The Fine Print of an Offer in Compromise: What You Agree To, What Happens If It Is Rejected, and How to Keep It

Most of the attention on an offer in compromise goes to the number: how little the IRS will accept. But an offer is also a contract, and the fine print in Section 7 of Form 656 shapes your finances for years after the IRS says yes. It also governs your options when the answer is no. Knowing those terms before you sign helps you avoid the two most painful outcomes: a rejected offer you could have saved, and an accepted offer you later lose.

This post covers what you agree to when you submit an offer, how the review and rejection process works, how to appeal, and how to keep an accepted offer in good standing. Our earlier posts cover how to estimate a minimum offer and how offers work during a Tax Court case.

The Terms You Accept When You Sign

The current Form 656, included in the Form 656 Booklet (Rev. 4-2026), lists the offer terms. The ones with the biggest practical impact are:

• Your payments stay with the IRS. The application payment and any amounts paid with or during the offer are generally not returned, even when the offer fails or you withdraw it. They are applied to your balance.
• Refunds through the acceptance year are kept. The IRS may keep any refund, including interest, for tax assessed before the date it accepts your offer. A refund that arrives while the offer is pending does not count as a payment toward the offer amount.
• No amended returns for offer years. You agree not to amend the years in the offer while it is pending or after acceptance.
• Five years of compliance. For five years after acceptance, you must file and pay all taxes on time, including estimated taxes, for yourself and any business you have an interest in.
• A longer assessment period. You agree that the IRS has more time to assess tax: the time the offer is under review, plus an extra year when it ends without acceptance. You can narrow or refuse this extension, though doing so may lead the IRS not to process your offer.
• A paused collection clock. The ten-year collection period is suspended while the offer is pending, for 30 days after a rejection, and while Appeals considers a rejection.
• Pending installment requests end. Submitting an offer withdraws any pending installment agreement request. An already approved installment agreement does not require payments while the offer is reviewed and can come back into effect after a failed offer, as long as no new tax debt has built up.
• No later court challenge. Once accepted, you cannot contest the compromised liabilities in court or by refund claim, even if the offer later defaults.

What Happens While the Offer Is Pending

An offer becomes "pending" when an IRS official signs off that it is being processed. Under § 6331(k)(1), the IRS generally cannot levy for the liabilities in the offer while it is pending, for 30 days after a rejection, and during a timely appeal. Before the offer is signed as pending, however, levies can still occur, and the IRS may keep what it collects. A Notice of Federal Tax Lien may also be filed during consideration.

Penalties and interest continue to accrue. And you must stay current on every filing and payment obligation while the offer is under review. Falling behind is one of the most common reasons offers are returned.

One more protection: under § 7122(f), an offer that sits for 24 months after receipt without a rejection is treated as accepted by law. Periods when a liability in the offer is in dispute in court do not count toward the 24 months, so this rule rarely helps in a docketed case.

Returned Versus Rejected: A Critical Difference

An offer can end without acceptance in two very different ways.

• Returned. The IRS sends the offer back without deciding it, typically because a form was incomplete, a required return was not filed, a current-year payment was missed, or requested information did not arrive on time. A returned offer carries no appeal rights, though you can usually fix the problem and submit a new one.
• Rejected. The IRS evaluated the offer on its merits and decided not to accept it. Under the regulations, a rejection only becomes official once you receive a letter giving the reasons and describing your appeal rights, and § 7122(e) requires an independent administrative review before a rejection is communicated.

Because a return forfeits appeal rights, the best protection is responsiveness. Answer every information request by its deadline, and if you cannot, ask for more time in writing before the deadline passes.

How to Appeal a Rejection

The window to ask Appeals for review is short: 30 days, measured from the date shown on the rejection letter. The usual vehicle is Form 13711 or a written protest containing the same information. Miss the 30 days and, under the offer terms, you waive the Appeals hearing.

An effective appeal is specific. It should:

• Identify each disputed item. For example, the value assigned to a vehicle or home, a disallowed expense, or the monthly income figure.
• Explain the correct number and how it changes the reasonable collection potential.
• Attach proof. Appraisals, loan payoff statements, medical bills, or pay stubs that support each change.
• Address special circumstances such as age, health, or a job loss that make future income lower than past income suggests.

Appeals can sustain the rejection, reverse it, or work with you on an amended offer. If you submitted the offer as part of a Collection Due Process hearing, the review path and Tax Court rights may differ, so confirm which procedure applies.

Keeping an Accepted Offer

Acceptance is not the finish line. If you miss a filing or payment in the five-year compliance period, the IRS may default the offer, reinstate the original balance less payments made, add penalties and interest, and resume collection, including refiling a lien.

• Adjust withholding or estimates right away. A balance due on next year's return is the most common default trigger.
• Calendar every deadline for five full years, including payroll deposits and quarterly estimates for any business you own.
• Respond fast to any default notice. The IRS generally contacts you before defaulting. A prompt fix, such as paying a small new balance, can often preserve the offer.
• Watch for lien releases. Liens for the compromised periods are generally released after the offer amount is paid. Confirm the release is recorded.
• Understand the public file. The law requires the IRS to make certain information about accepted offers available for public inspection for a limited period.

Notes for Business Owners

A business that owes payroll taxes faces extra rules. The IRS generally will not consider the business's offer until the trust fund portion is paid or the Trust Fund Recovery Penalty has been assessed against the responsible individuals, and compromising the business's debt does not erase what those individuals owe. Owners should also keep in mind that the five-year compliance term covers any business in which they have an interest.

An Example

A hypothetical restaurant owner submits an offer that the IRS rejects because it valued her delivery van at retail rather than its true condition and counted overtime income that ended when her hours were cut. Within 30 days she files Form 13711 with a dealer's written trade-in quote, photos of the van, and her employer's letter confirming the reduced schedule. Appeals recalculates and agrees to an amended offer close to her original amount. She then raises her withholding to avoid any balance due during the five-year compliance period.

Key Takeaways

• Form 656 is a contract. You agree to five years of compliance, give up certain refunds, and extend the assessment period.
• Payments made with an offer are generally kept, even if it is rejected or withdrawn.
• A returned offer has no appeal rights. A rejected offer can be appealed within 30 days, usually with Form 13711.
• Levy is generally barred while an offer is pending, but interest and penalties keep accruing and the collection clock is paused.
• Missing a filing or payment during the five-year period can revive the full original balance.

If you are considering an offer in compromise, or yours was just rejected, schedule a consultation with SMB CPA Group so the 30-day window does not pass. You can also contact us, see our process, or review our pricing.

Disclaimer: The information presented on this website or any SMB CPA Group, PC online platform is for general information and illustrative purposes only. It should not be considered tax, legal, financial, or other professional advice. The content is not intended to provide definitive answers or solutions to specific business situations and is not a substitute for careful research or the advice of a licensed professional that knows your unique circumstances.

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Please contact an SMB CPA Group professional directly to discuss your specific questions or business situation. Our team would be happy to speak with you about a tailored consultation to your needs. We also encourage all readers to seek counsel from licensed attorneys, financial advisors, CPAs, Enrolled Agents, or other qualified professionals prior to making decisions related to their finances or enterprises.