Overview

An Offer in Compromise (OIC) is a formal option the IRS uses to resolve tax liabilities for taxpayers who cannot pay the full amount or for whom collection would create an unfair hardship. The IRS will accept an OIC only after reviewing your ability to pay (called Reasonable Collection Potential, or RCP), your assets, income, and allowable expenses. The goal of the program is pragmatic: collect what the IRS realistically can, rather than pursue full collection that would likely yield little or nothing.

Authoritative guidance and forms are available from the IRS: see the Offer in Compromise main page (irs.gov/offer-in-compromise) and Form 656 (Offer in Compromise) and instructions (irs.gov/forms-pubs/about-form-656). The Taxpayer Advocate Service also explains when OICs may be appropriate (taxpayeradvocate.irs.gov).

Who qualifies for an Offer in Compromise?

Eligibility isn’t automatic. The IRS generally requires that you:

  • Have filed all required tax returns (current and prior years). (IRS requirement)
  • Not be in an open bankruptcy case.
  • Be current on estimated tax payments and federal tax deposits where applicable.
  • Demonstrate through financial disclosure that you cannot pay the full liability via lump sum or reasonable installment terms.

Qualifying categories the IRS considers include:

  • Doubt as to Collectibility: You can’t pay the full tax within the statutory period and RCP is less than the liability.
  • Doubt as to Liability: You can show the assessed tax is incorrect.
  • Effective Tax Administration: Paying the tax would be unfair and inequitable despite the IRS being technically able to collect.

In my practice I see most accepted OICs fall under “Doubt as to Collectibility” — realistic collection ability matters more than sympathy.

How the IRS calculates what you should offer

The IRS computes your Reasonable Collection Potential (RCP):

  • Net realizable equity in assets (market value minus selling costs and secured debt).
  • Future income available (monthly disposable income times a collection period the IRS uses). Disposable income is your monthly income minus allowed living expenses based on IRS Collection Financial Standards (these standards set allowable amounts for housing, utilities, food, etc.).

If RCP is less than the tax balance, you may be able to settle for that RCP amount or less under certain circumstances. The IRS uses national and local standards for expenses (see IRS Collection Financial Standards at irs.gov).

Types of offers and payment options

There are two common payment options when you submit an OIC:

  • Lump-Sum Cash Offer: You must submit 20% of the offer amount with Form 656 and, if accepted, pay the remaining balance in five or fewer installments.
  • Periodic Payment Offer: You must submit the first proposed payment with the application and continue payments while the IRS considers the offer. If accepted, you continue the agreed schedule until the offer is fully paid.

Note: Low-income taxpayers (as defined by the IRS) may be exempt from the $205 application fee and initial payment — check current rules and Form 656 instructions to confirm.

Documents and forms you must provide

The OIC package typically includes:

  • Form 656 (Offer in Compromise) — the primary application.
  • Form 433-A (for individuals) or Form 433-B (for businesses) — Collection Information Statements showing assets, liabilities, income and expenses.
  • Supporting documents: pay stubs, bank statements, recent bills, property appraisals, and proof of hardship as applicable.

A complete documentation package greatly improves the chance of acceptance. For a practical checklist, see the FinHelp documentation guide: Documentation Checklist for Installment Agreements and Offers in Compromise (finhelp.io/glossary/documentation-checklist-for-installment-agreements-and-offers-in-compromise/).

Typical timeline and processing

Processing time varies. Expect the IRS to take several months — frequently 6–12 months — to evaluate an offer. During this time:

  • Collections may be suspended while the offer is pending if you’ve complied with filing and payment requirements.
  • If the IRS returns the offer as incomplete, you must correct and resubmit.

If the IRS accepts your offer and you complete the required payments, the liability is considered settled. Acceptance is binding, and you must remain compliant with tax filing and payment obligations for a set period after acceptance (usually 5 years). If you fail to stay compliant, the IRS can vacate the agreement.

Common reasons OICs are rejected

  • Incomplete forms or missing documentation.
  • Underestimating the RCP: the IRS identifies additional collectible assets or income.
  • Failure to file required returns or be current on estimated taxes.
  • Ongoing bankruptcy cases or other legal bars.

When an offer is rejected you can: file an appeal with the IRS Independent Office of Appeals (Form 13711 may be used in certain appeal processes), submit a new offer with better documentation, or pursue alternatives such as installment agreements (see FinHelp’s Installment Agreements Explained: Types, Fees, and Eligibility (finhelp.io/glossary/installment-agreements-explained-types-fees-and-eligibility/) for comparison).

How OIC affects liens, credit, and future taxes

  • Credit bureaus are not directly notified by the IRS when an OIC is filed. However, tax liens (if already filed) and public records may still affect credit until resolved.
  • If a federal tax lien exists, look to the IRS process for lien release after the offer is paid; the IRS releases liens once terms are met, but timing can vary.
  • You must remain current on tax filings and payments for a period after acceptance; failure to do so can reinstate collection.

Practical strategies and professional tips

  1. Build a realistic budget before applying. The IRS uses its standards — but you should document unusual recurring expenses (e.g., medical costs) clearly.
  2. Don’t hide assets. Full disclosure is mandatory; undisclosed assets discovered later will likely lead to rejection and potential penalties.
  3. Consider whether an Installment Agreement is a better fit. If your income allows a manageable monthly payment, an installment plan might be quicker and less invasive. See our Installment Agreements article for a side-by-side comparison (finhelp.io/glossary/how-installment-agreements-work-setting-up-monthly-payments/).
  4. Use professional help when your case is complex. In my work as a tax resolution specialist, I’ve seen that negotiated offers with careful documentation and a defensible RCP calculation are more likely to succeed. Hiring a CPA or tax attorney often speeds review and reduces errors.

Real-world examples (anonymized)

  • A client with $30,000 in assessed tax and minimal equity in assets obtained an accepted OIC for $5,000 after we documented high medical expenses and limited disposable income.
  • A small-business owner with $50,000 in tax debt achieved an accepted OIC for a reduced amount after liquidating some non-essential assets and documenting inability to pay without bankruptcy.

These cases illustrate that acceptance is situational: accurate financials and patience are key.

Alternatives and next steps if OIC is not right for you

  • Installment Agreement: Often faster and suitable when reasonable monthly payments exist. See our Installment Agreements Explained and related guides for how to set up payments and the different agreement types.
  • Currently Not Collectible (CNC) Status: If you truly have no ability to pay any amount, the IRS may place your account in CNC, temporarily stopping collection action.
  • Bankruptcy: In some cases, consumer bankruptcy may discharge certain tax debts. This is complex and requires bankruptcy counsel.

Appeals and what to do if rejected

If your offer is rejected, you generally have a chance to appeal within the IRS appeals process or submit a new offer with additional evidence. The Taxpayer Advocate Service can help when normal IRS channels stall or you face undue hardship (taxpayeradvocate.irs.gov).

Final checklist before filing an OIC

  • File all required tax returns.
  • Gather pay stubs, bank statements, asset valuations, and bills.
  • Complete Form 656 and the correct Form 433 series (A for individuals, B for businesses).
  • Prepare the required application fee and initial payment unless you qualify for a low-income waiver.
  • Consider consulting a tax professional to validate your RCP calculation and submission.

Resources

Disclaimer: This article is educational and does not constitute legal or tax advice. For guidance about your specific situation, consult a licensed tax professional, enrolled agent, CPA, or tax attorney.