Offer in Compromise
An Offer in Compromise (OIC) allows eligible taxpayers to settle their federal tax debt for less than the full amount owed when paying the liability would create a financial hardship. IRS policy requires that taxpayers explore other payment options before submitting an OIC. The IRS considers several factors—including ability to pay, income, expenses and equity in assets—to determine whether the offer represents the most the government could expect to collect within a reasonable time.
To apply, taxpayers must have filed all required tax returns and estimated tax payments, cannot be in an open bankruptcy proceeding and must have valid extensions for current‐year filings. Businesses must have made all required payroll tax deposits for the previous two quarters. Application packages include Form 433‑A (OIC) or 433‑B (OIC), supporting documents, Form 656 and an application fee of $205. Two payment options exist: a lump‑sum cash offer, requiring 20 % of the offered amount up front and payment of the balance within five or fewer installments, and a periodic payment offer where monthly payments continue while the IRS reviews the offer. Low‑income applicants who meet guidelines listed in Form 656‑B can waive both the application fee and initial payment.
Submitting an OIC suspends most collection actions and extends the collection statute of limitations. If the IRS accepts the offer, the taxpayer must comply with all filing and payment obligations during a five‑year compliance period; federal tax liens are released only after the offer terms are satisfied. If the IRS rejects the offer, taxpayers may appeal within 30 days. Because an OIC reduces the tax debt permanently, the IRS encourages taxpayers to consult a qualified tax professional and to use the Offer in Compromise Pre‑Qualifier Tool before submitting an application.