IRS offer in compromise: can you really settle for less?
An offer in compromise lets you settle your tax debt for less than you owe. It's real, but it's not for everyone. Here's how the IRS decides, so you can tell whether it's worth pursuing.
The short version
- The IRS accepts an offer when it's the most it can reasonably expect to collect from you.
- It looks at your assets and your future income after basic living expenses.
- If you could pay the debt in full over time, an offer will usually be rejected.
- Get an honest assessment before you apply. A rejected offer costs time and money.
1How the IRS decides
The IRS calculates your reasonable collection potential, which is roughly what it thinks it could collect from you before the collection deadline runs out. It has two parts:
- Your assets: the equity in things like your home, car, bank accounts and retirement accounts, after certain allowances.
- Your future income: your monthly income minus allowable living expenses, multiplied by 12 months if you pay the offer quickly, or 24 months if you pay over time.
Your offer generally needs to be at least that amount. Allowable expenses are based on IRS national and local standards, not on what you actually spend.
2The three grounds for an offer
- Doubt as to collectibility: you can't pay the full amount. This is by far the most common.
- Doubt as to liability: there's a real question about whether you owe the tax at all.
- Effective tax administration: you could technically pay, but doing so would create serious hardship or be unfair given unusual circumstances.
3Paying the offer
| Option | How it works |
|---|---|
| Lump sum | Send 20% of the offer with your application, and pay the rest within 5 months of acceptance. |
| Periodic payments | Make the first payment with your application, and keep paying monthly while the IRS reviews it. Pay the rest within 24 months. |
There's also an application fee. Low-income taxpayers can have the fee and the upfront payments waived. Check irs.gov for the current fee.
4How to apply
- File every required tax return, and make any required estimated payments for this year.
- Gather your financial information on Form 433-A (OIC) for individuals, or 433-B (OIC) for businesses.
- Submit Form 656 with the fee and initial payment, unless you qualify for a waiver.
- Respond to IRS questions during the review, which often takes several months.
While your offer is being considered, the IRS generally won't levy. The time the IRS has to collect is extended during the review.
5After it's accepted
You have to file and pay all your taxes on time for the next five years. If you don't, the IRS can reinstate the full original debt. Any refund for the year your offer is accepted goes toward the debt.
Common questions
Can anyone settle for "pennies on the dollar"?
No. Some people settle for much less than they owe, but only because their finances show they can't pay more. Be wary of anyone who promises a specific settlement before reviewing your numbers.
What if my offer is rejected?
You can appeal within 30 days of the rejection letter, or submit a new offer if your situation changes. Often a payment plan or "currently not collectible" status is the better path.
Will a payment I made with my offer be refunded if it's rejected?
Generally no. The application payments are applied to your tax debt.
Is an offer realistic for you? We'll tell you honestly.
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Written by Jonathan Samuel, EA, an Enrolled Agent licensed to represent taxpayers before the IRS. This page is general information, not advice for your specific situation.