An offer in compromise is a request to settle your tax debt for less than the full amount. People think of it as a settlement tool, which it is. Fewer people think of it as a levy tool, which it also is.
While a real offer is pending, the IRS cannot levy your bank account for the taxes in the offer. That protection is written into the Code. But it has edges, and the IRS watches them closely.
The statute
IRC § 6331(k)(1) says no levy may be made on your property or rights to property for the unpaid tax:
- During the period that an offer in compromise under § 7122 for that tax is pending with the IRS.
- If the offer is rejected, during the 30 days after rejection.
- If you appeal the rejection within those 30 days, while the appeal is pending.
And the definition that matters most: "an offer is pending beginning on the date the Secretary accepts such offer for processing."
IRM 5.11.1.4.11 adds an operational detail for IRS employees. After the 30 days following a rejection run out, they are told to allow an additional 15 days for receipt of a timely mailed appeal before levying.
Exceptions the IRS can use
The IRM lists the situations where levies can still be served (IRM 5.11.1.4.11):
- Jeopardy. If collection is in jeopardy, with manager approval and Counsel concurrence. See jeopardy levies.
- Written waiver. If you waive the restriction in writing.
- Offers made solely to delay collection. If an offer is made solely to delay collection, the IRM says levies can be served.
- Property no longer yours. The IRS can still levy property encumbered by the federal tax lien that you no longer own.
That third bullet is why I do not file offers as a stall tactic. An offer that is not real does not protect you, and it costs you credibility with the people deciding your case.
What "accepted for processing" requires
Section 7122(c) sets payment rules that have to be met up front:
- Lump-sum offers (five or fewer installments) must be accompanied by 20 percent of the offer amount (§ 7122(c)(1)(A)).
- Periodic payment offers must be accompanied by the first proposed installment (§ 7122(c)(1)(B)). Missing a later installment while the offer is being evaluated may be treated as a withdrawal.
- Low-income individuals, with adjusted gross income at or below 250 percent of the applicable poverty level, are excused from those payments and from the user fee (§ 7122(c)(3)).
The offer itself is made on Form 656, with a Collection Information Statement and supporting documents. The details of what makes an offer processable are set by the IRS, so follow the current Form 656 booklet exactly. A missing signature or a missing payment can keep your offer from ever becoming "pending," which means the levy protection never starts.
One more statutory point helps you. Under § 7122(f), an offer is deemed accepted if the IRS does not reject it within 24 months after submission, not counting periods when the liability is in dispute in court. That keeps offers from sitting forever.
What a pending offer does not do
It does not automatically release a levy already served
Section 6331(k)(1) prohibits making a levy while the offer is pending. A bank levy served before your offer was accepted for processing was already made. The statute does not say it must be released.
So if your account is frozen and you are filing an offer, you need a release ground from § 6343(a) as well. Economic hardship is the usual one for individuals. In some cases, release may facilitate collection, for example if the plan is to use the money toward the offer. Raise it with the collection employee and put it in writing. See all five release grounds.
It does not stop the clock running against you
Under § 6331(k)(3), the rule in § 6331(i)(5) applies: the 10-year collection period in § 6502 is suspended while the IRS is prohibited from levying. That includes the time the offer is pending, the 30 days after a rejection, and any appeal. A long offer process can extend the IRS's collection window. See the collection statute and bank levies.
It does not cover taxes left out of the offer
The protection is for "such unpaid tax," meaning the liabilities in the offer. If a tax period is not in the offer, it is not protected by it.
If the IRS levies anyway
A levy made while your offer was pending is a levy in violation of the law. IRM 5.11.2.3.1 says any notice of levy that violates the Code must be released. If the bank already paid, IRM 5.11.2.4.1 names a levy made while an offer was pending, in violation of § 6331(k)(1), as an example where the levy proceeds must be returned, subject to the statutory time period. The time period is generally two years from the levy for levies made after March 22, 2017.
Document everything: the date the offer was accepted for processing, the levy date, and your request for release or return. See getting levied funds returned.
Offer vs. installment agreement during a levy
| Offer in compromise | Installment agreement | |
|---|---|---|
| Bars new levies | While pending, 30 days after rejection, during appeal (§ 6331(k)(1)) | While pending, while in effect, 30 days after rejection or termination, during appeal (§ 6331(k)(2)) |
| Requires release of existing levy | Not by § 6331(k) alone | Yes, unless the agreement says otherwise (§ 6343(a)(1)(C)) |
| Collection statute | Suspended while levy is barred | Suspended while pending; runs while agreement is in effect |
| Up-front money | 20% for lump-sum offers, first installment for periodic offers, unless low-income | Depends on plan |
Sometimes the right move is both, in sequence: an installment agreement or hardship release to get the account unfrozen now, then an offer once the numbers support it. The IRM says an installment agreement request is not treated as pending while you are pursuing another resolution such as an offer (IRM 5.14.1.3), so do not file them on top of each other without a plan. Compare with installment agreements and bank levies.
Is an offer realistic for you?
An offer only makes sense if the numbers support it. The IRS evaluates offers under the standards in § 7122(d) and its own procedures, and it has no obligation to accept an offer just because you made one. If the numbers do support it, an offer can resolve the debt and the levy problem together. Be honest about it with yourself first. A rejected offer can extend the collection statute and still leave you facing levies.
File an offer to settle, not to stall. The levy protection is a side effect of a real offer. It is not a reason to file a fake one.
For more on how offers work, see the firm's page on the offer in compromise.