Navigating the Hawaii Offer in Compromise for Tax Relief Solutions

Introduction to Tax Relief Options

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.

Offer in Compromise Program

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.

Hawaii vs. IRS Offer in Compromise Programs

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.

Application Fee

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.

Initial Payment Requirement

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.

Required Forms

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.

Collection Activity Suspension

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.

Grounds for Acceptance

Both the IRS and the Hawaii Department of Taxation consider offers based on the same three grounds:

  • Doubt as to collectability (the taxpayer cannot afford to pay the full debt),

  • Doubt as to liability (there is a legitimate dispute about whether the debt is owed), and

  • Effective tax administration (collecting the full amount would create an economic hardship or would be unfair).

Appeal Rights

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.

Processing Timeline

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.

Use of Federal Forms

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.

Eligibility Requirements for IRS Offer in Compromise

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.

Basic Requirements

The following conditions must be met before the IRS will process your offer:

  • You must have filed all required tax returns.

  • You must have made all necessary estimated tax payments for the current year.

  • If you are a business owner with employees, you must have made all required federal tax deposits for the current and previous two quarters.

  • You cannot be involved in an open bankruptcy case.

  • You must include a completed IRS Form 656 and either Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.

If you don't comply with these requirements, the IRS will return your offer without any consideration.

Grounds for Acceptance

The IRS will only accept an offer if one of the following three conditions is met:

  • Doubt about Collectability: The IRS believes you cannot pay the full tax debt within the statutory collection period.

  • Doubt as to Liability: There is a legitimate dispute about the existence or amount of the tax debt.

  • Effective Tax Administration: You can pay the full amount, but doing so would cause economic hardship or would be unfair based on exceptional circumstances.

Each ground requires detailed documentation, including a financial statement and evidence of hardship or legal error, depending on the reason claimed.

Automatic Disqualifiers

The IRS will not process your Offer in Compromise application under the following circumstances:

  • If you are in bankruptcy proceedings, your offer is automatically ineligible for consideration. Your bankruptcy must be resolved before applying.

  • If your case has been referred to the Department of Justice, the IRS no longer has jurisdiction to review your offer.

  • The IRS can't process an offer if you don't owe taxes.

  • If the statutory period for collections on your tax debt has already expired, the IRS cannot accept an offer related to it.

  • Your application will be rejected if you have not filed all required tax returns or are not current with estimated tax payments or federal tax deposits.

  • Unless you qualify for a low-income exemption, the IRS will return your offer without review if you fail to include the required application fee and initial payment—

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.

Eligibility Requirements for Hawaii Offer in Compromise

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.

Basic Conditions

To be considered for a Hawaii Offer in Compromise, you must meet at least one of the following five core eligibility requirements:

  • You are retired or permanently disabled and unable to generate future income sufficient to pay the debt.

  • The total value of your assets—including property, bank accounts, and investments—is less than the amount of taxes owed.

  • You do not have significant passive income sources, such as rental or investment income, that could be used to pay your tax liability.

  • You have filed all required Hawaii tax returns through the current period.

  • You have not previously received tax relief through bankruptcy, expired collection statutes, innocent spouse relief, or prior settlements with the department.

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.

Grounds for Acceptance

Hawaii recognizes three legal grounds for accepting an Offer in Compromise:

  1. Doubt about Collectability: The department believes you will never be able to pay the full amount due, even over time. This may apply if you have no assets, limited income, and no realistic ability to improve your financial condition.

  2. Doubt as to Liability: There is reason to believe the amount assessed may be incorrect, possibly due to an audit error, missing documentation, or misinterpretation of tax law.

  3. Exceptional Circumstances (Effective Tax Administration): You can technically pay the debt, but doing so would cause significant hardship or be considered unfair. This might include a serious illness that limits your ability to support your family.

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.

How to Apply for an Offer in Compromise

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.

How to Apply for an OIC with the IRS

To apply for a federal Offer in Compromise, do the following:

  1. Use the IRS Pre-Qualifier Tool

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.

  1. Gather the Required Forms

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.

  1. Select a Payment Option

 You can choose between a lump sum offer or periodic payments:

  • Lump Sum Offer: Submit 20 percent of your proposed offer with the application and pay the remaining balance in five or fewer payments within five months of acceptance.

  • Periodic Payment Offer: Submit your first monthly payment with the application and continue to make monthly payments while the IRS evaluates your offer.

  1. Calculate and Include Fees

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.

  1. Submit the Application

You can mail your completed application to the IRS address in the Form 656 booklet or submit it online via your Individual Online Account.

Hawaii OIC Application Process

To apply for a Hawaii Offer in Compromise, follow these steps:

  1. Contact Collections First

The Hawaii Department recommends contacting the collections staff before applying. Sometimes, a payment plan may be a more appropriate solution than an OIC.

  1. Complete Required Forms

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.

  1. Compile Supporting Documents

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.

  1. Submit the Application

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.

Common Mistakes to Avoid When Applying

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.

  1. Filing Incomplete or Outdated Forms

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.

  1. Failing to Submit Required Documentation

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.

  1. Not Complying With Filing or Payment Requirements

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.

  1. Offering an Unrealistic Payment Amount

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.

  1. Skipping Alternative Solutions

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.

  1. Applying at the Wrong Time

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.

Alternatives to an Offer in Compromise

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.

Installment Agreement

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.

Currently Not Collectible (CNC) Status

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.

Penalty Abatement

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.

Innocent Spouse Relief

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.

Resources for Hawaii Taxpayers

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.

Hawaii Department of Taxation

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.

Internal Revenue Service (IRS)

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.

Low-Income Taxpayer Clinics (LITCs)

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.

Qualified Tax Professionals

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.

Frequently Asked Questions (FAQs)

Can I apply for both Hawaii and IRS Offers in Compromise at the same time?

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.

How long does the Offer in Compromise process take in Hawaii?

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.

What happens to collections during the review process?

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.

What if my offer is rejected? Can I appeal?

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.

Who qualifies as “low income” for fee waivers?

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.

Do I need a tax attorney or CPA to apply?

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.

Is my Offer in Compromise publicly disclosed?

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.