IRS Offer in Compromise Explained: Who Qualifies & How to Apply
Owing money to the IRS is stressful. The debt keeps piling up, and with penalties and interest, it can feel impossible to get out. If you don’t have the means to pay, you might worry about wage garnishments, bank levies, or losing your assets.
The good news? The IRS has a program called an Offer in Compromise (OIC) that lets some taxpayers settle their debt for less than what they owe. It sounds great, but not everyone qualifies. So, how does it work? Who can apply? And what are the risks? Let’s break it down.
What is an Offer in Compromise?
An Offer in Compromise (OIC) is a tax relief program offered by the IRS that allows eligible taxpayers to settle their tax debt for less than the full amount owed. It’s designed for people who genuinely can’t afford to pay their full tax bill. Instead of forcing payment, the IRS might agree to take a reduced amount, as long as it’s the most they believe they can collect.
The IRS doesn’t hand out these deals to just anyone. They look at your income, assets, expenses, and overall financial situation. If they believe they can eventually collect the full amount through normal means, they won’t accept an OIC. But if you’re struggling financially and have no realistic way to pay the full amount, they might consider it.
This program is available for both individuals and businesses, but it’s not an easy way out. The IRS only accepts offers when they believe it’s in their best interest—meaning they think they’ll collect more through a settlement than by continuing to chase unpaid taxes.
How an Offer in Compromise Works
IRS Evaluation Process
When you submit an OIC, the IRS doesn’t just take your word for it. They review your financial situation in detail. They look at your income, living expenses, and what you own. If they think you can pay off your debt in full over time, they won’t accept your offer.
To figure out if you qualify, they consider four main factors:
- Your ability to pay based on your current income.
- Your monthly expenses (like rent, groceries, and medical costs).
- The value of your assets (such as savings accounts, real estate, or vehicles).
- Any other financial obligations you have.
The Three Main Types of OIC
Doubt as to Liability
This applies when you genuinely believe the IRS made a mistake and that you don’t actually owe the full tax bill. If there’s a valid dispute about your liability, the IRS may agree to settle for a lower amount.
Doubt as to Collectibility
If you can’t afford to pay your tax debt, even over time, the IRS may accept an OIC based on what they believe they can realistically collect.
Effective Tax Administration
Sometimes, even if the tax amount is correct and you technically could pay it, doing so would cause extreme financial hardship. In rare cases, the IRS might accept an OIC under this category.
Who Qualifies for an Offer in Compromise?
Basic Eligibility Criteria
Not everyone can apply for an Offer in Compromise. The IRS has strict rules about who qualifies.
- First, you must have filed all required tax returns. If you haven’t, the IRS won’t even look at your application.
- Second, you can’t be in an open bankruptcy case. If you’ve filed for bankruptcy, you’ll need to resolve that first before applying for an OIC.
- Third, you must be current on any estimated tax payments or federal tax deposits if you’re self-employed or a business owner.
Factors Affecting Eligibility
Even if you meet the basic criteria, the IRS will still take a deeper look at your finances. They consider:
- Financial hardship – If you can barely afford your basic living expenses, you may qualify.
- Income and expenses – The IRS will analyze how much money you make and how much you spend each month.
- Assets – If you have valuable assets, like property or investments, the IRS might expect you to sell them before they approve an OIC.
- Past tax compliance – If you have a history of missing tax payments or failing to file returns, it could hurt your chances.
While an OIC can provide significant tax relief, getting approved isn’t easy. The IRS only accepts a small percentage of applications each year, so it’s important to ensure you meet all requirements before applying.
The Offer in Compromise Application Process
Step 1: Submitting an Application
To start the process, you need to submit Form 656, which is the official OIC application. This form includes details about your tax debt and the offer amount you’re proposing.
If you’re applying as an individual, you’ll need Form 433-A (OIC), which provides a detailed breakdown of your income, expenses, and assets. If you’re a business owner, you’ll submit Form 433-B (OIC) instead.
The IRS needs full transparency, so you’ll be required to provide supporting documents, such as pay stubs, bank statements, and proof of living expenses.
Step 2: Providing Financial Documentation
The IRS won’t approve your offer without proof of your financial situation. You’ll need to submit:
- A list of all income sources, including wages, self-employment income, and benefits.
- A breakdown of your monthly expenses, like rent, utilities, food, and medical costs.
- A list of all assets, such as cash in the bank, real estate, and vehicles.
The IRS will use this information to determine if your offer is reasonable based on what they believe they can collect from you.
Step 3: Paying the Application Fee
There’s a non-refundable application fee, which is typically around $205. However, some low-income applicants may qualify for a waiver.
Along with the fee, you must also send an initial payment based on the payment option you choose.
Step 4: Choosing a Payment Option
You have two main ways to pay your offer:
- Lump sum cash offer – You pay 20% upfront when submitting your application, and the remaining balance within five months of acceptance.
- Periodic payment offer – You make monthly payments while the IRS reviews your offer. If approved, you continue making payments until the full amount is paid (usually within six to 24 months).
Step 5: IRS Review and Decision
Once your application is submitted, the IRS will review everything carefully. This process can take six months to a year or even longer in complex cases.
During this time, the IRS pauses collection efforts, meaning they won’t garnish wages or levy your bank account while they’re considering your offer. However, interest and penalties on your tax debt will continue to accrue.
If the IRS accepts your offer, you must follow the agreed payment plan. If they reject it, you’ll receive a letter explaining why, and you have 30 days to appeal the decision.
Getting an OIC approved is challenging, but for those who truly can’t afford their full tax debt, it can be a life-changing option.
Common Reasons an Offer in Compromise is Rejected
Not everyone who applies for an Offer in Compromise gets approved. In fact, the IRS rejects many applications each year. Understanding why applications get denied can help you prepare a stronger case and avoid common mistakes.
One of the biggest reasons for rejection is that the IRS believes you can pay your tax debt in full, either immediately or through an installment plan. The IRS uses your financial documents to calculate what they call a “reasonable collection potential.” If they determine that you have the ability to pay off your tax bill, even if it takes time, they won’t accept a settlement.
Another common issue is failing to provide complete or accurate financial information. If the IRS finds that you have left out sources of income, misrepresented your expenses, or undervalued your assets, they will likely deny your offer. Transparency is key. They want to see an honest, detailed picture of your financial situation before they consider reducing your debt.
Missing tax filings can also lead to rejection. If you haven’t filed all your required tax returns, the IRS won’t even process your Offer in Compromise application. They want to see that you are in compliance before they agree to negotiate.
If your application is rejected, all hope is not lost. You have the right to appeal within 30 days of receiving the rejection notice. The IRS provides specific instructions on how to challenge their decision, and in some cases, additional documentation or explanations can help get the offer approved. If appealing isn’t an option, other payment alternatives, such as installment agreements or requesting “currently not collectible” status, may be available. The key is not to ignore your tax debt but to explore every option to resolve it.
Offer in Compromise Payment and Collection Impact
When the IRS accepts your Offer in Compromise, it does not mean your tax troubles disappear overnight. There are still some things you need to keep in mind.
One of the biggest concerns is tax liens. Even after your offer is approved, the IRS may keep a federal tax lien in place until you complete your payments. A tax lien is a legal claim against your assets that alerts creditors that you owe the government money. The good news is that once you successfully pay the agreed amount, the IRS will remove the lien, clearing your record.
If you default on your OIC agreement, things can take a turn for the worse. The IRS has the right to reinstate your full original tax debt, meaning the discount you received disappears. This can happen if you miss a payment, fail to file your taxes on time, or don’t stay compliant with future tax obligations. An Offer in Compromise is not just about settling past debt—it’s about proving you can stay on track going forward.
During the IRS review process, collections are temporarily paused, which means they won’t seize your assets or garnish your wages while they’re making a decision. However, interest and penalties on your unpaid tax debt will continue to add up until the offer is finalized. This is why it’s important to have a clear plan in place before you apply.
Once your offer is accepted, you need to follow the agreed payment plan carefully. Some taxpayers choose a lump sum payment, while others spread the payments over several months. Either way, staying compliant with your agreement is the only way to ensure you don’t end up back where you started.
Alternatives to an Offer in Compromise
Not everyone qualifies for an Offer in Compromise, and even for those who do, the process can be lengthy and uncertain. Fortunately, the IRS provides other ways to manage tax debt if an OIC is not an option.
One common alternative is an installment agreement, which allows taxpayers to set up a monthly payment plan with the IRS. This option is typically available to those who owe less than $50,000 and can afford to pay off their debt in manageable chunks over time. While interest and penalties still accrue, an installment plan can prevent aggressive collection actions like wage garnishment.
For taxpayers facing extreme financial hardship, the IRS may grant currently not collectible (CNC) status. This means that while you still owe the debt, the IRS will temporarily stop collection efforts because forcing payment would cause serious financial distress. This status is reviewed periodically, and if your situation improves, the IRS may resume collection efforts.
Another possible solution is penalty abatement, where the IRS removes or reduces penalties on unpaid taxes. This is typically granted if you can show reasonable cause for why you failed to pay, such as a medical emergency, a natural disaster, or unavoidable financial setbacks. While penalty abatement does not erase the debt itself, it can significantly reduce the total amount owed.
Each of these alternatives has its pros and cons, and what works best depends on your specific financial situation. The most important thing is to take action. Ignoring your tax debt can lead to serious consequences, including asset seizures, wage garnishments, and long-term financial harm.
Warning: Scams and Misleading Tax Relief Companies
With tax debt being such a stressful burden, it’s no surprise that many companies claim to offer easy solutions. You’ve probably seen ads promising to settle tax debt for pennies on the dollar or guaranteeing approval for an Offer in Compromise. Unfortunately, many of these so-called “tax relief” companies are scams.
The truth is, no one can guarantee IRS approval for an OIC. The IRS has strict guidelines, and most applications get rejected. Scammers prey on desperate taxpayers by charging thousands of dollars in upfront fees, only to disappear or provide little to no real assistance.
A legitimate tax professional will be upfront about your chances of approval and help you explore all available options—not just an OIC. Be wary of anyone who asks for large upfront payments, refuses to explain the process in detail, or pressures you into signing a contract without understanding your options.
If you need help with tax debt, consider working with a certified tax professional, such as a licensed tax attorney, certified public accountant (CPA), or an enrolled agent. The IRS also provides free resources to help taxpayers understand their rights and responsibilities.
Tax debt is serious, but falling for a scam can make your situation even worse. Do your research, ask questions, and be cautious of anyone who makes promises that sound too good to be true.
Final Thoughts
An Offer in Compromise can provide significant relief for those struggling with tax debt, but it’s not an easy fix. The IRS only approves offers when they believe it’s the best way to collect at least part of what’s owed. The process is detailed, requires full financial disclosure, and takes time.
If you think you may qualify, consider speaking with a tax professional to improve your chances of approval. Even if an OIC isn’t an option, there are other ways to manage your tax debt. The key is to take action and not let the problem grow worse over time.
FAQs
How long does the Offer in Compromise process take?
The duration of the Offer in Compromise (OIC) process varies, but it typically takes between six months to a year for the IRS to review and make a decision on your application. Complex cases or incomplete submissions can extend this timeframe. During the review period, it’s crucial to stay current with all tax filings and payments to avoid delays.
Can I apply for an Offer in Compromise if I’m self-employed?
Yes, self-employed individuals can apply for an OIC. The IRS will assess your ability to pay based on your income, expenses, and asset equity, similar to wage earners. It’s essential to provide detailed financial information, including business income and expenses, to support your application.
What happens if my Offer in Compromise is rejected?
If the IRS rejects your OIC, you have 30 days from the date on the rejection letter to appeal the decision. The appeal process involves providing additional information or clarification to support your case. Alternatively, you may consider other payment arrangements, such as an installment agreement, to address your tax debt.
Will an accepted Offer in Compromise affect my credit score?
The IRS does not report tax debts or accepted OICs directly to credit bureaus. However, if a Notice of Federal Tax Lien was filed, it could appear on your credit report. Once your offer is accepted and the agreed amount is paid in full, the IRS will release the lien, which may positively impact your credit over time.
Do I need a tax professional to submit an Offer in Compromise?
While it’s possible to submit an OIC on your own, the process can be complex and requires thorough financial documentation. Engaging a qualified tax professional can help ensure your application is accurate and complete, potentially increasing the likelihood of acceptance. Be cautious of firms promising guaranteed results; always verify their credentials and experience.
