For taxpayers facing substantial tax debt with limited means to pay, the IRS Offer in Compromise (OIC) program provides an opportunity to settle federal tax obligations for less than the full amount owed. This program represents a legitimate resolution path when certain conditions are met, though acceptance requires demonstrating genuine inability to pay the full debt.

This guide examines the OIC program comprehensively, covering eligibility requirements, the application process, evaluation criteria, and realistic expectations. Understanding these elements helps taxpayers determine whether pursuing an offer makes sense for their specific situation.

Tax professionals, individuals with significant tax debt, and business owners exploring resolution options will gain practical insights into how the IRS evaluates offers and what distinguishes successful applications from those rejected. The information draws from official IRS guidelines and established tax resolution practices.

What Is an Offer in Compromise?

An Offer in Compromise is a formal agreement between a taxpayer and the Internal Revenue Service that settles tax liabilities for an amount less than what is legally owed. The IRS accepts such offers when doing so serves the best interests of both the government and the taxpayer.

The program exists because the IRS recognizes that collecting the full amount from every taxpayer is not always possible or practical. When a taxpayer’s financial situation makes full payment unlikely within a reasonable timeframe, settling for a lesser amount may recover more than continued collection efforts would yield.

Three grounds exist for submitting an OIC:

Doubt as to Collectibility: The most common basis, applying when a taxpayer’s assets and income are insufficient to pay the full tax liability. The IRS determines this through analysis of the taxpayer’s reasonable collection potential.

Doubt as to Liability: Used when legitimate dispute exists regarding whether the tax debt is actually owed. This requires demonstrating that the assessed amount is incorrect.

Effective Tax Administration: Applies in rare cases where no doubt exists about the liability or ability to pay, but requiring full payment would create exceptional hardship or be unfair due to extraordinary circumstances.

The IRS accepted approximately 12,711 offers out of 30,163 submitted in 2023, representing an acceptance rate of about 42%. [VERIFY: IRS Data Book statistics] This figure underscores that while the program provides genuine relief for qualifying taxpayers, approval requires meeting specific criteria.

Eligibility Requirements

Before evaluating an offer amount, the IRS must determine whether a taxpayer is eligible to submit an OIC. Several baseline requirements must be met.

Filing Compliance

All required tax returns must be filed before the IRS will consider an offer. This includes:

  • Individual income tax returns for all required years
  • Business returns if applicable (corporate, partnership, S-corporation)
  • Employment tax returns for business owners with employees
  • Information returns (1099s, W-2s) if required

Taxpayers with unfiled returns should prioritize filing those returns before submitting an offer. The IRS will return applications from non-compliant taxpayers without consideration.

Estimated Tax Payments

Taxpayers required to make estimated tax payments must be current on these obligations for the year in which they submit the offer. This applies to self-employed individuals, business owners, and others with income not subject to withholding.

Failure to make current-year estimated payments results in offer rejection.

Employment Tax Deposits

Business owners with employees must have made all required federal tax deposits for the current quarter and the two preceding quarters before the IRS will process an offer.

Delinquent payroll tax deposits signal ongoing compliance problems that make the IRS reluctant to settle past debts.

Bankruptcy Exclusion

Taxpayers in an open bankruptcy proceeding cannot submit an offer. Tax debts are addressed through the bankruptcy process, not through OIC negotiations.

Once bankruptcy is concluded, taxpayers may submit offers for any remaining eligible tax debt.

Basic Eligibility Check

The IRS provides an Offer in Compromise Pre-Qualifier Tool on its website that helps taxpayers determine preliminary eligibility. While this tool does not guarantee acceptance, it identifies obvious disqualifying factors and provides an estimate of what the IRS might accept.

How the IRS Evaluates Offers

The IRS evaluates offers primarily based on the taxpayer’s “Reasonable Collection Potential” (RCP). This calculation represents what the IRS believes it could collect from the taxpayer through enforced collection if it did not accept the offer.

Reasonable Collection Potential Formula

The RCP calculation includes:

Asset Equity: The net value of assets after subtracting secured debts. The IRS typically allows a 20% reduction from fair market value for quick-sale considerations.

Assets evaluated include:

  • Bank accounts and cash
  • Real estate equity
  • Vehicle equity
  • Retirement accounts (with some exceptions)
  • Investments and securities
  • Business assets
  • Other property of value

Future Income: A portion of projected future income based on the offer payment terms:

  • Lump-sum offers: 12 months of future income
  • Periodic payment offers: 24 months of future income

Future income is calculated by subtracting allowable expenses from gross monthly income.

Allowable Expenses

The IRS uses National and Local Standards to determine allowable living expenses. These standards set maximum amounts for various expense categories:

National Standards (set amounts regardless of location):

  • Food, clothing, and personal care
  • Housekeeping supplies
  • Miscellaneous expenses

Local Standards (vary by geographic area):

  • Housing and utilities
  • Transportation costs

Other Necessary Expenses (actual amounts allowed if reasonable):

  • Health insurance premiums
  • Court-ordered payments
  • Childcare
  • Life insurance (term policies)
  • Current tax payments

Expenses exceeding standard amounts require justification and documentation.

The Offer Formula

The minimum acceptable offer typically equals:

For Lump-Sum Offers:
Asset Equity + (Monthly Disposable Income × 12) = Minimum Offer

For Periodic Payment Offers:
Asset Equity + (Monthly Disposable Income × 24) = Minimum Offer

Monthly disposable income represents gross income minus allowable expenses.

The Application Process

Submitting an OIC requires careful preparation and specific forms. The process involves several stages from initial application through final determination.

Required Forms and Documents

The complete OIC package includes:

Form 656: The actual offer document where the taxpayer proposes a settlement amount and payment terms.

Form 433-A (OIC): Collection Information Statement for individuals, providing detailed financial information including:

  • Income from all sources
  • Bank account balances
  • Asset values and equity
  • Monthly living expenses
  • Liabilities and debts

Form 433-B (OIC): Required for business tax debts, detailing business finances.

Application Fee: Currently $205, unless the taxpayer qualifies for low-income certification.

Initial Payment: Required with the application:

  • Lump-sum offers: 20% of the proposed amount
  • Periodic payment offers: First proposed monthly payment

Supporting Documentation: Pay stubs, bank statements, asset valuations, expense documentation, and other financial records.

Low-Income Certification

Taxpayers with income at or below 250% of the federal poverty level may qualify for low-income certification, which waives:

  • The $205 application fee
  • Initial payment requirements
  • Payments during offer consideration

Qualification is based on adjusted gross income from the most recent tax return or current household income from Form 433-A (OIC).

Payment Options

Two payment structures are available:

Lump-Sum Cash Offer: The taxpayer pays 20% of the offer amount with the application. If accepted, the remaining balance is due within five months of acceptance.

Periodic Payment Offer: The taxpayer proposes monthly payments over 6 to 24 months. Payments must continue throughout the IRS review period.

The chosen payment method affects the RCP calculation and minimum acceptable offer amount.

Processing Timeline

OIC processing typically takes 6 to 12 months, though complex cases may take longer. During this period:

  • The IRS assigns a settlement officer to review the case
  • The taxpayer may receive requests for additional information
  • The IRS may contact the taxpayer for an interview
  • Collection activities are generally suspended
  • The collection statute is extended

An offer is automatically accepted if the IRS fails to make a determination within two years of receipt, excluding time spent in appeal.

Common Reasons Offers Get Rejected

Understanding why the IRS rejects offers helps taxpayers submit more successful applications.

Incomplete Applications

The most common rejection reason is incomplete or inaccurate applications. Missing forms, unsigned documents, mathematical errors, and insufficient documentation cause immediate returns.

Calculation Disagreements

The IRS may determine that the taxpayer’s RCP is higher than the amount offered. This occurs when:

  • Asset values are understated
  • Income is underreported
  • Expenses claimed exceed allowable amounts
  • Future earning potential differs from stated figures

Compliance Issues

Offers are rejected when taxpayers:

  • Have unfiled returns
  • Are delinquent on estimated tax payments
  • Have outstanding employment tax deposits
  • Become non-compliant during the review process

Ability to Pay Full Amount

If the IRS determines the taxpayer can pay the full liability through an installment agreement or other means, the offer will be rejected. The OIC program is reserved for cases where full payment is not feasible.

Dissipated Assets

If the IRS finds that the taxpayer recently sold or transferred assets for less than fair market value, those dissipated assets may be added back to the RCP calculation, potentially disqualifying the offer amount.

After Submission: What to Expect

Once an offer is submitted, several scenarios may unfold.

Acceptance

If the IRS accepts the offer:

  • The taxpayer receives written acceptance notification
  • Remaining payments must be made according to the terms
  • A federal tax lien remains until the offer terms are completed
  • The taxpayer must remain tax-compliant for five years

Failure to meet any terms during the five-year compliance period results in default, reinstatement of the original debt minus payments made, and potential collection action.

Rejection

If the IRS rejects the offer:

  • The taxpayer receives written explanation of the rejection
  • Appeal rights exist through the IRS Independent Office of Appeals
  • The appeal must be filed within 30 days of rejection
  • During appeal, collection actions remain suspended

Return Without Consideration

The IRS may return an offer without consideration if:

  • Basic eligibility requirements are not met
  • Required forms are missing or incomplete
  • The application fee or initial payment is missing

Returned offers do not count toward the two-year processing deadline and do not provide appeal rights.

Offer in Compromise Alternatives

Taxpayers who do not qualify for an OIC have other options for addressing tax debt.

Installment Agreements

Monthly payment plans allow taxpayers to pay their full balance over time. Streamlined agreements are available for balances up to $50,000 for individuals or $25,000 for businesses.

Currently Not Collectible Status

Taxpayers experiencing genuine financial hardship may qualify for Currently Not Collectible (CNC) status, which suspends collection activities. The debt remains, but the IRS does not actively pursue payment.

Partial Payment Installment Agreements

When taxpayers can make some payments but cannot pay the full amount before the collection statute expires, partial payment agreements may be available.

Penalty Abatement

While not reducing tax principal, penalty abatement can significantly reduce the total amount owed. First-time penalty abatement and reasonable cause relief are available options.

Frequently Asked Questions

How much should be offered in an OIC?

Offers must at least equal the taxpayer’s reasonable collection potential. Offering less than this amount virtually guarantees rejection. Many successful offers exceed the minimum RCP to demonstrate good faith.

Can payroll taxes be included in an OIC?

Business payroll taxes can be included in an offer, but the business must be current on deposits before the IRS will consider the application. Personal liability for trust fund taxes (the employee portion of payroll taxes) can also be addressed through OIC.

Does submitting an OIC stop collection actions?

Generally, yes. While an offer is pending, the IRS typically suspends levy actions. However, the IRS may file a Notice of Federal Tax Lien to protect its interest in the taxpayer’s assets.

What happens to refunds while an OIC is pending?

The IRS will keep any tax refunds due while an offer is being considered and apply them to the tax debt. This continues until the offer is accepted, rejected, or withdrawn.

Can an OIC be appealed if rejected?

Yes. Taxpayers have 30 days from the rejection date to request an appeal with the IRS Independent Office of Appeals. The appeal process allows for additional documentation and arguments supporting the offer.

Key Takeaways

  • An Offer in Compromise allows qualifying taxpayers to settle tax debt for less than owed, but acceptance rates of approximately 42% indicate that meeting requirements is essential.
  • Eligibility requires full filing compliance, current estimated tax payments, and no open bankruptcy proceedings—issues that must be resolved before submitting an offer.
  • The IRS calculates Reasonable Collection Potential based on asset equity plus future income, using standardized expense allowances that may differ from actual spending.
  • Complete, accurate applications with proper documentation significantly increase the likelihood of acceptance; incomplete submissions face immediate return.
  • Accepted offers require five years of continued tax compliance; defaulting reinstates the original debt minus payments made.

Conclusion

The Offer in Compromise program provides meaningful relief for taxpayers who genuinely cannot pay their full tax liability. Success requires understanding the IRS evaluation criteria, particularly the reasonable collection potential calculation that determines minimum acceptable offers.

Careful preparation distinguishes successful applications from those rejected. Complete documentation, accurate financial disclosure, and realistic offer amounts aligned with IRS methodology improve outcomes.

Taxpayers considering an OIC should evaluate their situation honestly, including the likelihood of qualification and the commitment to five years of compliance following acceptance. Professional guidance can help determine whether an offer represents the best resolution strategy given individual circumstances.