannot pay now and are unlikely to be able to pay in the future. |
| Payment | Lump sum within five months, or monthly over up to 24 months. | Generally a lump sum. |
| Afterward | Five years of filing and payment compliance. | Similar compliance terms set in the agreement. |
What It Costs
Preparing an offer is a flat-fee engagement in most cases, quoted after we have run the calculation and know whether an offer is realistic. The IRS charges a modest application fee, waived for low-income taxpayers, and the initial payment that accompanies the offer is applied to the tax. We do not recommend paying anyone to prepare an offer until the calculation has been done.
- The most recent IRS and FTB notices showing the balances
- Tax returns for the last three years, or a list of years not yet filed
- Three months of bank statements for every account
- Pay stubs or profit-and-loss statements for the last three months
- Mortgage, vehicle loan, and retirement account statements
- A list of monthly living expenses
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.