Many people in Hawaii are getting deeper into tax debt because they haven't paid their income tax, general excise tax, or state sales tax. Penalties, interest, and collection actions keep increasing, making it harder to deal with the burden, especially for people with few assets or businesses having trouble meeting their financial obligations. The Offer in Compromise (OIC) program from the IRS and the Hawaii Department of Taxation may help some taxpayers pay off their tax debt for less than the full amount.
An Offer in Compromise considers your income, ability to pay, monthly payments, and the total value of your assets. If you are unable to pay all of your back taxes due to financial difficulties, assistance is available. This is true for both federal and state taxes in Hawaii. The program doesn't check how much you owe in taxes, like business taxes, personal taxes, or taxes you didn't file. Instead, it looks at what can be gathered.
This guide talks about the most important parts of the Hawaii and IRS OIC programs, such as who can apply, how to do it, and what forms and papers you must send in. It also talks about how to avoid mistakes, other options like a payment plan or penalty abatement, and where to get help, like Hawaii Tax Online. Whether you're a homeowner, a consumer, or a small business owner, this resource is meant to help you lower your taxes and regain control of them.
The IRS and the Hawaii Department of Taxation offer an Offer in Compromise (OIC) program that lets some taxpayers pay off their tax debt for less than the full amount owed. This program is for people or businesses that can't pay their full tax bill because they don't have enough money or assets or are having trouble with money.
Hawaii and the IRS each have their OIC programs. The IRS program covers federal tax debts, such as unpaid income tax, penalties, and interest. Hawaii's OIC includes the state sales tax, the general excise tax, and other state-level debts. Each program looks at your finances, including your ability to pay, your assets, your monthly payments, and the value of your property, to see if your offer is in line with what they could reasonably collect.
If you meet the requirements, you can offer to pay less in one payment or in monthly installments. For instance, a taxpayer who owes $20,000 but has little money or property could settle for $6,000 if the agency agrees that this is the maximum amount they can collect.
While approval is not guaranteed, an OIC can be a valuable option for Hawaii taxpayers facing serious debt. A complete, well-supported application can stop collection actions and provide a legal path toward tax relief.
Both the Internal Revenue Service (IRS) and the Hawaii Department of Taxation (HDT) offer an Offer in Compromise (OIC) program designed to help taxpayers settle their tax debts for less than the full amount owed. However, the two programs differ in several key areas, including application procedures, required forms, initial payment expectations, and processing times. Understanding these differences is especially important for taxpayers who owe both federal and state taxes and must decide which agency to approach first.
The IRS requires a $205 application fee for most Offer in Compromise submissions. However, this fee is waived for low-income applicants who meet specific criteria. In contrast, the Hawaii Department of Taxation does not list a specific application fee for its OIC program, which may reduce upfront costs for eligible taxpayers.
When submitting an OIC to the IRS, taxpayers are generally expected to include an initial payment with their application, unless they qualify for a low-income exception. The Hawaii program also expects taxpayers to make an initial payment with most offers. However, the requirements may vary depending on the taxpayer's situation and the type of offer submitted.
To apply for an IRS Offer in Compromise, individuals must complete Form 656, along with either Form 433-A (OIC) or Form 433-B (OIC), depending on whether they are applying as individuals or businesses. Hawaii, on the other hand, uses its own state-specific forms, which include Form CM-1 and either Form CM-2 or Form CM-2B, depending on the applicant's entity type. These forms are tailored to Hawaii’s tax administration processes.
The IRS suspends collection activities while an OIC application is under review. This temporarily pauses wage garnishments, bank levies, and other enforcement actions. Hawaii offers a similar safeguard, suspending collection efforts for the specific tax periods covered by the offer, though not necessarily for all outstanding balances.
Both the IRS and the Hawaii Department of Taxation consider offers based on the same three grounds:
If the IRS rejects an Offer in Compromise, the taxpayer can appeal the decision within 30 days of receiving the rejection notice. In comparison, the Hawaii program does not explicitly specify whether appeal rights are available after a rejection, which may limit a taxpayer's options for review or reconsideration.
The IRS states that most OIC applications take between 6 and 24 months to process, depending on the case's complexity and current workload. Hawaii does not specify an official processing timeline, which may create uncertainty for applicants waiting for a decision on their offer.
Taxpayers are required to use official IRS forms when applying to the IRS. While requiring its own forms, Hawaii may accept certain federal OIC forms as supporting documentation. These forms can be helpful for taxpayers who are already in the process of applying to the IRS and wish to reuse some of the same financial information.
Both programs assess your ability to pay by reviewing your income, assets, and reasonable expenses. While the IRS follows federal regulations and national standards, Hawaii may be more flexible in evaluating exceptional circumstances. Still, both agencies expect applicants to be current on all required tax returns and to submit a complete and accurate application.
If taxpayers owe taxes at the state and federal levels, they may apply to both programs simultaneously. Each program requires a separate application and review, but providing proof of a federal offer can strengthen a state application, primarily when both agencies assess the same financial information.
Taxpayers must meet several basic requirements to be eligible for an Offer in Compromise with the IRS. The IRS employs these standards to prioritize individuals experiencing financial difficulties. A complete application must show that the taxpayer has followed federal tax laws and can't pay the full amount owed.
The following conditions must be met before the IRS will process your offer:
If you don't comply with these requirements, the IRS will return your offer without any consideration.
The IRS will only accept an offer if one of the following three conditions is met:
Each ground requires detailed documentation, including a financial statement and evidence of hardship or legal error, depending on the reason claimed.
The IRS will not process your Offer in Compromise application under the following circumstances:
Meeting eligibility requirements is only the first step. Submitting a complete, well-supported application improves your chances of approval and reduces delays. The IRS evaluates every offer based on your financial condition, including income, property, accounts, and monthly expenses.
The Hawaii Department of Taxation has its version of the Offer in Compromise program. This program lets some taxpayers pay off their state tax debt for less than the full amount owed. The state, however, looks at each application based on strict criteria, and meeting these criteria does not mean you will be accepted. Taxpayers need to know the eligibility requirements and the specific reasons Hawaii uses to lower a tax bill.
To be considered for a Hawaii Offer in Compromise, you must meet at least one of the following five core eligibility requirements:
These requirements help the Hawaii Department determine whether your financial condition justifies a reduced settlement. Applicants must provide thorough documentation to support their claims, including medical records, income statements, and account balances.
Hawaii recognizes three legal grounds for accepting an Offer in Compromise:
Each application is reviewed individually, and the department considers all documentation when evaluating your eligibility. A complete, honest financial disclosure and a clear explanation of your circumstances are essential to improving your chances of approval.
There are a few steps to take when applying for an Offer in Compromise, and the process is a little different depending on whether you are using the Internal Revenue Service or the Hawaii Department of Taxation. Before looking at your request, each agency needs certain forms, proof of income, and proof that you are following the rules for filing and paying. Turning in a complete and correct application is crucial to avoid delays or automatic rejection.
To apply for a federal Offer in Compromise, do the following:
Visit the IRS.gov website and use the Offer in Compromise Pre-Qualifier Tool. This tool helps determine if you may be eligible based on your income, assets, and expenses. Using the tool can help avoid unnecessary application fees if you're not a strong candidate.
Complete IRS Form 656, Offer in Compromise, and Form 433-A(OIC) for individuals or Form 433-B(OIC) for businesses. These forms provide detailed financial information, including monthly payments, property values, and liabilities. Be prepared to include supporting documents like bank statements, pay stubs, and mortgage records.
You can choose between a lump sum offer or periodic payments:
Include a $205 application fee unless you qualify for a low-income exemption, as defined in the IRS Form 656 booklet. If required, also submit the initial payment based on your selected option.
You can mail your completed application to the IRS address in the Form 656 booklet or submit it online via your Individual Online Account.
To apply for a Hawaii Offer in Compromise, follow these steps:
The Hawaii Department recommends contacting the collections staff before applying. Sometimes, a payment plan may be a more appropriate solution than an OIC.
Fill out Form CM-1 (Offer in Compromise) and Form CM-2 for individuals or Form CM-2B for corporations. These forms require detailed information about your income, expenses, liabilities, and assets.
Gather recent tax returns, bank statements, insurance policies, pay stubs, and other records supporting your financial condition and hardship claim. If applying based on illness or disability, include medical documentation and a statement from your physician.
The fastest method is to upload your completed forms and documents in PDF format through your account at Hawaii Tax Online. You may also mail your application to the Department of Taxation’s Collections Branch at P.O. Box 259, Honolulu, HI 96809-0259.
Accuracy and completeness are essential when applying to the IRS or the Hawaii Department. Incomplete forms, missing documents, or failure to meet eligibility requirements will result in delays or rejections. Please review all instructions and ensure your application accurately reflects your financial situation.
Submitting an Offer in Compromise is a complex process, and minor errors can result in delays, rejections, or lost opportunities for tax relief. Whether you are applying through the IRS or the Hawaii Department of Taxation, knowing common mistakes can help you avoid unnecessary setbacks.
Using outdated forms or the absence of required sections frequently leads to the return of applications. Both agencies update their forms regularly, so using the latest IRS or Hawaii Tax Online versions is essential. Please ensure all information is accurate and that every section is filled out completely.
Applicants often overlook key supporting documents such as bank statements, recent pay stubs, or previous years' tax returns. Missing documents prevent the agency from evaluating your financial condition and may result in an automatic rejection. Always include everything requested in the instructions on the form.
Your offer will not be processed if you have unfiled tax returns, missed required estimated tax payments, or deposited federal tax. Before submitting your application, you must be in full compliance and meet current payment obligations.
Proposing a settlement amount far below your demonstrated ability to pay will likely lead to rejection. The IRS and the Hawaii Department of Taxation calculate what you can pay. Use reasonable collection considerations that take into account your income, expenses, and assets. Offers should be based on documented financial reality.
Sometimes taxpayers rush into an OIC when a more straightforward solution would be more appropriate. For example, an installment agreement or hardship status may provide faster and easier relief. Consult a tax professional to explore all available options before applying.
Submitting an offer during a period of high income, recent asset acquisition, or after receiving tax credits or refunds can negatively impact your eligibility. Timing matters, and applying when your financial condition reflects hardship is often best.
Hawaii taxpayers who are having trouble paying their taxes, penalties, or interest have more options than just an Offer in Compromise. Individual solutions may be more accessible or appropriate, especially for those not qualifying for a formal compromise. Knowing about these options can help you make the best choice for your financial situation.
An installment agreement allows you to pay your tax debt monthly over time. This option is often easier to qualify for than an Offer in Compromise and may be approved more quickly. You can set up installment plans online or submit a formal request to the IRS and the Hawaii Department of Taxation. Once the agreement is in place, you may limit collection actions while interest and penalties accrue.
If your income and assets cannot pay any portion of your tax debt without causing financial hardship, you may qualify for a currently non-collectible status. This temporarily suspends collection efforts, although the tax debt remains active. You will still receive annual tax assessments, but no enforced collection actions, such as garnishments or bank levies, will occur while you are in CNC status.
If you could not pay taxes on time due to circumstances beyond your control—such as illness, natural disaster, or job loss—you may be eligible to request penalty abatement. This removes or reduces late-payment or late-filing penalties. You must provide documentation showing reasonable cause for the delay.
In cases involving joint tax returns, one spouse may qualify for relief from taxes owed due to the actions or omissions of the other spouse. Innocent spouse relief is granted when a taxpayer can demonstrate a lack of knowledge or responsibility for the underlying tax issue.
Each alternative has specific qualifications and procedures. Reviewing these options or consulting a qualified tax professional can help you determine the most effective path forward based on your current liabilities, assets, and ability to pay.
If you're considering an Offer in Compromise or exploring other tax relief options, several resources are available to help Hawaii taxpayers understand their rights, responsibilities, and available support. These services can assist with filing tax returns, setting up a payment plan, claiming tax credits, or understanding Hawaii tax regulations and procedures.
The Hawaii Department of Taxation provides forms, guidance, and submission tools through the official Hawaii Tax Online portal. Taxpayers can use this system to electronically submit Form CM-1 and supporting documents. The site also offers information about general excise tax, state sales tax, and county-level obligations that may affect your total tax liability.
The IRS website offers federal forms, pre-qualification tools, and detailed instructions for completing Form 656 and Form 433-A(OIC) or 433-B(OIC). Whether you’re applying for an Offer in Compromise, an installment agreement, or requesting penalty abatement, the IRS outlines the steps needed to comply with federal tax law.
These clinics assist qualified individuals who need help resolving disputes with the IRS or state taxation authorities. Services may include legal advice, preparation of exemption claims, or help responding to assessment notices. LITCs are especially helpful for those facing collection actions or who cannot pay for a private tax professional.
Taxpayers with complex business taxes, property issues, or high-value assets should consult a tax professional such as an enrolled agent, CPA, or tax attorney. These experts can help determine whether you qualify for relief and guide you through submission, ensuring your financial condition is documented and your forms are complete.
Each of these resources can help Hawaii consumers resolve tax issues and stay compliant with federal and state tax laws.
You can simultaneously apply for the Hawaii Department of Taxation and the Internal Revenue Service Offer in Compromise programs. Each agency requires its application, supporting documents, and payment. Although they operate independently, submitting a federal offer may help your Hawaii request, especially if it reflects your financial condition and demonstrates your limited ability to pay state and federal tax debt.
The Hawaii Department of Taxation does not provide a specific timeline for processing Offers in Compromise. However, based on the complexity of the financial review and the volume of submissions, the process can take several months. Applicants should use Hawaii Tax Online to track their submission and contact department representatives if they have questions about the status of their offer.
While evaluating your Offer in Compromise, the IRS and the Hawaii Department of Taxation typically suspend most collection actions. This protects you from enforced measures like wage garnishments, bank levies, or property seizures. However, interest and penalties may continue to accrue, and the IRS may still file a federal tax lien to protect the government’s interest during the review period.
If the IRS rejects your offer, you can appeal the decision by submitting Form 13711 within 30 days of the rejection notice. The Hawaii Department of Taxation does not outline a formal appeal process on its website, but you should contact its collections office to discuss next steps. Sometimes, you may revise and resubmit your offer with updated information or additional documentation.
The IRS defines low-income eligibility in the Form 656 booklet based on household size and income levels. If you meet these guidelines, you may be exempt from the $205 application fee and the initial payment. Hawaii may also waive payment requirements for low-income taxpayers, particularly when exceptional circumstances exist. Still, including a written explanation and proof of hardship is important when submitting your offer.
Hiring a tax professional is not required, but it is highly recommended for those with complex financial situations, multiple sources of income, or prior application rejections. A qualified tax professional can help ensure that your forms are complete, your assets are accurately listed, and your eligibility is well-documented, increasing your chances of success.
The IRS makes some Offer in Compromise information available for public inspection, including the taxpayer’s name and liability amount, though personal financial details remain confidential. The Hawaii Department of Taxation does not indicate whether offers are made public. Still, it's best to assume that basic information may be subject to disclosure under state law or public records requests.
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