Offer in Compromise

What Is an Offer in Compromise?

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liability for less than the full amount owed. The IRS authority to accept OICs comes from IRC Section 7122. The IRS considers three grounds for accepting an OIC: doubt as to liability (you dispute that you owe the tax), doubt as to collectibility (your assets and income are less than the full tax liability), and effective tax administration (you owe the tax and could pay it, but doing so would create an economic hardship or would be unfair and inequitable). The vast majority of accepted OICs are based on doubt as to collectibility. The IRS uses a formula called the Reasonable Collection Potential (RCP) to determine the minimum acceptable offer amount. The RCP equals the net equity in your assets plus your future income (monthly disposable income multiplied by a factor based on whether you pay in 5 months or 24 months). If your RCP is less than your total tax debt, you are a candidate for an OIC. The OIC program exists because the IRS recognizes it is sometimes in the government's best interest to accept a partial payment rather than spend years trying to collect a debt that may never be fully paid.

How the Offer in Compromise Process Works

1. 1

   Pre-Qualification Assessment

   Before investing time and money in an OIC application, a thorough pre-qualification analysis is conducted. This involves calculating your Reasonable Collection Potential (RCP) using IRS Collection Financial Standards for allowable expenses, assessing asset equity, and comparing the result to your total tax liability.

2. 2

   Application Preparation

   Form 656 (Offer in Compromise) and Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed) or Form 433-B (OIC) (for businesses) are meticulously prepared. Every figure must be accurate and supported by documentation, as the IRS closely scrutinizes these forms.

3. 3

   Payment and Fee Submission

   The application fee of $205 (waived for low-income taxpayers) is submitted along with the required initial payment. For a lump sum offer (paid in 5 months or less), 20% of the offered amount must be included. For a periodic payment offer (paid in 6-24 months), the first month's payment is required.

4. 4

   IRS Review and Investigation

   The IRS assigns an OIC Examiner who reviews the application, verifies all financial information, and may request additional documentation. The examiner independently calculates your RCP and compares it to your offer amount. This review process typically takes 6 to 12 months.

5. 5

   Negotiation and Acceptance

   If the initial offer is below the IRS's calculated RCP, the examiner may counter with a higher amount. Your representative negotiates to reach an acceptable figure. The IRS may also accept the offer as submitted if the RCP calculation supports it.

6. 6

   Compliance Period

   After acceptance, you must remain in full tax compliance for 5 years (filing all returns on time and paying all taxes owed). If you fall out of compliance during this period, the IRS can default the OIC and reinstate the original full tax liability minus any payments made.

Who Qualifies for an Offer in Compromise?

OIC qualification is primarily a mathematical determination based on your Reasonable Collection Potential. The IRS calculates this by adding the net equity in your assets (fair market value minus loans, multiplied by 80% for quick-sale value) to your future income capacity (monthly disposable income multiplied by 12 for a lump sum offer or 24 for a periodic payment offer). Your monthly disposable income is your gross income minus IRS-allowable expenses from the Collection Financial Standards (published amounts for housing, transportation, food, and other essentials based on family size and location). If your RCP is less than your total tax liability, the IRS should accept an offer at or near the RCP amount. Certain categories of taxpayers are strong OIC candidates: those with limited income and few assets, those nearing the end of their 10-year collection statute, those who have experienced significant income reduction, and those with large tax debts relative to their income. The IRS also considers special circumstances such as age, health issues, and unique financial situations.

• Your total tax liability exceeds your Reasonable Collection Potential (RCP)
• You have filed all required federal tax returns
• You are current on estimated tax payments for the current year (if applicable)
• You are not in an open bankruptcy proceeding
• You are willing and able to pay the offered amount within the selected timeframe (5 or 24 months)
• You agree to remain in full tax compliance for 5 years after acceptance

How Much Can You Settle Your IRS Debt For?

The savings from an accepted Offer in Compromise can be substantial. IRS statistics show that accepted OICs settle tax debts at a fraction of the total amount owed. In fiscal year 2023, the IRS accepted approximately 17,890 Offers in Compromise with a total value of about $273 million in accepted offers against significantly higher original liabilities. The average accepted offer amount was approximately $5,234, but this figure is skewed by many small offers from low-income taxpayers. Individual savings depend entirely on the taxpayer's financial profile and the size of their tax debt. It is not uncommon for taxpayers with large tax debts and limited income to settle for 10 to 20 cents on the dollar. The key variables that determine your offer amount are your monthly disposable income, the equity in your assets, and whether you choose the lump sum (5 months) or periodic payment (24 months) option.

Offer in Compromise vs. Installment Agreement

An Offer in Compromise and an installment agreement are the two most common IRS debt resolution tools, but they serve very different purposes. An OIC settles the debt for less than the full amount, while an installment agreement pays the full debt over time. The OIC is better for taxpayers who cannot afford to pay the full balance even with extended payment terms, while installment agreements are appropriate when the taxpayer can afford monthly payments that will satisfy the debt within the collection period. OICs require a more complex application process, an application fee, and a 5-year compliance period, but offer the possibility of significant debt reduction.

How to Apply for an Offer in Compromise

1. 1

   Use the IRS Pre-Qualifier Tool

   Visit irs.gov and use the Offer in Compromise Pre-Qualifier tool for a preliminary assessment. This free online tool asks basic financial questions and indicates whether you might qualify. Note that this is a rough estimate; a professional analysis is more accurate.

2. 2

   Complete Form 433-A (OIC)

   Prepare Form 433-A (OIC) with detailed financial information including income from all sources, monthly living expenses, bank account balances, real estate equity, vehicle values, and other assets. Every figure must be documented with supporting evidence such as bank statements, pay stubs, and property valuations.

3. 3

   Prepare Form 656

   Complete Form 656 (Offer in Compromise) specifying the offer amount and payment terms. Choose between a lump sum offer (paid within 5 months of acceptance, requires 20% down payment with application) or a periodic payment offer (paid within 6-24 months, requires first month's payment with application).

4. 4

   Submit Application Package

   Mail the complete OIC package to the IRS, including Forms 656, 433-A (OIC), the $205 application fee (or Form 656-A for low-income waiver), the required initial payment, and all supporting financial documentation. Incomplete submissions are returned without processing.

5. 5

   Respond to IRS Examiner Requests

   During the 6-12 month review period, the assigned OIC Examiner may request additional documentation or clarification. Respond promptly and completely to all requests. Continue making any required payments during the review period and remain in full tax compliance.