How to convert a Full-Payment OIC to a Partial-Payment OIC — step-by-step

If your financial situation has declined after submitting a Full-Payment Offer in Compromise (OIC), you may be able to convert that submission to a Partial-Payment OIC. In my practice advising taxpayers on collection alternatives, this adjustment is often necessary when new hardships—like medical bills, job loss, or reduced income—make the original full-payment proposal infeasible. Below is a clear, practical pathway and the documentation the IRS expects.

Quick overview of the two offer types

  • Full-Payment OIC: an offer equal to the IRS’s estimate of the amount it can reasonably collect from you (often based on equity and reasonably collectible income) and typically submitted as either a lump-sum or periodic payment arrangement intended to satisfy the liability in full.
  • Partial-Payment OIC: an offer that proposes to pay less than the full liability over time. The IRS will hold periodic payments while it reviews your finances and may accept the offer when the collection period expires or if the IRS determines the proposed amount is the most it can reasonably expect to collect.

Does the IRS allow a conversion?

Yes — but there are limits and rules. You can request to modify or replace an earlier full-payment OIC with a new offer that reflects changed circumstances, but you must supply updated documentation and follow Form 656 instructions. The IRS treats each offer on the merits; it will not automatically downgrade a full-payment offer to a partial one without evidence of changed ability to pay. See IRS guidance on Offers in Compromise (IRS.gov).

Sources: IRS Offer in Compromise page (https://www.irs.gov/individuals/offer-in-compromise) and Form 656 instructions (https://www.irs.gov/forms-pubs/about-form-656).

When to act

  • Before the IRS accepts or rejects the original full-payment offer: faster and simpler. If you notify the IRS before decision, you can amend or withdraw and submit a new offer.
  • After submission but before acceptance: you can amend the offer with new financial data; the IRS will consider the new information during processing.
  • After acceptance and full satisfaction (you paid and the liability is closed): conversion isn’t meaningful after the debt is settled. If the IRS accepted a full-payment OIC but you can’t make required payments, you must contact the IRS immediately — default can lead to reinstatement of the full liability.

In my experience, the ideal time to request conversion is as soon as your circumstances change and before the IRS issues a decision.

Step-by-step conversion process

  1. Gather updated financial documents
  • Current pay stubs, year‑to‑date income statements, or profit-and-loss for self-employed taxpayers.
  • Bank statements (last 3–6 months).
  • Proof of recurring bills and extraordinary expenses (medical bills, elder care, childcare, recent layoffs, etc.).
  • Documentation of assets and their values (vehicles, real estate, retirement accounts) and outstanding loan balances.
  • Recent tax returns and any notices from the IRS.
  1. Complete the correct Collection Information Statement
  • For individuals: Form 433-A (Collection Information Statement for Wage Earners and Self-Employed People) or the specific OIC version if requested by the IRS.
  • For businesses: Form 433-B (Collection Information Statement for Businesses).
  • These forms supply the IRS’s view of your Reasonably Collectible Income (RCI). If the RCI has decreased since your full‑payment submission, that supports a lower offer. See our in-depth guide on the Offer in Compromise Collection Information Statement.
  1. Prepare a new or amended Form 656
  • Complete Form 656 (Offer in Compromise) marking it as an amendment if the IRS allows or as a new submission if you choose to withdraw the earlier offer.
  • Explain clearly in a cover letter why your financial condition changed and reference the earlier OIC submission (include case number if available).
  • Include updated Collection Information Statement and supporting documents.
  1. Include required payments or fee details
  • Follow the Form 656 instructions for initial payments and application fees. If you qualify for a low-income waiver or lack funds for the application fee, include a fee waiver request and supporting documents.
  • Do not assume the IRS will waive payments automatically; include what you can afford and document hardship.
  1. Submit to the address noted on Form 656 and request proof of delivery
  • Send via certified mail, return receipt, or a tracked courier; keep copies of everything.
  1. Maintain compliance with filing and estimated taxes
  • Continue to file all required returns and pay current tax obligations. Failure to do so can jeopardize any pending OIC, including a modified offer.
  1. Follow up and respond promptly to IRS requests
  • The IRS may request more documentation or clarification. Respond within the time given and keep records of your communications.

Practical items and professional tips

  • Be specific about the change: The IRS wants concrete evidence (medical bills, termination notices, reduction in hours, etc.). Vague statements about hardship carry less weight.
  • Update asset valuations honestly: Overstating expenses or understating assets risks denial or later reopening of the case.
  • Consider a withdrawal and refile if it avoids confusion: If you clearly cannot meet the originally proposed full-payment plan, withdrawing the earlier offer and filing a new, properly supported partial offer may be cleaner.
  • Use our guide on How To Reapply or Modify an Offer in Compromise After Financial Changes for examples of amendment language and timing.

Typical timelines

Processing times vary. The IRS historically takes several months to review OICs; complex cases can take longer. Converting or amending an offer adds time because the IRS must re-evaluate collectibility. Expect 3–12 months in many cases; keep paying current taxes while waiting.

What the IRS evaluates

  • Reasonably Collectible Income (RCI): monthly disposable income after allowed living expenses. A meaningful drop in RCI supports a lower offer.
  • Equity in assets: the IRS looks at market value less liens and allowable exemptions.
  • Ability to pay now vs. over time: periodic-payment partial offers are held while the IRS assesses whether the offer is best under the circumstances.

See our article on Calculating Reasonably Collectible Income for how the IRS computes monthly disposable income.

Example scenario (realistic, anonymized)

A taxpayer submitted a full-payment OIC proposing $20,000 to close a $50,000 liability, intending to sell an investment property. Before sale, the taxpayer suffered a medical event and could not sell the property quickly; medical debt and lost wages reduced monthly disposable income. We assembled updated bank and medical billing statements and filed an amended Form 656 with an updated 433-A OIC showing collectible amount of $10,000 and requested withdrawal of the prior full-payment offer. The IRS placed the previous file on hold, reviewed the new information, and ultimately accepted the partial-payment offer as the most the IRS could collect.

Note: outcomes vary by case.

Common mistakes and how to avoid them

  • Waiting too long to notify the IRS. Act immediately when circumstances change.
  • Failing to provide supporting documentation for changed expenses.
  • Stopping current tax filings or payments. Keep up with filings and pay current taxes.
  • Assuming conversion is automatic. The IRS evaluates fresh evidence.

If the IRS rejects the conversion

You can:

  • Appeal the denial using the Collection Appeals Program (CAP) or request a Collection Due Process hearing where applicable.
  • Reapply with stronger documentation or explore alternatives such as an installment agreement, currently not recommended if your RCI shows ability to pay, or bankruptcy in specific cases. See our guide on Next Steps After an Offer in Compromise Denial.

Tax consequences and other legal considerations

Offers in Compromise settle the tax liability; forgiven tax liability under an OIC generally resolves the tax account. However, individual tax consequences regarding cancellation-of-debt income, liens, and dischargeability can be complex. Always consult a qualified tax professional or attorney before finalizing offers.

Final checklist before filing a conversion request

  • Updated Form 433-A or 433-B (as required)
  • New or amended Form 656 with clear explanation and case references
  • Bank statements (3–6 months)
  • Proof of extraordinary expenses (medical, unemployment, divorce, etc.)
  • Proof of income reduction (pay stubs, termination notices)
  • Documentation for assets and liabilities
  • Application fee or documented fee-waiver request
  • Copies of earlier OIC submissions and IRS correspondence
  • Certified mailing receipt and file copies

Professional disclaimer

This article is educational and not individualized tax advice. Rules and procedures for Offers in Compromise can change; consult the IRS website (https://www.irs.gov) and a qualified tax professional for case-specific guidance.

Author note: In 15+ years working with clients, I’ve seen timely, well-documented amendments materially change outcomes. Being proactive, detailed, and honest about current finances gives you the best chance of a favorable conversion.

Authoritative sources

(Internal links: “How To Reapply or Modify an Offer in Compromise After Financial Changes”: https://finhelp.io/glossary/how-to-reapply-or-modify-an-offer-in-compromise-after-financial-changes/; “Offer in Compromise Collection Information Statement”: https://finhelp.io/glossary/understanding-the-offer-in-compromise-collection-information-statement/; “Next Steps After an Offer in Compromise Denial”: https://finhelp.io/glossary/next-steps-after-an-offer-in-compromise-denial-appeals-and-alternatives/.)