Offer in Compromise

An IRS Offer in Compromise (OIC) is a program that allows taxpayers to settle their federal tax debt for less than the full amount owed. The IRS may accept an OIC when it believes the amount offered represents the most it can reasonably expect to collect within a reasonable period.

57 steps across 12 sections

1. Use the IRS Pre-Qualifier Tool

  • Visit the OIC Pre-Qualifier Tool on the IRS website.
  • Enter your financial information to get a preliminary assessment of whether an OIC may be viable.
  • This tool estimates your minimum offer amount based on simplified RCP calculation.
  • Important: The Pre-Qualifier is a screening tool only. The actual IRS evaluation may differ.

2. Gather Financial Documentation

  • Pay stubs (last 3 months)
  • Bank statements (last 3 months for all accounts)
  • Investment/retirement account statements
  • Real estate appraisals or comparable sales data
  • Vehicle valuations (Kelley Blue Book or NADA)
  • Monthly expense documentation (rent/mortgage, utilities, insurance, medical, etc.)
  • Business financial statements (if self-employed)
  • Proof of any other income sources

3. Complete the Required Forms

  • Form 656 — The actual offer document where you state your offer amount and payment terms.
  • Form 433-A(OIC) — Collection Information Statement for Wage Earners and Self-Employed Individuals (individuals).
  • Form 433-B(OIC) — Collection Information Statement for Businesses (corporations, partnerships, LLCs).
  • All forms are bundled in Form 656-B (the OIC Booklet), which includes instructions.

4. Calculate Your Offer Amount

  • Net realizable equity in assets = Quick-sale value (typically 80% of fair market value) minus encumbrances
  • Monthly disposable income = Gross monthly income minus IRS-allowed expenses (using Collection Financial Standards)
  • Future income multiplier = 12 months for lump sum offers; 24 months for periodic payment offers

5. Choose a Payment Option

  • Pay 20% of total offer amount with the application.
  • Remaining balance paid in 5 or fewer installments within 5 months of acceptance.
  • Uses a 12-month future income multiplier (lower RCP = potentially lower offer).
  • Make an initial payment with the application (first proposed monthly installment).
  • Continue making proposed monthly payments while the IRS evaluates (these are NOT refundable).
  • Remaining balance paid within 6 to 24 months of acceptance.
  • Uses a 24-month future income multiplier (higher RCP = potentially higher offer).

6. Submit the Application Package

  • Form 656 (signed and dated)
  • Form 433-A(OIC) and/or Form 433-B(OIC) with all supporting documentation
  • $205 application fee (check or money order payable to "United States Treasury") — waived for low-income applicants
  • Initial payment (20% for lump sum, or first monthly payment for periodic)
  • Copy of the Form 656-B checklist confirming completeness
  • Mail to the applicable IRS processing center listed in Form 656-B
  • Submit online via your Individual Online Account at IRS.gov (newer option)

7. Wait for IRS Review

  • IRS sends an acknowledgment letter with an estimated contact date.
  • Processing time: typically 6-12 months; complex cases can exceed 12 months.
  • The IRS may request additional documentation during review.
  • Important: Your offer is automatically accepted if the IRS does not make a determination within 2 years of receipt.
  • During review, IRS collection activity is generally suspended (but the collection statute is also suspended).

8. Handle the Outcome

  • If accepted: Pay the remaining balance per your chosen payment option. You must remain compliant (file and pay all taxes on time) for 5 years after acceptance or the agreement is voided.
  • If rejected: You have 30 days to appeal using Form 13711 (Request for Appeal of Offer in Compromise). You can also resubmit a new offer.

9. 1. Doubt as to Liability (DATL)

  • You believe you do not owe the tax debt, or the amount is incorrect.
  • Example: The IRS assessed tax based on incorrect information, or you have evidence that changes the amount owed.
  • Filed using Form 656-L (separate from the standard Form 656).
  • No application fee or initial payment required for DATL offers.
  • Less common; requires strong documentation proving the assessed liability is wrong.

10. 2. Doubt as to Collectibility (DATC)

  • Most common type — the vast majority of OIC applications fall here.
  • You acknowledge you owe the tax but cannot pay the full amount based on your income, expenses, and asset equity.
  • The IRS calculates your "reasonable collection potential" (RCP) — the minimum offer they will accept.
  • RCP = (net realizable equity in assets) + (future income x number of months).
  • Filed using Form 656 with Form 433-A(OIC) or 433-B(OIC).

11. 3. Effective Tax Administration (ETA)

  • You owe the tax and could technically pay it, but doing so would create an economic hardship or would be unfair/inequitable.
  • Example: Elderly taxpayer on fixed income; paying would leave them unable to meet basic living expenses.
  • Also covers "exceptional circumstances" — e.g., the tax debt arose from actions of a third party, or collecting would undermine public confidence in the tax system.
  • Hardest to get approved; requires compelling documentation of special circumstances.
  • Filed using Form 656 with Form 433-A(OIC) or 433-B(OIC).

12. Individual vs. Business

  • Individual taxpayer (IMF) acceptance rate: ~44% (FY 2010-2017 average)
  • Business taxpayer (BMF) acceptance rate: ~24% (FY 2010-2017 average)

Common Mistakes

  • Offering too little
  • Incomplete applications
  • Not filing all required tax returns
  • Not making estimated tax payments
  • Hiding assets or income

Pro Tips

  • Use the IRS Pre-Qualifier first
  • Be brutally honest on financial forms
  • Document everything
  • Consider timing
  • Choose lump sum if possible

Sources

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