Overview
An Offer in Compromise (OIC) is one of the IRS’s formal tools to resolve federal tax debt for less than the full amount owed when paying in full would be unfair or create financial hardship. The IRS considers OICs under three main grounds: doubt as to collectibility (you truly cannot pay), doubt as to liability (you don’t owe the assessed tax), or effective tax administration (collecting full tax would be inequitable).
This article explains who may qualify, how the IRS values offers, the forms and fees involved, typical timelines, practical tips from 15 years of advising taxpayers, and where to go next. It includes internal resources on financial disclosures and application mistakes to help you prepare a stronger submission.
(Primary IRS guidance: IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise)
How eligibility is assessed
The IRS evaluates OIC applications by estimating your “reasonable collection potential” (RCP): the amount the IRS can expect to collect from your available assets and future income over a defined period. If your RCP is less than the tax you owe, an OIC may be approved on doubt as to collectibility grounds.
Key elements the IRS examines:
- Assets and their net realizable value (what you could reasonably sell or borrow against).
- Monthly income after allowable living expenses.
- Reasonable future income (IRS uses future income to calculate periodic offers).
- Special factors for businesses, estates, or taxpayers with limited prospects.
To qualify on doubt as to liability, you must show a legitimate question about the correctness of the tax assessment. For effective tax administration, you must show that collecting the full tax would cause economic hardship or be unfair given your circumstances.
See our practical examples to decide if an OIC might fit your case: When an Offer in Compromise Makes Sense: Practical Examples.
Forms, fees and required documentation
Core forms and documents:
- Form 656, Offer in Compromise — the official offer form.
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses — financial disclosure forms specific to OICs.
- Supporting documents: bank statements, pay stubs, proof of monthly expenses, asset valuations, and any documentation relevant to disputes about liability.
Application fee and payments:
- The standard application fee for most OIC submissions is $205 (non-refundable). Certain low-income taxpayers may be exempt; check IRS guidance.
- You must also include either the initial payment for a lump-sum (5) offer or the first periodic payment if you submit a periodic offer. The IRS keeps checks if your offer is rejected.
Authoritative IRS guidance and instructions: see the IRS OIC page and Form 656 instructions (IRS): https://www.irs.gov/payments/offer-in-compromise.
For detailed help preparing a financial disclosure, consult our guide: What to Include in a Financial Disclosure for an Offer in Compromise.
How the IRS calculates an acceptable offer
The IRS’s calculation focuses on net realizable equity in assets plus future income available for collection. In plain terms:
- Estimate the value of your assets, subtracting amounts the IRS won’t collect (e.g., secured loans). That gives net equity.
- Project monthly disposable income (income minus allowable living expenses) and multiply by the number of months in the collection period the IRS uses.
- The sum of (1) and (2) equals your RCP. Offers below the RCP are more likely to be accepted.
The IRS uses nationally published standards for many living expenses but also allows some local or special expenses with documentation. That means an accurate, honest expense worksheet matters.
Payment options and timelines
Two common payment streams:
- Lump-sum (5) payment: Offer includes five monthly payments (the first with the application) and a final payment upon acceptance.
- Periodic payment: A set monthly payment while the IRS reviews the offer and continuing until acceptance.
Processing time: OIC processing commonly takes 6 to 12 months. Complex cases, appeals, or litigation can extend this timeline. Keep in mind the IRS will generally hold collection activity while a properly submitted OIC is pending, but penalties and interest continue to accrue until the debt is satisfied or abated.
Practical tips from experience
In my practice helping taxpayers with OICs for 15 years, success often comes down to documentation quality and realistic valuation. Specific recommendations:
- Document everything. Bank statements, cancelled checks, recent appraisals for significant assets, and proof of recurring expenses are critical.
- Be realistic about asset values. Overvaluing property or understating income triggers IRS requests for more proof or outright denial.
- Use the correct OIC-specific Forms 433-A (OIC) or 433-B (OIC). These differ from general collection information forms.
- If you’re near the line between an installment agreement and an OIC, compare both options. See our comparison: Installment Agreements vs. Offers in Compromise: Which is Right for You?.
- Consider professional representation when liability is contested or when asset valuation is complex. Experienced practitioners can reduce common errors and improve communication with IRS examiners.
Real-world example: A client with a $50,000 assessed liability and limited future earning potential submitted a lump-sum OIC for $15,000 after we documented low net realizable equity and high unavoidable expenses. The IRS accepted the OIC after an eight-month review. Carefully prepared disclosures and conservative valuations helped.
Common mistakes and red flags
- Incomplete or inconsistent financial disclosures.
- Failing to file required tax returns or being out of compliance — the IRS requires current filing and payment compliance to process many OICs.
- Underestimating the IRS’s ability to attach equity in real property or retirement funds in some cases.
- Submitting an offer without assessing alternatives (installment agreement, currently not collectible status, bankruptcy in narrow cases).
Avoid common application errors with our step-by-step checklist: Avoiding Common Mistakes on an Offer in Compromise Application.
What happens if the IRS rejects your offer?
If rejected, the IRS will return your application fee only in narrow circumstances and may keep your submitted payment. Options after rejection include:
- File an appeal to the IRS Appeals Office within the timeframe provided.
- Rework and resubmit a new offer with better documentation or changed circumstances.
- Consider alternative resolution paths: installment agreement, currently not collectible (CNC) status, or pursuing dispute resolution if liability is in question.
Our guide on reapplying or modifying an existing offer provides practical steps for next actions.
After an accepted offer: obligations and consequences
- Comply with tax law for five years after acceptance. The IRS can void the OIC if you fail to file returns or pay taxes during that period.
- The accepted offer satisfies the assessed tax and typically releases federal tax liens for the amount settled; however, you should confirm lien release steps and consider state tax or private creditor liens unaffected by the OIC.
- Penalties and interest generally stop accruing on the settled liability from acceptance, but always confirm the final accounting in writing with the IRS.
When an OIC is not the right choice
- You have adequate income or realizable assets to pay via an installment agreement.
- Your tax debt arises from a liability you can successfully contest — then focus on dispute resolution or appeals rather than an OIC.
- You can reorganize your finances in a way that resolves the debt faster and at lower cost than the OIC fees and application process.
Frequently asked questions (brief)
- How long does processing usually take? Generally 6–12 months for straightforward cases.
- Is the application fee refundable? Generally no; $205 is typically non-refundable for most applicants, though some low-income exceptions apply (IRS guidance).
- Can I file an OIC for state tax debt? OICs are federal; some states have their own programs — check with your state tax authority.
Sources and further reading
- IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise (primary authoritative source)
- FinHelp internal: What to Include in a Financial Disclosure for an Offer in Compromise — https://finhelp.io/glossary/what-to-include-in-a-financial-disclosure-for-an-offer-in-compromise/
- FinHelp internal: When an Offer in Compromise Makes Sense: Practical Examples — https://finhelp.io/glossary/when-an-offer-in-compromise-makes-sense-practical-examples/
- FinHelp internal: Installment Agreements vs. Offers in Compromise — https://finhelp.io/glossary/installment-agreements-vs-offers-in-compromise-which-is-right-for-you/
Professional disclaimer: This article is educational and reflects general information as of 2025. It is not individualized tax advice. Taxpayers should consult a qualified tax professional or attorney about their specific situation before submitting an Offer in Compromise.
