Background and purpose

An Offer in Compromise (OIC) is a formal IRS program that lets qualifying taxpayers settle a tax debt for less than the full balance when full payment would create financial hardship or doubt exists about collectibility (IRS: Offer in Compromise). The IRS accepts OIC submissions online, which can speed processing and make it easier to upload documents and track status.

How the online OIC process works

  • Complete Form 656 (Offer in Compromise) and the appropriate financial statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. (See IRS Form 656 and Forms 433-A/B (OIC).)
  • Create an account or sign in to the IRS portal where the OIC online application is hosted, attach required supporting documents, and pay the application fee or request a low‑income waiver.
  • Choose an offer type: lump-sum cash offer (usually more favorable) or periodic payments. The IRS calculates the reasonable collection potential (RCP) from your submitted financials to evaluate the offer.
  • The IRS reviews your application; typical processing takes about 6–12 months, longer for complex cases or incomplete submissions (IRS guidance).

Required forms and common supporting documents

  • Form 656 (Offer in Compromise).
  • Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
  • Proof of income: recent pay stubs, 1099s, business profit/loss statements, or tax returns.
  • Expense verification: lease/mortgage statements, utility bills, medical bills, childcare receipts.
  • Asset documentation: bank statements, vehicle titles, retirement account statements, property appraisals.
  • Identity verification: photo ID and Social Security number documentation.

Tip: scan and name files clearly before uploading (e.g., “2024_paystubs.pdf”). Missing or unclear documents are the most common cause of processing delays.

Fees, low‑income exceptions, and payment options

  • Application fee: $205 (unless you qualify for a low‑income certification). This fee must generally accompany the application for it to be processed. (IRS: Offer in Compromise — Fees)
  • Offers may require an initial payment: lump-sum offers typically require 20% of the offer with submission; periodic offers usually require initial and continuing payments. Review the Form 656 instructions for exact current payment rules.

Who should consider an OIC

  • Taxpayers who cannot pay the full tax debt and for whom an installment agreement would be unaffordable.
  • Taxpayers whose reasonable collection potential (RCP)—based on disposable income and net realizable assets—is less than the tax liability.
  • Those facing significant, documented hardship (medical expenses, persistent negative cash flow).

Common mistakes to avoid

  • Under-documenting income or expenses. The IRS verifies balances and may request additional proof.
  • Submitting an offer that exceeds your realistic ability to pay based on RCP.
  • Failing to file current tax returns or enroll in required payment plans for current taxes—OIC eligibility typically requires that you be current with filing and estimated tax payment obligations.
  • Neglecting to pay the application fee or request the low‑income waiver when eligible.

Real-world example (brief)

In my practice, a self-employed client with variable monthly income and high medical costs had $30,000 in assessed taxes. By documenting realistic monthly expenses and presenting a lump-sum offer backed by bank statements, we negotiated acceptance for a $5,000 settlement—allowing the client to rebuild credit and cash flow.

Professional tips to improve acceptance odds

  • Prepare a complete packet before starting the online form: scanned paystubs, bank statements (three months), bills, and proof of asset values.
  • Use the IRS RCP logic—show why your disposable income and asset equity cannot cover the full liability.
  • Consider consulting a tax professional if you have complex assets, multiple tax years, or business valuations.

Next steps and resources

  • Use the IRS OIC page to start an online application and review current instructions (IRS: Offer in Compromise).
  • Detailed document preparation guides on FinHelp: Preparing the Financial Documentation for an Offer in Compromise and Offer in Compromise Application Checklist: Documents and Common Pitfalls.
  • If your OIC is rejected, see our guide: How to Appeal an Offer in Compromise Rejection and Next Steps.

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Professional disclaimer

This article is educational and does not constitute personalized tax advice. In my 15 years advising individuals on tax relief options, I recommend consulting a qualified tax professional for guidance tailored to your situation.