An IRS Offer in Compromise is a formal agreement that settles your federal tax debt for less than the full amount you owe. It exists because the IRS would rather collect a realistic portion of a debt than chase a full balance it will never see. The program is narrow: in fiscal year 2024, the IRS accepted roughly 7,200 of about 33,600 offers submitted, an acceptance rate near 21 percent.1Internal Revenue Service. Collections, Activities, Penalties and Appeals Whether you’re a candidate depends less on how much you owe than on what the IRS calculates it could realistically collect from you.
The Three Grounds You Can Qualify Under
Federal law authorizes the IRS to accept a reduced payment on one of three grounds, and you only need to fit one.2Office of the Law Revision Counsel. 26 USC 7122 Compromises
Doubt as to collectibility is by far the most common. You concede you owe the tax, but your income and assets are not enough to pay the full balance before the IRS’s collection window (generally ten years from assessment) closes. The IRS looks at the equity in what you own, your take-home pay, and your allowable living expenses to decide the most it could realistically pull from you. If your offer meets or exceeds that figure, it has a reason to say yes.3Internal Revenue Service. 8.23.1 Offer in Compromise Overview
Doubt as to liability is for taxpayers who believe the IRS got the amount wrong, or that they don’t owe it at all. You’re not claiming inability to pay; you’re disputing the assessment. This path uses Form 656-L instead of the standard Form 656, and you submit a written explanation with supporting records such as missing documentation, corrected calculations, or evidence of audit errors. No financial statement is required.4Internal Revenue Service. Form 656-L Offer in Compromise Doubt as to Liability You cannot file a liability-based offer and a collectibility-based offer for the same tax year at once, and the IRS advises resolving any dispute over whether the tax is owed before pursuing a collectibility offer.
Effective tax administration covers a narrow band of cases where the tax is correctly owed and you technically could pay it, but full collection would create severe economic hardship or would be fundamentally unfair. The classic example is a homeowner whose equity is needed to fund long-term medical care for a dependent with a serious illness.5Internal Revenue Service. IRM 5.8.11 Effective Tax Administration The IRS may also compromise on public policy or equity grounds under this heading, but only in truly exceptional circumstances.
Eligibility Requirements Before the IRS Will Look at Your Offer
Even a well-priced offer gets returned if you fail these prerequisites, and a returned offer means lost time and, in most cases, a lost application fee.
- You must have filed every tax return you are legally required to file. Missing returns cause the IRS to return the offer and apply any initial payment to your existing debt.6Internal Revenue Service. Form 656 Booklet Offer in Compromise
- If you’re self-employed, your current-year estimated tax payments must be up to date.7Internal Revenue Service. Offer in Compromise FAQs
- If you have employees, your federal tax deposits for the current quarter and the two preceding quarters must be current.
- You cannot be in an open bankruptcy proceeding. Wait until it has been discharged and closed.
- You must have received a bill for at least one of the tax debts you’re including.
These duties don’t stop when you file the application. If you fall out of compliance while the IRS is reviewing your offer, it can return the offer without further consideration.
How the IRS Decides What Your Offer Has to Be
The IRS does not accept whatever number you write on Form 656. It calculates a figure called the Reasonable Collection Potential, and your offer generally must meet or exceed that amount. Two components make up the RCP.
The first is net realizable equity in your assets. The IRS takes the fair market value of what you own (real estate, vehicles, bank accounts, investments, retirement funds), multiplies by 0.80 to reflect a quick-sale discount, and subtracts what you owe against each asset.8Internal Revenue Service. Form 433-B (OIC) Collection Information Statement for Businesses
The second is future income. The IRS estimates what’s left of your monthly income after allowable living expenses and multiplies that remainder by 12 months for a lump-sum offer or 24 months for a periodic-payment offer. Allowable expenses come from IRS Collection Financial Standards: national figures for food, clothing, and out-of-pocket health care, and local figures for housing, utilities, and transportation.9Internal Revenue Service. Collection Financial Standards For most line items, you get the lesser of what you actually spend or the local standard. Underreporting assets or income can trigger a fast rejection and, if the IRS treats it as false information, worse.
Before you assemble the paperwork, the IRS’s free online Offer in Compromise Pre-Qualifier tool will estimate whether you’re a plausible candidate and give a rough offer amount.10Internal Revenue Service. Offer in Compromise Pre-Qualifier It’s not binding, but if the numbers clearly don’t work, you’ll know before spending the fee.
The Application Fee and How You Pay the Offer
The non-refundable application fee is $205.11Internal Revenue Service. Offer in Compromise If your household income is at or below 250 percent of the federal poverty level, the Low-Income Certification waives the fee and the payments otherwise required during the review period.12Internal Revenue Service. IRS Announces Waivers for Offer in Compromise Applications For 2026, the threshold is $39,900 for one person and $82,500 for a family of four in the contiguous 48 states, with higher amounts for Alaska and Hawaii.
You must pick one of two payment structures when you file. A lump-sum offer requires 20 percent of the total offer with the application; if accepted, the balance is paid in five or fewer installments within five months. A periodic-payment offer requires the first proposed monthly installment with the application and continued monthly payments during the review (unless the Low-Income Certification applies), with the total payment period capped at 24 months.6Internal Revenue Service. Form 656 Booklet Offer in Compromise
For a collectibility or effective-tax-administration offer, the core package is Form 656 plus Form 433-A (OIC) for individuals or Form 433-B (OIC) for corporations, partnerships, and LLCs.11Internal Revenue Service. Offer in Compromise Expect to attach at least six months of pay stubs, bank statements, and mortgage and retirement account records. Individuals can file electronically through their IRS Individual Online Account.
What Happens While the IRS Reviews Your Offer
An examiner verifies your financial information and will ask for more documentation. During the review, the IRS generally cannot levy your wages or bank accounts, and that protection extends 30 days past a rejection and through any appeal.3Internal Revenue Service. 8.23.1 Offer in Compromise Overview Interest on the underlying debt keeps accruing.
If the IRS doesn’t decide within 24 months of receiving the offer, it is deemed accepted by law.2Office of the Law Revision Counsel. 26 USC 7122 Compromises
One risk deserves attention before you file. The IRS normally has ten years from assessment to collect a tax. Submitting an offer pauses that clock for the entire time the offer is pending, plus 30 days after any rejection, plus any appeal time.13Internal Revenue Service. Collection Statute Expiration A rejected offer gives the IRS more time to collect than it had before you applied. If the ten-year deadline is already close, weigh that carefully.
Two other consequences kick in at acceptance. The IRS keeps any refund (including interest on overpayments) for the year the offer is accepted and any prior year in the deal, and applies it to your overall tax debt rather than crediting it against the offer amount.7Internal Revenue Service. Offer in Compromise FAQs Any existing federal tax lien stays in place until you finish paying the offer, at which point the IRS releases it.
If Your Offer Is Rejected
You have 30 days from the date on the rejection letter to appeal, using Form 13711. After 30 days, the IRS will not accept the appeal.14Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC) The case goes to the IRS Independent Office of Appeals, which reviews it separately from the collection division that rejected the offer, and levy protection continues during the appeal.
Some outcomes cannot be appealed. Offers returned because you had an open bankruptcy, fell out of filing or payment compliance after submitting, or filed solely to delay collection carry no appeal right.
What You Owe the IRS After Acceptance
An accepted offer starts a five-year compliance period. During those five years, every required return must be filed on time (including extensions) and every tax bill paid in full. If you chose periodic payments and your schedule runs longer than five years, the compliance period stretches to match.15Internal Revenue Service. 5.19.7 Monitoring Offer In Compromise Miss a filing deadline or a future tax bill and the IRS can default the offer, reinstating the original debt minus what you’ve paid, along with penalties and interest, and pursue liens or levies. Offers accepted on doubt-as-to-liability grounds are the one exception; they are not subject to the five-year monitoring period.
Accepted offers are also not fully private. A limited version of Form 7249 (the Offer Acceptance Report) is available for public inspection for one year after acceptance, listing your name, city, state, ZIP code, the original liability amount, and the offer terms.16Internal Revenue Service. Offer in Compromise Public Inspection File Anyone can request a copy, and the IRS typically responds within 15 business days.