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An IRS offer in compromise is a way to settle a federal tax debt for less than the full amount owed. But not everyone qualifies. The IRS looks at your income, living costs, savings, and property. If it believes you can pay the full bill, even over time, it usually will not accept an offer.
For New Jersey taxpayers, the key question is not simply how much you owe. It is how much the IRS believes it can collect from you. That is why two people with the same tax bill may get very different answers.
Who qualifies for an IRS offer in compromise?
You may qualify if you cannot pay the full tax bill with your income and assets, or if full payment would cause serious hardship. In some cases, an offer may also be used when there is a real dispute over whether the tax is owed.
Before the IRS will consider most offers, you must:
- File all required federal tax returns.
- Be current with required estimated tax payments for this year.
- Not be in an open bankruptcy case.
- If you have employees, be current with required federal payroll tax deposits for the current quarter and the prior two quarters.
You also generally need to have received an IRS bill for at least one tax debt in the offer. A large balance by itself does not make you eligible.
How does the IRS decide what you can pay?
The IRS uses a figure called reasonable collection potential. In plain English, it is what the IRS thinks it can collect from you. The IRS reviews money in the bank, equity in a home or car, some other assets, and future income after allowed living costs.
This is where the details matter. A New Jersey family may have high housing, child care, or medical costs. A business owner may have uneven income. Those facts need clear records. The IRS does not always allow every expense at the amount you actually spend, so it is important to explain any special needs and provide proof.
Owning a home or running a business does not always rule out an offer. But the value of what you own can change the amount you need to offer.
What might this look like for a New Jersey taxpayer?
Here is a simple hypothetical example, not a real client case. Imagine a New Jersey worker who owes back taxes, rents an apartment, has little savings, and recently had work hours cut. There may be very little left each month after necessary bills. That person could be a candidate for an IRS offer in compromise.
Now imagine the same tax debt, but the person has large savings or substantial equity in a second property. The IRS may expect more money, or it may find that a settlement is not needed. The amount you owe is only one part of the picture.
How do you apply for an IRS offer in compromise?
First, check your tax returns and IRS account. Make sure the balance is right and that required returns are filed. Then collect proof of income, household costs, bank balances, debts, and property values.
Individuals may be able to apply through their IRS Individual Online Account. Paper applications generally use Form 656 and a financial statement, Form 433-A (OIC) or Form 433-B (OIC). A separate Form 656-L is used when the offer is based on a genuine dispute about the tax owed. However you are disclosing all of your assets in an Offer in Compromise application allowing easy levy action by the IRS if the Offer is rejected. Additionally, the IRS does NOT recognize certain expenses as deductible when determining how much monthly residual is leftover. It is therefore best to be represented by a licensed professional in submitting an offer
Most standard applications require a $205 fee and a first payment. With a lump-sum offer, you usually send 20% of your proposed amount when you apply. With a payment offer, you send the first proposed payment and generally keep paying while the IRS reviews your case. Qualifying low-income individuals can be excused from the fee and required offer payments during review. The rules are different for offers that dispute the tax liability.
Important: Offer payments are generally not refunded if the IRS says no. They are applied to the tax debt instead. This is one reason to review eligibility before paying to apply.
The IRS has a free eligibility tool and step-by-step instructions. Read the IRS offer in compromise guidance before submitting anything.
Will an offer stop IRS wage garnishments or bank levies?
Once an offer is accepted for processing, the IRS generally pauses most new collection actions while it reviews the offer. That does not mean every existing levy is automatically released. The IRS may still file a federal tax lien, and interest and penalties can keep growing while the offer is pending.
There is another detail that people often miss: submitting an offer generally pauses the clock on the time the IRS has left to collect. Filing an offer simply to buy time can make a tax problem worse. If your wages or bank account are already being levied, get advice about the levy itself right away.
What happens if the IRS accepts or rejects your offer?
If the IRS accepts your offer, you must pay the agreed amount on time and follow the terms. For most offers, you must also file your tax returns and pay new taxes on time for five years after acceptance. The IRS can keep certain refunds for tax periods through the date it accepts the offer. A federal tax lien is generally released once the offer payment terms have been met.
It is important that you do not break the agreement or the IRS will put the old balance back into collection, minus payments already made. If the IRS rejects your offer, you normally have 30 days from the date of the rejection letter to appeal. If an offer is returned for missing information or other filing problems, that is different from a rejection and usually does not come with the same appeal right.
A payment plan, Currently Not Collectible status, or a request to remove penalties may make more sense in some cases. An offer should be one option you compare, not the first choice just because a tax relief advertisement promises a big discount.
What if you owe New Jersey state taxes too?
An IRS offer in compromise settles only the federal tax debts covered by that agreement. It does not erase a bill from the New Jersey Division of Taxation. New Jersey has its own rules for compromise requests under N.J.A.C. 18:33, and the state also has a separate payment plan process. State relief must be reviewed and requested on its own terms.
If you owe both the IRS and New Jersey, a plan for one debt should not leave you unable to handle the other. We look at both sides before recommending a path forward.
Quick questions about an IRS offer in compromise
Can I settle my tax debt for pennies on the dollar?
Sometimes a qualified taxpayer settles for far less than the total bill. But there is no set discount and no guarantee. The IRS looks at your real ability to pay.
Does owning a home mean I cannot qualify?
No. The IRS looks at the equity in your home, along with your other assets, income, and necessary expenses.
How long will the IRS take to decide?
It can take many months and sometimes longer. The IRS may ask for more records during its review. Do not assume your offer has been accepted just because you have not heard back.
Can a business owner apply?
Yes. But business and personal tax debts may require separate offers, and employers need to be current with required payroll tax deposits.
Do I need a lawyer to file an offer?
No. The IRS provides free tools and allows eligible individuals to apply on their own. An attorney may be helpful when the debt is large, the records are complex, the IRS is collecting, or you need to compare an offer with other options.
Why Should You Have an Attorney Represent You in an Offer in Compromise?
Applying for an IRS Offer in Compromise involves much more than asking the IRS to accept less than you owe. You must provide detailed financial information, including your bank accounts, retirement accounts, home equity, vehicles, business assets, income, and living expenses. The IRS uses this information to decide how much it believes you can pay. Not every expense you actually pay will be allowed by the IRS, and certain expenses above IRS guidelines may be accepted if they are necessary and properly documented. An experienced tax resolution attorney understands what financial information must be disclosed, which expenses the IRS may allow, and how to document expenses that exceed its standards. At Tomes Law Firm, we review your complete financial picture, identify allowable expenses, and help ensure the IRS has an accurate understanding of your ability to pay. The goal is not simply to submit an offer. It is to submit an offer that is properly supported and gives you the best possible chance of reaching a fair resolution.
Before you apply, make sure an offer is right for you
At Tomes Law Firm, we help New Jersey individuals and small business owners review their IRS records, understand what they can truly afford, and choose a tax resolution plan that fits their situation. Sometimes that is an offer in compromise. Sometimes it is not.
If back taxes are keeping you up at night, schedule a confidential free consultation with the tax resolution attorneys and professionals at Tomes Law Firm in Freehold, New Jersey. Call 732-333-0681 or 833-4IRS-TAX or visit our contact page to discuss your options.
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Official sources and further reading
IRS: Offer in compromise overview