Overview

An Offer in Compromise (OIC) lets the IRS accept a reduced amount to settle a tax debt; an Installment Agreement lets you pay the full amount over time. In my 15 years helping clients with tax problems, I’ve seen OICs make sense when the IRS’s reasonable collection potential (RCP) indicates the agency can’t realistically collect the full debt, or when monthly payments under an installment plan would create severe financial hardship. (See the IRS explanation of OICs and Installment Agreements for official guidance.)

When an OIC is typically the better choice

  • Low reasonable collection potential: The IRS calculates RCP from asset equity and future income. If RCP is meaningfully less than the tax owed, an OIC may be viable. (See how the IRS calculates payment amounts.)
  • Severe or prolonged hardship: If required installment payments would prevent you from meeting basic living expenses, an OIC can be the relief you need.
  • Close to insolvency or liquidation: For individuals or business owners winding down operations, an OIC can stop collection attempts and resolve tax exposure faster.
  • Assets are minimal or protected: When liquidating assets won’t cover the tax and selling would create undue hardship, an OIC may be preferable.

When an Installment Agreement is usually better

  • You can afford monthly payments that meet the IRS’s terms.
  • You prefer to avoid the paperwork and uncertainty of an OIC.
  • You want to stop enforced collection quickly and can pay in full over time.

How the IRS evaluates OICs (brief)

The IRS evaluates offers against the taxpayer’s RCP: equity in assets plus projected future disposable income. The agency requires complete financial disclosures (Forms 656 and supporting collection information statements) and will consider offers in lump-sum or periodic payment options. Processing time varies by complexity; expect several months. For official details, see IRS: Understanding Offers in Compromise and IRS: Installment Agreements.

Steps I recommend before choosing

  1. Gather records: recent pay stubs, bank statements, asset valuation, and documented expenses.
  2. Run a realistic RCP estimate: use the IRS guidelines to see whether an OIC would clear the gap between RCP and tax owed. My practical tip: be conservative when estimating future income—IRS reviewers are strict.
  3. Compare net cost: account for interest and penalties that continue during an Installment Agreement vs. the potential savings from an accepted OIC.
  4. Consider timing and enforcement: OICs can stop levies if accepted; installment plans typically stop most enforced collection while in good standing.
  5. Consult a qualified tax professional: an experienced CPA or enrolled agent can prepare the financial package and advise whether to submit Form 656 or request an installment plan.

Pros and cons (quick)

  • Offer in Compromise: Pros — can reduce total balance, provide a fresh start, stop aggressive collection when accepted. Cons — lower acceptance rates, lengthy documentation and review, possible tax consequences if forgiven debt is reported as income in rare cases.
  • Installment Agreement: Pros — easier to set up, higher acceptance, predictable monthly payments. Cons — you pay the full balance plus continuing interest and penalties, and the debt remains until paid in full.

Common mistakes to avoid

  • Submitting an OIC without filing required returns or being current on estimated tax payments. The IRS generally requires all returns filed to consider an OIC.
  • Underestimating allowable living expenses or failing to document them—IRS examiners will request proof.
  • Making an offer that’s obviously too low relative to RCP; such offers are often rejected without negotiation.

Action checklist (practical next steps)

  • File any unfiled returns immediately.
  • Compile bank statements, pay stubs, asset valuations, and monthly bills.
  • Use the IRS worksheets or a tax professional to estimate RCP.
  • Decide whether to apply for an OIC (Form 656) or set up an Installment Agreement.

Related resources

Authoritative sources

Professional disclaimer

This page is for educational purposes and does not replace personalized tax advice. Consult a qualified tax professional before submitting an Offer in Compromise or entering an Installment Agreement.