Offers in Compromise on Trust Fund Taxes: Business Offers, Personal Offers and Doubt as to Liability

IRC 7122 gives the IRS authority to compromise tax liabilities. The Treasury regulation at 26 CFR 301.7122-1, as the Appeals manual at IRM 8.23.7 describes it, authorizes compromise on three grounds: doubt as to collectibility, doubt as to liability, and effective tax administration.

In payroll tax cases, offers come up in three different settings, and the rules differ for each:

1. the business offers to settle its own employment tax debt;
2. a responsible person offers to settle an assessed TFRP based on inability to pay; and
3. a responsible person offers to settle an assessed TFRP because they dispute that they owe it.

1. The Business Offer: The TFRP Comes First

Business owners often want the company to submit an offer before anyone is personally assessed. The IRS does not allow that order of operations when trust fund taxes are involved.

IRM 5.7.4.9 states IRS policy: before an offer to compromise trust fund tax will be investigated for an entity where the TFRP is applicable, in business or out of business, one of the following must be true:

• the trust fund portion of the taxes has been paid;
• the TFRP has been assessed against all responsible persons;
• the trust fund package has been forwarded for assessment; or
• a Revenue Officer has determined not to assert the penalty due to collectibility.

IRM 5.7.8.5.3, the section on repeat and pyramiding employers, adds the consequence: an offer submitted before the required trust fund investigation actions are completed will be returned without appeal rights. It also says in-business taxpayers who offer to compromise employment taxes must demonstrate compliance by making timely federal tax deposits and filing returns while the offer is considered, and that an offer previously deemed processable will be returned without appeal rights if they fail to do so.

Why does the IRS insist? Because, as IRM 5.7.4.9 explains, the amount the business offers represents what can be collected from the business. If the IRS compromises part of the trust fund liability with the entity, the remainder may still be collected from responsible persons under section 6672, citing Treasury Regulation 301.7122-1. A business offer does not wipe out the responsible persons' exposure.

There is a narrow exception for small, closed businesses. IRM 5.7.4.9 notes that if the aggregate trust fund liability is under an internal threshold, the business is out of business with no potential to incur more liabilities, and no other prior TFRP assertions from unrelated entities were made against the responsible persons, the Revenue Officer may decide not to assert the penalty. The IRM still requires a collectibility determination if the trust fund portion was not paid.

IRM 5.7.4.9 also flags a special cross-reference, IRM 5.8.11.6, for offers submitted by an entity harmed by a payroll service provider's fraud. See our guide on payroll provider failures.

2. Your Personal Offer: Doubt as to Collectibility

Once the TFRP is assessed against you, it is your individual tax debt. You can include it in an offer based on doubt as to collectibility, the standard offer where you show the IRS cannot collect more than you are offering from your assets and future income.

Two points specific to TFRP cases:

• Multiple responsible persons. The IRS collects trust fund taxes only once in total. But your offer is evaluated on what can be collected from you. Payments by the business or others reduce the balance through cross-referencing, which can change the numbers mid-offer. Our guide on multiple responsible persons explains how credits post.
• Levy protection. IRC 6331(k)(1) bars levy while an offer is pending with the IRS and, if rejected, for 30 days afterward and during a timely appeal. An offer is pending beginning on the date the IRS accepts it for processing.

For the general mechanics of collectibility offers, the firm's main site has a page on the IRS offer in compromise program.

3. Your Personal Offer: Doubt as to Liability

Doubt as to liability offers are a different animal. IRM 8.23.7.1.1 says doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax debt under the law. These offers are not based on ability to pay.

For a responsible person who never got a real hearing on whether they were responsible or willful, a doubt as to liability offer can be a path to resolution without a lawsuit.

How it works

• It is submitted on Form 656-L, Offer in Compromise (Doubt as to Liability). IRM 8.23.7.2 says the most current revision should be used.
• No financial statements, application fees or TIPRA payments are required with Form 656-L, according to IRM 8.23.7.2.
• The offer must be at least $1.00, and an accepted offer must generally be payable within 90 days unless alternative terms are approved.
• Under IRC 7122(f), as described in IRM 8.23.7.2, if the offer is not returned, rejected or withdrawn within 24 months after the IRS receives it, it is deemed accepted.
• If Collection rejects it, you have 30 calendar days from the date of the rejection letter to request an Appeals hearing, per IRM 8.23.7.4.

What Appeals does with TFRP liability offers

IRM 8.23.7.10 through 8.23.7.13 address TFRP offers specifically:

• If a court already decided your TFRP liability, there is no doubt as to liability, and Appeals will sustain rejection.
• If Appeals previously decided the liability, for example through a Form 2751-AD agreement, Appeals takes jurisdiction without initial development by Collection, and new information can be referred back for investigation.
• If the liability was established by a signed Form 2751 or a defaulted Letter 1153, and you present new information, Appeals retains jurisdiction and refers the new information back for investigation.
• Appeals weighs the hazards of litigation in deciding the degree of doubt, and an acceptable offer amount depends on that degree of doubt.

IRM 8.23.7.10 adds two features that make this kind of offer attractive. Once the offer amount is paid, acceptance concludes the TFRP matter for the taxpayer. And there are no five-year compliance or refund offset provisions on an accepted doubt as to liability offer.

One trap: a doubt as to liability offer is not considered while you are in bankruptcy. IRM 8.23.7.10 says Appeals will sustain rejection if a bankruptcy is identified.

Business Offers That Require TFRP Abatement

Sometimes a business offer and the TFRP intersect in the other direction. IRM 5.7.7.6 lists, among the reasons the IRS adjusts a TFRP assessment, that the IRS has accepted an employer's offer in compromise of trust fund taxes for which abatement of an assessed TFRP is a condition. Offer terms matter. Read them.

Choosing the Right Path

Situation	Likely path
Business owes trust fund taxes; no one assessed yet	Address the TFRP first, then consider a business offer
You were assessed and cannot pay	Doubt as to collectibility offer, installment agreement, or a CDP alternative
You were assessed and dispute responsibility or willfulness	Protest if still timely; otherwise refund claim and suit, or a doubt as to liability offer
Liability already decided by a court	Doubt as to liability not available; collectibility options only

For the refund route, see our refund claim guide. For collection alternatives raised in a hearing, see CDP after a TFRP.

The IRS will compromise trust fund debt. It just wants to know who else can pay first. Line up the sequence, then make the offer. Call (813) 229-7100. Let's talk.