An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the total amount owed. However, not all taxpayers qualify. Generally, if a taxpayer can pay their tax liability in full through an installment plan or other payment method, they will not be eligible for an OIC.
To qualify, the taxpayer must have:
Filed all required tax returns
Received a bill for at least one of the tax debts included in the offer
Made all necessary estimated tax payments for the current year
If a business owner with employees, made all required federal tax deposits for the current and prior two quarters
IRS Evaluation of an OIC
The IRS typically accepts an OIC only if the amount offered is equal to or greater than the reasonable collection potential (RCP)—the IRS’s measure of what a taxpayer can realistically pay. The RCP takes into account the taxpayer’s assets, such as real estate, vehicles, bank accounts, and other property, as well as future income minus necessary living expenses.
Reasons the IRS May Accept an OIC
The IRS may approve an offer for one of the following reasons:
Doubt as to Liability – If there is a legitimate question about whether the taxpayer actually owes the debt or the correct amount under the law.
Doubt as to Collectibility – If the taxpayer’s financial situation shows they cannot afford to pay the full amount owed.
Effective Tax Administration – If the taxpayer can technically pay in full but doing so would cause significant financial hardship or be unfair due to exceptional circumstances.
Forms Required for Submission
The forms required for an OIC depend on the reason for the request:
For doubt as to collectibility or effective tax administration, taxpayers must submit Form 656 (Offer in Compromise) along with:
Form 433-A (OIC) – For wage earners and self-employed individuals
Form 433-B (OIC) – For businesses
For doubt as to liability, taxpayers must file Form 656-L (Offer in Compromise – Doubt as to Liability) instead of Form 656 and the financial disclosure forms.
These forms and further details can be found in the Offer in Compromise Booklet (Form 656-B).
Application Fees
A nonrefundable application fee is typically required when submitting an OIC, except in two cases:
Doubt as to liability – No fee is required.
Low-income exception – Individuals may qualify for a waiver if their income is at or below 250% of the federal poverty level. The guidelines for this exemption are detailed in Section 1 of Form 656.
Payment Options for an OIC
Taxpayers can choose between two payment structures:
Lump Sum Offer – Requires full payment within five or fewer installments over five months after acceptance. A nonrefundable 20% initial payment must be included with the offer (unless the low-income exemption applies). This amount is applied to the tax debt, even if the offer is later rejected.
Periodic Payment Offer – Allows payments over six or more monthly installments within 24 months after acceptance. The first proposed installment must be included with the application, and ongoing payments must continue while the IRS reviews the offer. These payments are also nonrefundable and applied toward the tax debt.
Once an OIC is accepted, taxpayers cannot designate specific payments to particular tax liabilities included in the agreement.
Collection Suspension During OIC Review
While an OIC is under review, IRS collection activities are generally paused, including for:
The duration of the OIC review
30 days after a rejection
The appeal period if the rejection is challenged with the IRS Independent Office of Appeals
Terms and Compliance After Acceptance
If an offer is accepted, the taxpayer must remain fully compliant with tax laws. The IRS will keep any tax refunds (plus interest) from returns filed up to the date the offer is accepted.
For OICs based on doubt as to collectibility or effective tax administration, taxpayers must file all tax returns and pay taxes on time for five years after acceptance. Failure to comply can result in the IRS canceling the agreement, reinstating the original debt amount (minus payments made), and adding interest and penalties.
Right to Appeal a Rejected Offer
If the IRS rejects an OIC, the taxpayer will receive a letter explaining the reason for the denial and instructions on how to appeal. Appeals must be submitted within 30 days from the date of the rejection notice.
Returned Offers vs. Rejections
In some cases, the IRS returns an OIC rather than rejecting it. This can happen if:
The taxpayer did not submit all required information
The taxpayer is in bankruptcy proceedings
The required application fee or initial payment was not included
The taxpayer has outstanding unfiled tax returns or unpaid current tax obligations
Unlike a rejection, returned offers cannot be appealed. However, the taxpayer can resubmit the corrected offer once the issues are resolved.