An offer in compromise (OIC) lets you settle your IRS tax debt for less than the full amount you owe. The process involves proving to the IRS that you can’t pay your full tax bill, submitting a formal application with a $205 fee, and making an initial payment along with your offer. The IRS accepts roughly 30% to 40% of the offers it receives, so preparation matters. Here’s how the process works from start to finish.
Who Qualifies to Apply
Before you spend time on the paperwork, make sure you meet the IRS’s baseline eligibility requirements. You must have filed all required tax returns, both personal and business. If you have a valid extension for the current year and have made your required payments, the IRS considers that return current, but the extension only covers the filing deadline, not the payment deadline.
You also need to be current on estimated tax payments. That means you’ve paid either 100% of your prior year’s total tax or 90% of what you expect to owe for the current year, divided into quarterly installments. If you’re an employer, all federal tax deposits for the current quarter and the two preceding quarters must be up to date.
One hard disqualifier: you cannot apply while you’re in an open bankruptcy proceeding. Once the bankruptcy is discharged and closed, you’re free to submit an offer.
How the IRS Decides What You Can Pay
The IRS doesn’t accept an offer just because you ask. It evaluates your “reasonable collection potential,” or RCP, which is essentially the agency’s calculation of what it could realistically collect from you. Your offer generally needs to meet or exceed this number to be considered.
The RCP has two components. First, the IRS looks at the equity in your assets: real estate, vehicles, bank accounts, investments, retirement funds, and other property. It calculates what those assets could be sold for, then subtracts any loans or encumbrances. Second, it estimates your future income by taking your monthly earnings, subtracting allowable living expenses (housing, food, transportation, health care, and other necessities based on IRS national and local standards), and multiplying the remaining monthly disposable income by a set number of months.
The multiplier depends on which payment option you choose. For a lump sum offer, the IRS multiplies your monthly disposable income by 12. For a periodic payment offer (paid over 6 to 24 months), it multiplies by 24. That means a periodic payment offer will almost always result in a higher minimum the IRS expects to see.
Choose Your Payment Option
You have two ways to structure your offer:
- Lump sum cash offer: You pay the full settlement amount in five or fewer installments within five months of acceptance. When you submit your application, you must include 20% of the total offer amount as an initial payment. This money is nonrefundable even if the IRS rejects your offer.
- Periodic payment offer: You pay in monthly installments over 6 to 24 months. Your first proposed monthly payment must accompany the application, and you continue making those monthly payments while the IRS reviews your case. These payments are also nonrefundable.
Most applicants choose the lump sum option because it results in a lower total offer amount due to the shorter income multiplier. But if you don’t have cash available for the 20% upfront payment, periodic payments may be more realistic.
Gather Your Financial Documentation
The IRS will scrutinize your finances closely, so you need thorough records before you start filling out forms. Collect the following:
- Income records: Pay stubs, profit and loss statements for self-employment, Social Security statements, rental income documentation, and any other sources of money coming in.
- Bank and investment statements: At least three months of statements for every checking, savings, brokerage, and retirement account you own.
- Asset documentation: Recent appraisals or market values for real estate, vehicle valuations, and documentation for any other significant property.
- Monthly expense records: Mortgage or rent payments, utilities, insurance premiums, car payments, medical costs, and childcare expenses. The IRS uses its own allowable expense standards, but you still need to document what you actually spend.
- Loan and liability statements: Current balances and monthly payments on all debts.
Complete the Required Forms
The application package requires three main documents. Form 656, the official offer in compromise form, is where you state the amount you’re offering, which tax periods you want to settle, and which payment option you’re choosing. Form 433-A (OIC) is a detailed financial statement for individuals, covering income, expenses, assets, and liabilities. If your tax debt involves a business, you’ll also need Form 433-B (OIC) for the business finances.
All of these forms are included in Form 656-B, the OIC booklet, which the IRS publishes with current instructions, worksheets, and fee information. Download the most recent version from IRS.gov before you begin, since the forms and allowable expense tables are updated periodically.
Take your time with the financial statements. Inconsistencies between what you report and what your bank statements show will slow down or sink your application. The IRS will verify your numbers against its own records and may request additional documentation.
Submit Your Application and Fee
Mail your completed forms, the $205 application fee, and your initial payment (either 20% for a lump sum offer or your first monthly installment for a periodic payment offer) to the IRS address listed in the Form 656-B booklet. The mailing address depends on where you live.
If your household income falls at or below certain thresholds based on your family size (the IRS publishes a Low Income Certification worksheet in the 656-B booklet), you can request a waiver of both the application fee and the initial payment. Check the worksheet carefully, because the income limits change and qualifying saves you significant upfront costs.
What Happens After You File
Once the IRS receives your package, it assigns your case to an offer examiner. Processing times vary widely, but most offers take anywhere from 6 to 12 months to get a decision. During this review period, the IRS generally pauses collection activity on the tax debt covered by your offer.
The examiner may contact you to request additional documents, clarify income or expenses, or negotiate the offer amount. Respond promptly to any requests. Delays on your end extend the timeline and can lead to a return of your offer without a decision.
If the IRS doesn’t act on your offer within two years of the received date, your offer is automatically deemed accepted. This is a statutory protection, though most cases are resolved well before that point.
If Your Offer Is Accepted
Once accepted, you must follow through on every payment according to the agreed schedule. You also must stay compliant with all tax filing and payment obligations for the next five years. That means filing every return on time and paying all taxes owed in full. If you fall out of compliance during that five-year window, the IRS can default the agreement and reinstate the original debt, minus any payments you’ve already made.
Any federal tax refunds due to you for the year the offer is accepted (and potentially the prior year, depending on timing) will be applied to your tax debt rather than refunded to you.
If Your Offer Is Rejected
You have 30 days from the date of the rejection letter to file an appeal with the IRS Office of Appeals. The appeal should explain why you believe your offer was reasonable and include any additional evidence supporting your financial situation. If you don’t appeal within that window, you can submit a new offer later, but you’ll need to pay the application fee and initial payment again.
Before reapplying, use the IRS’s free pre-qualifier tool on IRS.gov. It walks you through a simplified version of the RCP calculation and gives you a rough sense of whether your proposed offer amount is in the right range. It won’t guarantee acceptance, but it can save you from submitting an offer that’s clearly too low.