An offer in compromise is an agreement to settle a tax debt for less than the full amount. People who are being levied often hear about offers and assume that filing one shuts everything down. It shuts a lot down. It does not necessarily shut down the levy you already have.
What the law bars while an offer is pending
IRC 6331(k)(1) says no levy may be made on a person’s property or rights to property for an unpaid tax:
- during the period that an offer in compromise for that tax is pending with the IRS, and
- if the offer is rejected, during the 30 days after rejection, and during any appeal of the rejection filed within those 30 days.
An offer is pending beginning on the date the IRS accepts it for processing. IRM 5.11.1.4.11 tells revenue officers the same thing: notices of levy cannot be served while an offer is pending, within 30 days after rejection, or while a rejected offer is being appealed. It adds that after the 30 days run out following rejection, the IRS should allow an additional 15 days for receipt of a timely mailed appeal before levying.
There are exceptions. Levies can be served if collection is in jeopardy or if the taxpayer waives the restriction in writing. And IRM 5.11.1.4.11 says that if an offer is made solely to delay collection, levies can be served.
The gap: levies already in place
Here is the part people miss. The statute says no levy “may be made” while the offer is pending. A continuous wage levy was already made. IRM 5.8.1.16 addresses this directly: “The prohibition on levy does not require release of a levy that was served prior to the offer submission.” It goes on: the taxpayer’s circumstances should be considered when making a determination to release a levy or keep it in place while the offer is pending.
So if your wages are already levied and you file an offer, the IRS may keep the levy running while it evaluates the offer. Offers can take a long time to evaluate. That can mean months of levied paychecks.
How to close the gap
Ask for release on an independent ground
The offer itself is not a release ground in IRC 6343(a). But the facts that support an offer often support a release. If you are filing an offer because you cannot pay, your financial statement may show the levy is creating an economic hardship. That is a release ground under IRC 6343(a)(1)(D), and it is separate from the offer. See economic hardship release.
Ask the IRS to exercise its discretion
IRM 5.8.1.16 tells IRS employees to consider your circumstances in deciding whether to keep an existing levy in place. Make the case. Explain what the levy is doing to your household and why continuing it while the offer is reviewed does not serve collection.
Consider a partial release
If the IRS will not release the levy entirely, a partial release setting a floor you can live on is a reasonable middle ground.
Do not wait to file the offer
New levies are barred once the offer is pending, so a properly prepared offer protects your other property, such as bank accounts, from new levies while it is considered.
Does a levy hurt your offer?
A levy that keeps collecting reduces the balance, but the offer is evaluated on what the IRS can reasonably collect from you. The mechanics of that calculation are beyond this guide. The practical point is that an offer and a levy are often working against each other: the levy is the IRS collecting through force, the offer is you proposing what you can pay. Resolving the levy first, by release or CNC, can give you room to put together a sound offer.
Levy money taken while the offer was pending
If a new levy was served in violation of IRC 6331(k)(1), that is an erroneous levy. IRM 5.11.2.4.1 gives that exact example, a levy issued while an offer in compromise is pending in violation of IRC 6331(k)(1), as a levy in violation of law whose proceeds must be returned, subject to the statutory time period for requesting return. Note the distinction: that is a new levy served during the pending period, not an existing wage levy left in place. See getting levied wages back.
If the offer is rejected
You have 30 days to appeal, and the levy bar continues during that window and while a timely appeal is pending. After that, the IRS can levy again. Have your fallback ready: an installment agreement or CNC status. IRM 5.1.9.4.1 notes that rejected offers have their own appeal procedure and are excluded from the Collection Appeals Program.
An example timeline
Jim’s wages were levied in March. In April he files an offer in compromise, and the IRS accepts it for processing in May. From May on, IRC 6331(k)(1) bars the IRS from serving any new levy, so his bank account is safe from a new levy while the offer is pending. But his March wage levy keeps running, because IRM 5.8.1.16 says the bar does not require release of a levy served before the offer.
Jim calls with his financial statement and asks for release on hardship grounds. His numbers show the levy leaves him unable to cover rent and utilities. The IRS releases the levy under IRC 6343(a)(1)(D). Now he has both protections: no new levies while the offer is considered, and no wage levy draining his paycheck. If the offer is later rejected, he has 30 days to appeal, and the levy bar runs through that period and any timely appeal.
Had Jim filed the offer without asking for a release, he might have spent months with a levied paycheck waiting for a decision.
The order of operations I recommend
- Get the levy statement right so the Publication 1494 exemption is applied. See the statement guide.
- Prepare a full financial statement.
- Use it to seek release of the wage levy now, on hardship or another ground.
- Use the same information to evaluate whether an offer makes sense.
- If it does, file a complete offer. Incomplete offers can be returned, and a returned offer is no longer pending, which ends the levy bar. IRM 5.8.1.16 says the IRS may levy after an offer is returned, withdrawn or terminated.
For background from my firm’s main site on how offers work, see offers in compromise at GetIRSHelp.com.
An offer stops the IRS from starting new fights. It does not end the one already in your paycheck. You have to ask for that separately.