IRS Offer in Compromise: How to Settle Your Tax Debt for Less

Reliable Tax Relief
Dec 18, 2024
5 min read

Updated: Dec 22, 2024

"Tax relief concept with IRS Offer in Compromise application form"

If you’re struggling to pay your federal taxes, you’re not alone — and you’re not out of options. One of the most powerful tools at your disposal is the IRS Offer in Compromise (OIC), a program that allows you to settle your tax debt for less than you owe.

If the full amount of your tax debt feels out of reach or paying it would cause financial hardship, this option could give you the fresh start you need. While the process requires some patience and paperwork, the potential savings are worth it.

This guide will walk you through everything you need to know about the IRS Offer in Compromise, including:

What an Offer in Compromise is
Who qualifies for an OIC
How to apply and avoid common pitfalls

By the end, you’ll have the clarity and confidence to take your next steps toward financial freedom.

What Is an IRS Offer in Compromise?

An Offer in Compromise (OIC) is a program that allows taxpayers to settle their IRS debt for less than the total amount owed. Essentially, you make an offer to the IRS, and if they agree that collecting the full debt isn’t feasible, they’ll accept your offer.

The IRS reviews your:

Income
Expenses
Assets
Ability to pay

If the IRS believes you’re offering them the most they can reasonably expect to collect, they’ll accept it. This means you could wipe out your tax debt for significantly less than you owe.

Key takeaway: An OIC gives taxpayers a way to settle for less, but only if you meet specific qualifications.

Who Qualifies for an Offer in Compromise?

Not everyone qualifies for an Offer in Compromise, but if you meet certain requirements, you could be on your way to significant tax debt relief.

To qualify for an OIC, you must:

File all required tax returns (You can’t be behind on your filings.)
Not be in an open bankruptcy proceeding (Bankruptcy and OICs don’t mix.)
Have a current bill for at least one of your tax debts (This ensures the IRS is aware of what you owe.)
Be up-to-date on current year payments (This includes estimated payments for self-employed people.)

For business owners with employees:

You must also be up-to-date on federal tax deposits for the current and previous two quarters.

Pro Tip: If you’re unsure if you qualify, use the IRS Offer in Compromise Pre-Qualifier Tool. It’s a quick way to check your eligibility before committing to the application process.

How Do You Apply for an Offer in Compromise?

The process for applying for an OIC requires preparation and attention to detail, but it’s completely manageable if you understand the steps.

Here’s how to apply for an Offer in Compromise:

Complete IRS Forms 656 and 433-A (for individuals) or 433-B (for businesses).
- Form 656: This is the offer form where you propose how much you’re willing to pay.
- Form 433-A or 433-B: These forms provide the IRS with detailed information about your finances, including income, expenses, and assets.
Calculate your minimum offer.
- The IRS will only accept offers that meet or exceed the minimum offer amount. Use the instructions on Form 433-A to determine how much you should offer.
Submit supporting documentation.
- This includes pay stubs, bank statements, mortgage details, utility bills, and any other proof of your financial situation.
Pay the application fee.
- The OIC application fee is $205, but it’s waived if you qualify for low-income certification.
Make your initial payment.
- If you’re choosing the lump-sum payment option, you must send 20% of your offer. If you’re choosing monthly payments, you send the first month’s payment.

Pro Tip: Honesty is critical. Submitting false information can lead to civil or criminal penalties for tax fraud.

What Payment Options Are Available for an OIC?

The IRS allows two ways to pay for an Offer in Compromise:

Lump-Sum Payment
- You pay 20% of the offer amount upfront and pay the rest in up to 5 payments.
Periodic Payments
- You make an initial payment with your application, then pay the rest in monthly payments over 6 to 24 months.

If you qualify for low-income certification, you won’t have to make any initial payments, and you won’t need to pay the $205 application fee.

How Does the IRS Decide Whether to Accept Your Offer?

The IRS will only accept your offer if they believe it’s the most they can collect within a reasonable period. They’ll assess your:

Ability to pay
Income and expenses
Equity in assets

The IRS will approve an OIC for one of the following reasons:

Doubt as to Collectibility: You can’t afford to pay the full debt before the collection period runs out.
Doubt as to Liability: You believe you don’t actually owe the amount stated. (Use Form 656-L for this.)
Effective Tax Administration: You can technically pay in full, but doing so would cause you financial hardship or be “unfair” under exceptional circumstances.

What Happens If the IRS Accepts Your OIC?

Congratulations! If the IRS accepts your OIC, your debt is officially reduced, but you’ll have a few responsibilities moving forward.

You must:

Pay the offer amount as agreed.
File and pay taxes on time for the next 5 years.
Waive your right to dispute the debt in court.

If you don’t follow these terms, the IRS can revoke the agreement and reinstate the original debt amount.

What Happens If the IRS Rejects Your OIC?

Don’t lose hope! If your offer is rejected, you still have options.

If your OIC is rejected, you can:

Request an appeal within 30 days of the rejection by filing Form 13711.
Provide additional information or corrections that support a higher offer.
Ask for reconsideration if the IRS miscalculated your financial situation.

Pro Tip: If your OIC is rejected, work with a tax professional to strengthen your appeal.

Is an Offer in Compromise Right for You?

An OIC can be life-changing if you’re drowning in tax debt, but it’s not for everyone. Here’s when it makes sense:

You have no way to pay your tax debt in full.
You’re experiencing financial hardship.
You want to avoid wage garnishment, tax liens, or levies.

When it’s not a good fit:

You have the means to pay the full debt.
You haven’t filed all required tax returns.
You’re in bankruptcy proceedings.

The Benefits and Downsides of an Offer in Compromise

Benefits of an OIC:

Settle your debt for less.
Avoid wage garnishments and asset seizures.
Eliminate tax liens once paid in full.

Downsides of an OIC:

Non-refundable payments. Any initial payments are non-refundable, even if your OIC is rejected.
Full financial disclosure. You must share personal financial details, which some people find invasive.
Lengthy process. The review process can take up to 2 years.

Ready to Apply for an OIC? Get Expert Help!

If you’re ready to reduce your tax debt and reclaim financial freedom, an Offer in Compromise could be the solution you’ve been looking for.

But remember, the process requires accurate forms, proper calculations, and supporting documentation. If you want to avoid mistakes, work with a tax professional who can guide you every step of the way.

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