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How to Write an Offer in Compromise Letter

Direct answer: an offer in compromise is a proposal to settle a tax balance for less than the full amount owed, when you cannot pay in full. You propose an amount with Form 656, the offer form, and a letter that states the balance, the tax years, the amount you propose, and the reason full payment is not possible. The IRS reviews the offer and either accepts it, asks for different terms, or rejects it. Nothing about the letter guarantees acceptance, and no amount in this guide is a recommendation.

Step 1: What an offer in compromise is, in general terms

An offer in compromise asks the IRS to accept a proposed amount as settlement of a tax balance, instead of the full amount owed. It is for taxpayers who cannot pay in full: the letter explains, in plain financial facts, why full payment is not possible, and proposes an amount the taxpayer can actually pay on the terms stated.

Three things to get straight before you write anything. First, an offer is a request, not a settlement: until the IRS accepts it, the full balance stands. Second, the letter is only part of the submission; the offer itself goes on Form 656, following the instructions printed on the form. Third, every required tax return must be filed before an offer can be reviewed. An unfiled return blocks the review, whatever the letter says.

Step 2: Lump-sum versus periodic offers

Lump-sum offer. You propose paying the offered amount in one payment. The letter should say so in one plain sentence, state the amount, and leave no doubt that a single payment is what is being proposed.

Periodic-payment offer. You propose paying the offered amount over a term of months. The letter should state the amount, the term, and the monthly figure, and the monthly figure must be one you can pay every month without fail. A periodic offer you cannot sustain is worse than a smaller honest proposal made the first time.

Pick one and commit to it in the letter. A letter that blurs the two, or states an amount without stating its terms, gives the reviewer a reason to ask again instead of a proposal to consider.

Step 3: What a strong offer letter includes

• The balance and the tax years. The total balance from your IRS notice, and every tax year it covers. Copy the figures exactly; do not guess them.
• The offer, with its terms. The amount you propose, and whether it is a lump-sum or periodic-payment offer. For a periodic offer, the term in months and the monthly figure.
• Why full payment is not possible, in facts. Income, essential expenses, and what changed, in your own terms, formalized. Numbers you can support beat adjectives every time.
• Supporting facts. Returns filed, prior payments made, and any income change, stated only where true. Do not claim payments, filings, or contact that did not happen.
• A commitment to stay current. New tax years filed on time and new balances kept current while the offer is under review. An offer covers the past; it does not excuse the present.
• The enclosures. Form 656, following the instructions on the form, and anything else the form asks for. State what is enclosed so nothing is assumed.

Our offer in compromise letter tool drafts this letter from your figures, with the offer shown as a percentage of your balance and, for a periodic offer, the monthly figure computed from your own numbers. Those figures are arithmetic on your figures only, not an eligibility result and not a recommendation.

Step 4: What happens after you send it

The IRS reviews the offer, which takes time. Expect one of three outcomes: acceptance, a request for more information or different terms, or rejection. While the offer is under review, stay current on new filings and new balances, and tell the IRS if your finances change rather than letting the letter go stale.

If the offer is rejected, read the rejection before you do anything else. A revised offer should address what the rejection said, state what has changed since the earlier offer, and explain what is different about the new figures. Resending the same figures without addressing the rejection reads as a repeat, not a revision.

Interest and penalties generally continue while any balance is unpaid, even while an offer is under review. That is a reason to propose terms you can meet and to keep the file current, not a reason to rush a proposal you cannot pay.

Step 5: Common mistakes

• Proposing an amount you cannot pay. The offer is a commitment on stated terms. If the terms fail, the offer fails with them.
• Leaving the terms unstated. An amount without lump-sum or periodic terms is not yet a proposal a reviewer can act on.
• Writing hardship as adjectives. "I am struggling" says nothing a reviewer can verify. Income, expenses, and what changed say everything.
• Ignoring an earlier rejection. A revised offer that does not address the rejection invites the same answer.
• Letting new years slide. Unfiled new returns and unpaid new balances undermine the offer while it is under review.
• Sending the letter without the form. The letter accompanies Form 656; it does not replace it. Follow the instructions on the form.

Step 6: Keep the file until the balance is resolved

The notice, your offer letter, Form 656, payment confirmations, any revised offers, and every IRS reply, in one folder. Keep it until the IRS confirms the balance is resolved. If the offer is ever questioned again, the file is what settles it.

FAQ

This guide is for general information only and is not tax advice. IRS rules change; confirm current procedures at IRS.gov or with a tax professional before you act.