An individual taxpayer in the Dallas area owed the IRS for seven separate years of personal income tax, from 2012 through 2019. PFGTAX filed an Offer in Compromise under the exceptional circumstances category, which follows different rules than the usual math. The IRS accepted the offer at $3,034 in October 2022, about seventeen months after the first payment went in.

Seven years of returns

The balances came from Form 1040 for tax years 2012, 2013, 2014, 2015, 2016, 2017, and 2019. Seven years of unpaid personal income tax is hard to carry. Each year collects its own penalties and interest, and the oldest years have been growing the longest. A taxpayer in that position often cannot see an end to it, even while paying what they can. The letters keep arriving, and each new notice adds to the sense that the balance is permanent.

The IRS normally accepts an Offer in Compromise when the taxpayer cannot pay the full balance from income and assets over the time left to collect. This file went through the other door the program offers. That route asks a different question, and it comes with a different set of documents.

An offer built on exceptional circumstances

The offer application, Form 656, has a section for the reason behind the offer. PFGTAX checked the box for exceptional circumstances, also called Effective Tax Administration. The IRS describes this category as one where full payment would cause economic hardship, or where collecting the whole amount would undermine public confidence that the tax laws are applied fairly. It is a narrower route than the standard offer, and the IRS wants documents behind it.

The payment terms were a lump sum. The total offer was $3,034, and the IRS required twenty percent of it, $607, with the application. The remaining $2,427 could go in over as many as five payments in the five months after acceptance.

Seventeen months, one amended form

PFGTAX pulled the financial documents together in March 2021, and the first $607 payment reached the IRS on May 14, 2021. An IRS offer unit then reviewed the file for the better part of a year.

In April 2022, PFGTAX filed an amended Form 656. The IRS stamped it received on April 25, 2022. An amended form lets a taxpayer correct or change terms on an offer already under review, without starting a new application and losing the place in line.

On August 18, 2022, the IRS sent the case a notice. PFGTAX faxed a response to the offer unit the next day, August 19. Those two dates matter because the IRS gives short deadlines on offer correspondence. A late reply can send an offer back or close it.

What we did

The work started with a full financial picture. PFGTAX prepared Form 433-A (OIC), the collection information statement for individuals, and revised it as the file changed. The IRS builds its own number from that form, so every figure on it has to match the bank statements and proof behind it.

PFGTAX also tracked each payment. The file holds the initial payment record, a third payment record, and a set of payment confirmations. Keeping those organized matters, because an offer that falls behind on its terms can default.

Accepted in October 2022

The IRS issued its acceptance letter from the Memphis campus in October 2022. The letter says the IRS accepted the offer the taxpayer signed on April 21, 2022. It names the basis as effective tax administration, or doubt as to collectibility with special circumstances. The IRS applied the $607 payment toward the accepted offer.

Acceptance comes with conditions. The taxpayer must file every return and pay every tax on time for five years from the date of the letter. If the IRS filed a federal tax lien, it releases the lien once the offer is paid in full. The letter came from Memphis, a long way from North Texas, where Cowboys fans fill AT&T Stadium in Arlington every fall. For this taxpayer, the old balances no longer follow them into the next season.

Why it matters

Offers based on exceptional circumstances are the less common route, and the IRS accepts about one in five offers overall. This one stayed in the system through an amended form and an IRS notice, and it ended in acceptance.

For someone with several old tax years stacked up, an offer is one path among a few. An installment agreement or a Currently Not Collectible status may fit better. The right choice depends on the numbers.

Frequently asked questions

What is an Offer in Compromise?

An Offer in Compromise is an agreement to settle a tax debt for less than the full balance. IRC 7122 authorizes it, and IRM 5.8 sets out how the IRS reviews it. The IRS accepts an offer only after it weighs the taxpayer’s finances and the reason for the offer.

What are exceptional circumstances in an offer?

Exceptional circumstances is the Form 656 name for Effective Tax Administration offers under IRC 7122 and IRM 5.8. It applies when full payment would cause economic hardship, or when collecting the full amount would be unfair. The taxpayer must explain the facts and back them up with documents.

Why did PFGTAX file an amended Form 656?

An amended Form 656 changes the terms or details of an offer already in the IRS system. It keeps the original offer date and payments in place, so the taxpayer does not need to start over. The IRS stamped the amended form in this case as received on April 25, 2022.

How does the lump sum payment option work?

With a lump sum cash offer, the taxpayer sends twenty percent of the offer amount with the application. The rest is due within five months of the IRS accepting the offer. In this case, the initial payment was $607 on a $3,034 offer.

What happens if a taxpayer misses a term after acceptance?

The taxpayer must stay current on filing and paying for five years, and must make every offer payment on time. If the taxpayer misses a term, the IRS can send a default notice and the original balance can come back, less what was paid.

Every case is different. Outcomes depend on a taxpayer’s specific financial situation, and PFGTAX does not guarantee any particular result or reduction in tax debt.