What does the IRS look at when evaluating an Offer in Compromise?

The IRS reviews your ability to pay, income, allowable living expenses, and equity in assets. It calculates your reasonable collection potential and generally accepts an offer only if that amount equals or exceeds what you propose.

Is the $205 OIC application fee refundable?

No. The application fee is non-refundable, but it may be waived if your household income falls at or below 250 percent of the federal poverty guidelines under the low-income certification rules.

Can I apply for an OIC if I am currently in bankruptcy?

No. The IRS will not process an OIC while you have an open bankruptcy proceeding. You must wait until the bankruptcy case is closed before applying.

What happens if the IRS rejects my offer?

You can file an appeal within 30 days using Form 13711 through the IRS Independent Office of Appeals. You can also explore other resolution options such as an installment agreement or currently-not-collectible status.

IRS Offer in Compromise: Do You Qualify to Settle for Less?

By Priya Raman, Contributing Writer, Policy & Regulation
Updated June 17, 2026

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An IRS Offer in Compromise (OIC) is a formal agreement that lets qualifying taxpayers settle federal tax debt for less than the total owed. The IRS accepts an offer only when it represents the most the agency can reasonably expect to collect, based on your income, expenses, assets, and financial situation. Not everyone qualifies, and eligibility turns on a detailed review of your specific circumstances.

What Is an Offer in Compromise?

Per the IRS Offer in Compromise page, the OIC is available when you cannot pay your full tax liability or doing so would create genuine financial hardship. The IRS weighs four factors when evaluating any offer:

Ability to pay
Income
Allowable expenses
Equity in assets

If the IRS calculates it can collect more by pursuing standard tools, including liens, levies, and wage garnishment, your offer will be rejected. The OIC is not a quick fix or a shortcut. It is a structured legal process with specific qualification standards, and the IRS publishes acceptance-rate data each year that suggests most applicants do not clear the bar.

Who Actually Qualifies?

To apply, the IRS requires that you have:

Filed all required tax returns for all applicable tax years
Made all required estimated tax payments for the current year
No open bankruptcy proceeding at the time of application
If you are an employer, made all required federal tax deposits for the current and prior two quarters

Meeting these procedural requirements does not guarantee approval. The IRS then evaluates your "reasonable collection potential," the sum of your net realizable equity in assets plus your future income capacity after allowable living expenses. If your offer equals or exceeds that figure, acceptance is more likely. If your assets and income indicate the IRS could collect more in full, the offer will generally be declined.

The free IRS OIC Pre-Qualifier Tool can give you a preliminary read on eligibility before you submit a formal application. It does not guarantee an outcome, but it is a reasonable first step.

The "Pennies on the Dollar" Misconception

Late-night TV and radio ads from private tax-relief companies have been promising to settle debts for "pennies on the dollar" for decades. The pitch is compelling and consistently overstated. The IRS does not hand out blanket discounts. OIC acceptance rates vary by year, and many applicants are rejected because their financial picture indicates the agency could collect more through standard enforcement. When taxpayers do receive accepted offers, the settlement amounts are calculated from actual asset equity and future income capacity, not plucked from the air by a negotiator with special connections.

A firm that promises specific settlement figures before reviewing your bank statements, tax transcripts, and asset values is telling you something useful about its business model. Watch for large upfront fees, high-pressure sales calls, and guarantees of acceptance. The free Taxpayer Advocate Service can help you work through IRS disputes at no cost to you.

How to Apply: Step by Step

The application package for an OIC includes several components:

Form	Purpose
Form 433-A (OIC)	Collection information statement for individuals
Form 433-B (OIC)	Collection information statement for businesses
Form 656	The formal offer document listing your proposed settlement amount
Application fee ($205)	Non-refundable unless your income qualifies for a low-income waiver
Initial payment	Either 20% of the offer (lump sum) or first installment (periodic payment option)

If your income is at or below 250 percent of the federal poverty guidelines, you may qualify for a low-income certification that waives both the application fee and the initial payment requirement. See the Form 656-B Offer in Compromise Booklet for details.

Payment Options Within the OIC

If the IRS accepts your offer, you pay the agreed settlement one of two ways:

Lump sum cash offer: You submit 20 percent of the total offer amount with your application and pay the remaining balance in five or fewer payments after acceptance.
Periodic payment offer: You make an initial payment and continue monthly installments while the IRS reviews your application, then keep paying until the balance is satisfied after acceptance.

Payments made during the review process are non-refundable and are applied to your outstanding tax liability regardless of the outcome.

What Happens During Review

The IRS can take many months to process an OIC. During that time, most collection actions are suspended, but the agency may still file a federal tax lien to protect its interest. The legal collection period is extended for the duration of the review. If the IRS does not make a determination within two years of receiving your application (excluding any appeal period), the offer is automatically accepted under current rules.

If Your Offer Is Rejected

A rejection is not the end of the road. You have 30 days from the rejection date to file an appeal using Form 13711. The IRS Independent Office of Appeals can reconsider your case. Other options to explore include an installment agreement, currently-not-collectible status, or penalty abatement. Use our free IRS payment plan calculator to estimate what a monthly installment agreement might look like for your balance.

Should You Hire Help?

You can apply for an OIC without professional help. The IRS publishes the Form 656-B booklet with instructions, and the Pre-Qualifier Tool is free. That said, the financial disclosure forms are detailed, the asset-valuation math matters, and an error in your favor can prompt the IRS to request more documentation. If you hire someone, make sure they hold an active license as a CPA, enrolled agent, or tax attorney. The IRS has a searchable directory of credentialed preparers. Avoid any company that cannot name the specific professional who will handle your case.

If professional help is out of reach financially, the free Taxpayer Advocate Service is an independent office within the IRS that helps taxpayers resolve problems at no charge. Low Income Taxpayer Clinics (LITCs) also provide free or low-cost representation for qualifying individuals, and their existence is something the paid-relief industry rarely mentions.

An Offer in Compromise is a legitimate option for taxpayers in genuine financial hardship. It takes honest documentation, patience (the review can take many months), and a realistic read of your own financial picture. Use the IRS Pre-Qualifier Tool first, review all your alternatives, and talk to a licensed tax professional before submitting a formal application.