How an Offer in Compromise works

An Offer in Compromise (OIC) is a formal IRS program that lets taxpayers resolve federal tax liabilities for less than the total balance owed when the IRS determines full collection is unlikely. The IRS evaluates your ability to pay using your assets and future income to calculate a Reasonably Collectible Amount (RCA). If your offer equals or exceeds the RCA and you meet eligibility rules, the IRS may accept the offer and close the tax liability subject to the terms agreed.

Official IRS guidance: see the IRS OIC page for current instructions and forms: https://www.irs.gov/payments/offer-in-compromise (IRS).

Who is eligible?

To be eligible for an OIC you must generally meet these core requirements:

  • Owe at least $1,000 in federal tax (after credits and payments).
  • Have filed all required tax returns. The IRS will not accept an OIC if returns are missing for tax years that are required to be filed.
  • Be current with estimated tax payments for the current tax year (if required).
  • Not be in an open bankruptcy proceeding. Bankruptcy alters collection rights and must be resolved separately.
  • Not be under active criminal investigation related to tax matters.

Taxpayers who meet the IRS low-income certification may qualify for a waiver of the $205 application fee and the initial payment. See the OIC instructions on the IRS site for the latest low-income thresholds and exceptions (IRS).

Which forms and documents are required?

The main documents you must file:

  • Form 656, Offer in Compromise — the official offer form (IRS PDF: https://www.irs.gov/pub/irs-pdf/f656.pdf).
  • A Collection Information Statement: Form 433-A(OIC) for individuals or Form 433-B(OIC) for businesses. These forms list income, expenses, assets, and liabilities.
  • Supporting documentation: recent pay stubs, bank statements, bills, proof of non-wage income, property valuations, retirement account statements, and copies of filed tax returns.
  • Application fee ($205 as of 2025) and the initial payment amount depending on the offer type — unless you qualify for low-income certification and a waiver.

Internal resources that expand on documentation and common pitfalls include our Offer in Compromise Application Checklist: Documents and Common Pitfalls (https://finhelp.io/glossary/offer-in-compromise-application-checklist-documents-and-common-pitfalls/).

How the IRS calculates your offer amount

The IRS calculates a Reasonably Collectible Amount (RCA) based on two components:

  1. Equity in assets: the net realizable value of all assets (home equity above an IRS allowance, vehicles after depreciation, liquid accounts, etc.).
  2. Future income: disposable monthly income times a statutory multiplier. For lump-sum (cash) offers, the IRS typically uses 12 months of disposable income; for periodic payment offers, it commonly uses 24 months. The detailed mechanics and examples are covered in our article How the IRS Calculates Your Payment Amount in Offers in Compromise (https://finhelp.io/glossary/how-the-irs-calculates-your-payment-amount-in-offers-in-compromise/).

The RCA is compared to your offer; the IRS generally accepts an offer that it believes represents the most the agency can reasonably expect to collect within a reasonable period.

Official IRS explainer: https://www.irs.gov/payments/offer-in-compromise (IRS).

Step-by-step application process

  1. Gather paperwork: filed tax returns, pay stubs, bank and investment statements, proof of monthly bills, and documentation of extraordinary medical or unemployment expenses.
  2. Complete Form 656 and the appropriate 433 series collection statement (433-A(OIC) or 433-B(OIC)).
  3. Calculate an offer amount. You can propose a lump-sum offer (one-time payment) or a periodic payment offer (payments over time). Consider the internal cash offer strength vs. monthly affordability.
  4. Submit the application package with the $205 fee (if required) and the initial payment: 20% of the lump-sum offer if choosing the lump-sum cash offer; the first proposed periodic payment if choosing the periodic option. Low-income filers may submit without fee/initial payment if they meet the certification rules.
  5. The IRS reviews the application, may request additional documentation, and will place the account in a “pending” status during review. Penalties and interest generally continue to accrue until the offer is accepted and paid.
  6. The IRS issues a written decision: accepted, rejected, or returned as unprocessable. If accepted and fully paid, the approved liabilities are resolved. If accepted under periodic payment terms, adhere to the payment schedule.

Typical review times vary. Many cases take 6–12 months; complex cases can take longer depending on documentation completeness and IRS workload (IRS).

Professional tips from practice

In my 15+ years advising clients on tax resolution, the following strategies materially improve approval odds:

  • Prepare a complete financial story. The IRS wants credible documentation. Provide bank statements, canceled checks, medical bills, and third-party verifications when possible.
  • Be conservative and realistic in expense reporting. The IRS scrutinizes unusually high or non-typical expense claims.
  • Consider timing. If surprise income is expected (e.g., a pending bonus or inheritance), weigh whether waiting makes the offer less likely to be accepted.
  • Use the correct collection statement. Filing the wrong 433 form commonly delays review and triggers requests for resubmission.
  • Communicate promptly on IRS requests. Delays often lead to automatic rejections or being returned as unprocessable.

A real example: a client with $50,000 in tax debt, no liquid assets, and high medical debt submitted a carefully documented OIC showing minimal equity and low disposable income. The IRS accepted a $12,000 lump-sum offer after six months, saving the client nearly 76% of the debt.

Common mistakes and pitfalls

  • Filing without all required tax returns. Missing returns are an automatic disqualifier until filed.
  • Underestimating the level of documentation required for expenses and assets.
  • Using generic budgets instead of bank statement–backed numbers.
  • Believing an OIC will stop penalties and interest immediately — these generally continue until the IRS accepts the offer and the agreed payments are completed.
  • Not considering alternatives. An installment agreement, currently not collectible (CNC) status, or bankruptcy may be better in some circumstances.

For help comparing settlement options, see our page on choosing between an installment agreement and an Offer in Compromise: https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-offer-in-compromise/.

If your offer is rejected — next steps

If the IRS rejects your offer, you typically have these options:

  • Appeal the decision through the IRS Independent Office of Appeals or request a Collection Due Process review if the case qualifies. Appeals procedures and timelines are set out in the IRS rejection notice.
  • Submit a written request for reconsideration if your financial situation has materially changed and you have new documentation.
  • Explore alternatives: installment agreement, partial payment installment agreement, or collection alternatives like Currently Not Collectible status.

Our guide Next Steps After an Offer in Compromise Denial explains appeals and alternatives in more detail: https://finhelp.io/glossary/next-steps-after-an-offer-in-compromise-denial-appeals-and-alternatives/.

Practical considerations and effects on credit or borrowing

An accepted OIC resolves the federal tax lien on a specific liability, but a Notice of Federal Tax Lien may remain on public records until released. The lien-release timing and lien withdrawal rules depend on whether the IRS files a Certificate of Release or withdraws the lien. Accepted offers can affect mortgage and loan underwriting — lenders may require explanations and documentation of the OIC. See our related coverage on how Offers in Compromise affect lending decisions: https://finhelp.io/glossary/how-offers-in-compromise-affect-your-ability-to-get-a-loan-or-mortgage/.

Final checklist before submission

  • Have you filed all required tax returns?
  • Did you complete Form 656 and Form 433-A(OIC) or 433-B(OIC) accurately?
  • Did you include bank statements, pay stubs, and documentation for large expenses?
  • Have you attached Form 656 and included the application fee or a low-income waiver?
  • Are you prepared to provide additional documentation if requested by the IRS?

Closing and disclaimer

An Offer in Compromise can be a powerful tool to resolve unpaid federal taxes when collection of the full amount is unlikely, but the process is documentation-heavy and fact-specific. This article summarizes general rules and practical advice; it is educational only and not individualized tax advice. For personalized guidance, consult a certified tax professional, enrolled agent, or tax attorney experienced in OIC cases.

Authoritative sources used: IRS — Offer in Compromise, Form 656 instructions (https://www.irs.gov/payments/offer-in-compromise; https://www.irs.gov/pub/irs-pdf/f656.pdf). Additional internal resources linked above provide deeper, practical guidance on calculations and documentation.