Overview

An Offer in Compromise (OIC) is an IRS program that lets qualifying taxpayers settle federal tax liabilities for less than the full amount owed (IRS, Offer in Compromise). The IRS accepts two common OIC payment methods: a Lump‑Sum Cash Offer (one substantial payment) or a Periodic‑Payment Offer (often called a Partial Payment OIC) paid in installments during review and, if accepted, until the balance is paid.

How the IRS treats each option (what to expect)

  • Forms and filing: You submit Form 656 (Offer in Compromise) and a Collection Information Statement—Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses—plus supporting documentation (IRS OIC guidance).
  • Lump‑Sum Cash Offer: You must include an initial payment equal to 20% of the offer when you apply. If accepted, the remaining balance must be paid in five or fewer payments and the balance completed within five months of acceptance (IRS guidance).
  • Periodic‑Payment (Partial) Offer: You submit the first proposed installment with your application and continue payments while the IRS considers the offer. If accepted, you continue the agreed periodic payments until the offer is paid in full.

Which option is generally better?

Choose Lump‑Sum Cash when:

  • You have liquid assets or funds available to make the initial 20% and pay the balance within five months. A lump‑sum often recovers more money for the IRS and can be viewed more favorably.

Choose Periodic‑Payment (Partial) when:

  • You lack a large amount of cash now but can afford smaller monthly payments; you need time to preserve cash for living or business operations; or you face short‑term income disruption.

How the IRS decides: Reasonably Collectible Amount

The IRS calculates a taxpayer’s Reasonably Collectible Value (RCV) by valuing nonexempt assets and future income (after necessary living expenses). The offer must at least equal the RCV for acceptance to be likely. For details on how asset valuation and allowable expenses affect offers, see our guide on Offer in Compromise: How Asset Valuation Affects Your Settlement and the IRS OIC page (irs.gov/payments/offer-in-compromise).

Pros and cons (quick comparison)

  • Lump‑Sum Cash
  • Pros: Faster closure, may be viewed more favorably, typically resolves liability sooner.
  • Cons: Requires substantial cash up front; may deplete emergency savings or business capital.
  • Periodic‑Payment (Partial)
  • Pros: Lower monthly burden, preserves cash flow for immediate needs.
  • Cons: IRS considers total payments across time; acceptance may take longer and you must keep making payments during review.

Practical examples (real‑world patterns)

  • If you inherit or liquidate investments and can front a sizable payment, a Lump‑Sum Cash Offer can close the case quickly and reduce total paid.
  • If you’re self‑employed with irregular income or recently lost a job, a Periodic‑Payment Offer may be the only practical path while you rebuild income.

Steps to prepare a stronger offer

  1. Complete Form 656 and the appropriate Collection Information Statement (Form 433‑A (OIC) or 433‑B (OIC)).
  2. Gather proof of income, bank statements, asset documentation and invoices for allowable living/business expenses.
  3. Calculate an offer that reflects your RCV—don’t understate income or assets.
  4. Consider professional help; an experienced tax practitioner can structure realistic offers and spot documentation gaps (in my practice, accurate expense documentation often moves borderline cases to acceptance).

Common mistakes to avoid

  • Submitting an offer without current, complete financial statements.
  • Using emergency reserves for a Lump‑Sum without keeping minimal working capital or living savings.
  • Assuming the IRS will accept a lower offer just because you say you’re struggling—IRS reviews are evidence‑based.

Timing, processing and appeals

Processing can vary; many OICs take roughly 6–12 months to resolve depending on complexity and IRS workload. If the IRS rejects your offer, you may request reconsideration, appeal to the IRS Office of Appeals, or pursue alternatives such as installment agreements or bankruptcy in limited situations. See our Offer in Compromise Application Checklist for documentation tips and When an Offer in Compromise Might Be Better Than an Installment Agreement for decision guidance.

Authoritative sources

Professional disclaimer

This content is educational and does not constitute legal or tax advice. For recommendations tailored to your situation, consult a qualified tax professional or an enrolled agent. In my practice, careful documentation and realistic offers substantially improve acceptance odds.