Quick overview

A Partial-Payment OIC combines the Offer in Compromise rules with a periodic payment plan: you propose a reduced total and pay in installments while the IRS evaluates the offer. The IRS compares your offer to your Reasonable Collection Potential (RCP) — equity in assets plus what it can reasonably collect from future income — and accepts the OIC only if your offer equals or exceeds that RCP (IRS, Offer in Compromise).

Practical, step-by-step walkthrough

  1. Pre-check eligibility
  • Be current with all required tax filings and estimated taxes going forward.
  • Not in an open bankruptcy proceeding.
  • No outstanding requirement to file a return or submit payroll tax deposits (unless otherwise allowed).
    (See IRS guidance: Offer in Compromise.)
  1. Gather required forms and documentation
  • Complete Form 656 (Offer in Compromise) and the appropriate financial statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
  • Pay the application fee (commonly $205 as of 2025) unless you qualify for a low-income waiver. Provide pay stubs, bank statements, recent statements for retirement accounts, and documentation of extraordinary expenses (medical bills, unreimbursed business losses).
  • Use supporting documentation to back each expense and asset valuation.
  1. Calculate a realistic offer (how the IRS evaluates it)
  • The IRS looks at Reasonable Collection Potential (RCP): net equity in assets plus a portion of future income the IRS can collect. Your offer needs to equal or exceed that RCP.
  • For a partial-payment structure, propose (a) a realistic periodic payment schedule you can sustain and (b) a total amount that reflects the present value of those payments. Show cash-flow projections and a written promise to pay the installments while the offer is pending.
  1. Choose payment option on Form 656
  • Lump-sum cash offer (less common for partial-payment cases).
  • Periodic payment offer (what a Partial-Payment OIC uses): you submit an initial payment and propose monthly payments while the IRS evaluates the offer and after acceptance until the total is paid.
  1. Submit the offer and monitor
  • Double-check for missing documentation. Submit Form 656, application fee (or waiver request), and Form 433 series along with supporting docs.
  • Keep up with required tax filings and deposits while the offer is pending; the IRS can return or reject an offer if you fall behind.

Example (illustrative)

  • Tax debt: $60,000. After calculating RCP (equity in assets plus projected collectible future income), you determine the IRS could realistically collect $16,500. You submit a periodic-payment OIC for $15,000 payable over 24 months with supporting cash-flow statements and expense verification. If the IRS accepts the $15,000 as equal to or exceeding its RCP calculation, the offer resolves the liability when payments complete.

Note: numbers above are illustrative — use the IRS RCP framework and your documentation to justify an offer. See our guide to estimating the minimum acceptable offer for more on valuation and income multipliers: Estimating the Minimum Acceptable Offer in an Offer in Compromise.

Documentation checklist

  • Completed Form 656 (Offer in Compromise).
  • Form 433-A (OIC) or 433-B (OIC) with signed statements.
  • Recent pay stubs, bank statements (3–6 months), and tax returns for 2–3 years.
  • Proof of unavoidable expenses (medical bills, childcare, court-ordered payments).
  • Retirement account statements and signed appraisals for nonstandard assets.
  • Application fee or low-income waiver request.

Typical timeline and what to expect

  • Average processing commonly takes 6–12 months but varies with IRS workload and case complexity.
  • The IRS may request additional documentation or propose a counteroffer. Stay current on filings and payments while the file is open.

Common mistakes and how to avoid them

  • Under- or overvaluing assets: use current statements and appraisals.
  • Missing or inconsistent documentation: provide source docs for every line item.
  • Falling behind on filings or payroll deposits during the process: the IRS can reject offers if compliance lapses.
  • Ignoring lien and collection consequences: an accepted OIC normally closes the tax liability but you must ensure lien release steps are completed.

For more on common application pitfalls and how to avoid them, see: Top Application Pitfalls When Preparing an Offer in Compromise.

If the IRS rejects the offer

Options include requesting reconsideration, appealing to the IRS Office of Appeals, or pursuing alternative solutions such as an installment agreement or bankruptcy (depending on circumstances). You can reapply if your financial situation changes; consult our guidance on appeals and next steps.How to Appeal an Offer in Compromise Rejection and Next Steps.

Professional tips from practice

  • Build a transparent cash-flow projection: show realistic, month-by-month income and unavoidable expenses.
  • Prioritize documenting non-discretionary costs (medical expenses, child support, unreimbursed business losses) — these reduce RCP.
  • Consider a pre-submission review by a tax practitioner experienced with OICs; small errors or missing paperwork are common rejection triggers.

Authoritative sources

Disclaimer: This article is educational and not individualized tax advice. For a tailored plan, consult a CPA, enrolled agent, or tax attorney licensed to practice in your jurisdiction.