How do an Installment Agreement and an Offer in Compromise differ, and which should you choose?
Facing an IRS balance can feel overwhelming. Two of the most common formal resolutions are an Installment Agreement (IA) and an Offer in Compromise (OIC). Both resolve an outstanding tax liability, but they serve very different financial situations and produce different outcomes for your credit, cash flow, and exposure to collection (levies, liens). This article explains the key differences, who typically qualifies, what documentation each requires, practical pros and cons, and step‑by‑step actions you can take next.
Quick primer: how each option works
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Installment Agreement (IA): You agree with the IRS to pay the full tax balance over time with monthly payments. Interest and penalties continue to accrue until the tax is paid in full, but the agreement prevents certain aggressive collection actions if you stay compliant. Apply online or by paper using Form 9465 or through IRS Online Payment Agreement tools. See IRS guidance: https://www.irs.gov/payments/installment-agreements
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Offer in Compromise (OIC): You submit a formal offer (Form 656) plus detailed financial disclosure (Form 433‑A(OIC) or 433‑B(OIC)) showing you cannot pay the full tax liability. The IRS evaluates your Reasonable Collection Potential (RCP) and will accept an offer if it believes the offered amount is the most it can reasonably collect within a practical period. See IRS guidance: https://www.irs.gov/payments/offer-in-compromise
Eligibility and documentation (at a glance)
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Installment Agreement
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Who: Most individuals and small businesses can qualify if they can make regular payments. The IRS offers streamlined options for smaller balances and lower documentation requirements.
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Documentation: Typically limited. Online applications use existing IRS account information; more complex long‑term plans may require a financial statement (Form 433‑F) or proof of income/expenses.
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Common limits: Streamlined online options are available when the total balance (tax, penalties and interest) is at or below IRS thresholds. Check the IRS page for current thresholds and program rules.
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Offer in Compromise
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Who: Taxpayers who can demonstrate inability to pay in full (low RCP) or those with legitimate doubt as to liability or exceptional circumstances.
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Documentation: Extensive. You must submit Form 656 plus the OIC version of Form 433 with supporting documents (bank statements, proof of income, asset valuations, bills). The IRS closely vets these packages.
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Key test: RCP — the IRS’s snapshot of how much it could collect from your assets and future income.
(Authoritative sources: IRS Installment Agreements and Offer in Compromise pages; Taxpayer Advocate Service commentary.)
Pros and cons
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Installment Agreement — Pros:
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Preserves option to pay over time and avoid immediate enforced collection if you stay current.
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Lower documentation burden for many cases; online setup can be quick for qualifying balances.
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Often the right choice when you can reasonably pay the full balance but need time.
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Installment Agreement — Cons:
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Interest and penalties continue to accrue until debt is repaid.
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The repayment period can be long and may include setup fees or direct‑debit requirements.
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Liens may still be filed in some cases (particularly for large unpaid balances).
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Offer in Compromise — Pros:
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Potential to substantially reduce the amount owed when you legitimately cannot pay.
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If accepted and fully complied with, the original liability is released.
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Offer in Compromise — Cons:
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High documentation burden and long processing times; many applications are denied.
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IRS will expect you to remain tax‑compliant going forward; defaulting can resurrect the original debt.
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You may be required to make periodic payments while the OIC is pending.
Typical timelines and costs (what to expect)
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Installment Agreement: An IA can be set up in a few days to several weeks once the IRS processes your application. Streamlined online agreements often finalize faster. There may be user/setup fees for new agreements; low‑income taxpayers can qualify for a waiver. Always check the IRS page for current fee amounts and qualification rules: https://www.irs.gov/payments/installment-agreements
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Offer in Compromise: OICs typically take several months to more than a year to resolve, depending on complexity and backlog. The IRS charges a nonrefundable application fee and may require an initial payment with the offer unless you qualify for a fee waiver. See filing instructions: https://www.irs.gov/payments/offer-in-compromise
Note: interest and penalties generally continue to accrue until the IRS accepts and fully processes an OIC and you meet any required payments. The Taxpayer Advocate Service and IRS pages explain processing expectations and common delays.
How the IRS values an OIC (Reasonable Collection Potential)
The IRS calculates RCP by adding the value of collectible assets plus a portion of future income the IRS believes is available for collection. Typical components:
- Value of cash, bank accounts, and investments
- Equity in real property and vehicles (after allowed expenses)
- A portion of future disposable income over a specified collection period
If your offer equals or exceeds the RCP, the IRS may accept it. That’s why preparing a complete and accurate Form 433‑A(OIC) or 433‑B(OIC) is essential. For guidance: https://www.irs.gov/payments/offer-in-compromise and see our guide on calculating RCP: https://finhelp.io/glossary/calculating-reasonable-collection-potential-for-an-offer-in-compromise-a-walkthrough/
Practical workflow: Choose the right path in five steps
- Gather your numbers: balances, recent paystubs, bank statements, asset valuations, monthly living expenses, outstanding debts. This is necessary for either path.
- Run an affordability check: For an IA estimate a monthly payment you can sustain; for an OIC estimate your RCP (or get help calculating it). Our calculator and walkthrough articles can help (see links below).
- Consider partial‑payment options: If you can’t pay the full balance but have some ability to pay, a Partial‑Payment Installment Agreement (PPIA) may be appropriate—this blends features of IA and OIC. Read: https://finhelp.io/glossary/when-to-use-a-partial-payment-installment-agreement/
- Decide and apply: Apply online for streamlined IAs when eligible, or prepare a complete OIC package (Form 656 + Form 433‑A/B(OIC)) with supporting documents.
- Stay compliant: File and pay current tax returns and estimated taxes on time while an IA or OIC is pending or in effect. Noncompliance is a common reason agreements are revoked.
Realistic examples (cleaned and anonymized)
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Example A — IA: A freelance graphic designer owed $7,500 after a tax filing error. They set up a streamlined monthly IA for $175. Interest and penalties applied, but the manageable payment avoided enforced collection while preserving cash flow.
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Example B — OIC: A homeowner who lost income and had limited liquid assets completed an OIC package showing their RCP was substantially lower than the assessed balance. After negotiation, the IRS accepted a settlement substantially below the original liability. (Each case is unique; acceptance is never guaranteed.)
Common mistakes and how to avoid them
- Mistake: Applying for an OIC without accurate documentation. Fix: Assemble complete bank statements, proof of monthly expenses, and asset valuations before filing.
- Mistake: Choosing an IA with unaffordable payments. Fix: Be realistic—use a budget and consider nationwide averages for necessary living expenses when negotiating payments.
- Mistake: Falling out of compliance on current taxes after an OIC or IA. Fix: Set up withholding/estimated payments and calendar automatic transfers.
If an OIC is denied or an IA defaults
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OIC denial: You can appeal, revise your offer (improve documentation, adjust the amount), or explore alternative options like a PPIA or Currently Not Collectible status. See our article on next steps after a denied OIC: https://finhelp.io/glossary/options-after-a-denied-offer-in-compromise/
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IA default: The IRS can terminate the agreement and resume aggressive collection (liens, levies). If you default, act quickly: contact the IRS, request reinstatement, or discuss alternative arrangements.
When to bring in a professional
In my practice, complex cases benefit from professional help when:
- You have significant assets or complex business income.
- You’re considering an OIC and your RCP calculation is borderline.
- The IRS has filed a lien or started levy actions.
A tax attorney or enrolled agent can prepare a stronger financial package and negotiate with the IRS. However, hiring a professional is not required for many streamlined IAs.
Checklist: Documents to have ready
- Recent tax returns (all required years)
- Paystubs and proof of other income
- Bank and investment statements (last 3–12 months)
- Recent bills (mortgage/rent, utilities, medical, child support)
- Vehicle titles and valuations
- Property valuations and mortgage statements
For OICs also include a completed Form 656 and Form 433‑A(OIC) or 433‑B(OIC) with supporting documentation.
Final considerations
- An IA is usually the right choice if you can pay the full liability over time and want a predictable path to resolution. An OIC is for those who truly cannot pay and whose RCP supports settlement for less than the balance.
- Both options require timely tax filing and future compliance; failure to remain compliant can undo an agreement or settlement.
Authoritative and up‑to‑date resources:
- IRS — Installment Agreements: https://www.irs.gov/payments/installment-agreements
- IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
- Taxpayer Advocate Service — taxpayer‑friendly explanations and appeals: https://www.taxpayeradvocate.irs.gov
Internal resources on FinHelp (practical how‑tos):
- When an Installment Agreement Is Better Than an Offer in Compromise: https://finhelp.io/glossary/when-an-installment-agreement-is-better-than-an-offer-in-compromise/
- How to Apply for an Installment Agreement Online: https://finhelp.io/glossary/how-to-apply-for-an-installment-agreement-online-step-by-step/
- Calculating Reasonable Collection Potential for an Offer in Compromise: https://finhelp.io/glossary/calculating-reasonable-collection-potential-for-an-offer-in-compromise-a-walkthrough/
Disclaimer: This article is educational only and does not replace personalized tax advice. IRS rules change; confirm current filing instructions and fees on IRS pages linked above or consult a tax professional for decisions specific to your situation.
