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 Chris Terry, Founder & Editor
Updated June 17, 2026

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An IRS Offer in Compromise (OIC) is a formal agreement that allows qualifying taxpayers to settle their federal tax debt for less than the total amount 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 overall financial situation. Not everyone qualifies, and eligibility depends on a careful review of your individual circumstances.

What Is an Offer in Compromise?

According to the IRS Offer in Compromise page, an OIC may be a legitimate option if you cannot pay your full tax liability or doing so would create a genuine financial hardship. The IRS considers four main factors when evaluating any offer:

Ability to pay
Income
Allowable expenses
Equity in assets

If the IRS concludes it can collect more by pursuing standard collection methods such as liens, levies, or garnishment, your offer will typically be rejected. This is why the OIC is not a quick fix or a guaranteed path to a reduced bill. It is a structured legal process with specific qualification standards.

Who Actually Qualifies?

To be eligible 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," which is the sum of your net realizable equity in assets plus your future income capacity after allowable living expenses. If your offer is at or above that number, acceptance is more likely. If your assets and income suggest the IRS could collect more in full, the offer will generally be declined.

You can use the free IRS OIC Pre-Qualifier Tool to get a preliminary sense of whether you may be eligible before submitting a formal application. This online tool does not guarantee an outcome, but it is a useful starting point.

The "Pennies on the Dollar" Misconception

Television and radio ads from private tax relief companies frequently promise to settle tax debts for "pennies on the dollar." This framing is misleading. The IRS does not offer a blanket discount to anyone with unpaid taxes. Approval rates for OIC applications are not high, and many applicants do not qualify based on their financial picture. Taxpayers who do receive an accepted offer often owe substantially less than advertised scenarios suggest. Always approach these claims with skepticism.

If a private company is promising specific settlement amounts before reviewing your actual financial records, that is a warning sign. Be cautious of upfront fees, high-pressure tactics, and guarantees of acceptance. The free Taxpayer Advocate Service can help taxpayers navigate disputes with the IRS at no cost.

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 falls 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. Check the Form 656-B Offer in Compromise Booklet for full details.

Payment Options Within the OIC

If the IRS accepts your offer, you have two ways to pay the agreed settlement:

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 continue 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 may 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 also extended for the duration of the review. If the IRS does not make a determination within two years of receiving your application (not counting any appeal period), the offer is automatically accepted under current rules.

If Your Offer Is Rejected

A rejection does not mean your situation is hopeless. You have 30 days from the date of rejection to file an appeal using Form 13711. The IRS Independent Office of Appeals can reconsider your case. Alternatively, you may want to explore other options such as 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 situation.

Should You Hire Help?

While you can apply for an OIC on your own, the process involves detailed financial disclosure and complex IRS rules. If you hire a tax professional, verify their credentials. Look for a licensed CPA, enrolled agent, or tax attorney. The IRS recommends checking the qualifications of anyone you hire. Avoid companies that charge large upfront fees before evaluating your financial records.

If you cannot afford professional help, the free Taxpayer Advocate Service is an independent office within the IRS that helps taxpayers resolve problems. Low Income Taxpayer Clinics (LITCs) also provide free or low-cost representation for qualifying individuals.

An Offer in Compromise is a legitimate tool for taxpayers in genuine financial hardship, but it requires honesty, documentation, and patience. Review all your options, use the IRS Pre-Qualifier Tool, and consider speaking with a licensed tax professional before submitting an application.