Offer in Compromise: When the IRS Accepts Less
How the IRS decides what you can pay, the three grounds for an offer, the payment options, and the conditions that follow an accepted offer.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
An offer in compromise is an agreement with the IRS to settle a tax debt for less than the full amount owed. The IRS generally accepts only an offer at least equal to what it could collect from your assets and future income before the collection deadline. Many offers rest on doubt that the debt is collectible.
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What are the grounds for an offer?
| Ground | What you must show |
|---|---|
| Doubt as to collectibility | Your assets and future income cannot pay the full balance before the collection period ends |
| Doubt as to liability | The tax assessed is genuinely wrong |
| Effective tax administration | You could pay, but doing so would create economic hardship or be unfair given exceptional circumstances |
How does the IRS calculate what you can pay?
The IRS computes "reasonable collection potential": the net equity in your assets plus 12 months of future disposable income for an offer paid within five months, or 24 months for one paid over 6 to 24 months. Equity is generally the quick-sale value of assets — typically 80 percent of current market value — minus loans against them. Disposable income is your monthly income minus allowable living expenses, which the IRS measures against national and local standards rather than what you actually spend. If your offer is below that figure, it will usually be rejected unless special circumstances apply.
What do you file?
- Form 656, the offer itself, with a $205 nonrefundable application fee (waived, along with the initial and monthly payments, for individuals who meet the low-income certification guidelines). An offer based only on doubt as to liability uses Form 656-L instead.
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, with documentation of income, expenses, and assets.
- An initial payment. A lump-sum offer requires 20 percent of the offer with the application and the rest in five or fewer payments within five months of acceptance; a periodic payment offer requires the first proposed payment and continued monthly payments while the IRS evaluates it, with the balance paid within 6 to 24 months.
The IRS's online pre-qualifier tool gives a rough read on whether an offer is realistic before you prepare one.
Who is eligible?
You must have filed all required returns, received a bill for at least one tax debt in the offer, made required estimated payments for the current year, and — for a business with employees — made federal tax deposits for the current quarter and the two preceding quarters. You cannot be in an open bankruptcy proceeding.
What happens after acceptance?
- The IRS keeps any refund, including interest, for tax assessed before the date it accepts the offer.
- You must file and pay all taxes on time for five years. Missing a return or a payment can revive the original debt.
- A filed federal tax lien is not released until the offer terms are satisfied, including full payment of the offer amount.
While an offer is pending, the IRS generally suspends levies, though it may file a federal tax lien, and the collection deadline is extended for the time the offer is under review. An offer the IRS has not decided within two years of receiving it is automatically accepted.
Frequently asked questions
Will the IRS accept any offer if I am in financial difficulty?
No. The IRS accepts offers that match its calculation of what it can collect. Many offers are rejected because the taxpayer has more equity or income than they realized.
Can I appeal a rejected offer?
Yes. You can request an appeal within 30 days of the rejection letter.
Should I try a payment plan first?
If you can pay the full balance over time, the IRS expects an installment agreement instead. An offer fits when full payment is not realistic before the collection deadline.
Can a business submit an offer?
Yes, on its own Form 656 with Form 433-B (OIC). A business that owes payroll taxes is not eligible unless the trust fund portion is paid or the IRS has made trust fund recovery penalty determinations on the responsible people, and those people can still be pursued for trust fund taxes the offer does not cover.
Official sources
The IRS explains: “We generally approve an offer in compromise when the amount you offer represents the most we can expect to collect within a reasonable period of time.” — Internal Revenue Service, Offer in compromise, https://www.irs.gov/payments/offer-in-compromise
The IRS explains: “For an OIC based on doubt as to collectability or based on effective tax administration, download Form 656-B, a booklet which includes instructions and the following forms:” — Internal Revenue Service, About Form 656, Offer in Compromise, https://www.irs.gov/forms-pubs/about-form-656
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk runs the collection-potential math before you file an offer, so you know whether it can succeed. See pricing or book a free fit call.
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