Offer in Compromise

An offer in compromise, or OIC, is an agreement with the IRS to settle a tax debt for less than the full amount owed. For some taxpayers it is a real way out, but the program is tightly controlled. The IRS generally will not accept an offer from someone who can pay in full through a payment plan or the equity in their assets. This page explains how the program works so you can judge whether it is realistic.

The three grounds for an offer

1. Doubt as to collectibility. Your assets and income are less than the full amount owed.
2. Doubt as to liability. There is a genuine dispute about whether you owe the tax or how much. This type uses Form 656-L and has no application fee.
3. Effective tax administration. The tax is owed and collectible, but full payment would cause economic hardship or be unfair because of exceptional circumstances.

Eligibility

To be considered, the IRS requires that you:

• have filed all required tax returns;
• have made all required estimated tax payments for the current year;
• are not in an open bankruptcy; and
• if you are an employer, have made the required federal tax deposits for the current quarter and the two preceding quarters.

You must also have received a bill for at least one tax debt in the offer. The Offer in Compromise Pre-Qualifier tool on irs.gov checks eligibility, though using it does not guarantee acceptance. If you are not eligible, the IRS returns the application and fee. An offer can also be returned, rather than rejected, for reasons such as missing information, an omitted fee, unfiled returns or an unpaid current-year tax.

How the IRS evaluates an offer

For a collectibility offer, the IRS generally expects the offer to equal or exceed your reasonable collection potential. That figure combines the value of your assets and anticipated future income, minus allowed basic living expenses. The IRS uses National Standards for items such as food and clothing, and Local Standards for housing, utilities and transportation. For Local Standards it uses what you actually spend or the standard amount, whichever is less. If your offer is too low, the IRS may calculate the correct amount and let you raise it.

The paperwork

Individuals can apply through their IRS online account. Otherwise, use the Form 656-B booklet, which contains Form 656 (the offer), Form 433-A (OIC) for individuals and sole proprietors, and Form 433-B (OIC) for businesses. The financial statements list your income, expenses, accounts, assets and debts, with supporting documents. Doubt-as-to-liability offers use Form 656-L. Incomplete or unsigned packages cannot be reviewed.

Fees and payments

• Application fee. $205 per the IRS (2026), unless you qualify for the low-income exception.
• Low-income exception. Only individuals can use it. It applies if your adjusted gross income, or your household gross monthly income multiplied by 12, is at or below 250% of the federal poverty guidelines for your family size and location. Qualifying filers do not pay the fee, the initial payment or the payments while the offer is reviewed.
• Lump sum offer. You pay 20% of the offer with your application and the rest in five or fewer payments, within five or fewer months of acceptance.
• Periodic payment offer. You send the first payment with the application and continue making payments during the review, generally finishing within 24 months.

The required payments and the fee are not refundable, and the IRS applies the payments to your tax balance.

While the IRS reviews your offer

The IRS says most collection activity is suspended while an offer is pending, and the collection statute is extended for the time the offer is pending, 30 days after a rejection, and during any appeal. The IRS may still file a Notice of Federal Tax Lien. Review can take up to 24 months. See statute of limitations for how offers affect the collection clock.

After the decision

If accepted, you agree to follow the terms, including timely filing and paying all taxes for five years from the acceptance date. The IRS keeps any refund for returns through the acceptance date, and a lien is not released until the offer is paid in full. If you default, the IRS can terminate the offer and collect the original balance less payments made.

If rejected, you can appeal to the IRS Independent Office of Appeals within 30 days of the date on the rejection letter, and the fee and payments are not returned. A returned offer cannot be appealed, but you may resubmit it once the problem is fixed.

Common mistakes

• Applying when payment in full through an installment agreement is realistic.
• Understating income or leaving out assets.
• Paying a company a large upfront fee for an offer it cannot promise. The IRS warns about "offer mills."

How we can help

We can run the numbers using the IRS formulas before you pay a fee, gather the supporting documents, prepare Form 656 and the financial statements, and help respond to IRS questions or a rejection. If an offer is unlikely to succeed, we can compare a payment plan or hardship status. We cannot promise acceptance.

For the wider picture, see tax debt relief options, or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.