Maine Offer in Compromise Guide

Dealing with tax debt can feel overwhelming, especially when you’re unsure how to pay the full amount you owe. Fortunately, the IRS and Maine Revenue Services offer compromise programs that may allow qualifying taxpayers to settle their tax liability for less than the full amount. These programs are designed to help individuals experiencing severe or extreme financial hardship find a path toward tax debt relief.

A formal agreement, referred to as an offer in compromise, requires the taxing authority to accept a reduced payment to satisfy your tax obligations. While the Internal Revenue Service administers the federal program, Maine offers its version specifically for state-level taxes. Understanding the differences between these programs is essential, particularly if you owe both state and federal taxes.

This guide explains how the Maine offer in compromise works, compares it to the IRS option, and outlines the steps required to apply. Whether you're facing unpaid balances from past tax years, recovering from a significant financial hardship, or simply trying to regain control of your finances, this article will help you evaluate your eligibility and prepare a strong application.

What Is an Offer in Compromise? 

An offer in compromise is a formal agreement between a taxpayer and a taxing authority to settle a tax debt for less than the full amount owed. This option is available at the federal and state levels and is designed to help taxpayers who cannot afford to pay their entire tax liability due to financial hardship. While the Internal Revenue Service offers a nationwide compromise program, the state of Maine operates its own version with different criteria and review procedures.

To better understand how these programs work, consider the following key elements:

Purpose of the Offer in Compromise

• Taxpayers facing significant financial hardship can resolve their debt without paying the entire amount.
  
  
• It assists those unlikely to fulfill their tax responsibilities by utilizing conventional collection methods.
  
  

How It Works

• The taxpayer submits a formal request to pay a reduced amount, based on their financial condition.
  
  
• The tax authority reviews the application and supporting documentation to determine whether accepting less than the full tax liability is in its best interest.
  
  
• If approved, the taxpayer must meet all terms and remain compliant for a specific period, usually five years.
  
  

Types of Offer in Compromise Programs

• Federal Offer in Compromise: Managed by the IRS, this program applies to federal income taxes, payroll taxes, and other federal tax debts. It follows strict eligibility requirements and uses standardized calculations based on income, basic living expenses, and asset equity.
  
  
• Maine Offer in Compromise: Administered by Maine Revenue Services, this program is discretionary and applies to state taxes such as income, sales, and withholding tax. It does not follow a rigid formula but considers other factors such as extraordinary circumstances or serious illness.
  
  

The offer in compromise can provide meaningful relief for taxpayers with a specific financial situation who cannot pay the entire amount they owe by offering an opportunity to resolve tax debt through structured payment options.

Overview of the Maine Offer in Compromise Program 

The Maine Offer in Compromise (OIC) program allows qualifying taxpayers to settle their state tax debt for less than the full amount owed. Unlike the IRS compromise program, this option is not a legal right in Maine. It is entirely discretionary and granted only when the State Tax Assessor determines that accepting less than full payment is appropriate. 

The program applies to a variety of state tax obligations, including

• Individual income taxes assessed by Maine Revenue Services for prior or current tax years.
• Sales taxes collected but not remitted by businesses may be more difficult to compromise.
  
  
• Individuals or business entities owe withholding taxes and other state-imposed obligations.
  
  

Maine Revenue Services considers various financial and personal factors when evaluating an offer. While there is no fixed formula, the agency assesses whether settling the debt aligns with the state’s best interests. Key considerations include:

• The agency considers the taxpayer's overall financial condition, encompassing income, expenses, assets, and liabilities.
  
  
• Events beyond the taxpayer's control, such as serious illness or prolonged unemployment, may have caused the tax liability.
  
  
• Collection actions are highly likely to recover the full tax debt, especially if the taxpayer has few assets or minimal disposable income.
  
  
• There is evidence of extraordinary circumstances, such as extreme financial hardship, medical crises, or the loss of a primary income source.
  
  

Because the program is highly case-specific, success depends on providing accurate financial disclosures, a compelling written statement, and all required documentation. Incomplete or unsubstantiated offers are typically denied without further consideration.

Federal vs. State: Key Differences in Offer in Compromise Programs

The IRS and Maine Revenue Services allow taxpayers to settle their tax debts for less than the full amount owed through an Offer in Compromise (OIC). However, these programs differ significantly in their legal basis, procedures, eligibility requirements, and taxpayer protections. Understanding these differences is critical for preparing practical applications and avoiding common pitfalls. Below is a detailed comparison highlighting the key areas where the two programs diverge.

Application Fee

• The IRS charges a $205 application fee when a taxpayer submits an Offer in Compromise.
  
  
• This fee can be waived if the applicant meets the low-income certification requirements.
  
  
• Maine does not charge a formal application fee to apply for an OIC, which can lower the financial barrier to submitting an offer.
  
  

Legal Authority

• IRS OIC submissions are a taxpayer’s legal right under federal law, meaning eligible taxpayers can apply.
  
  
• In Maine, submitting an OIC is not a legal right. Instead, the State Tax Assessor has complete discretion over considering or accepting an offer.
  
  

Eligibility Criteria

• The IRS has well-defined eligibility standards and pre-qualification rules that applicants must satisfy before submitting an offer.
  
  
• Maine’s eligibility criteria are more subjective, allowing for greater flexibility. The state assesses eligibility based on the taxpayer’s financial situation rather than strict rules.
  
  

Grounds for Acceptance

• The IRS can approve offers for tax relief based on the following criteria:
  
  
  
  • Doubt as to collectability (when the taxpayer is unlikely to pay the full debt),
    
    
  • Doubt as to liability (when there is a legitimate dispute about the tax amount owed),
    
    
  • When paying the full amount would result in significant economic hardship, the administration of taxes becomes effective.
    
    
• Maine only accepts offers under two grounds: doubt as to collectability or doubt as to liability. The state does not consider hardship-based offers.
  
  

Financial Evaluation Method

• The IRS uses standardized Collection Financial Standards to determine a taxpayer’s reasonable collection potential (RCP), which informs how much they should offer.
  
  
• Maine takes a more flexible approach and reviews each case individually, without using a fixed formula or national standards.
  
  

Required Documentation

• IRS applicants must submit:
  
  
  
  • Form 656 (Offer in Compromise),
    
    
  • Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses,
    
    
  • A comprehensive collection of financial documents is also required.
    
    
• Maine requires a complete personal financial statement and a written explanation supporting why the offer is appropriate. No standardized forms are mandated.
  
  

Collection Suspension

• While the IRS reviews an OIC, it automatically suspends most collection activities, providing temporary relief from garnishments or levies.
  
  
• Maine does not automatically suspend collections. Taxpayers must specifically request a hold, typically granted only in liability-related cases.
  
  

Appeal Rights

• If the IRS denies an OIC, taxpayers can appeal the decision within 30 days.
  
  
• Maine offers no administrative or judicial appeal process if the State Tax Assessor rejects an offer. The decision is final.
  
  

Processing Timeline

• IRS OICs are usually processed within 6 to 24 months, depending on the complexity of the case and agency workload.
  
  
• Maine does not provide a standard processing timeframe, making it more difficult for taxpayers to anticipate how long their offer will remain under review.

Each program requires a separate application, even if you owe state and federal taxes. An offer the IRS accepts does not influence MRS’s decision, and vice versa. You must follow each agency’s procedures carefully and provide the documentation they require to be considered.

Eligibility Requirements

Before applying for a compromise offer, you must confirm that you meet all eligibility requirements. These vary between the IRS and Maine programs and must be addressed thoroughly to avoid automatic disqualification.

IRS Offer in Compromise Eligibility

To apply for a federal offer in compromise, you must meet the following basic conditions:

• All required tax returns must be filed, including those from previous and current years.
  
  
• You must be current with estimated tax payments, especially if you are self-employed or do not have tax withholding through an employer.
  
  
• You cannot be in an open bankruptcy proceeding at the time of application.
  
  
• If you are an employer, you must have submitted all required federal tax deposits for the current and prior quarters.
  
  

The IRS allows offers under three specific grounds:

• Doubt about Collectability applies when you cannot reasonably pay the full tax liability, based on your financial condition.
  
  
• Doubt about Liability is available if you believe the amount the IRS claims you owe is incorrect or based on an error.
  
  
• Effective Tax Administration may apply if paying the full debt would cause extreme financial hardship, even if the debt is technically collectible.
  
  

The IRS may waive the $205 application fee and initial payment for qualifying low-income taxpayers. Eligibility is based on your adjusted gross income, family size, and the IRS’s low-income certification guidelines.

Maine Offer in Compromise Eligibility

Maine has a more discretionary eligibility process. You may be eligible if:

• You have filed all required tax returns, including business and individual filings.
  
  
• Your offer is not submitted to delay collection or based on fraudulent information, as these offers are automatically rejected.
  
  
• You provide complete and accurate financial disclosures, including income, basic living expenses, and assets.
  
  
• You base your offer on doubt as to collectability or doubt as to liability, as these are the only two grounds Maine considers.
  
  

Unlike the IRS, Maine does not allow offers based solely on financial hardship or inability to pay due to health or age. However, if supported by appropriate documentation, these factors may still influence the State Tax Assessor’s decision.

Step-by-Step Application Process 

Applying for an offer in compromise requires attention to detail, accurate documentation, and a clear understanding of which program you are using. Below are the step-by-step instructions for both the IRS and Maine processes.

How to Apply for an IRS Offer in Compromise

1. Confirm Eligibility
   Before beginning the application, use the IRS Pre-Qualifier Tool to determine if you meet the basic eligibility requirements. You must have filed all required tax returns, made current estimated tax payments, and not be in an open bankruptcy proceeding.
   
   
2. Gather Required Documentation
   You will need several forms and financial records, including:
   
   
   
   • Form 656 (Offer in Compromise)
     
     
   • Form 433-A (OIC) for individuals or 433-B (OIC) for businesses
     
     
   • Your most recent tax returns
     
     
   • Proof of income, such as pay stubs or self-employment income
     
     
   • Statements showing asset values (vehicles, real estate, retirement accounts)
     
     
   • Monthly expense documentation (housing, utilities, food, etc.)
     
     
3. Calculate the Offer Amount
   The IRS uses your Reasonable Collection Potential (RCP) to determine how much you can pay. This includes:
   
   
   
   • Net equity in assets (e.g., home, vehicle, retirement accounts)
     
     
   • Disposable income over 12 or 24 months, depending on your selected payment option
     
     
4. Select a Payment Option
   
   
   
   • Lump Sum: Pay 20% of your offer upfront and the remainder in five or fewer payments within five months of acceptance.
     
     
   • Periodic Payment: Make the first payment with your application and continue making monthly payments while the IRS reviews your offer.
     
     
5. Submit the Application Package
   Mail your complete application to the address in the Form 656 booklet, or submit it online through your IRS account. Include the $205 application fee unless you qualify for a low-income waiver.
   
   

How to Apply for a Maine Offer in Compromise

1. Determine Your Grounds for Compromise
   Identify whether your offer is based on doubt as to liability or collectability. Maine does not consider offers based solely on financial hardship unless supported by other factors such as serious illness or extraordinary circumstances.
   
   
2. Gather and Complete Required Documentation
   Prepare the following:
   
   
   
   • A detailed written statement explaining your situation
     
     
   • A complete personal financial statement, including assets, debts, income, and basic living expenses
     
     
   • Your most recent federal and state tax returns
     
     
   • Pay stubs or proof of income for the current year
     
     
   • Any supporting documentation relevant to your claim, such as medical bills or evidence of income loss
     
     
3. Draft Your Offer
   Clearly state the amount you propose to pay, the reason for the offer, and why it is in the state’s best interest to accept it. The offer must reflect a realistic amount based on your financial condition.
   
   

Submit Your Application to MRS
Mail your complete application package to Maine Revenue Services.

Compliance Division  

PO Box 1060  

Augusta, ME 04332-1060  

4.  If you are working with an MRS examiner, include their name on the envelope.

Common Reasons for Rejection

Both the IRS and Maine Revenue Services review offer in compromise applications carefully, and many are denied due to preventable errors. Understanding the most common reasons for rejection can help you avoid unnecessary delays.

Federal Offer in Compromise Rejections

• Insufficient Offer Amount: The IRS may reject your offer if it falls short of your calculated Reasonable Collection Potential based on income and assets.
  
  
• Incomplete Application: Missing forms, lack of signatures, or incomplete financial statements can result in automatic rejection.
  
  
• Current Year Non-Compliance: Your application will not be considered if you have not made estimated tax payments for the current year or filed required tax returns.
  
  
• Ability to Pay in Full: If the IRS determines you can pay the full tax liability through an installment agreement or asset liquidation, your offer will likely be denied.
  
  
• Fraud Indicators: The IRS will reject offers if it suspects that income or assets have been hidden or misrepresented.
  
  

Maine Offer in Compromise Rejections

• History of Non-Compliance: Offers may be rejected if you have a pattern of failing to file or pay taxes on time.
  
  
• Asset Transfers: Moving or hiding assets before submitting your offer can disqualify your application.
  
  
• Premature Submissions: Maine Revenue Services may reject offers filed too early in the collection process, especially if other collection actions have not been exhausted.
  
  
• Failure to Cooperate: Not responding to requests for additional information or documentation may result in rejection.
  
  
• Insufficient Justification: Offers without a strong financial basis or compelling written explanation are often denied.

What Happens After Acceptance

If your offer in compromise is accepted, it can provide significant tax debt relief—but it also comes with important obligations. Understanding what happens next can help you stay in compliance and avoid losing your settlement.

For IRS Offers

• Finalization: The IRS will send you an acceptance letter outlining the terms of your agreement, including the amount settled and payment terms.
  
  
• Tax Compliance Period: You must fully comply with all tax obligations for five years after acceptance. This includes filing required tax returns and making timely payments for any new taxes owed.
  
  
• Default Consequences: If you fail to meet the terms of your agreement during these five years, the IRS may revoke the offer and reinstate the full tax liability, including penalties and interest.
  
  
• Tax Implications: The IRS may issue Form 1099-C for canceled debt, which could be taxable income in the year it is forgiven.
  
  

For Maine Offers

• Settlement Terms: Accepted offers are finalized with a written agreement. Maine Revenue Services may also impose conditions like staying current with future taxes or submitting additional documentation.
  
  
• Compliance Requirements: Like the IRS, Maine expects you to comply with filing and payment obligations.
  
  
• No Formal Review: If your situation changes or you default, there is no formal appeal process. MRS may resume collection activities on the full tax bill.
  
  

By understanding the responsibilities that follow acceptance, taxpayers can protect their settlement and regain control of their finances in the long term.

Should You Apply on Your Own or Hire a Professional? 

Whether you choose to submit an offer in compromise independently or with the help of a tax professional depends on the complexity of your financial situation. While some taxpayers can navigate the process alone, others benefit greatly from expert assistance.

When It Makes Sense to Apply on Your Own

You may be able to handle the application yourself if:

• Your financial records are simple to document.
  
  
• You do not own a business or hold complex investments.
  
  
• You qualify based on your financial condition and unpaid balances.
  
  
• You have reviewed the IRS and Maine Revenue Services guidelines and are confident you will meet the documentation requirements.
  
  

Filing on your own requires careful attention to required tax returns, accurate calculations, and clear written statements. Minor mistakes—such as underreporting income or leaving out supporting documentation—can lead to delays or denials.

When to Hire a Tax Professional

Consider hiring a qualified tax professional if you meet any of the following criteria:

• You have business income, rental properties, or investment assets.
  
  
• Your financial hardship involves serious illness, job loss, or extraordinary circumstances.
  
  
• You owe federal and Maine state taxes and want to coordinate dual offers.
  
  
• You’ve had a previous offer rejected or are unsure about eligibility requirements.
  
  

Tax professionals—including CPAs, enrolled agents, and tax attorneys—understand the nuances of the IRS collection process and Maine’s discretionary review system. They can help ensure your offer reflects your financial reality and includes all required documentation.

FAQs

Can I simultaneously apply for a Maine offer in compromise and an IRS offer?

Yes, taxpayers may submit a Maine offer in compromise while applying for a federal offer through the Internal Revenue Service. Each compromise program has eligibility requirements, an application process, and review criteria. Submitting both is common for those with federal and state tax debt. However, approval by one agency does not affect the other, and separate tax returns and supporting documentation must be provided. Decision of the State Tax Assessor

What happens if I’m in an open bankruptcy proceeding?

You can't submit an offer in compromise to the IRS if you're in an open bankruptcy case. The IRS collection process halts during bankruptcy, but offers are automatically rejected. Maine Revenue Services also typically denies OIC applications during bankruptcy. Taxpayers must wait until the case is closed and any unpaid balances or penalties are reassessed to qualify for tax debt relief through a compromise.

Does Maine stop collection actions during the review?

Maine does not automatically suspend collection activities when reviewing an offer in compromise (OIC). While the IRS pauses collection actions during the application process, Maine Revenue Services may continue pursuing the tax bill unless a request is made, especially for cases of doubt as to liability. When requesting a hold, taxpayers should communicate with the assigned agent and provide a written statement detailing their financial hardship or extraordinary circumstances.

What if I’m on an installment agreement when I apply?

If you're currently on an IRS installment agreement, you can halt your payments while your offer in compromise undergoes review. The IRS employee handling your case will apply the date received and pause collection efforts. However, Maine Revenue Services does not guarantee a pause in payments. Taxpayers with an active payment plan should continue payments unless they receive written confirmation from MRS to suspend them.

Is forgiven debt through an offer in compromise considered taxable?

Yes, forgiven IRS debt may be considered taxable income by the Internal Revenue Service. Taxpayers who settle for less than the full tax liability may receive Form 1099-C, reporting the forgiven amount as income for that tax year. While some tax forgiveness programs include exceptions for insolvency or extreme financial hardship, it is best to consult a tax professional to understand the income and tax liability implications for state and federal taxes.

What documents do I need for my offer in compromise application?

You’ll need tax returns, proof of income, asset records, and a detailed personal financial statement outlining your basic living expenses to apply for a compromise offer. Additional documentation that may be required includes pay stubs, bank statements, mortgage or loan balances, and medical records if you are claiming serious illness or significant financial hardship. Ensure your eligibility and present a firm offer by submitting complete, accurate supporting documentation.

Can I make changes to my offer once I've submitted it?

For IRS offers, taxpayers may increase their offer amount or switch payment options if the initial amount is rejected. The IRS allows modifications if fewer payments or a larger lump sum improves the compromise’s viability. However, Maine Revenue Services typically does not allow changes once the offer and supporting documents are submitted. If you need to adjust your offer, it’s usually better to withdraw and reapply with updated financial information.