The Offer in Compromise (OIC) program is one of the most powerful tools for resolving IRS tax debt. This guide explains everything you need to know about settling your tax debt for less.

What is an Offer in Compromise?

An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer's tax debt for less than the full amount owed. The IRS accepts OICs when collecting the full amount is unlikely or would cause financial hardship.

Types of Offers

Doubt as to Collectibility (Most Common)

The IRS cannot collect the full amount within the 10-year collection period based on your:

Income and expenses
Assets and equity
Future earning potential

Doubt as to Liability

There's genuine dispute about whether you owe the amount the IRS claims.

Effective Tax Administration

Paying the full amount would create economic hardship or be unfair due to exceptional circumstances.

Qualification Requirements

To qualify for an OIC:

All tax returns must be filed
Current estimated tax payments must be current
Not in open bankruptcy
Completed application with fee (waivable for low income)
Financial disclosure of all assets, income, and expenses

The OIC Process

Step 1: Pre-Qualification

Use the IRS Pre-Qualifier tool or work with a professional to estimate your offer amount.

Step 2: Application

Submit Form 656 (Offer in Compromise) and Form 433-A (OIC) (Collection Information Statement) with:

$205 application fee (or waiver request)
Initial payment (20% for lump sum offers, first month's payment for periodic offers)

Step 3: IRS Review

The IRS has up to 24 months to process your offer. During this time:

Collection is suspended
The statute of limitations is extended
You must stay current on new tax obligations

Step 4: Negotiation

The IRS may:

Accept your offer
Reject and explain why
Counter with a higher amount

Step 5: Acceptance

If accepted:

Pay the agreed amount
Remain compliant for 5 years
Failure to comply can reinstate original debt

Calculating Your Offer Amount

The IRS uses a formula called Reasonable Collection Potential (RCP):

Future income (monthly disposable income x 12-24)
Plus asset equity
Minus allowable expenses

Allowable Expenses

The IRS uses national and local standards for:

Housing and utilities
Food and clothing
Transportation
Health care
Other (childcare, life insurance, etc.)

Common OIC Mistakes

Undervaluing assets
Using unrealistic expense claims
Not filing all required returns first
Missing deadlines
Poor documentation

Success Rates

The IRS accepts approximately 33% of OIC applications. Professional preparation significantly improves odds by:

Accurately calculating offer amounts
Properly documenting financial situation
Anticipating and addressing IRS concerns
Navigating the appeals process if needed

Timeline and Costs

Timeline

Preparation: 1-4 weeks
IRS processing: 6-24 months
Total resolution: 7-26 months

Costs

Application fee: $205 (waivable)
Initial payment: 20% of offer (lump sum) or first month's payment
Professional fees: $3,500-$7,500 typically

Is OIC Right for You?

Consider OIC if:

You owe more than you can pay within 10 years
Your financial situation is unlikely to improve significantly
You have limited assets
You want a permanent resolution

Consider alternatives if:

You can pay through an installment agreement
You have significant assets
Your income is likely to increase substantially
You want faster resolution

Getting Professional Help

OIC applications are complex and errors can be costly. Los Angeles Relief offers free consultations to evaluate your OIC eligibility and discuss all available options.

Offer in Compromise: The Complete Guide to IRS Tax Settlement