To ease the tax burden on the average taxpayer, the IRS created a program called the IRS Offer in Compromise. This program offers significant relief to taxpayers who want to negotiate and settle their outstanding issues with the IRS for less than the original amount owed. It’s one of the most effective tools for IRS tax negotiation, especially if full payment of tax debt would create financial hardship for the taxpayer.
But not everyone will qualify, and applying isn’t as simple as filling out a form. The IRS uses strict eligibility criteria and financial analysis to determine who gets approved. Nonetheless, knowing how IRS guidelines work and how to position your case can dramatically increase your chances of success.
At Victory Tax Lawyers, we can help you determine whether you’re a candidate for an IRS compromise settlement agreement and guide you through every step of the process. We offer expert tax relief services and hands-on legal support from real attorneys. Schedule your free consultation today or learn more about our IRS Offer in Compromise services, both in Los Angeles and across the U.S.
If you’re struggling with IRS tax debt and considering an IRS Offer in Compromise (OIC), this guide will walk you through everything you need to know—from what an OIC is, who qualifies, to how to apply and what to expect after submission. We’ll also break down the different types of offers and payment options.
What Is an IRS Offer in Compromise?
An IRS Offer in Compromise (OIC) is a legal agreement between a taxpayer and the IRS that allows you to settle your tax liability for less than the full amount owed. It’s designed for individuals or businesses who are unable to pay their tax liability in full. If paying your tax liability in full would create undue financial hardship, this is a good option to consider.
The OIC program is grounded in IRS Code Section 7122, a part of the federal tax laws governing tax collection and resolution. This gives the IRS the authority to accept less than what’s owed if they believe it’s the most they can reasonably collect. However, this OIC is not a quick fix. It’s a legitimate relief option for those who meet specific criteria.
This is how it works: You submit an application showing why paying your full debt is not possible. The IRS then reviews your income, expenses, assets, and ability to pay. If they agree that your offer is the most they’re likely to collect, they may approve your OIC request. The offer amount is based on what the IRS believes it can reasonably collect from you.
Consider one of the many IRS Offer in Compromise success stories shared by Victory Tax Lawyers: A professional owed $1,096,964 in back taxes and penalties. Although our client had consistent income, their limited asset equity made it clear they couldn’t pay the full amount. We built a strong case showing that, while our client could cover basic living expenses, they couldn’t afford to pay the full tax liability. The IRS agreed and approved an offer of $16,194. This was below 2% of the $1 million owed.
Who Qualifies for an IRS Offer in Compromise?
An IRS Offer in Compromise can be a powerful tool for resolving overwhelming income tax debt. But not everyone qualifies for it. For instance, if you have an open bankruptcy proceeding, the IRS will automatically reject your application. The IRS uses strict guidelines to determine eligibility, which is based largely on your financial situation and ability to pay.
To be considered for an IRS Offer in Compromise, you must meet the following basic criteria:
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Demonstrate financial hardship: You must show that paying the full amount would create a financial burden or that you simply cannot afford to pay the full balance.
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Be current on all required tax filings: The IRS won’t consider your offer unless all past-due returns have been filed. You must also be up to date with estimated tax payments if you’re self-employed.
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Not be in active bankruptcy: If you are involved in ongoing bankruptcy proceedings, you are not eligible to submit an OIC.
The IRS takes a close look at your finances when evaluating an OIC. This includes your assets, such as real estate, vehicles, retirement savings, and any other property you own. They’ll also consider all sources of income, your wages, self-employment income, and rental earnings.
Your monthly expenses are also scrutinized. The IRS looks at your housing costs, transportation, food, utilities, healthcare, and other necessary living expenses. On top of that, they calculate your equity—essentially the value of what you own after subtracting any debts tied to those assets. All of these details help the IRS determine what they believe you can reasonably pay toward your tax debt.
At the heart of the IRS’s decision-making process is the Reasonable Collection Potential (RCP) formula. This is their calculation of what they realistically think they can collect from you through tax audit enforcement, wage garnishments, or other methods over time. The IRS evaluates your income, including wages if you’re a wage earner, to determine how much you can realistically pay. If your offer equals or exceeds your RCP, there’s a much higher chance it will be accepted.
Types of an IRS Offer in Compromise
The IRS offers three distinct types of OIC. The goal is to understand which type best suits your situation:
1. Doubt as to Collectibility
This is the most common type of Offer in Compromise. It applies when a taxpayer is unable to pay their full tax bill due to their present financial limitations. In this case, the IRS examines your financial situation. This includes a detailed review of assets, income, and basic living expenses. If the IRS determines that the full debt is uncollectible based on this information, they may agree to settle for a lower amount.
2. Doubt as to Liability
This is commonly called a liability offer. It applies when there’s a legitimate disagreement about whether the taxpayer is responsible for the tax liability in question. This type of IRS Offer in Compromise isn’t about the ability to pay. It’s about whether the debt is accurate or valid in the first place. For example, the IRS may have made an error. If there’s supporting documentation to prove that the tax debt is wrong or overstated, this type of OIC allows you to challenge the liability.
3. Effective Tax Administration (ETA)
This is appropriate for a case where the taxpayer is technically able to pay the debt at the moment, only that doing so would lead to severe economic hardship or would simply be unjust under the circumstances. It acknowledges that, while the IRS is entitled to collect the debt, enforcing payment would cause undue suffering.
For example, a person in exceptional circumstances, like dealing with a chronic illness, living with a disability, or an elderly taxpayer surviving on a fixed income, might meet the criteria for ETA. Even if they have assets or income on paper, forcing payment could jeopardize their basic living conditions or medical care. In such cases, the IRS may agree to settle for less out of fairness and compassion.
How to Apply for an IRS Offer in Compromise
Understanding each step of the compromise process—from submitting the required forms to making your initial payment—can help you avoid costly mistakes. Here’s a step-by-step breakdown of how to apply:
1. Gather Your Financial Documents
Before you begin, collect all relevant financial information, such as pay stubs or income statements, bank account balances, mortgage or rent obligations, utility bills and living expenses, documentation of assets. The IRS will use this detailed information to assess your RCP.
2. Complete the Required IRS Forms
You’ll need to fill out two key forms: Form 656 and a Collection Information Statement.
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Form 656: This is your formal IRS Offer in Compromise request.
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Form 433-A (OIC for self-employed individuals) and 433-B (OIC for business): These forms detail your financial situation.
Be thorough and accurate when completing your Collection Information Statement. Any discrepancies can delay processing or result in a denial.
3. Choose a Payment Option
There are two ways to pay for your offer:
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Lump Sum Cash Offer: Pay 20% of the offer amount upfront, with the rest paid in 5 or fewer installments within 5 months.
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Periodic Payment Offer: Start making monthly payments while your offer is under review. Continue until the full offer amount is paid.
4. Pay the Application Fee and Initial Payment
The required application fee is $205. You must also send the initial payment based on your selected payment method. Note that the IRS waives the fee and initial payment if you meet the Low-Income Certification guidelines. You may also be exempt from this fee if you submit a liability offer under the Doubt as to Liability option, which is used when you dispute that the tax is owed.
Mail your completed forms, fee, and initial payment to the address listed in the OIC Booklet (Form 656 Booklet). The timeframe of the process usually varies depending on your location and situation. Keep in mind that the IRS typically takes 6 to 12 months to review and respond to your OIC application. But delays can occur if additional information is requested or if your paperwork isn’t complete. Also, note that you must be current on all required filings for the current year before submitting an OIC.
IRS Offer in Compromise Payment Options
You’ll need to choose between two payment options: a lump sum cash offer or a periodic payment offer. Each has its advantages, depending on your financial situation.
1. Lump Sum Cash Offer
A Lump Sum Cash Offer is the faster route and often preferred by the IRS. It requires you to pay 20% of your total offer amount upfront when submitting your application. If your offer is accepted, the remaining balance must be paid in five or fewer installments within five months of the IRS’s acceptance. This approach demonstrates financial readiness and a serious commitment to resolving your debt. Furthermore, it can improve your chances of approval. However, it’s important to note that the 20% upfront payment is non-refundable, even if the IRS rejects your offer. This is why an accurate and well-prepared application is essential.
2. Periodic Payment Offer
A Periodic Payment Offer provides more flexibility by allowing you to spread payments out over time. You begin making monthly payments right away—starting with your application submission—and must continue those payments while the IRS reviews your offer. The review process can take several months. If the offer is accepted, you continue to pay the agreed amount over a 6- to 24-month period. If you miss a scheduled payment during the review phase, you risk your offer being automatically rejected.
In either case, you are required to include a non-refundable $205 application fee when you submit your offer. You’ll also need to include an initial payment based on the payment option you select.
What Happens After You Submit Your IRS OIC?
Once your Offer in Compromise (OIC) is submitted, the waiting begins. But what happens behind the scenes can significantly impact the outcome. The IRS carefully reviews the details of your offer, including:
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Your financial documents (income, expenses, assets, and debts)
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The offer amount and whether it meets or exceeds your Reasonable Collection Potential (RCP)
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Compliance status: you must be current on all required tax filings and payments
During this time, the IRS suspends most collection actions. That means no new levies or wage garnishments while your offer is being considered. Here are some possible outcomes of the IRS’s evaluation:
1. Accepted
After the IRS accepts your Offer in Compromise (IOC), your responsibilities aren’t over. It’s rather the start of a long-term commitment. You’ll need to stick closely to the terms of your payment plan. You’ll also need to make each payment on time and in full. If you fall behind, the IRS can cancel the agreement and reinstate your full original tax debt, including interest and penalties.
It’s also essential to remain fully compliant with all future tax obligations. For the next five years, you must file your tax returns on time, make all estimated tax payments on time, and settle any future tax liabilities.
2. Returned
Your offer could be returned without consideration if it’s incomplete or if you fail to meet basic eligibility requirements (e.g., you’re in bankruptcy or not current with tax filings). Returned offers are not appealable but can be resubmitted.
3. Rejected
If the IRS determines that you can pay more than what you offer, your offer may be rejected. However, you have 30 days to appeal a rejection using Form 13711 (Request for Appeal of Offer in Compromise). Many rejections can be successfully appealed if supported with accurate documentation or legal reasoning.
While your Offer in Compromise (OIC) is pending, the IRS generally suspends most collection activities. This means they typically won’t levy your bank account, garnish your wages, or take other aggressive collection actions during the review process.
When to Get Professional Help
An IRS Offer in Compromise (OIC) isn’t something to take lightly. Some taxpayers can navigate the process on their own. But there are situations where hiring a tax attorney is not only smart, it’s necessary.
If you have multiple income sources, own a business, or hold various assets, calculating your RCP can get tricky fast. A tax attorney or an enrolled agent can help organize your financial records, assess your eligibility, and structure a stronger offer that’s more likely to be accepted.
When the IRS is actively pursuing levies, wage garnishments, or liens, you need a tax attorney immediately. You need one to request collection holds and represent you directly in communications with IRS agents. This way, you protect your income and assets during the offer process.
Tax attorneys are legally trained and authorized to represent you before the IRS. They understand both the tax laws and the procedural rules that can impact your case. A qualified attorney can:
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Negotiate with the IRS on your behalf to potentially reduce your tax debt.
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Identify legal arguments and financial evidence to strengthen your offer and work in your best interest.
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Help you avoid missteps that could delay or derail your application
Need an IRS OIC Attorney?
If you are overwhelmed by tax debt, an IRS Offer in Compromise is a powerful solution for you. If approved, it allows you to settle your tax liability for less than the full amount owed. But getting approved is not easy. That’s why it’s crucial to approach the process with accurate documentation. Moreover, you need a solid understanding of your financial profile.
Before you opt for an OIC, understand all your options. Furthermore, consider working with an experienced attorney. This will dramatically improve your chances of success, as they understand your rights under tax laws. They know how to assess your eligibility and are skilled in negotiating with the IRS.
At Victory Tax Lawyers, every client works directly with a licensed attorney. Our attorneys are here to help you weigh your choices and choose the one that best protects your financial future. Don’t wait. Take action in the current year to resolve your tax debt and start fresh. Schedule a free consultation today, and let’s get you started on settling your tax debt for less
FAQ
Below are some of the most frequently asked questions to help you make informed decisions.
How Much Will the IRS Take for an Offer in Compromise?
The amount the IRS accepts depends on your Reasonable Collection Potential (RCP). Your RCP is a calculation based on your income, assets, expenses, and overall ability to pay your tax debt. If your financial analysis shows that you genuinely cannot pay your full tax debt, the IRS may accept a lower settlement through the Offer in Compromise (OIC) process. In many cases, taxpayers settle for significantly less than the original amount owed.
What Is the Downside to Offer in Compromise for the IRS?
From the IRS’s perspective, the downside is collecting less than the full tax liability. That’s why offers are accepted only when it’s clear the taxpayer cannot pay in full through other means. The IRS carefully reviews all applications, and the taxpayer only has to provide proof. Additionally, if your offer is accepted, you must remain compliant with tax filings and payments for five years. You don’t want the agreement cancelled.
How Much Will the IRS Usually Settle For?
There’s no fixed percentage, but settlements typically reflect what the IRS believes it can reasonably collect. Some taxpayers settle for 10–20% of the total debt, while others may pay more. Every case is different. It depends entirely on the financial documentation you submit with your offer.
Does an Offer in Compromise Affect Your Credit?
An Offer in Compromise itself does not appear on your credit report. But the events leading up to it, like tax liens or missed payments, can impact your credit score. Keep in mind that the OIC process may actually help over time by resolving your debt and removing IRS collection actions, thereby improving your overall financial health.
