Understanding Offer in Compromise: Can You Settle for Less?

IRS Tax Fighters • July 9, 2025

If you're overwhelmed by tax debt and struggling to see a way out, the IRS has a program that might be the lifeline you need. It's called an Offer in Compromise (OIC), and it allows taxpayers to settle their tax debt for less than the full amount owed. While this program can offer significant relief, not everyone qualifies, and the application process can be complex.


In this blog, we’ll break down everything you need to know about Offers in Compromise—how they work, eligibility criteria, and how to determine if it’s the right option for you.  If after reading this you need further assistance please contact IRS Tax Fighters by calling 281-962-0070.


What Is an Offer in Compromise?

An Offer in Compromise is a program offered by the IRS that allows eligible taxpayers to resolve their tax debt for much less than the total amount owed. The IRS agrees to accept a lower amount if it believes the taxpayer cannot reasonably pay the full debt through traditional means, such as a payment plan or asset liquidation.


This program provides a fresh start to taxpayers who are experiencing financial hardship, allowing them to settle their debt and move forward without the looming burden of back taxes.


How Does the Offer in Compromise Process Work?

The Offer in Compromise process involves several key steps:


1. Submitting Your Application

Taxpayers must submit Form 656, Offer in Compromise, along with Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. These forms provide the IRS with detailed financial information, including income, expenses, and assets.


2. Paying the Application Fee

Most applicants are required to pay a $205 application fee. However, this fee may be waived for taxpayers who qualify as low-income.


3. Choosing a Payment Option

When submitting an OIC, you must propose how you plan to pay the offered amount. The IRS offers two main payment options:


• Lump-Sum Cash Offer: Pay 20% of the offered amount upfront and the remaining balance within five months of acceptance.


• Periodic Payment Offer: Make the first payment with your application and continue paying monthly installments while the IRS reviews your offer.
4. IRS Evaluation
The IRS carefully reviews your application, assessing whether the amount you’re offering is the most they can reasonably expect to collect. This evaluation includes a thorough analysis of your financial situation.

5. Decision
If the IRS accepts your offer, you must comply with all tax laws for the next five years to avoid defaulting on the agreement. If the offer is denied, you may appeal the decision or explore other resolution options.

Eligibility Criteria for Offer in Compromise
Not everyone qualifies for an Offer in Compromise. To be considered, you must meet specific eligibility requirements:

1. All Tax Filings Must Be Current
You must have filed all required tax returns before submitting your OIC application.

2. Required Estimated Payments Made
If you’re self-employed, you must be current on estimated tax payments for the current tax year.

3. No Open Bankruptcy Proceedings
Taxpayers in active bankruptcy are not eligible for an Offer in Compromise.

4. Demonstrated Inability to Pay in Full
The IRS evaluates your Reasonable Collection Potential (RCP), which is based on your income, expenses, and assets. If your RCP is less than the total tax debt, you may qualify for an OIC.

Reasons the IRS May Accept an Offer in Compromise
The IRS generally accepts Offers in Compromise under three circumstances:

1. Doubt as to Collectability
This applies when there is little chance the IRS will collect the full tax debt due to your financial situation.

2. Doubt as to Liability
If there’s a legitimate dispute over whether the assessed tax debt is correct, the IRS may accept an OIC.

3. Effective Tax Administration
Even if you can technically afford to pay the full amount, the IRS may accept an OIC if collecting the debt would create economic hardship or be unfair due to special circumstances.

Benefits of an Offer in Compromise
Settling your tax debt through an Offer in Compromise has several advantages:

• Reduced Financial Burden: You pay much less than the full amount owed, freeing up resources for other financial obligations.

• Fresh Start: Resolving your tax debt allows you to move forward without the fear of liens, levies, or garnishments.

• Peace of Mind: Eliminating the stress of unpaid taxes can improve your overall well-being.

Challenges of the Offer in Compromise Process
While the OIC program offers significant benefits, it’s not without challenges:

1. Complex Application Process
Submitting an accurate and compelling OIC application requires extensive documentation and knowledge of IRS procedures.

2. Low Acceptance Rate
The IRS accepts only a fraction of OIC applications each year, typically around 30%.

3. Continued Compliance Requirement
Even after your offer is accepted, you must comply with all tax laws for five years. Failure to do so can void the agreement.

How to Improve Your Chances of Success
To increase your likelihood of having an Offer in Compromise accepted:

• Be Honest and Thorough: Provide accurate and complete financial information.

• Seek Professional Help: A tax resolution specialist can help you prepare a strong application and negotiate with the IRS on your behalf.

• Stay Current with Tax Obligations: Make sure all required filings and payments are up to date before applying.

Is an Offer in Compromise Right for You?
An Offer in Compromise can be a valuable tool for resolving tax debt, but it’s not the best solution for everyone. You may benefit from exploring alternative options, such as:

• Installment Agreements: Spread your tax payments over time.

• Penalty Abatement: Request a reduction or elimination of penalties.

• Currently Not Collectible Status: Temporarily halt collection efforts if you’re facing financial hardship.

Each taxpayer’s situation is unique, so it’s essential to consult with a professional to determine the most appropriate strategy.

Conclusion
An Offer in Compromise provides a potential path to financial freedom for taxpayers burdened by overwhelming tax debt. While the process can be complex and challenging, the rewards of a successful OIC can be life-changing.

If you’re considering an Offer in Compromise, don’t navigate the process alone. Contact IRS Tax Fighters or call 281-962-0070 to schedule a consultation with an experienced tax resolution specialist. Let us help you take the first step toward resolving your tax debt and regaining control of your financial future.