Offer in Compromise While in Active Collections Checklist Checklist

Offer in Compromise While in Collections Reference Guide

Understanding the Collections Context

An Offer in Compromise is a formal proposal to settle your tax debt for less than you owe. Filing one while the IRS Collections division is actively pursuing you creates a unique situation with specific timing rules and procedural protections. While processing an offer in compromise and during any appeal period, the IRS generally suspends enforced collection actions, including levies and wage garnishments.

Collection may continue in limited circumstances, such as when the IRS determines the taxpayer is attempting to dissipate assets or when the offer is deemed frivolous. Federal tax liens that were filed before the OIC submission typically remain in place during processing.

Success depends on understanding that Collections and the OIC unit operate separately, and your actions during the review period can strengthen or weaken your negotiating position.

Who Should Use This Guide

This guide applies to you if the IRS Collections division has sent you notices or is actively pursuing payment, if you have received a levy notice, wage garnishment notice, or bank levy, if you owe back taxes and cannot pay the full amount, or if you want to propose paying a lower settlement amount while collection activity is ongoing. Use this guide if you have received a Final Notice of Intent to Levy or if you are self-employed or a small business owner with unpaid payroll or income taxes.

This guide does not apply if your account is in the examination or audit stage rather than collections, if you have already entered into a payment plan that you are honoring, if your debt is under criminal investigation, if you are in bankruptcy proceedings, or if your case involves only estimated tax penalties with no underlying unpaid tax.

What the IRS Evaluates

The IRS Collections function prioritizes immediate payment. Filing an OIC signals that you cannot pay immediately. The IRS will measure your reasonable collection potential, which is their estimate of what you can actually pay, before considering any settlement.

The IRS focuses on your current income, assets, and monthly living expenses when calculating your reasonable collection potential. The IRS verifies whether you have filed all legally required tax returns. The IRS checks whether you are current on estimated taxes or payroll deposits if self-employed. The IRS evaluates your assets that can be used to satisfy the debt.

Your leverage changes when you demonstrate that your financial situation has genuinely worsened since the debt arose, when you provide documentation that the IRS's estimate of what you can pay is too high, or when you offer a lump-sum payment that settles the case faster.

Missing filing deadlines, failing to submit required returns while the OIC is pending, failing to respond to requests for financial information from the OIC unit, incurring additional tax debt after you have filed the compromise offer, or ignoring collection notices make the situation worse.

Essential Steps When Filing During Collections

1. Verify whether the IRS Collections division is actively pursuing you by reviewing all written notices you have received in the past 12 months. Look specifically for words like "Final Notice of Intent to Levy," "Notice of Federal Tax Lien," "Levy," or contact from a Collections Revenue Officer.
2. Verify you have filed all legally required tax returns. Obtain your IRS transcripts and compare them with your records. If the IRS shows unfiled returns, file them immediately before submitting an OIC, because the IRS will not process an offer from someone with open filing obligations.
3. Calculate your reasonable collection potential using the IRS definition. Your reasonable collection potential equals the net realizable equity in your assets plus your future income potential. The IRS uses national standards and local standards for allowed living expenses. If your calculation shows you can pay more than a modest amount, the IRS will likely deny your OIC.
4. Gather three months of current financial documents. Collect recent pay stubs for the past two months, bank statements for the past three months, mortgage or rent statements, utility bills, car payment records, insurance bills, and proof of any child support or alimony. Incomplete financial documentation is a common reason OICs are rejected outright.
5. Document why you cannot pay the full debt and why you deserve a compromise. Provide a concise statement detailing the reasons for the debt and explaining why your current financial situation makes full payment unfeasible. Include dates and details.
6. Determine whether you will submit Form 656 based on doubts about collectibility, liability, or effective tax administration. Most taxpayers in collections should submit Form 656 with a specific dollar offer based on their reasonable collection potential.
7. Calculate your opening offer amount using the IRS formula. For lump-sum offers, future income equals monthly disposable income multiplied by 12. For periodic payment offers, multiply the monthly disposable income by 24 months, or by the number of months remaining under the collection statute, if fewer. Add the net realizable equity in your assets to determine your reasonable collection potential.
8. Understand that the IRS generally suspends enforced collection actions automatically during OIC processing. You may communicate with your assigned revenue officer to confirm the suspension; however, this is a standard procedural protection, not a discretionary accommodation.
9. Submit your OIC application along with all required documents. Use Form 656, Form 433-A for wage earners, or Form 433-B for self-employed individuals, a cover letter explaining your offer, copies of recent returns, and your financial documents.
10. Track your case status regularly after submission. Check whether the IRS is requesting additional documents. Most issues arise because the IRS sent a request for information that the taxpayer either never received or did not respond to promptly.
11. If the IRS requests additional information or amended financial documents, respond within 30 days. The OIC review period is limited. Submit responses to the exact address listed on the request letter.
12. Understand your appeal rights if the IRS denies your OIC. You have 30 days from the date of the rejection letter to file Form 13711 to request an appeal with the IRS Office of Appeals.

Common Mistakes to Avoid

● Failing to file missing tax returns before submitting the OIC triggers rejection and wastes months. The IRS will only negotiate a settlement with individuals who have met their basic filing obligations.

● Submitting an OIC with insufficient or outdated financial documentation gives the IRS grounds to request new documents or reject the offer outright. Missing or vague financial information is interpreted as an incomplete application.

● Incurring new tax debt or failing to file returns while the OIC is pending causes the IRS to view you as non-compliant and may result in denial. The IRS expects taxpayers to stay current on all tax obligations during the review period.

● Offering an amount far below your calculated reasonable collection potential without a precise justification results in denial. The IRS uses its formula, and it expects your offer to align with it or include specific evidence that the formula is incorrect for your situation.

● Failing to respond when the IRS requests additional information can result in the automatic withdrawal of the application. The OIC unit sends follow-up requests by mail. The IRS may withdraw the application and resume collection activity if you do not respond within 30 days.

● Submitting an OIC when you are earning a stable, adequate income can lead to denial. The IRS will calculate that you can afford to pay the full debt on an installment plan. An OIC is intended for situations where genuine financial hardship makes it impossible to make payments.

Actions That Improve Outcomes

Submitting a complete and accurate OIC application, along with current financial documentation, strengthens your position. Timing matters: filing an OIC earlier in the collection process, before aggressive enforcement begins, improves your negotiating position.

Maintaining full tax compliance during the OIC review period by filing all required returns on time and paying any estimated taxes currently due demonstrates your seriousness about resolving the debt. Clear documentation of changed financial circumstances or specific errors in the IRS calculation supports your case.

When to Seek Professional Assistance

Seek professional help if you have received a notice of federal tax lien and a collections notice within the past 60 days, if you have been assigned a revenue officer who is actively pursuing a specific levy or asset seizure, or if your OIC has been rejected once. You believe the IRS calculation of your reasonable collection potential is incorrect if your financial situation changed significantly between the time you submitted the OIC and now, or if you are self-employed, operate a business with employees, or have payroll tax debt in addition to income tax debt.

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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.