Offer in Compromise (OIC)

An offer in compromise is a settlement between a taxpayer and the IRS under which the government accepts payment of less than the assessed liability and the balance is written off. The authority is section 7122(a) of the Internal Revenue Code, which says only that "The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense." That is worth noticing, because it means the familiar "three grounds" are not statutory. They are supplied by Treasury Regulation section 301.7122-1(b), headed "Grounds for compromise", and the IRS will not compromise a liability unless one of them is present.

The spelling is genuinely unsettled across three primary sources, which is worth one sentence so nobody thinks a typo has crept in. The statute hyphenates it, writing "offer-in-compromise" in sections 7122(c), (f) and (g). The IRS's forms and web pages do not, titling Form 656-B simply "Offer in Compromise". And the fee regulation heads its own section "Offer to compromise fee". Quotations below preserve whichever form the source used.

The three grounds, verbatim from the regulation, because the differences matter.

The second branch of the third ground is deliberately narrow and reads that way: compromise "will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner", and the applicant is "expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full." A further limb bars any effective-tax-administration compromise that "would undermine compliance by taxpayers with the tax laws." Compressing that into "the IRS can also settle if it seems unfair" overstates a door the regulation kept almost shut.

"Ability to pay, income, expenses, asset equity" is not the list of grounds, and this is the commonest error on the subject. Those four are what the IRS's own page says it considers, and they are the collectibility analysis. A page or a preparer who presents them as the grounds has quietly erased doubt as to liability and effective tax administration, which are the two routes available to someone who can pay but should not have to.

How the number is built. The IRS says it "generally approve[s] an offer in compromise when the amount you offer represents the most we can expect to collect within a reasonable period of time." In practice that is the equity in the taxpayer's assets plus a multiple of monthly income remaining after allowable expenses, computed on Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC) for a business. Section 7122(d)(2) requires the Secretary to publish national and local allowances for basic living expenses and, importantly, forbids using those schedules "to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses." An offer below what that arithmetic produces is unlikely to succeed; the statute does add, at 7122(d)(3)(A), that an offer from a low-income taxpayer may not be rejected "solely on the basis of the amount of the offer."

A doubt-as-to-liability offer is a different animal, and cheaper. The regulation provides that taxpayers submitting offers "solely on the basis of doubt as to liability will not be required to provide financial statements", and section 7122(d)(3)(B)(ii) requires the same thing at statute level for an offer relating only to liability. 26 CFR 300.3(b)(1)(i) charges no fee at all for such an offer. So the financial disclosure and the application fee that dominate discussion of this program both belong to the collectibility route, and someone who genuinely disputes the tax rather than their ability to pay it is on a separate and lighter track.

The fee, and its two waivers. The application fee is $205, set by 26 CFR 300.3(b)(1) and confirmed on Form 656 and on the IRS's own page. It is regulatory rather than inflation-adjusted, so it changes only when Treasury amends the regulation, which it last did in 2020. It is waived where the offer rests solely on doubt as to liability, and separately under section 7122(c)(3) for an individual whose adjusted gross income "does not exceed 250 percent of the applicable poverty level". Form 656-B carries the resulting table by household size and geography; the base figure for a one-person household in the 48 contiguous states is $15,960, and the certification threshold is two and a half times the guideline for the applicant's household size. A low-income applicant sends no fee, no down payment, and makes no monthly payments while the offer is under review.

The down payment, and where the money goes. Section 7122(c)(1)(A) requires 20 percent of the offered amount with a lump-sum offer, and defines a lump-sum offer as "any offer of payments made in 5 or fewer installments". A periodic payment offer instead arrives with the first proposed installment and continues monthly while the IRS evaluates it, and missing one of those (other than the first) "may be treated by the Secretary as a withdrawal". None of it is refundable: payments and the fee are applied to the liability, though section 7122(c)(2)(A) lets the taxpayer specify which year and which debt they go against.

The two-year rule is keyed to "not rejected", not to "no answer". Section 7122(f) provides that an offer "shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer", excluding any period the liability is in dispute in a judicial proceeding. The IRS paraphrases this on its own page as automatic acceptance if it "doesn't make a determination within two years", which is looser than the statute; a withdrawal or a return of the offer as unprocessable is not a rejection, and the statutory wording is the one to rely on.

What acceptance actually costs, beyond the money. The offer terms in Section 7 of Form 656 are contractual, and three of them surprise people. The taxpayer agrees to "strictly comply with all provisions of the internal revenue laws, including requirements to timely file tax returns and timely pay taxes for the five year period beginning with the date of acceptance"; agrees that during those five years they "cannot request an installment agreement for unpaid taxes incurred before or after the accepted offer"; and gives up the right to challenge the settled debt in court or by refund claim afterwards, "even if the IRS defaults or rescinds the offer." Refunds for the year of acceptance are kept by the IRS, and a federal tax lien is not released until the offer terms are satisfied.

The honest numbers, and the industry built on their absence. In fiscal year 2025 taxpayers submitted 38,797 offers and the IRS accepted 5,464, per the IRS Data Book's delinquent collection activities table. Offers submitted and offers accepted in a single year are not the same cases, so that is an approximation rather than a true cohort acceptance rate, but the order of magnitude is roughly one in seven and it has been in that region for years. Advertising promising to settle tax debts "for pennies on the dollar" is selling a program whose arithmetic is driven mainly by the taxpayer's own assets and income. A representative can affect how expenses and asset values are characterized, and can spot a ground the taxpayer had not considered, which is real work; what nobody can do is move the balance sheet the offer is computed from. The IRS's own caution on the point is unusually direct: "Explore all other payment options before you submit an offer in compromise. The Offer in Compromise Program is not for everyone. Be sure to check the qualifications of any tax professional you hire to help you file an offer."

1. Confirm eligibility first. The IRS requires that all required returns are filed and all required estimated payments made, that the taxpayer is not in an open bankruptcy proceeding, that a current-year extension is valid where the current year is included, and that an employer has made tax deposits for the current and past two quarters. The Offer in Compromise Pre-Qualifier Tool on IRS.gov screens this and produces a preliminary proposal.

2. Assemble the package. Form 656 for each set of liabilities, Form 433-A (OIC) or 433-B (OIC) with documentation, the $205 fee, and the initial payment. Individuals use the Form 656 Booklet (Form 656-B); the standalone Form 656 PDF carries a warning that it "is not a stand-alone form and is intended for tax professional use only."

3. Submit it by mail to one of the designated sites, or online through an Individual Online Account.

4. While it is pending, other collection activity is suspended and section 6331(k) bars levy, payments on an existing installment agreement stop, and the assessment and collection period is extended. The IRS may still file a Notice of Federal Tax Lien.

5. Decision. Acceptance comes in writing with the offer terms attached. Rejection can be appealed within 30 days on Form 13711, Request for Appeal of Offer in Compromise, and no rejection may be communicated until an independent administrative review has been completed.

6. Then the five-year compliance period runs.

A hypothetical example of how the arithmetic actually works, with made-up figures. Suppose Alma owes $94,000. Her assets are a car with $3,500 of equity and a savings account with $1,200, so $4,700 of realizable equity. Her income after the IRS's allowable living expenses leaves $260 a month. If the examiner applies a 12-month multiple to that remaining income, the future-income component is $260 times 12, or $3,120, and the total the IRS would expect to collect is $4,700 plus $3,120, which is $7,820. An offer at or above roughly that figure has a realistic case; an offer of $500 does not, however sympathetic the circumstances. If she offers $7,820 as a lump sum she sends 20 percent of it, $1,564, with the application, plus the $205 fee unless she qualifies for the low-income certification, and the remaining $6,256 in five or fewer payments after acceptance. Against the $94,000 assessed, that is a write-off of $86,180, and it is produced by her balance sheet rather than by negotiation.

Pros

• It is the only route that permanently reduces the amount owed rather than rescheduling it.
• Three separate grounds exist, and two of them help a taxpayer who could pay but has a real dispute or a genuine hardship.
• A doubt-as-to-liability offer requires no financial statement and carries no fee, which makes contesting a wrong assessment far cheaper than most people assume.
• Low-income applicants pay no fee, no down payment, and nothing monthly while the offer is reviewed.
• Filing bars levy by statute while the offer is pending, and for 30 days after a rejection plus any appeal.
• The 24-month deemed-acceptance rule puts a hard outer limit on IRS delay.
• A rejection is appealable within 30 days, and cannot even be communicated until an independent review has been completed.

Cons

• Acceptance is uncommon. The IRS accepted 5,464 of the 38,797 offers submitted in fiscal year 2025.
• The fee and every payment are non-refundable and are applied to the debt if the offer fails.
• The amount the IRS will take is largely determined by the taxpayer's own assets and income, which limits what any representative can achieve, and is the fact the "pennies on the dollar" advertising industry depends on people not knowing.
• Submitting an offer extends the assessment and collection period, so a failed offer leaves the IRS more time to collect than it had before.
• The IRS may file a Notice of Federal Tax Lien while the offer is pending, and will not release an existing lien until the terms are satisfied.
• Five years of perfect filing and payment compliance follow acceptance, with no installment agreement available in that period, and a failure defaults the whole agreement.
• Full disclosure of assets, income and expenses is required on the collectibility route, and certain offer information is available for public inspection.
• Anyone with genuine ability to pay is better served by an installment agreement, and the IRS says as much.