Offer in Compromise: Eligibility, Process, and Examples

Introduction

Tax debt can derail budgets, stress families, and stall business growth. The IRS Offer in Compromise (OIC) exists to resolve eligible debts for less than the full balance when full payment isn’t realistic. This guide explains how OICs work, who qualifies, how the IRS evaluates offers using Reasonable Collection Potential (RCP), the application forms you’ll need, payment structures, timelines, appeal rights, and what ongoing compliance is required after acceptance.

Where helpful, we include real scenarios and practical tips. If you determine an OIC isn’t the right fit, consider alternatives such as Installment Agreements, Penalty Abatement, or Currently Not Collectible (CNC). For a full overview, see our services.

Key Takeaways

• An OIC allows eligible taxpayers to settle for less than the full balance when full payment would cause hardship or when liability is legitimately in dispute.
• Eligibility generally requires current filing compliance, current estimated payments, no open bankruptcy, and a realistic offer based on RCP.
• The IRS accepts OICs under three grounds: doubt as to collectibility, doubt as to liability, and effective tax administration (rare hardship cases).
• RCP weighs assets, income, and allowable living expenses; some assets may be protected or otherwise unavailable for collection.
• Form 656 (or 656‑L for liability disputes) and Form 433‑A/433‑B support the offer; most applicants pay a nonrefundable fee and initial payment unless low‑income certified.
• After acceptance, strict five‑year compliance is mandatory; rejections can be appealed within 30 days, while returned offers must be corrected and resubmitted.

Understanding Offers in Compromise

An OIC is a negotiated settlement with the IRS to resolve tax debt for less than the amount owed. It’s intended for taxpayers who cannot pay the full liability or for whom full payment would be inequitable. Keep in mind:

• Any application payments are nonrefundable and applied to your liability even if your offer is not accepted.
• While an offer is under review, most collection activity is suspended; however, the IRS may still file a Notice of Federal Tax Lien.
• Submitting an OIC extends the Collection Statute Expiration Date (CSED) for the period the offer is pending, plus certain additional time.
• If you have an existing installment agreement, you can generally pause those payments while your OIC is under review.
• If the IRS makes no decision within two years from receipt (excluding appeal time), the offer is deemed accepted.

For broader tax relief options, explore how tax relief works and our FAQ hub.

Eligibility Criteria

Only a minority of OICs are approved, and acceptance rates vary by year. The IRS evaluates both financial reality and compliance history. Three acceptance grounds exist:

1. Doubt as to Collectibility

You cannot pay the full liability now or in the foreseeable future. The IRS calculates your Reasonable Collection Potential (RCP) using:

• Projected future income minus allowable living expenses (IRS national and local standards)
• Net realizable equity in assets (e.g., real estate, vehicles, bank/investment accounts)

Certain assets may be excluded or limited by law or circumstance, such as:

• Property transferred to defraud creditors: The IRS can still consider assets transferred to evade collection.
• Non‑liable spouse property protected by state law: Depending on your state, some spousal assets may be partially or fully shielded.

2. Doubt as to Liability

There is a legitimate dispute over whether you owe the assessed tax. You must provide documentation showing the assessment is incorrect (e.g., income that was never received).

3. Effective Tax Administration

In rare cases, even if full collection is possible, the IRS may accept an offer where collection would cause severe economic hardship or be unfair due to exceptional circumstances.

• Taxpayer with a disability who cannot sell or mortgage a specially adapted home without severe consequences
• Parent providing full‑time care for a child with a serious long‑term illness
• Retiree whose only collection source is a retirement account needed for basic living costs

The Application Process

A well‑prepared OIC is thorough and accurate. The process generally includes:

Review Eligibility

Confirm you meet filing and payment requirements, are not in open bankruptcy, and that your financials support an OIC under one of the grounds above.

Gather Documentation

Collect detailed records of income, expenses, assets, and debts. Expect exhaustive requests; well‑organized documentation reduces follow‑ups and delays.

Complete the Forms

You’ll typically submit:

• Form 656 (Offer in Compromise) or Form 656‑L (Doubt as to Liability)
• Form 433‑A (Wage Earners & Self‑Employed) or Form 433‑B (Businesses)
• Application fee ($205) and initial payment, unless you qualify for the low‑income certification

All forms must be complete and accurate; omissions or inconsistencies are common reasons for returns (not appealable) and rejections.

Submitting the Offer

Choose one of two payment structures. Both are nonrefundable and applied to your tax debt:

For form references and eligibility nuances, see our IRS Forms directory.

Review & Timelines

The review can take 6–12 months or longer based on complexity and document follow‑ups. During review, most collection actions are paused. The pause also applies for 30 days after a rejection and during a timely appeal.

Acceptance or Appeal

If accepted, you agree to:

• Stay fully compliant with filing and payment obligations for five years after acceptance
• File all returns and pay on time; refunds through the acceptance date may be retained by the IRS

Defaulting on these terms allows the IRS to reinstate the original balance with interest and penalties.

Is an Offer in Compromise Right for You?

An OIC is most appropriate when:

• You cannot fully pay your liability without causing significant financial hardship
• Your circumstances align with one of the three OIC grounds
• You are able to maintain strict compliance for five years after acceptance

Consider professional guidance if you’re unsure whether Offer in Compromise is your best path versus alternatives like Back Tax Relief or Audit Representation.

FAQs – Offer in Compromise (OIC)