What Is an OIC? IRS Offer in Compromise: Grounds, Costs, and Review

An IRS Offer in Compromise is a formal agreement that lets you settle a federal tax debt for less than the full amount you owe. The IRS accepts these agreements on narrow legal grounds, and approval is not routine: in fiscal year 2024, the agency accepted roughly 7,199 of about 33,600 offers submitted, or close to one in five. If you qualify, the program can resolve a debt you cannot realistically pay before the IRS’s collection window closes. If you don’t, you can spend months on paperwork and lose the fees and payments you sent in.

The Three Grounds the IRS Will Consider

The IRS will only accept an offer on one of three legal bases, and your application has to identify which one applies.

Doubt as to collectibility. You agree the debt is valid, but your income and assets won’t cover it before the 10-year collection period expires. This is by far the most common basis for accepted offers. Federal law generally gives the IRS ten years from assessment to collect through levy or court action.¹
Doubt as to liability. You have a genuine legal dispute over whether you owe the tax at all, or over the amount assessed. This is not about ability to pay. It uses a different form (Form 656-L) and skips the financial statements and application fee required for the other two categories.²
Effective tax administration. You could technically pay in full, but doing so would create severe economic hardship or an outcome that is fundamentally unfair given your circumstances.

The rest of the process below applies to doubt-as-to-collectibility and effective-tax-administration offers, which share the same application track.

Who Qualifies to Apply

Before the IRS looks at what you’re offering, you have to clear procedural gates. Missing any one of them gets your application returned without review.

Every required tax return, personal and business, must be filed. A return covered by a valid extension with the required payments made counts as current.³
You cannot have an open bankruptcy case. You can apply after discharge and closure.³
If you’re self-employed or run a business, your estimated tax payments and federal tax deposits must be current.³

The IRS runs a free online Pre-Qualifier tool that walks you through basic eligibility and gives a rough read on whether an offer might work in your situation.⁴ It’s worth an hour before you start assembling the full package.

Low-Income Certification

If your adjusted gross income is at or below 250% of the federal poverty level for your household size, you qualify for the low-income certification.⁵ For 2026, a single filer earning up to $39,900 qualifies, as does a family of four earning up to $82,500. The certification waives the $205 application fee and the required payments during IRS review.⁶ For everyone else, those payments are nonrefundable even if the offer is rejected.

How the IRS Decides What Your Offer Is Worth

The number that determines acceptance is the Reasonable Collection Potential (RCP), which is the IRS’s estimate of what it could realistically collect from you through normal enforcement. Your offer generally has to meet or exceed the RCP. The formula has two components: the net value of your assets, plus a portion of your future disposable income.

The income multiplier depends on your payment track. A lump-sum offer uses 12 months of disposable income. A periodic payment offer uses 24 months. Same finances, meaningfully different minimum offer.

Quick Sale Value of Your Assets

The IRS doesn’t count your assets at full market value. It uses Quick Sale Value, which reflects what you could get in a forced sale of roughly 90 days, generally 80% of fair market value with adjustments for asset type and market conditions.⁷

Under the current Form 656-B (revised April 2025), individuals also get allowances that reduce counted equity: $1,000 on bank balances, $3,450 against the value of each vehicle, and $11,710 against other valuable personal items such as jewelry, artwork, and collections.⁸ These allowances apply only after the IRS determines you can’t pay through asset equity or an installment agreement alone. For businesses, income-producing assets other than real estate may be excluded entirely.

Allowable Living Expenses

You don’t get to claim whatever you actually spend each month. The IRS publishes National Standards for food, clothing, and out-of-pocket healthcare, and Local Standards for housing, utilities, and transportation.⁹ For most categories, you get the lower of actual spending or the standard amount. Food and clothing are allowed in full at the national standard for your family size without further proof. If your basic needs genuinely exceed the standards, you can argue for more, but you need documentation showing the standards leave essentials uncovered.

This is where many otherwise strong offers fall apart. People report their real mortgage or car payment without realizing the IRS will cap those at the local standard for their county.

Dissipated Assets

If you sold, transferred, or spent down assets after the tax debt arose, the IRS can add that value back into your RCP as a “dissipated” asset. The question is whether you disposed of it with disregard for the tax debt.¹⁰ You can rebut by showing the money went to necessary living expenses, but you need a defensible accounting. Recent transfers of property draw particular scrutiny.

Payment Options and the Application Fee

Unless the low-income certification applies, every offer requires a $205 nonrefundable application fee.⁸ You then choose one of two tracks.

A lump-sum offer is paid in five or fewer installments. You send a nonrefundable payment equal to 20% of your offer amount with the application.⁵ If accepted, the balance is due within five months of acceptance.⁸ More cash upfront, but the 12-month income multiplier often produces a lower minimum offer.

A periodic payment offer spreads payment over 6 to 24 monthly installments.² The first monthly payment goes in with the application, and you keep paying during the review period. Miss a payment while the IRS is evaluating and the agency can treat the offer as withdrawn.⁵ Lower entry cost, higher minimum offer because of the 24-month multiplier.

Either way, payments made during review are nonrefundable if the offer is rejected. You can, however, tell the IRS which tax years to apply them to.

How Long Review Takes and What Protects You During It

You mail the completed package to the processing center listed in the Form 656-B instructions.¹¹ The IRS first checks that everything required is in the envelope. Incomplete packages get returned. If it passes that screen, an offer examiner takes it, verifies your documentation, and calculates the RCP independently.

Full review can take up to 24 months depending on caseload and complexity.³ While the offer is pending, the IRS cannot levy your property or wages. That protection extends 30 days past a rejection, and continues through any timely appeal.¹² Interest, though, keeps running on the underlying debt the entire time. A long review can add real money to the balance if the offer fails.

One safeguard cuts the other way: if the IRS doesn’t reject your offer within 24 months of receipt, it’s deemed accepted by law.¹³ Any time your liability is being disputed in a judicial proceeding is excluded from that clock.⁵

If the IRS Rejects Your Offer

A rejection is not the end. You have 30 days from the date on the rejection letter to request review by the IRS Independent Office of Appeals, either by filing Form 13711 or by sending a written letter identifying your specific disagreements.¹⁴

The strongest appeals attack specific numbers in the examiner’s RCP calculation. Common lines to challenge:

Asset valuation. The IRS set the fair market value of your home or vehicle too high. Because Quick Sale Value is 80% of FMV, you’re really challenging the underlying FMV.
Monthly expenses. The examiner capped housing, transportation, or healthcare below what you actually need for basic living, and you have proof.
Income. The examiner credited income you no longer receive or overstated what you do receive.
Special circumstances. Age, illness, or similar factors justify acceptance even if the numbers alone don’t.¹⁴

Vague objections go nowhere. For each disagreement, compare your Form 433-A or 433-B against the examiner’s worksheets and attach the documents that support your figure.

What Acceptance Actually Commits You To

Getting to yes is a milestone. It also starts a five-year clock, and defaulting during that clock erases the benefit.

Five-Year Compliance Period

For five years after acceptance, including any extensions, you must file every required return on time and pay every tax in full. Fall behind on filing or run up a new balance during that window and the IRS can default your offer.³ A new tax debt cannot be folded into the compromise and cannot be paid through a new installment agreement during this period.

Default is severe: the IRS reinstates the original tax debt less what you’ve already paid, adds back penalties and interest, and can pursue liens and levies on the full reinstated amount.³ You lose the money you paid and the years of time.

Refunds Belong to the IRS

The IRS keeps any refund you’re owed for tax periods through the date your offer is accepted, and you can’t direct overpayments to next year’s estimated taxes.³ If you were counting on a refund, adjust your withholding so you’re not generating one the IRS will simply absorb.

Federal Tax Lien Release

Any federal tax lien stays in place until the full accepted amount is paid. Release timing depends on how you make the final payment: cashier’s checks, money orders, and online payments trigger release on receipt; personal checks take about 30 days; debit cards about 100 days; credit cards about 120 days.³ If you’re planning a property sale or credit cleanup around the final payment, choose the method accordingly.

1
Office of the Law Revision Counsel. 26 U.S. Code 6502 – Collection After Assessment
2
Internal Revenue Service. Topic No. 204, Offers in Compromise
3
Internal Revenue Service. Offer in Compromise FAQs
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Internal Revenue Service. Offer in Compromise Pre-Qualifier
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Office of the Law Revision Counsel. 26 USC 7122 – Compromises
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Internal Revenue Service. Offer in Compromise
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Internal Revenue Service. 5.8.5 Financial Analysis
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Internal Revenue Service. Form 656 Booklet
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Internal Revenue Service. Collection Financial Standards
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Internal Revenue Service. 8.23.3 Evaluation of Offers in Compromise
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Internal Revenue Service. Form 656 (Rev. 4-2025) Offer in Compromise
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Office of the Law Revision Counsel. 26 USC 6331 – Levy and Distraint
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GovInfo. Public Law 109-222 109th Congress An Act
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Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC)