You can settle with the IRS for less than you owe, but the agency accepts only about one application in five. In fiscal year 2024, the IRS received roughly 33,600 Offer in Compromise proposals and accepted around 7,200 of them.1Internal Revenue Service. IRS Data Book 2024 The Offer in Compromise is the main tool, and it works when your income and assets cannot realistically cover the full balance. If an offer is not the right fit, partial payment plans, Currently Not Collectible status, and penalty abatement can also reduce or pause what you owe.
How the IRS Decides Whether to Accept an Offer
The Offer in Compromise is authorized under 26 U.S.C. ยง 7122, which gives the IRS broad power to resolve tax liabilities through negotiated agreements.2Office of the Law Revision Counsel. 26 USC 7122 – Compromises The IRS will consider an offer on one of three grounds:
- Doubt as to liability. A genuine dispute exists about whether you owe the tax or about the correct amount.
- Doubt as to collectibility. Your assets and income are not enough to cover the full balance. This is by far the most common basis for accepted offers.
- Effective tax administration. You could technically pay, but doing so would create extreme financial hardship or be fundamentally unfair given exceptional circumstances.
For collectibility and effective-administration cases, the IRS runs a calculation called Reasonable Collection Potential. It adds the quick-sale value of everything you own (home equity, vehicles, bank accounts, investments) minus what you owe secured creditors, then adds your projected future disposable income over the remaining collection period.3Internal Revenue Service. Internal Revenue Manual 5.8.5 Financial Analysis The result is the floor. The IRS generally will not accept an offer below it.4Internal Revenue Service. Topic No. 204, Offers in Compromise If you owe $80,000 but the formula says the IRS could realistically collect $15,000 from you, an offer at or above $15,000 has a chance.
Eligibility Before You Apply
You have to clear a few hurdles before the IRS will even look at your offer. You must have filed all required tax returns, made all required estimated tax payments, not be in an open bankruptcy proceeding, and (if you are an employer) be current on federal tax deposits for the current and past two quarters.5Internal Revenue Service. Offer in Compromise Missing any of these gets your application returned without review, and the application fee is not refunded.
Before you invest time in the full package, use the free IRS Pre-Qualifier tool at irs.gov to plug in your income, assets, and expenses. It generates a preliminary offer amount. The tool is a guide rather than a guarantee, but it tells you whether you are in the right ballpark.
The Application Package
Putting together a settlement request means gathering several months of bank statements, pay stubs, and documentation for any investment or retirement accounts. You also need valuations for real property, vehicles, and any business interests. The goal is a thorough picture of your finances so the IRS can verify you cannot pay in full.
Required Forms
The core submission is Form 656, the actual settlement proposal.6Internal Revenue Service. About Form 656, Offer in Compromise Individuals also file Form 433-A (OIC), a detailed financial statement covering income, expenses, and assets. Business owners add Form 433-B (OIC) for the company’s finances.7Internal Revenue Service. Form 656 Booklet Offer in Compromise All of these come in the Form 656 Booklet on irs.gov.
Fees and Initial Payments
Every application must include a nonrefundable $205 fee, plus a good-faith payment that depends on how you propose to pay:
- Lump-sum offer. Send 20% of your total offer amount with the application. If accepted, you pay the rest in five or fewer installments.
- Periodic payment offer. Send your first proposed monthly payment with the application and keep making monthly payments while the IRS reviews your case.
If your income is low enough, you qualify for a certification that waives both the $205 fee and the initial payment. For 2025, a single person in the 48 contiguous states qualifies with an adjusted gross income at or below $37,650, and a family of four qualifies at $78,000.8Internal Revenue Service. Offer in Compromise, Form 656 The thresholds are higher for Alaska and Hawaii. The low-income certification is available only to individuals and sole proprietors, not to other business entities.5Internal Revenue Service. Offer in Compromise
How Expenses Are Measured
The IRS does not simply take your word on living costs. It compares what you report to National Standards published on irs.gov. The current standard monthly allowance for a single person’s food, clothing, personal care, and miscellaneous expenses is $839. A four-person household gets $2,129.9Internal Revenue Service. National Standards: Food, Clothing and Other Items You can claim up to these amounts without justifying each dollar. Anything higher needs documentation showing the extra spending is necessary. Separate local standards apply to housing and transportation based on where you live. A gap between what you report and what the standards allow is one of the most common reasons offers get rejected or countered.
What Happens After You Submit
An examiner verifies every piece of financial information in your package. The review routinely takes many months. During that time the IRS generally pauses aggressive collection actions like wage garnishments and bank levies. Interest and penalties, however, continue to accrue on the underlying debt.
A protection is built into the statute: if the IRS does not reject your offer within 24 months of submission, the offer is automatically deemed accepted.2Office of the Law Revision Counsel. 26 USC 7122 – Compromises Any period during which the tax liability is being disputed in court does not count toward the 24-month clock. The IRS almost always acts well before the deadline, but the rule prevents offers from sitting indefinitely.
One more detail. The IRS will offset your tax refunds against your outstanding balance while the offer is pending. If you need that refund, you can call the IRS to request an offset bypass refund. Once an offer is accepted, the IRS no longer recaptures refunds for the calendar year of acceptance.10Taxpayer Advocate Service. IRS Initiates New Favorable Offer In Compromise Policies
Staying Compliant After Acceptance
Acceptance is not the finish line. For the next five years, you must file every tax return on time and pay every dollar of tax you owe. Fall behind on either obligation and the IRS can declare your settlement in default, void the agreement, and come after the original amount you owed minus what you already paid, plus interest and penalties that accrued in the meantime.4Internal Revenue Service. Topic No. 204, Offers in Compromise Settling for a fraction of your debt and then losing the deal because you filed a return late two years later is a painful outcome that is entirely avoidable.
Once you complete all the terms, the IRS must release any federal tax lien within 30 days.11Office of the Law Revision Counsel. 26 USC 6325 – Release of Lien or Discharge of Property You may need to follow up. Check your IRS transcript for the release code and confirm with the county recorder’s office that the lien has been removed from public records. An unreleased lien can keep damaging your credit and complicate real estate transactions long after the debt is resolved.
If Your Offer Is Rejected
You have 30 days from the date of the rejection letter to request an appeal. Use Form 13711 or write a letter that identifies the specific items you disagree with and explains why.12Internal Revenue Service. Appeal Your Rejected Offer in Compromise The appeal goes to the IRS Independent Office of Appeals, which takes a fresh look at your case. Miss the 30-day window and you lose the right to appeal that rejection. You can submit a brand-new offer, but you will owe another $205 fee and start over.
Other Ways to Reduce What You Owe
Partial Payment Installment Agreement
If a lump-sum settlement is out of reach, a Partial Payment Installment Agreement is another way to pay less than the full balance. You make monthly payments based on what you can actually afford, and the remaining balance expires when the IRS collection statute runs out.13Internal Revenue Service. IRM 5.14.2 Partial Payment Installment Agreements That statute is generally 10 years from the date the tax was assessed.14Office of the Law Revision Counsel. 26 USC 6502 – Collection After Assessment
The math is simpler than it looks. The IRS reviews your income and expenses, determines what you have left each month after necessities, and sets your payment at that amount. If you have seven years left on the collection clock and the IRS finds you can pay $300 a month, you will pay $25,200 over the life of the agreement. If you owe $60,000, the remaining $34,800 (plus accrued interest and penalties) expires when the statute runs out.15Taxpayer Advocate Service. Partial Payment Installment Agreement
The IRS reviews your finances periodically while the plan is active, typically every two years. If your income has gone up or your expenses have dropped, the agency can increase your monthly payment.
Currently Not Collectible Status
If you truly cannot pay anything right now, the IRS may classify your account as Currently Not Collectible. This is not a settlement. The debt stays on the books, and interest and penalties keep accruing. But the IRS stops collection activity like levies and garnishments, and the 10-year collection statute keeps ticking in the background.16Internal Revenue Service. Temporarily Delay the Collection Process If your finances do not improve before the statute expires, the debt goes away. The IRS may file a federal tax lien to protect its interest while your account is in this status, and it will periodically reassess whether your situation has changed.
First-Time Penalty Abatement
Most large balances include significant penalties, and you may qualify to have them wiped out. First-time penalty abatement applies if you filed the same type of return for the prior three years, stayed penalty-free during those three years, and have otherwise been compliant.17Internal Revenue Service. Administrative Penalty Relief The IRS removes failure-to-file and failure-to-pay penalties, and interest attributable to those penalties gets reduced too. It is not a negotiation. It is an administrative waiver you can request by phone. On a large balance, abatement alone can knock thousands off what you owe, and it stacks with a payment plan or can be pursued before an Offer in Compromise to lower the starting balance.
Choosing the Right Path
The right approach depends on where you stand. An Offer in Compromise makes sense when you have a clear gap between what you owe and what the IRS could realistically collect, and you can come up with the settlement amount relatively quickly. A partial payment plan works better when you have steady but limited income and enough time left on the collection statute for the math to work in your favor. Currently Not Collectible status is for people who genuinely cannot pay anything at all right now. Penalty abatement is worth exploring for almost anyone with a clean three-year compliance history, regardless of which other strategy you pursue.
Professional help from an enrolled agent, CPA, or tax attorney is worth considering for an Offer in Compromise, where the financial analysis and negotiation get complex. Fees for professional OIC representation typically range from $3,000 to $15,000 depending on the case. For simpler moves like requesting penalty abatement or setting up a payment plan, you can often handle the process yourself using the forms and tools on irs.gov.