A periodic payment offer in compromise is an IRS settlement arrangement that lets you resolve a federal tax debt for less than the full balance by paying the agreed amount in six or more monthly installments, with everything paid off within 24 months of the date the IRS accepts your offer.1Internal Revenue Service. Topic No. 204, Offers in Compromise Your first proposed monthly payment goes in with the application, and you keep making those monthly payments the whole time the IRS is reviewing the file. The alternative track, a lump-sum offer, requires 20 percent down and the balance in five or fewer payments within five months of acceptance.
The periodic route fits taxpayers who can commit to steady monthly payments but cannot pull together a large upfront sum. It costs more in total, for a reason the calculation section below explains, and it locks you into a longer payment discipline.
Who Can Apply
Before the IRS looks at your numbers, you have to be current on everything else. Miss any of these and the application comes back:2Internal Revenue Service. Offer in Compromise FAQs
- All required tax returns filed, personal and business. A valid extension with required payments made counts as current for the current year.
- No open bankruptcy case. Once discharged and closed, you are eligible again.
- Estimated tax payments up to date for the current year.
- For business owners with employees, all required federal tax deposits made for the current quarter and the two before it.3Internal Revenue Service. Offer in Compromise
The IRS also expects a valid basis for the offer. The most common one for periodic payment applicants is doubt as to collectibility, meaning your assets and income are worth less than the total debt. Two other grounds exist (doubt as to liability, which uses a different form, and effective tax administration for cases of exceptional hardship or unfairness), but they are narrower situations.1Internal Revenue Service. Topic No. 204, Offers in Compromise
If you want a rough read before investing time in the paperwork, the IRS runs a free online Pre-Qualifier tool that estimates eligibility and a preliminary offer amount from basic financial answers.4Internal Revenue Service. Offer in Compromise Pre-Qualifier It is only a rough guide, but it can spare you the application fee if the math clearly doesn’t work.
How the IRS Decides What You Have to Offer
The IRS is not looking for a negotiation in the everyday sense. It is calculating a number called Reasonable Collection Potential, and your offer needs to meet or exceed that figure to have a realistic chance.1Internal Revenue Service. Topic No. 204, Offers in Compromise Reasonable Collection Potential combines two pieces:
- The equity in your assets, valued at Quick Sale Value. That means fair market value reduced by 20 percent, minus any secured debt like a mortgage balance.5Internal Revenue Service. Offer in Compromise (OIC) Disagreed Items
- Your future disposable income, projected forward over a set number of months.
Here is where the choice of payment track matters beyond scheduling. For a periodic payment offer, the IRS multiplies your monthly disposable income by more months than it does for a lump-sum offer, because it assumes you have more time to pay. That produces a higher minimum acceptable offer. Choosing the periodic track when you could manage a lump sum usually means paying more overall.
The Financial Disclosures
Your financial statement is Form 433-A (OIC) for individuals and self-employed taxpayers, or Form 433-B (OIC) for businesses with separate liabilities.6Internal Revenue Service. About Form 656, Offer in Compromise It lists monthly income from all sources (wages, pensions, Social Security, dividends, rental income, gig work) and itemizes necessary living expenses. The IRS compares your claimed expenses against its National and Local Standards for housing, utilities, food, clothing, transportation, and health care. If yours exceed those standards, the IRS substitutes its own numbers unless you can show special circumstances.
Supporting documents travel with the statement: recent pay stubs, three months of bank statements (six months for business accounts), current investment and retirement account statements, mortgage and loan balances, and records for any digital assets.7Internal Revenue Service. Form 433-A (OIC) Falsifying any of this is a felony under federal law, with fines up to $100,000 and up to three years in prison.8Office of the Law Revision Counsel. 26 U.S. Code 7206 – Fraud and False Statements
What You Send In and What You Pay Upfront
The complete package is Form 656 (the formal offer), Form 433-A (OIC) or 433-B (OIC), your supporting documents, a $205 application fee, and your first proposed monthly payment.9Internal Revenue Service. Form 656 Booklet, Offer in Compromise It goes to the IRS processing center for your state.
Lower-income applicants get a break. If your adjusted gross income is at or below 250 percent of the federal poverty level, low-income certification waives the $205 fee and also excuses you from making monthly payments while the offer is under review. Your first payment isn’t due until 30 days after acceptance.10Office of the Law Revision Counsel. 26 USC 7122 – Compromises You claim the waiver in the Low-Income Certification section on Form 656.
What Happens While the IRS Reviews
Reviews often take many months. During that time, you must keep sending each proposed monthly payment on schedule. Stop paying and the IRS treats the offer as withdrawn, with no right to appeal.9Internal Revenue Service. Form 656 Booklet, Offer in Compromise
Every payment you send during review is non-refundable. If the IRS rejects the offer, the money doesn’t come back. It gets applied to your outstanding balance, including accrued interest and penalties. Treat those payments as reducing your debt no matter what happens, not as money you might see again.
An examiner will verify what you disclosed and can ask for more documentation, including appraisals, updated statements, and proof of expenses. If the paperwork doesn’t back up your figures, the examiner has wide latitude to adjust them.
There is one silver lining while the offer sits with the IRS. Federal law bars the agency from levying your wages, bank accounts, or other property during the pending period, and that protection extends 30 days past a rejection and through any appeal.11Office of the Law Revision Counsel. 26 USC 6331 – Levy and Distraint The trade-off is that the 10-year collection statute is paused for the same window.
Refunds Get Offset
If you usually count on a spring refund, plan to lose it while the offer is pending. The IRS can offset refunds against the outstanding liability during review. Once the offer is accepted, refunds for the calendar year of acceptance are no longer offset, but refunds for earlier tax years that are part of the offer remain fair game.
If the IRS Rejects Your Offer
You have 30 days from the date on the rejection letter to appeal to the IRS Independent Office of Appeals. Miss that window and the right is gone.12Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC)
Saying you can’t pay is not a valid appeal argument. The rejection letter includes worksheets showing the IRS’s numbers for your income, expenses, and asset values. A successful appeal identifies specific items where those figures were wrong, backed by documentation: a new appraisal, updated loan statements, medical records supporting out-of-pocket costs above the standard allowance. You can also raise special circumstances that weren’t fully explained the first time.12Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC) The appeal goes back to the same office that sent the rejection.
After Acceptance: The Five-Year Compliance Period
Acceptance starts a five-year probationary window. During that period you must file every required return on time (extensions count) and pay every tax obligation in full.2Internal Revenue Service. Offer in Compromise FAQs One missed return or late payment can trigger default.
Default is severe. The IRS can reinstate the full original liability, along with all the penalties and interest that had been suspended, minus the payments you already made. Levies and liens are back on the table. If you filed a joint offer and only one spouse violates the compliance terms while the other stays current, the IRS will not default the agreement against the compliant spouse.
Liens and Public Records
A federal tax lien filed before your offer does not vanish at acceptance. It stays in place until the IRS releases it, which the agency must do within 30 days after you complete all payment terms.13Internal Revenue Service. Lien Release and Related Topics If your offer included collateral agreements, the 30-day clock starts only when those are also satisfied. Until release, the lien can still affect your ability to sell property or get credit.
Acceptance also creates a public record. Form 7249, the Offer Acceptance Report, is available for public inspection for one year and includes your name, city and state, liability amount, and offer terms.14Internal Revenue Service. Offer in Compromise Public Inspection File The disclosure is required by law and there is no opt-out.