An offer in compromise lets a taxpayer settle a federal tax debt for less than the full amount. It is real and it works, but only in specific circumstances. For most operating SaaS companies with a tax balance, a different tool fits better. Knowing which one applies saves months.
The three grounds
| Ground | Meaning |
|---|---|
| Doubt as to collectibility | Assets and future income are less than the amount owed |
| Doubt as to liability | A genuine dispute that the tax is owed |
| Effective tax administration | The tax is collectible, but collecting it would create economic hardship or be unfair given exceptional circumstances |
Most offers are filed on doubt as to collectibility.
How the IRS values an offer
The IRS calculates reasonable collection potential: the net equity in assets plus a measure of future disposable income. An offer generally needs to equal or exceed that amount. For a business, the analysis includes receivables, cash, equipment and the income the business is expected to produce.
Fees and payments
- Application fee: $205, with Form 656.
- Lump-sum offer: pay 20% of the offer amount with the application; if accepted, the rest is paid in five or fewer payments.
- Periodic payment offer: make the first proposed payment with the application and keep paying while the IRS considers it.
- The low-income waiver of the fee and payments is available only to individuals.
Before applying
The IRS returns applications from taxpayers who are not in filing and payment compliance. Before applying, a business generally must:
- File all required returns
- Make current-year estimated tax payments
- Make current-quarter federal tax deposits, if it has employees
- Not be in an open bankruptcy
The IRS's online pre-qualifier tool gives an early read on eligibility.
Alternatives that often fit better
| Option | When it fits |
|---|---|
| Penalty abatement | Much of the balance is penalties; first-time abatement or reasonable cause may apply |
| Installment agreement | The business can pay over time from cash flow |
| Currently not collectible status | Temporary hardship; collection pauses, interest continues |
| Correcting the return | The balance comes from an error, such as a missed credit or payment applied to the wrong period |
Payroll taxes need extra care
Unpaid employment taxes include trust fund amounts withheld from employees. The IRS can assess the trust fund recovery penalty personally against responsible individuals, such as officers who control payments. Resolving a payroll tax balance early protects the founders personally, not only the company.
A worked comparison
A business owes $60,000: $42,000 of tax, $12,000 of penalties and $6,000 of interest. It had a clean history before this year.
- First-time abatement may remove the failure-to-file and failure-to-pay penalties, and the interest on them.
- The remaining balance could be paid under an installment agreement from monthly cash flow.
- An offer would be considered only if the business could not pay the remaining amount from assets and income.
We review IRS balances, request penalty relief where it applies, and set up the resolution that matches the company's cash position.
Sources
- IRS, Offer in compromise
- IRS, About Form 656 (Offer in Compromise)
- IRS, Form 656-B, Offer in Compromise Booklet (PDF)
- IRS, Offer in compromise pre-qualifier
- IRS, Penalty relief
Questions founders ask
Can a business that is still operating get an offer in compromise?
It can apply, but the IRS evaluates what it could collect, including future income. Operating businesses with real cash flow often resolve balances through installment agreements instead.
What happens to refunds while an offer is pending?
Under the offer terms, the IRS keeps tax refunds for the year the offer is accepted and earlier years, applying them to the debt.
