Offer in Compromise: The Complete Guide to Settling Tax Debt
The offer in compromise is the most advertised and most misunderstood IRS program. Here's how the IRS actually decides, what it costs, and who really qualifies.
Quick Answer
An offer in compromise lets you settle IRS tax debt for less than you owe when paying in full would create economic hardship or when there's doubt the IRS can collect. The IRS calculates your 'reasonable collection potential' from your assets and future income; if your offer meets or exceeds that number, it's usually accepted.
What an offer in compromise actually is
An offer in compromise (OIC) is a formal agreement to settle your tax debt for less than the full amount owed. It exists for two situations: doubt as to collectibility (you can't pay the full amount within the collection statute) and doubt as to liability (you don't actually owe the tax). The vast majority of accepted offers are based on collectibility.
How the IRS calculates your number
The IRS uses your financial disclosure (Form 433-A (OIC)) to calculate your reasonable collection potential (RCP). RCP is roughly: the realizable value of your assets (what the IRS could get from selling them) plus your future income (monthly disposable income multiplied by a factor of 12 or 24, depending on how you pay).
If your RCP is $15,000 and you owe $80,000, an offer around $15,000 has a real chance. If your RCP is $70,000 and you owe $80,000, the IRS expects an offer close to $70,000 — at which point an installment agreement may be simpler.
The three payment options
Lump sum: 20% initial payment with the offer, balance paid in 5 or fewer payments. The IRS uses a 12-month future-income multiplier.
Periodic payment: initial payment with the offer, balance paid in 6–24 months. The IRS uses a 24-month future-income multiplier, which makes the required offer higher.
Deferred payment: paid over the remaining collection statute. Less common and more complex.
Eligibility requirements
You must have filed all required tax returns, made all required estimated payments for the current year, and be current on federal tax deposits if you're a business owner. You can't be in an open bankruptcy proceeding. If you're married and living with your spouse, the IRS considers household finances even if the debt is yours alone.
What it costs
There's a non-refundable $205 application fee (waived for low-income taxpayers) and the required initial payment. If the offer is rejected, the application fee and payments are applied to your tax debt, not refunded. If you withdraw the offer, payments are applied to the debt as well.
After acceptance
You must file all returns on time and pay all tax due on time for five years after acceptance. If you miss a year, the offer defaults and the full original debt (minus what you paid) is reinstated. This five-year compliance window is the most common reason accepted offers fail.
When an OIC is — and isn't — the right move
An OIC fits when your debt is large relative to your assets and income, and you can't pay it off within the 10-year collection statute. It doesn't fit when you have substantial assets or disposable income that the IRS could collect through an installment agreement, or when the debt is small enough to pay quickly. A tax professional can model your RCP before you apply so you know whether an offer is realistic. Before paying any firm, read our OIC mills & scams guide and the IRS's own Fresh Start program guidance.
Frequently Asked Questions
Answers to the questions taxpayers ask most about this topic.
How much will the IRS accept in an offer in compromise?
The IRS generally accepts an offer that meets or exceeds your 'reasonable collection potential' — the realizable value of your assets plus your projected future income (multiplied by 12 for lump-sum offers or 24 for periodic offers). There's no fixed percentage; an accepted offer might be 10% or 90% of the debt depending on your finances.
Can I do an offer in compromise myself?
Yes, you can file Form 656 and Form 433-A (OIC) yourself. The IRS accepts self-filed offers. However, the financial disclosure is detailed, and a miscalculation can lead to rejection or an offer higher than necessary. Many taxpayers use a tax professional for the first offer to model the numbers correctly.
Does the IRS really accept offers in compromise?
Yes. The IRS accepts roughly 30–40% of submitted offers in a typical year. Acceptance depends on whether your offer meets your reasonable collection potential and whether you meet the compliance requirements. Heavily advertised 'pennies on the dollar' claims overstate how easy it is.