The IRS 24-Month Offer in Compromise Rule: What Taxpayers Should Know

An Offer in Compromise (OIC) can allow an eligible taxpayer to resolve a federal tax liability for less than the full amount owed. One lesser-known rule deserves careful attention: under Internal Revenue Code section 7122(f), an offer may be deemed accepted if the IRS does not reject it within the applicable 24-month period. That rule is real, but it should not be treated as a shortcut or a reason to submit an offer that is not appropriate for the taxpayer's circumstances.

1. What Is the IRS 24-Month Rule?

The IRS states that an offer is automatically accepted if it does not make a determination within two years of the IRS receipt date, excluding applicable periods such as an appeal period. IRS guidance under section 7122(f) further explains that the relevant submission date is the date the IRS receives the offer—not the postmark date or the later processability date.

This makes documentation important. Taxpayers should retain the complete OIC package, proof of delivery, IRS correspondence, payment records and every subsequent notice. A taxpayer should not simply estimate the 24-month date from memory.

2. Two Years Does Not Mean Every Pending Offer Will Be Accepted

The deemed-acceptance rule has important limitations. IRS guidance explains that an offer will not become deemed accepted if, within the applicable period, the IRS rejects it, returns it as nonprocessable or no longer processable, the taxpayer withdraws it, or it is deemed withdrawn because required periodic offer payments are not made. Judicial proceedings involving a liability covered by the offer can also affect the 24-month calculation.

An OIC therefore requires active case management. Taxpayers should respond to requests for information, maintain required payments when applicable and keep track of all IRS correspondence. A pending offer should not be treated as a passive two-year countdown.

3. Eligibility and Current Compliance Still Matter

The IRS generally requires taxpayers applying for an OIC to have filed required tax returns and made required estimated tax payments. Employers also have federal tax-deposit requirements. An open bankruptcy proceeding generally prevents OIC eligibility.

The IRS evaluates income, expenses, asset equity and ability to pay. Depending on the basis for the offer, these facts help determine whether compromise is appropriate and what amount may be considered. An OIC is not automatically the best IRS resolution option for every taxpayer.

4. What Does an Offer in Compromise Cost?

The IRS currently lists a $205 application fee and an initial payment, subject to exceptions such as qualifying low-income certification. For a lump-sum offer, the taxpayer generally submits 20% of the total offer amount with the application. For a periodic-payment offer, the taxpayer generally submits the first proposed payment and continues required monthly payments while the IRS evaluates the offer.

These payments can have significant consequences and are generally applied to the tax liability rather than refunded simply because an offer is unsuccessful. Taxpayers should understand the rules before submitting an OIC.

5. What Happens If an OIC Is Accepted?

Acceptance is not the end of the taxpayer's responsibilities. The taxpayer must satisfy the terms of the accepted offer and generally remain compliant with tax filing and payment obligations for five years after acceptance. Failure to comply can result in default.

The IRS also states that it keeps certain refunds resulting from overpayments for tax periods through the date the offer is accepted, subject to the terms and type of offer. This is another reason to review the actual Form 656 terms and the taxpayer's individual circumstances rather than relying on general descriptions of the OIC program.

6. Keep Reading IRS Notices While an Offer Is Pending

A taxpayer with a pending OIC may still receive important IRS correspondence. Every notice should be reviewed for what the IRS is requesting and for any response deadline. Do not assume that a pending OIC makes an unrelated notice irrelevant.

If you receive an IRS notice while an offer is pending, preserve the complete notice and envelope and review the response date promptly. Depending on the issue, professional review may be appropriate.

7. Before Filing: Compare the Available IRS Resolution Paths

An Offer in Compromise is one possible collection-resolution strategy. Depending on the facts, other possibilities may include an installment agreement, a partial-pay installment agreement, currently-not-collectible status or another resolution approach. The appropriate strategy depends on tax compliance, income, allowable expenses, assets, collection statutes and other case-specific facts.

Urban AZ Financial can help taxpayers organize their IRS records, evaluate tax-compliance issues and review potential resolution pathways. A professional review does not guarantee that an OIC or any other IRS resolution will be accepted.

Key Takeaway

The 24-month deemed-acceptance rule is an important taxpayer protection, but it is not an OIC strategy by itself. The stronger approach is to determine whether the taxpayer is eligible, prepare an accurate and supportable submission, document the IRS receipt date, maintain required compliance and payments, respond to IRS requests and track the case carefully.

Need help evaluating an IRS tax debt? Urban AZ Financial can review your tax-compliance situation and help identify IRS resolution options that may warrant further consideration.