Educational note: This article explains Offers in Compromise (OICs) for educational purposes and is not a substitute for personalized tax advice. Consult a qualified tax professional or CPA for help with your specific case.
Quick answer
An Offer in Compromise (OIC) is a formal proposal to the IRS asking it to accept a reduced payment to settle a taxpayer’s federal tax liabilities. The IRS evaluates the taxpayer’s financial situation, including assets, monthly income and allowable expenses, to calculate the reasonable collection potential (RCP). If the RCP shows the taxpayer cannot pay the full amount, the IRS may accept an offer that represents the most it can reasonably collect (Internal Revenue Service).
How the IRS evaluates an OIC
The IRS approves an OIC only when the offer equals or exceeds the agency’s reasonable collection potential (RCP). RCP is a snapshot of what the IRS could collect from:
- Liquid assets (bank accounts, investments);
- Non-exempt equity in property (vehicles, second homes); and
- Future income the taxpayer can reasonably pay after allowed living expenses.
The three legal bases for an OIC are:
- Doubt as to collectibility (DAC) — you can’t pay the full liability now or in the foreseeable future (the most common basis).
- Doubt as to liability — there’s a legitimate dispute that you owe the tax (requires Form 656-L and supporting evidence).
- Effective tax administration — paying the full liability would create exceptional hardship or be unfair, even if the liability could technically be collected.
(See IRS Offer in Compromise guidance and Form 656 instructions for details.)
Forms, fees and payment options (what you’ll submit)
To file an OIC you generally must submit:
- Form 656, Offer in Compromise (individuals and businesses);
- A financial statement — typically Form 433-A(OIC) for individuals or Form 433-B(OIC) for businesses; and
- The nonrefundable application fee (currently $205 for most applicants) unless you qualify for a low-income waiver. (Internal Revenue Service: Offer in Compromise)
Payment options when you apply:
- Lump-sum cash offer: Submit 20% of the offer amount with the application and pay the balance in five or fewer payments once the offer is accepted; or
- Periodic payment offer: Submit the first proposed periodic payment with the application and continue monthly payments while the IRS considers the offer.
Which option you choose affects collection status and processing. The IRS generally will not levy your assets while it is considering a properly submitted offer, but other collection actions (like lien filings) can still occur in some circumstances — see IRS guidance for specifics.
Who is likely to qualify
An OIC is for taxpayers whose financial circumstances make full payment either impossible or unfair. Typical qualifying situations include prolonged unemployment, catastrophic medical expenses, and permanent reduction in income. To be considered, you must also:
- Have filed all required tax returns;
- Make estimated tax payments or federal tax deposits current, as required; and
- Not be in an open bankruptcy case without coordinating with your bankruptcy counsel.
Certain liabilities or cases — for example, those arising from fraud — have additional restrictions. Use the IRS pre‑qualifier tool to get a quick, nonbinding assessment before preparing a full application.
Typical timeline and outcomes
Processing time varies by complexity. In many cases the IRS takes 6–12 months to review an OIC, although simple offers may be resolved faster and complex or contested matters can take longer (Internal Revenue Service). While an offer is pending, collection activity is generally suspended; if your offer is accepted, the case usually closes after your payment terms are completed and you remain compliant with future filing and payment requirements.
If your offer is rejected, you may request reconsideration or file an appeal with the IRS Office of Appeals. For guidance about next steps if your offer is denied, see our article on How to Reconsider a Denied Offer in Compromise: Next Steps and Documentation.
Real-world examples (how RCP drives the result)
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Example 1: A single taxpayer with $5,000 in bank accounts, a modest car with no equity after a loan, and monthly disposable income of $150 — the IRS determines RCP of $9,000 over a reasonable collection window. An OIC near that amount has a good chance of acceptance.
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Example 2: A small-business owner whose business has stopped generating revenue and whose only asset is an owner-occupied home that the family needs — RCP may be low when the owner’s equity is protected by the IRS’s allowed living expense standards. An OIC for a substantially reduced amount could be viable.
These examples show why careful documentation of income and expenses matters: the RCP calculation is numeric and evidence-driven.
How to prepare a stronger application (professional tips)
- Be complete and realistic: Understate nothing; the IRS verifies bank statements, paystubs, and asset valuations. Missing or inconsistent documents delay processing or trigger rejection.
- Use the right forms: Attach Form 433-A(OIC) or Form 433-B(OIC) as required; use Form 656-L only when disputing liability. Follow the Form 656 instructions exactly (Internal Revenue Service: Instructions for Form 656).
- Document special expenses: If you have unusual, nonstandard expenses (ongoing medical costs, support obligations), include bills and third‑party statements to support them.
- Consider professional help: Experienced tax resolution professionals or enrolled agents can structure offers, calculate realistic RCP, and prepare persuasive documentation. In my practice, an organized financial packet shortens review time and improves acceptance chances.
Common mistakes and misconceptions
- Thinking the IRS will accept any low offer: The IRS looks for an offer equal to or above its RCP. Too-low offers are often rejected.
- Missing returns or deposits: The IRS will refuse to process an OIC if required returns are not filed or employment tax deposits are delinquent.
- Believing an OIC clears liens automatically: Acceptance settles the tax liability, but liens may remain until paid off or released through lien release procedures.
- Assuming credit scores are directly fixed: An OIC resolves the federal tax debt but won’t automatically remove public records or quickly rebuild credit — those are separate processes.
Alternatives to an OIC
If an OIC is unlikely or unsuitable, consider alternatives: an installment agreement, a partial-payment installment agreement, currently not collectible status, or bankruptcy in narrow circumstances. Our guide When an Offer in Compromise Is Not the Right Choice: Alternatives to Consider walks through these options with practical examples.
What happens after acceptance
If the IRS accepts your offer you must:
- Pay the agreed amount per the terms; and
- Stay current with all filing and payment requirements (generally for five years) — failure to comply can cause the offer to default and the IRS to reinstate the full balance.
An accepted OIC closes the federal tax liability covered by the offer, but any lien or public record will follow the rules for release and discharge.
Frequently asked practical questions
- How long does it take? Typically 6–12 months, but expect variation.
- Will collections stop? Generally, levy actions are suspended while your application is pending if you submit a complete offer; specific outcomes depend on the facts of the case.
- Is the application fee refundable? No; the application fee is nonrefundable unless you qualify for a low-income waiver.
Final checklist before you file
- File any unfiled returns.
- Gather paystubs, bank statements, and bills.
- Choose lump-sum or periodic payment option.
- Prepare Form 656 and the appropriate Form 433.
- Consider pre‑filing advice from a tax professional.
Further reading and authoritative sources
- IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
- IRS — Instructions for Form 656: https://www.irs.gov/forms-pubs/about-form-656
- National Taxpayer Advocate — Taxpayer resources and issue discussions.
Internal FinHelp links for next steps:
- How to Reconsider a Denied Offer in Compromise: Next Steps and Documentation — https://finhelp.io/glossary/how-to-reconsider-a-denied-offer-in-compromise-next-steps-and-documentation/
- 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/
- When an Offer in Compromise Is Not the Right Choice: Alternatives to Consider — https://finhelp.io/glossary/when-an-offer-in-compromise-is-not-the-right-choice-alternatives-to-consider/
Professional disclaimer: This page is educational only and does not replace personalized tax or legal advice. For guidance specific to your situation, consult a CPA, enrolled agent, or tax attorney.
