An Offer in Compromise (OIC) is a contractual agreement between a taxpayer and the IRS that is provided by our tax laws. If accepted by the IRS, the offer settles a tax liability for payment of less than the full amount owed. This is often referred to using the term “pennies on the dollar.”

Statistics show that the IRS rejects most offers made by taxpayers. Many of the rejections result from not having submitted sufficient documentation with the offer in compromise. Here is a checklist of action items for your offer in compromise:

1. Verify you have filed all tax returns you are required to have filed.
2. If you are filing your offer in compromise before April 15th of the current year, be sure to verify you have had enough withholdings to pay this year’s tax liability. If you have not had sufficient withholdings, you may need to wait until you file the tax return for this year and then include this year in your offer in compromise.
3. Complete the IRS Form 656 which is entitled Offer in Compromise Agreement. Refer to the instructions for the Form 656 to help you complete the form correctly.
4. Complete the IRS Form 433 entitled Collection Information Statement. Pay particular attention to the income and expense items on the last page of this form.
5. Request three months worth of financial statements for every bank, brokerage, or other financial institution that you have an account with. Don’t forget to get statements for your retirement accounts.
6. Make copies of bills and invoices to substantiate all of your expenses for the last month (consider typing up a short index to help the IRS go through this information). Provide as much detail as possible. Do not forget about necessary annual expenses that must be estimated, such as medical costs, costs for clothing, etc.
7. Write a check for the IRS application fee for the offer in compromise. You may request the IRS to waive this fee if you are unable to pay this amount. There is an additional IRS form that must be submitted for the IRS to consider waiving this fee.

This information should result in a nice stack of paperwork. Once you have all of this information put together, you should:

1. Make a copy of this entire set of copies (just in case the IRS loses the paperwork).
2. Mail the documents to the correct IRS address (listed in the Form 656 instructions) and mail it via certified mail.

The IRS should send you a letter in about a month explaining that it received your offer in compromise. This initial letter will tell you whether your offer in compromise was deemed to be processible by the IRS. By processible, the IRS is saying that you have included all of the information that is necessary to have the case assigned to an IRS employee. If your offer is not processible, the IRS may ask for additional documents or it may return your offer form you to.

Between six months to a year later, the IRS may send you a letter saying that the case has been assigned to an IRS employee. The IRS employee will eventually send a letter asking you to provide additional documents. As you work with this employee, you can then start the negotiation process.