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IRS Offer in Compromise

Tax professional and client shaking hands over desk with laptop and documents

Can you settle with the IRS for less than you owe? Sometimes, yes. An offer in compromise is a formal agreement, made on Form 656, in which the IRS accepts less than the full balance and treats the rest as settled. But the amount isn’t negotiated as a percentage of the debt, and it isn’t “pennies on the dollar” the way some advertising suggests. The IRS works out what it thinks it could realistically collect from you. An offer that’s at least that number has a chance, and an offer below it usually doesn’t.

That’s why we start every offer conversation with your numbers, not with a hoped-for discount.

The three grounds for an offer

The IRS will consider an offer on one of three grounds:

  • Doubt as to collectibility. Your assets and income are less than the full amount owed. This is the ground most offers are based on.
  • Doubt as to liability. There’s a genuine dispute over whether you owe the tax, or how much.
  • Effective tax administration. You could technically pay in full, but doing so would cause economic hardship or would be unfair given exceptional circumstances.

Who can apply

Before the IRS will look at an offer, you need to meet a few basic conditions:

  • All required tax returns are filed.
  • Estimated tax payments for the current year are made.
  • If you own a business with employees, your federal tax deposits for the current quarter and the two quarters before it are made.
  • You’ve received a bill for at least one of the debts in the offer.
  • You’re not in an open bankruptcy proceeding.

If any of these isn’t met, the offer gets returned without being considered. Fixing them comes first.

How the IRS sets the minimum offer

The IRS calculates your reasonable collection potential. That figure has two parts. The first is the equity in your assets: what they’d bring in a sale, less what’s owed against them, with certain adjustments. The second is your future remaining income: what’s left each month after the IRS’s allowable living expenses, multiplied by 12 if you’ll pay the offer in five or fewer payments within five months, or by 24 if you’ll pay it over 6 to 24 months. Special circumstances can justify an offer below that figure, but they have to be documented.

Both parts are judgment calls with rules attached. Allowable living expenses follow national and local standards that don’t always match what you actually spend, so read IRS allowable living expenses for an offer in compromise. Home equity is often the largest asset, and how the IRS values your home equity explains how it’s counted. Money that was spent or moved once the debt was known can also be added back. See dissipation of assets.

The IRS also offers an online Offer in Compromise Pre-Qualifier tool. It’s a useful first check. It can’t see the judgment calls above, though, which is where offers are usually won or lost.

Lump sum or periodic payment

When you submit an offer, you choose how you’ll pay it:

  • Lump sum cash offer. Paid in five or fewer installments, with 20 percent of the offer sent with the application.
  • Periodic payment offer. Paid over 6 to 24 months, with the first payment sent with the application and the rest paid monthly while the IRS reviews it.

There’s also a $205 application fee. The fee and the initial payment aren’t refundable, and both are waived for individuals who meet the IRS’s low-income guidelines. Our post on lump sum vs periodic payment compares the two in detail.

While your offer is being considered

The IRS generally won’t levy while an offer is pending, or for 30 days after a rejection while you decide whether to appeal. The IRS can still file a federal tax lien during this time. The ten-year collection period is paused while the offer is pending, for 30 days after a rejection, and during any appeal. Reviews take months, not weeks. IRS offer in compromise process time and what happens after you submit walk through the timeline.

After an offer is accepted

Acceptance comes with conditions. You have to file and pay your taxes on time for five years afterward, and missing that can put the original debt back. The IRS also keeps any refund due for tax assessed before the date it accepted your offer, and that refund doesn’t count as a payment on the offer. Once the offer terms are met, the IRS releases any federal tax lien.

When an offer isn’t the right tool

Offers are accepted less often than the advertising suggests. In fiscal year 2025, taxpayers submitted 38,797 offers and the IRS accepted 5,464, according to the IRS Data Book. Many people who call us about an offer are better served by something else. If you can pay the balance over time, the IRS expects an installment plan instead. If penalties make up a big part of the balance, penalty abatement may shrink the problem first. And if you can’t pay anything at the moment, currently not collectible status may fit better than an offer. IRS offer in compromise approval chances and why most offers get rejected explain how to tell the difference.

New York State runs its own program with different rules. See the NYS offer in compromise and how it differs from the IRS program. If a payment arrangement with the state is a better fit, read about the NYS tax payment plan.

How we prepare an offer

We pull your IRS transcripts, build the financial statement the IRS will use (Form 433-A (OIC) for individuals), and calculate your reasonable collection potential before anything is filed. If the numbers support an offer, we prepare and submit Form 656 with the documentation behind every figure. Then we handle the questions that come back from the offer examiner. If the numbers don’t support one, we tell you, and we show you the option that does fit.

Questions people ask about offers in compromise

How much does the IRS usually settle for?

There’s no typical percentage. The accepted amount is generally the IRS’s calculation of what it could collect from your assets and future income. For some people that’s a small fraction of the debt. For others it’s close to the full balance, and then an offer doesn’t make sense.

How long does the IRS have to respond to an offer in compromise?

If the IRS doesn’t reject your offer within 24 months of receiving it, the offer is treated as accepted. That period doesn’t count time when the liability is being disputed in court. In practice, most decisions come well before that, usually after several months.

Does an offer in compromise hurt your credit?

The IRS doesn’t publish anything about offers and credit scores. What we can say is that a federal tax lien, if one has been filed, is a public record that lenders can find, even though federal tax liens no longer appear on consumer credit reports from the major bureaus. The lien stays in place until the offer terms are met and the IRS releases it.

What happens when you owe the IRS more than $10,000?

Owing more than $10,000 doesn’t disqualify you from any option, but it does change how the IRS approaches collection. Our post on what to do if you owe the IRS more than $10,000 covers it.

If you’d like to know whether an offer is realistic for you, call Fine & Clear Tax Solutions at 516-209-2594 or request a free consultation. We’ll give you a straight answer before you spend anything on an application.