Offer in Compromise (OIC) | Settle IRS Tax Debt for Less

An Offer in Compromise (OIC) is a formal agreement between you and the IRS that allows you to resolve your tax liability for a reduced amount. The IRS considers your ability to pay, income, expenses, and asset equity when evaluating your offer. While not every taxpayer qualifies, an accepted OIC can provide a fresh financial start for those facing overwhelming tax debt.

How the OIC Process Works

The OIC process begins with filing IRS Form 656 along with a $205 application fee and an initial payment. You must also submit Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which detail your financial situation. The IRS uses a formula called the Reasonable Collection Potential (RCP) to determine the minimum offer it will accept. This calculation factors in your monthly disposable income, the equity in your assets, and your future earning potential. The entire review process typically takes 12 to 24 months.

Lump Sum vs. Periodic Payment Offers

There are two primary OIC payment options. A Lump Sum Cash Offer requires 20% of the total offer amount upfront with the application, and the remaining balance must be paid within five months of acceptance. A Periodic Payment Offer allows you to make monthly installments over 6 to 24 months while the IRS reviews your case. The lump sum option typically results in a lower total settlement amount, while periodic payments provide more flexibility for taxpayers with limited liquid assets.

Common Reasons OIC Applications Are Rejected

The IRS rejects roughly 60% of OIC applications. The most common reasons include failure to file all required tax returns, offering less than the calculated RCP, not staying current on estimated tax payments, or having an open bankruptcy proceeding. Working with an experienced tax professional significantly improves your chances of submitting a viable offer and navigating the negotiation process successfully.

What Happens After Your OIC Is Accepted

Once the IRS accepts your OIC, you must comply with all tax laws for the next five years. This means filing all returns on time and paying any taxes owed in full. If you breach these terms, the IRS can void the agreement and reinstate the original debt, minus any payments already made. A federal tax lien will not be released until the offer terms are fully satisfied, though the lien's public notice may be withdrawn to help you rebuild your credit.

Who Qualifies?

You must be current on all tax filing obligations (all required returns filed)
You cannot be in an open bankruptcy proceeding
You must have received a bill for at least one tax debt included in the offer
Your offered amount must meet or exceed the IRS-calculated Reasonable Collection Potential
Self-employed individuals must be current on estimated tax payments for the current year

Pros

+Settle your total tax debt for significantly less than you owe
+Stop aggressive IRS collection actions including levies and garnishments
+Provides a genuine fresh start for qualifying taxpayers
+IRS must suspend collection activity while your offer is under review
+10-year collection statute continues to run during the review period

Cons

-Acceptance rate is low — roughly 40% of applications are approved
-The process takes 12 to 24 months and requires extensive financial documentation
-You must remain fully tax compliant for five years after acceptance or the deal is voided

Offer in Compromise