When taxpayers owe back taxes they cannot fully pay, the IRS’s Offer in Compromise (OIC) program provides a method to settle their debt for less than the total amount owed. However, initiating this process requires submitting Form 656 along with an application fee to the IRS.
Why Does the IRS Charge an Application Fee?
The IRS charges the OIC application fee to cover the costs associated with reviewing and processing offers submitted by taxpayers. Handling each application requires verification of financial information and eligibility criteria, which involves IRS resources and staff time. The fee also serves to discourage frivolous or non-serious applications.
How the OIC Application Fee Works
The application fee is a fixed non-refundable amount (currently $205 as of 2025, but always verify on the IRS Form 656 instructions or IRS.gov). When submitting Form 656, you typically pay this fee along with an initial payment toward your proposed offer:
- Lump Sum Offers: Submit 20% of the total offer amount plus the application fee at the time of application.
- Periodic Payment Offers: Submit the first scheduled payment amount in addition to the application fee.
Submitting the correct fee and initial payment is crucial. If the IRS doesn’t receive the proper payment, the application may be deemed unprocessable, delaying your process.
Who Must Pay and Who Is Exempt?
Not every taxpayer submitting an OIC needs to pay the application fee. The IRS offers exemptions for qualifying individuals:
- Required to Pay: Most applicants submitting Form 656 must pay the fee unless they meet specific exemption criteria.
- Low-Income Certification Exemption: Taxpayers with total monthly income below IRS-defined thresholds based on family size and regional cost of living can qualify for a low-income certification. Eligible individuals are exempt from both the application fee and the initial offer payment.
- Doubt as to Liability (DATL) Offers: Offers challenging the validity of the tax liability are exempt from paying the application fee and initial payments.
Taxpayers should carefully review the IRS’s guidelines in the Form 656 instructions to determine eligibility for these exemptions.
Common Application Fee Pitfalls
Some common errors with the application fee include:
- Forgetting to include the fee, resulting in the rejection of the offer.
- Sending an outdated or incorrect fee amount.
- Incorrectly assuming exemption eligibility.
- Confusing the application fee with the initial offer payment.
Practical Examples
Example 1: Standard Payment
Sarah submits an OIC for $5,000 on a $20,000 tax debt. She isn’t low-income and opts for a lump sum offer:
- Pays the $205 fee plus 20% ($1,000) of the offered amount.
- Total upfront payment: $1,205.
Example 2: Low-Income Exemption
David owes $15,000 but qualifies for low-income certification. He submits an OIC for $3,000:
- Pays no application fee or initial payment.
- Only submits Form 656 with supporting documentation.
Example 3: Doubt as to Liability
Maria disputes the tax owed ($10,000). She qualifies for the DATL exemption:
- Pays no application fee or initial payment.
- Provides Form 656 and evidence disputing the debt.
Tips for a Successful Application
- Carefully follow Form 656 instructions regarding fees and payments.
- Confirm current fee amounts from IRS official sources before submitting.
- Assess exemption qualifications thoroughly.
- Consider consulting a tax professional if uncertain.
Frequently Asked Questions
Is the application fee refundable? No, it is non-refundable regardless of the IRS’s decision.
Can you pay the fee by credit card? Payment is typically by check or money order with Form 656. Verify current acceptable payment methods.
What if I can’t afford the fee but don’t qualify for exemptions? Explore other IRS payment options like installment agreements and seek professional advice.
Does the fee reduce my tax debt? No, it solely covers processing costs and does not reduce your tax liability.
For official details, see the IRS Offer in Compromise page.