Offer in Compromise (OIC)
The IRS Offer in Compromise program allows certain taxpayers to settle their tax debt for less than the full amount owed. Acceptance depends on your specific financial situation — not the size of your debt. A licensed professional can determine whether you're a realistic candidate.
What is an Offer in Compromise?
An Offer in Compromise is a formal agreement between a taxpayer and the IRS that settles the taxpayer's tax liability for less than the full amount owed. The IRS considers an OIC when a taxpayer is unable to pay their full tax liability or doing so would create financial hardship.
The program is administered under IRS Form 656 and is governed by Internal Revenue Code §7122. The IRS evaluates OIC applications based on three primary grounds:
- Doubt as to Collectibility (DATC) — The most common basis. The taxpayer demonstrates they cannot pay the full amount before the collection statute of limitations expires.
- Doubt as to Liability (DATL) — The taxpayer disputes the validity or accuracy of the assessed tax liability.
- Effective Tax Administration (ETA) — The taxpayer can technically pay the full amount but doing so would create economic hardship or would be inequitable in exceptional circumstances.
IRS Source: The official IRS page on the Offer in Compromise program provides eligibility information, forms, and instructions. Before consulting a professional, you may find it helpful to review the IRS's own materials.
Who Does the IRS Consider for an OIC?
The IRS will generally consider an OIC when the amount offered represents the most it can realistically expect to collect from a taxpayer within the remaining collection statute period (typically 10 years from assessment). The IRS calculates what it calls the taxpayer's "Reasonable Collection Potential" (RCP).
Factors that may support eligibility
- Low or fixed income with limited assets
- High allowable living expenses relative to income
- Assets with limited equity (encumbered by debt)
- Diminishing earning capacity due to age or health
- Doubt about the accuracy of the tax liability
- All required tax returns filed before applying
- No open bankruptcy proceeding
Factors that may reduce eligibility
- Significant assets or home equity that can satisfy the debt
- High income relative to allowable expenses
- Unfiled tax returns (must be current before applying)
- Open bankruptcy proceeding
- Failure to make required estimated tax payments
- Current IRS payment plan that could satisfy the debt
Important: The IRS has a free pre-qualifier tool (linked above) that provides a rough estimate of whether you might qualify. However, this tool does not account for all circumstances, and a licensed professional can often identify strategies that improve an OIC submission's chances of acceptance.
How the OIC Process Works
Step 1: Pre-qualification review
Before submitting, a licensed professional evaluates your full financial picture — income, expenses, assets, liabilities, and collection statute dates — to determine whether an OIC is the right strategy and what offer amount is realistic.
Step 2: Preparing and submitting the application
The application requires IRS Form 656 (Offer in Compromise), IRS Form 433-A or 433-B (Collection Information Statement), supporting financial documentation, and the application fee or low-income certification. A professional prepares and submits these on your behalf using IRS Form 2848 (Power of Attorney).
Step 3: IRS review and processing
The IRS assigns an Offer Examiner who reviews the application. During review, the IRS will generally pause active collection activity. The IRS may accept the offer, reject it, or return it for additional information. Processing typically takes 12–24 months.
Step 4: Acceptance, rejection, or appeal
If accepted, the taxpayer must fulfill the agreed payment terms and remain compliant with tax obligations for 5 years. If rejected, the taxpayer has the right to appeal through the IRS Appeals Office. A licensed professional can represent the taxpayer through appeals.
What Happens to Collection During OIC Review?
Per IRS policy, most enforced collection action is suspended while an OIC application is under review and for 30 days after a rejection (to allow for appeal). The collection statute of limitations is also tolled (paused) during this time. Levies and liens generally remain in place but new collection action is limited during the review period.
What an OIC Is Not
It's worth being direct about some common misconceptions promoted in tax relief advertising:
- An OIC is not a guaranteed program — the IRS rejects a significant percentage of applications
- The IRS does not settle debts simply because a taxpayer asks — offers must be based on financial reality
- Companies that advertise settling "for pennies on the dollar" without first reviewing your financials are not giving you accurate information
- An OIC is one resolution option among several — other strategies (installment agreements, CNC status, penalty abatement) may be more appropriate depending on your situation
The information on this page is derived from public IRS materials and is provided for general educational purposes only. It does not constitute tax advice and is not a substitute for consultation with a licensed Enrolled Agent, CPA, or tax attorney. Eligibility for the IRS Offer in Compromise program depends entirely on individual financial circumstances that a professional must evaluate. Tax Allstars (Brokentoy LLC) does not provide tax advice and does not determine OIC eligibility. All tax strategy and IRS representation is handled by independently licensed professionals.