In a nutshell, the key to a successful Offer in Compromise is making sure that you qualify for the program at the outset, can meet the ongoing terms of the program in the future, the IRS can process your application, and that you submit complete backup documentation to support your offer.
An offer to compromise a tax liability must be signed by the taxpayer under penalty of perjury and must contain the information prescribed or requested by the IRS. This information varies based upon the grounds the taxpayer is relying upon to make the Offer.
The three grounds on which a taxpayer can rely upon in making an offer are as follows:
1) Doubt as to Liability – The taxpayer disputes the existence or amount of the correct tax liability including penalties and interest.
2) Doubt as to Collectibility – The taxpayer is unable to pay the liability in full based upon the value of his or her assets and future income. (i.e. Reasonable Collection Potential).
3) Exceptional Circumstances (Effective Tax Administration) – Collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship or based upon other compelling public policy or equity considerations.
If the offer is based on doubt as to collectibility or effective tax administration, the taxpayer must submit a Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals), and/or Form 433-B (OIC) (Collection Information Statement for Businesses) along with Form 656 (Offer in Compromise).
Offers based on doubt as to liability must be made on Form 656-L and the offer must specify all of the liabilities that the taxpayer seeks to compromise, the grounds for compromise, the amount the taxpayer proposes to pay and the payment terms. Additionally the taxpayer must submit a Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals), and/or Form 433-B (OIC) (Collection Information Statement for Businesses).
The following publication accessible via hyperlink explains the Offer in Compromise process: