Background and why this matters

Closing a business doesn’t stop federal tax obligations. Payroll taxes, employment tax deposits, income tax, and unfiled returns can create priority liabilities that survive the business and may reach owners personally through trust fund penalties or personal guarantees. For many small-business owners I work with, resolving the IRS exposure quickly and deliberately is the difference between a clean wind-down and prolonged collection actions such as liens, levies, or referral for criminal investigation in severe cases.

Two primary IRS paths to resolve tax debt are:

  • Installment Agreements — a payment plan to pay the tax over time (with interest and penalties continuing to accrue).
  • Offer in Compromise (OIC) — an agreement to settle the debt for less than the full balance if the IRS finds the lesser amount is the most it can reasonably expect to collect.

These tools serve different purposes. An installment agreement is usually the faster, more predictable option. An OIC is appropriate when collection of the full liability is unlikely, when liquidation would produce less than what the business can reasonably pay, or in exceptional hardship situations (see IRS guidance) (IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise).

Key eligibility requirements and practical checks

  • File all required tax returns. The IRS generally requires you to be up to date on filings before approving either an Installment Agreement or an OIC (IRS, Understanding Your Installment Agreement: https://www.irs.gov/businesses/small-businesses-individuals/understanding-your-installment-agreement).
  • Be current with estimated tax payments for the current tax year when applying for an OIC.
  • Not be in an open bankruptcy proceeding when filing an OIC.
  • For payroll/trust fund liabilities: these are high priority. Responsible persons may face Trust Fund Recovery Penalty exposure; an OIC or installment plan does not eliminate criminal risk and may have special processing for payroll taxes.

How the IRS evaluates an OIC for a closing business

The IRS primarily considers three grounds for accepting an OIC (IRS, Offer in Compromise):

  1. Doubt as to collectibility — the taxpayer’s assets and future income will not yield full payment within a reasonable period.
  2. Doubt as to liability — there is a legitimate dispute as to the correctness of the assessed tax.
  3. Effective tax administration — no doubt exists about liability or collectibility, but requiring full payment would create economic hardship or be unfair and inequitable.

For a business closure, the most common basis is doubt as to collectibility. The IRS calculates a taxpayer’s Reasonable Collection Potential (RCP): the net realizable value of assets plus an allowance for expected future income over a defined period. A successful OIC usually requires showing that the RCP is less than the tax liability. For businesses, the IRS expects detailed documentation — profit and loss statements, balance sheets, bank statements, asset appraisals, and a completed Collection Information Statement (Form 433-B for businesses) — so accurate bookkeeping matters.

Forms and process — practical checklist

  • Form 656 (Offer in Compromise): the application the IRS uses for OICs. Include the required initial payment and the $205 application fee unless you qualify for a low-income waiver (see Form 656 instructions and IRS OIC site).
  • Form 433-B (Collection Information Statement for Businesses): documents business assets, liabilities, and current income/expenses.
  • For Installment Agreements: businesses or sole proprietors often use Form 9465 (Installment Agreement Request) or enroll online if eligible. The IRS also may request Form 433-B to evaluate ability to pay.

Note: Fee and payment waiver rules can change. Always check the current IRS pages before submitting (IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise).

Step-by-step approach when closing a business

  1. Inventory liabilities and filings. Identify all tax types (income tax, payroll taxes, sales tax, employment taxes) and confirm which returns are unfiled. Payroll and trust fund taxes are highest priority.
  2. Gather financial records. Prepare the last 3–24 months of bank statements, balance sheets, profit & loss, asset lists, and any liquidation or sale quotes for inventory or equipment.
  3. Evaluate the realistic collectibility. Calculate what would be recoverable if assets were sold and what owners could pay personally without causing undue hardship. This is your internal RCP estimate.
  4. Choose a path.
  1. Submit the application. For an OIC, include Form 656, Form 433-B, the application fee (if applicable), and required initial payment. For an installment agreement, use the online portal or file Form 9465/433-B as requested.
  2. Maintain compliance. If you negotiate an OIC, you must file and pay future returns on time for the period specified. For installment agreements, stay current with payments. Failure to comply can reopen collection actions or void an accepted OIC.

Timing and likely outcomes

  • Installment Agreements are usually faster to approve and are often granted when taxpayers demonstrate an ability to pay in reasonable monthly amounts.
  • OIC reviews take longer and sometimes require several months of document review and counteroffers. The IRS may accept, reject, or return the offer with a revision request.

Examples (realistic anonymized cases)

  • Example A — OIC accepted during business closure: A sole proprietor with declining receipts, modest equipment with low resale value, and limited personal assets submitted a Form 656 with a detailed Form 433-B. The IRS determined the RCP was far below the liability and accepted an OIC to settle for roughly 30% of the balance, enabling a clean wind-down.

  • Example B — Installment Agreement chosen: A service business with steady receivables but insufficient cash to pay in full negotiated a 60-month installment agreement. Interest and penalties continued to accrue, but monthly payments were affordable and avoided the uncertainty of an OIC review.

Common pitfalls and how to avoid them

  • Waiting too long. Don’t wait for levies or liens to appear. Early proactive engagement tends to produce better terms.
  • Under-documenting. The IRS requires substantiation. Missing or sloppy records frequently trigger rejection of an OIC or delays.
  • Ignoring payroll tax responsibilities. Trust fund taxes are treated differently; a responsible officer can be personally liable regardless of an OIC. Address payroll liabilities immediately and consult counsel where there’s a risk of personal exposure.
  • Assuming approval guarantees no further action. An accepted OIC ends the assessed tax, but penalties, interest through the acceptance date, and liens may remain or require release steps.

Professional tips

  • Model both outcomes. Run a side-by-side comparison of total cost under an installment agreement (including interest and penalties) vs the likely OIC settlement amount and timeline.
  • Use liquidation quotes. Obtain bids for equipment or inventory liquidation to support low asset values in an OIC.
  • Consider partial-payment installment agreements (PPIAs) where appropriate — these are installment plans that do not fully amortize the debt but reduce current collection pressure while the IRS periodically reviews ability to pay.
  • Ask about penalty relief or abatement where reasonable cause exists; this can materially change the economics.

When to call a professional

If there are payroll tax liabilities, possible trust fund issues, or complex asset liquidation scenarios, engage a CPA or tax attorney experienced in collection practice. In my practice, bringing a tax professional in early clarifies whether an OIC is realistic and prevents mistakes that can close the door to favorable outcomes.

Useful resources and further reading

Professional disclaimer

This article is educational and reflects general practices and IRS guidance current in 2025. It is not individualized tax advice. Your facts may change the correct path. Consult a licensed CPA, enrolled agent, or tax attorney for guidance tailored to your situation.

Checklist before filing an OIC or Installment Agreement (quick)

  • [ ] All required federal returns filed
  • [ ] Payroll/trust fund liabilities identified and prioritized
  • [ ] Financial statements, bank records, and liquidation quotes ready
  • [ ] Completed Form 433-B (business) or Form 433-A (if applicable)
  • [ ] Form 656 (OIC) ready if choosing OIC; application fee included or waiver documented
  • [ ] Installment plan calculations and proposed monthly amount prepared

If you want, I can prepare a condensed worksheet to estimate Reasonable Collection Potential for your closing business (requires amounts for assets, monthly living and operating expenses, and projected liquidation values).