Quick overview
An Offer in Compromise (OIC) is the IRS’s option for resolving tax debt for taxpayers who legitimately cannot pay the full amount. The IRS accepts only a small percentage of OICs because the agency compares the offer against what it believes it can collect through normal collection tools. The application’s organization and documentation are critical to a favorable outcome. (IRS: Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise)
Background and purpose
The OIC program exists to balance two goals: maximize tax collections and provide taxpayers a path to relief when full collection is not feasible. The IRS considers an OIC under three primary grounds: doubt as to liability (the tax owed is legitimately in dispute), effective tax administration (collecting the full amount would be unfair or inequitable), and doubt as to collectibility (the taxpayer cannot pay the full amount). Most accepted offers are based on doubt as to collectibility. For more on the statutory and administrative framework, see IRS Offer in Compromise materials (https://www.irs.gov/payments/offer-in-compromise).
In my 15 years advising clients, I’ve seen that the strongest cases combine accurate calculations with clear supporting records. Poor documentation—not the amount of the offer—is most often the reason for denial.
Who may qualify?
Basic eligibility requirements include:
- Current tax compliance: all required tax returns must be filed and, for current tax years, estimated taxes generally should be paid. (IRS OIC guidance)
- No open bankruptcy cases that would affect the IRS’s legal rights without separate court approval.
- Disclosure of all material assets, income, and liabilities.
Eligibility can vary by situation, so review the IRS guidance and consult a tax professional if you have complex facts (e.g., recent bankruptcy or multiple business entities).
Key forms and fees
- Form 656, Offer in Compromise — the formal offer form (see IRS Form 656 instructions: https://www.irs.gov/pub/irs-pdf/i656.pdf).
- Financial statement form(s): Form 433-A(OIC) for individuals (and sole proprietors) and Form 433-B(OIC) for businesses. These replace the older standard 433 forms for OIC submissions.
- Application fee: the IRS charges an application fee (the fee amount and low-income waiver rules are posted on the IRS OIC page). Low-income taxpayers may qualify for a waiver of the application fee and initial payment. (IRS: Offer in Compromise page)
- Initial payment: For a lump‑sum offer, you generally submit an initial payment along with Form 656 (the percentage and conditions are detailed in the Form 656 instructions). For periodic offers, you submit the first proposed installment and continue monthly payments during processing unless you qualify for a waiver.
Note: Specific dollar amounts and waiver thresholds are published by the IRS and can change; always verify current fee figures at the IRS OIC page (https://www.irs.gov/payments/offer-in-compromise).
What the IRS evaluates (the evaluation framework)
The IRS uses a concept called Reasonable Collection Potential (RCP) when considering an OIC. RCP is the agency’s estimate of the amount it can collect from a taxpayer through enforced collection (levies, liens, wage garnishments, or asset liquidation) or voluntary collection over a reasonable time. RCP generally includes:
- Net realizable equity in nonexempt assets (what could reasonably be sold or used to pay the tax), and
- Future income available for collection (monthly disposable income the taxpayer can pay toward tax liabilities).
The IRS compares your offer amount to its RCP. If your offer equals or exceeds RCP, the IRS is likely to accept. If not, it will typically reject the offer or request additional documentation or a higher offer. For the precise math and allowances the IRS uses when computing RCP, see the Form 656 instructions and IRS OIC guidance (https://www.irs.gov/payments/offer-in-compromise; Form 656 instructions).
Documentation checklist (what to include)
Provide clear, legible copies and organize them in the order requested on Form 656 and Form 433-A(OIC) / 433-B(OIC). Typical required documentation includes:
- Government-issued photo ID and Social Security card (or ITIN documentation) for all individuals on the application.
- Signed and completed Form 656.
- Signed and completed Form 433-A(OIC) or 433-B(OIC) with all asset, income, and expense detail.
- Recent pay stubs (last 2–3 months) and a year-to-date income statement for self-employment.
- Bank statements (3–6 months). Include statements for all accounts, including joint accounts.
- Proof of monthly living expenses: mortgage/rent statements, utilities, insurance, child-care, tuition, medical bills, court-ordered payments.
- Documentation of assets: vehicle titles, recent appraisals for real property, retirement account statements, brokerage statements, business balance sheets.
- Evidence of hardship or unusual expenses (medical debt, foreclosure notices, expenses related to disability) when relying on effective tax administration.
- Business documentation for businesses: profit/loss statements, balance sheets, accounts receivable aging, business bank statements.
Missing or incomplete documentation is the single most common reason for delayed processing or denial. See our guide on What to Include in a Financial Disclosure for an Offer in Compromise for a detailed checklist.
Process and timeline
- Preparation: Gather forms and documentation, calculate your offer amount, and decide whether to submit a lump-sum or periodic offer.
- Submission: Mail Form 656, the appropriate Form 433 series, supporting documentation, the application fee (or waiver request), and initial payment if required.
- Processing: The IRS acknowledges receipt and assigns the case to an OIC examiner. If the examination requires more information, the IRS will request it in writing.
- Determination: After reviewing documentation and often after an interview or phone call with the taxpayer or representative, the IRS issues a decision letter. Typical processing times vary—many cases take six months or more; some complex cases take longer. See our article on Preparing a Financial Disclosure Package for an Offer in Compromise for tips that shorten processing time.
If your offer is rejected or returned
- Rejection: You have the right to appeal an OIC rejection within the IRS Office of Appeals. Appeals rely on new or clarified facts or legal arguments showing the IRS’s decision was incorrect given your financial condition. See How Offer in Compromise Appeals Work After a Denial.
- Returned: The IRS may return an incomplete offer if documentation or signatures are missing. Fix the deficiencies and reapply promptly.
Common mistakes and how to avoid them
- Incomplete financial disclosure: Double‑check every line on Form 433 and attach supporting documents.
- Using emotional appeals without evidence: If you claim hardship, supply bills, medical records, or other proof.
- Underestimating asset equity: Don’t hide assets or undervalue property—this will trigger denial and potential penalties.
- Missing tax compliance requirements: Ensure all returns are filed and required estimated taxes are current.
Practical strategies and professional tips
- Prepare a conservative offer: Base the amount on documented RCP analysis, not on what you hope the IRS will accept.
- Keep a clean paper trail: Label documents and create a table of contents so examiners can find evidence quickly.
- Consider professional representation: A tax attorney, CPA, or enrolled agent with OIC experience can streamline negotiations and spot documentation gaps. In my practice, well-prepared cases with professional representation are more likely to move through the system without repeated document requests.
- Be ready to negotiate: The IRS may counteroffer; respond promptly and provide any new documentation requested.
Alternatives to an OIC
An OIC is not the only way to handle tax debt:
- Installment agreements (monthly payments) — often the simpler path when liquidity is available.
- Currently not collectible status — temporary suspension of collection if paying would cause severe hardship.
- Bankruptcy — in limited cases, certain tax debts may be discharged in bankruptcy, but rules are complex; consult bankruptcy counsel.
Example scenarios (brief)
- Debtor with low income and no nonexempt assets: An OIC based on doubt as to collectibility can be accepted if the RCP is less than the taxpayer’s reasonable offer.
- Business owner with fluctuating income and disputed assessment: A mixture of doubt as to liability (if the assessment is questionable) and strong documentation may yield a successful OIC.
Final steps and recordkeeping
After submission, keep copies of everything. If your offer is accepted, comply with all terms: timely payments for periodic offers, staying current on tax filings, and making required estimated payments. Failure to comply can void the agreement and reinstate full collection.
Professional disclaimer
This article is educational and does not replace personalized tax advice. Rules, fee amounts, and procedures can change—confirm current details on the IRS Offer in Compromise page (https://www.irs.gov/payments/offer-in-compromise) or consult a qualified tax professional before filing.
Authoritative sources and further reading
- IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
- IRS — Form 656 Instructions: https://www.irs.gov/pub/irs-pdf/i656.pdf
Related FinHelp resources:
- Preparing a Financial Disclosure Package for an Offer in Compromise: https://finhelp.io/glossary/preparing-a-financial-disclosure-package-for-an-offer-in-compromise/
- 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/
- How Offer in Compromise Appeals Work After a Denial: https://finhelp.io/glossary/how-offer-in-compromise-appeals-work-after-a-denial/
With organized documentation and realistic valuation of your assets and income, an OIC can be an effective tax-relief tool. Prepare carefully, follow IRS instructions, and consider professional help when facts are complex.
