The Tax Increase Prevention and Reconciliation Act of 2005 made significant changes to the IRS’s Offer in Compromise program. These new rules went into effect for all Offers in Compromise submitted after July 16, 2006. Perhaps the most significant change came with the requirement that all Offers must be submitted with a down payment. For a lump sum offer, a taxpayer must pay 20% of the Offer up front. For an Offer that will be paid in installments, a taxpayer must make the planned monthly payments required in the Offer until it is accepted by the IRS.
If the taxpayer makes the planned payments for at least 2 years without the Offer being returned, withdrawn, or rejected, then the Offer is deemed to be accepted by the IRS. This means that an Offer in Compromise can be submitted for less than what the IRS would deem acceptable. If the Offer is not responded to in a timely manner, then the taxpayer gets to pay the Offered amount and the IRS must accept it.
Taxpayers who fall into a low income bracket don’t have to pay the down payment regardless of whether the Offer is a lump sum or installment arrangement. These taxpayers are also exempt from paying the filing fee of $150.