IRS Offer in Compromise: eligibility, process and realistic odds

An Offer in Compromise (OIC) is an agreement between you and the IRS that settles your tax debt for less than the full amount owed. It isn't a negotiation over how much you'd like to pay. The IRS accepts an offer when the amount offered is the most it can reasonably expect to collect within a reasonable time. That's why advertisements promising to settle "for pennies on the dollar" are misleading — the result is driven by a formula applied to your finances, not by persuasion.

The IRS considers offers on three grounds: doubt as to collectibility (you can't pay in full before the collection statute expires — by far the most common), doubt as to liability (you don't actually owe the tax), and effective tax administration (you could pay, but doing so would cause economic hardship or be unfair given exceptional circumstances).

For collectibility offers, the IRS calculates your reasonable collection potential (RCP): the net equity in your assets (generally quick-sale value minus loans) plus your future disposable income. Future income is your monthly income minus allowable living expenses under the IRS's Collection Financial Standards, multiplied by 12 months for a lump-sum offer or 24 months for a periodic payment offer.

If your RCP is less than what you owe, an offer at or above your RCP may be acceptable. If your RCP is higher than the balance, the IRS expects full payment, usually through an installment agreement. A settlement amount can't be predicted from the balance alone. Try our Offer in Compromise estimator to see how the formula works.

Before the IRS will consider an offer, you must have filed all required tax returns, made required estimated payments for the current year, and (for business owners with employees) made required federal tax deposits for the current quarter. You can't apply while in an open bankruptcy proceeding. The IRS's Pre-Qualifier tool checks these requirements and gives a rough idea of whether an offer is realistic. See OIC qualifications for more.

The application fee is $205, and you must include an initial payment. For a lump-sum cash offer (paid in five or fewer installments), you send 20% of the offer amount with the application. For a periodic payment offer, you pay the first proposed installment with the application and keep paying monthly while the IRS evaluates it. Low-income applicants who meet IRS guidelines can have the fee and initial payment waived. Payments are generally not refunded if the offer is rejected; they're applied to your balance.

The IRS generally doesn't levy while your offer is being considered, and for 30 days after a rejection, plus while a timely appeal is pending. The collection statute is paused during this time too, which means the IRS has longer to collect if the offer fails. Interest continues to accrue. If the IRS doesn't decide within two years of receiving the offer, it's deemed accepted. A Notice of Federal Tax Lien may still be filed.

If the IRS accepts your offer, you must file and pay all taxes on time for five years, or the offer can be defaulted and the original debt reinstated. The IRS keeps any refund you're owed for the year the offer is accepted (and earlier years). Liens are released once the offer amount is paid. Accepted offers are public record for one year.

An offer makes sense mainly when your income after allowable expenses is low and your assets have little equity relative to what you owe. If you could pay the balance within the collection statute, an installment agreement is usually faster and cheaper. If you can't pay anything now but your situation may improve, Currently Not Collectible status may fit better. Compare the options in OIC vs installment agreement and CNC vs OIC.

The IRS returns or rejects many offers for avoidable reasons. An offer is returned without review if you haven't filed all returns, didn't include the fee and initial payment, or are in bankruptcy. It's rejected when the amount is below your calculated reasonable collection potential — often because of home or retirement-account equity, or because claimed expenses exceed IRS standards without documentation. Before applying, compare your figures against the Collection Financial Standards and make sure every number on Form 433-A (OIC) matches your bank statements and pay stubs.