Offer in Compromise: What It Is and How It Works

An Offer in Compromise (often abbreviated as OIC) is one of the most widely discussed IRS tax debt resolution options. It allows certain taxpayers to settle their tax debt for less than the full amount owed. While the idea can sound appealing, the program has strict requirements and does not apply to everyone.

This guide explains what an Offer in Compromise is, how the IRS evaluates applications, common reasons offers are accepted or rejected, required forms, typical timelines, and practical considerations to keep in mind before pursuing this option.

What Is an Offer in Compromise?

An Offer in Compromise is a formal agreement between a taxpayer and the Internal Revenue Service (IRS) that settles outstanding tax liabilities for less than the full balance owed. The IRS may consider accepting an offer when it believes the amount offered represents the most it can reasonably expect to collect within the time allowed.

The IRS does not accept Offers in Compromise simply because someone would prefer a lower payment. Instead, the IRS typically requires detailed financial information and evaluates factors such as income, allowable expenses, asset equity, and future earning potential.

When the IRS May Consider an Offer in Compromise

The IRS generally considers Offers in Compromise under three main circumstances:

• Doubt as to Collectibility: When the IRS believes it is unlikely to collect the full tax liability.
• Doubt as to Liability: When there is a legitimate dispute about whether the tax assessed is correct.
• Effective Tax Administration: When collecting the full amount would create economic hardship or be unfair due to exceptional circumstances.

The most common category discussed in the tax debt space is doubt as to collectibility, where the IRS concludes the taxpayer cannot reasonably pay the full amount.

How the IRS Evaluates an Offer in Compromise

The IRS uses a financial calculation to determine what it calls “reasonable collection potential,” or RCP. In simplified terms, RCP is the amount the IRS believes it could collect through a combination of available assets and future income.

RCP often includes:

• Cash and bank account balances
• Equity in assets (home, vehicle, investments, retirement accounts in some cases)
• Monthly income minus allowable expenses
• Estimated future income potential over a set period

If an offer is below the IRS’s calculated RCP, the offer is commonly rejected. If the offer meets or exceeds the IRS’s RCP calculation, it may be considered for acceptance (though acceptance is still not guaranteed).

Payment Options for an Offer in Compromise

The IRS generally allows two payment structures:

• Lump Sum Cash Offer: A portion is paid upfront, and the remaining amount is paid in a short period after acceptance.
• Periodic Payment Offer: Payments are made over time according to an agreed schedule while the offer is being considered and after acceptance.

Payment structure can influence how the IRS calculates the amount it expects to collect, and it affects what is required while the offer is under review.

Detailed Eligibility Requirements for an Offer in Compromise

Before an offer will be considered, the IRS typically requires that all required tax returns are filed and that the taxpayer is current on estimated tax payments or federal tax withholding (when applicable). If a taxpayer is not current, the IRS may return the offer without a full evaluation.

The IRS also evaluates whether other resolution options are available. For example, if the IRS determines that a taxpayer can reasonably pay the full balance through an installment agreement or by liquidating assets, an Offer in Compromise may not be approved.

Taxpayers in an open bankruptcy proceeding are generally not eligible to submit an Offer in Compromise until the bankruptcy is resolved.

IRS Forms Commonly Required for an Offer in Compromise

Submitting an Offer in Compromise involves completing IRS forms and providing supporting documentation. Common forms include:

• Form 656: Offer in Compromise
• Form 433-A (OIC): Collection Information Statement for individuals
• Form 433-B (OIC): Collection Information Statement for businesses

These forms typically require details about income sources, monthly living expenses, bank balances, asset values, debts, and other financial information. Supporting documents are often needed, and incomplete or inconsistent submissions may cause delays or lead to rejection.

How Long Does the Offer in Compromise Process Take?

The Offer in Compromise review process can take several months, and in some situations it may take longer. Processing times can vary based on workload, complexity, and whether additional documentation is requested.

During the review period, the IRS may request clarification or proof related to income, expenses, and asset values. Failure to respond by the deadline can result in the offer being returned or denied.

While an offer is being evaluated, certain collection activity may be paused, but interest and penalties may continue to accrue until the IRS makes a final decision.

What Happens If an Offer in Compromise Is Accepted?

If an offer is accepted, the taxpayer must comply with the terms of the agreement. This typically includes making payments as agreed and staying current with tax filings and tax payment obligations for a defined period after acceptance.

If the taxpayer fails to remain compliant, the IRS may consider the offer to be in default, which can result in the original tax debt being reinstated along with additional penalties and interest.

What Happens If an Offer in Compromise Is Rejected?

If an offer is rejected, the IRS generally provides a written explanation. In many cases, the taxpayer may have the option to appeal the decision within a limited timeframe.

Even if an Offer in Compromise is not accepted, other resolution options may still exist. Depending on circumstances, alternatives may include an installment agreement, currently not collectible status, or other forms of relief.

Common Reasons Offers Are Rejected

Offers may be rejected for a variety of reasons. Some common causes include:

• Missing forms or documentation
• Financial information that appears inconsistent or unverifiable
• Offer amount below the IRS’s calculated reasonable collection potential
• Unfiled tax returns or lack of compliance during review
• IRS determination that an installment agreement is a more appropriate option

Alternatives to an Offer in Compromise

An Offer in Compromise is not the only possible way to address tax debt. Depending on your situation, an independent provider may discuss options such as:

• IRS installment agreements: structured monthly payment plans
• Currently not collectible status: temporary collection pause when hardship exists
• Penalty abatement: potential relief from certain penalties under qualifying circumstances
• Partial payment installment agreements: payments that may not cover the full balance before the collection period expires

Common Myths About Offer in Compromise

Offer in Compromise is sometimes misunderstood due to marketing claims and “pennies on the dollar” messaging. A few common myths include:

• Myth: Everyone qualifies to settle for pennies on the dollar.
  Reality: The IRS applies strict criteria and accepts offers only when financial thresholds are met.
• Myth: Submitting an offer guarantees collection stops.
  Reality: Some collection activity may pause during review, but not all activity is guaranteed to stop in every situation.
• Myth: The IRS will accept any reasonable offer.
  Reality: The IRS relies on its RCP calculation, and offers below that level are commonly rejected.

Frequently Asked Questions