Offer in Compromise (OIC)

What is an Offer in Compromise (OIC)?

An Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles qualifying federal tax liabilities for less than the full amount owed. 

The IRS may consider an OIC when the taxpayer cannot reasonably pay the full liability, when there is genuine doubt about the liability, or when full collection could cause economic hardship or be unfair because of exceptional circumstances. See the IRS Offer in Compromise page.

An OIC is not automatic tax-debt forgiveness. The taxpayer must meet the applicable requirements, provide the required information, and receive IRS acceptance before the liability can be resolved through the offer.

Who Qualifies for an Offer in Compromise?

A taxpayer must meet the IRS's basic filing and payment requirements before an OIC can be considered. Generally, the taxpayer must:

• File all required federal tax returns.

• Receive a bill for at least one tax liability included in the offer.

• Make required estimated tax payments for the current year.

• Not have an open bankruptcy proceeding.

• Have a valid filing extension and have made the required payments when applying before filing a current-year return. An extension provides additional time to file, not additional time to pay tax due.

• If operating a business with employees, make all required federal tax deposits for the current quarter and the two preceding quarters.

• Do not have a deactivated ITIN. The IRS will not consider an offer until the ITIN is reactivated.

The IRS also advises taxpayers to resolve an open audit or pending innocent-spouse claim before submitting an OIC, because those matters can prevent completion of the offer investigation. 

The IRS discusses these issues in its Offer in Compromise FAQs.

Taxpayers can use the IRS Offer in Compromise Pre-Qualifier Tool to check basic eligibility and prepare a preliminary proposal. Using the tool does not guarantee that the IRS will accept the offer.

How Does the IRS Determine How Much You Can Pay?

For many OICs, the IRS evaluates the taxpayer's Reasonable Collection Potential (RCP), which represents what the IRS believes it can reasonably collect. The calculation can consider:

• Realizable value of assets

• Bank accounts and other property

• Current income

• Anticipated future income

• Allowable basic living expenses

On the IRS's collection information statements, the minimum offer is generally available equity in assets plus remaining monthly income multiplied by 12 (lump-sum offers) or 24 (periodic-payment offers). 

An offer generally must be at least the calculated amount unless special circumstances prevent the taxpayer from paying it. In that case, the taxpayer explains those circumstances on Form 656 and provides supporting documentation.

The IRS may use its Collection Financial Standards when evaluating living expenses. These include national amounts for certain necessary expenses and local standards for items such as housing, utilities, and transportation.

What are the Three Grounds for an Offer in Compromise?

The IRS recognizes three primary grounds for compromising a federal tax liability.

Doubt as to Collectibility

Doubt as to collectibility applies when the tax liability is valid, but the taxpayer's income and assets are insufficient to pay the full amount owed. The issue is whether the IRS can reasonably expect to collect the full liability from the taxpayer's assets and future income.

Doubt as to Liability

Doubt as to liability applies when there is a genuine dispute about whether the tax is legally owed or whether the assessed amount is correct.

A taxpayer pursuing this basis uses Form 656-L, Offer in Compromise (Doubt as to Liability) and must provide a written explanation with supporting documentation. Inability to pay does not establish doubt as to liability. The offer must be $1.00 or more, so a zero-dollar offer is not valid.

Form 656-L also requires the taxpayer to pursue other available remedies first, such as an amended return, audit reconsideration, or penalty abatement. A doubt-as-to-liability offer cannot be considered if a final court decision or judgment established the liability. The form includes its own pre-qualifier assessment.

Effective Tax Administration

An Effective Tax Administration (ETA) offer may apply when the tax liability is legally owed and could be collected in full, but requiring full payment would cause economic hardship or would be unfair and inequitable because of exceptional circumstances. 

Unlike doubt as to collectibility, an ETA offer does not depend on the IRS being unable to collect the full liability. Only individuals qualify under the economic-hardship ground.

What Forms are Required for an Offer in Compromise?

The required documents depend on the basis for the offer and whether the liability belongs to an individual or a separate business entity.

The IRS's About Form 656 page collects the standard OIC forms and related resources. 

The current booklet and its forms (Forms 656, 433-A (OIC), 433-B (OIC), and 656-B) are April 2026 revisions, and Form 656-L is a July 2026 revision.

A sole proprietorship uses Form 433-A (OIC) because the business is tied to the individual owner. Form 433-B (OIC) applies to separate entities such as corporations, partnerships, and LLCs. Separate Forms 656 are required for individual liabilities and for liabilities of a separate business entity. Sole-proprietorship liabilities are included with the individual's offer. Spouses with joint and separate debts also file separate Forms 656.

Individuals can use their IRS Individual Online Account to check eligibility, prepare and submit an offer, and make required payments. Business Tax Account can be used to make OIC payments but not to submit an offer, according to IRS Tax Tip 2026-40.

How Much Does an Offer in Compromise Cost & How Payments Are Made?

A standard OIC requires a $205 nonrefundable application fee plus an initial offer payment. The IRS generally returns the fee only if it does not accept the offer for processing. See the IRS Offer in Compromise page and the Form 656-B booklet.

These requirements do not apply in every case:

• Individuals and sole proprietors who qualify for the Low-Income Certification do not have to submit the application fee or initial payment, and do not make monthly payments while the offer is evaluated. Their first payment is generally due 30 days after acceptance.

• A doubt-as-to-liability offer has no application fee or required payment.

Lump-Sum Cash Offer

A lump-sum cash offer requires a nonrefundable payment of 20% of the total offer amount with Form 656. If the IRS accepts the offer, the remaining balance is paid in five or fewer payments within five or fewer months of acceptance. If the offer is not accepted, the 20% payment is generally applied to the taxpayer's tax liability rather than refunded.

Periodic Payment Offer

A periodic payment offer requires the first payment with the offer, with the remaining balance paid in monthly installments within six to 24 months under the proposed terms. The taxpayer must continue making the proposed payments while the IRS evaluates the offer, or the IRS may return it without appeal rights. Required payments are generally nonrefundable and are applied to the taxpayer's tax liabilities.

What Happens After You Submit an Offer in Compromise?

After receiving an OIC, the IRS first determines whether the application can be processed. If it is processable, the offer proceeds to investigation, and the IRS may request additional financial records or supporting documents.

Certain liabilities cannot be compromised through the OIC program, including:

• Court-ordered restitution

• Federal tax liabilities reduced to judgment

• Cases the IRS has referred to the Department of Justice for all tax periods

• Liabilities for which an IRC Section 965(i) election was made

See the Form 656-B booklet for these restrictions. A business is also not eligible unless the trust fund portion of its tax is paid or the IRS has made Trust Fund Recovery Penalty determinations on all potentially responsible parties.

A complete investigation can take up to 24 months. An offer is deemed accepted if the IRS does not notify the taxpayer otherwise within 24 months of the date the correct IRS site receives it. Periods in which a liability is in dispute in a judicial proceeding are excluded from that count.

While an offer is being reviewed:

• The IRS may levy assets until an authorized IRS official signs the offer as pending. After that, it generally may not levy while the offer is pending, for 30 days after a rejection, or during an appeal.

• The IRS generally does not release a levy served before the offer was pending merely because an OIC was filed.

• The IRS may keep proceeds collected through a prior levy.

• Payments under an existing installment agreement generally do not have to continue.

• The statutory collection period is generally suspended.

• Interest and penalties continue to accrue.

What is the Difference Between an Offer the IRS Cannot Process, a Returned Offer, and a Rejected Offer?

#1. An offer the IRS cannot process does not proceed to a substantive investigation. The IRS generally returns the offer and application fee with a letter explaining the reason, while applying any initial offer payment to the taxpayer's tax debt. A processability determination generally cannot be appealed.

#2. The IRS may return an offer after it accepts the submission for processing or begins its investigation but cannot complete the case.  Reasons include:

• Failure to provide requested information

• Failure to remain current with filing or payment obligations

• Failure to make required periodic payments

• Bankruptcy

• Another failure to meet OIC requirements

A returned offer has no right of appeal. Depending on the reason, the taxpayer may be able to request reconsideration or may need to submit a new offer.

#3. A rejected offer means the IRS substantively evaluated the proposal but decided not to accept it. A rejection carries appeal rights.

Can You Appeal a Rejected Offer in Compromise?

Yes. A taxpayer must request an appeal within 30 days of the date the IRS notifies them of the rejection, following the instructions in the rejection letter. 

The letter may direct the taxpayer to use Form 13711, Request for Appeal of Offer in Compromise. See the IRS guidance on how to appeal a rejected Offer in Compromise.

What Happens After an Offer in Compromise Is Accepted?

After acceptance, the taxpayer must pay the agreed amount under the offer terms and stay compliant with federal filing and payment obligations through the fifth year after acceptance, including any extensions. 

This applies to future federal tax obligations, not only the liabilities in the OIC. 

During that period, the taxpayer also cannot request an installment agreement or a new offer.

Tax liabilities that arise after acceptance are not added to the OIC and must be paid separately. 

A taxpayer may also risk default if a liability from a period before acceptance was omitted from the offer and is not promptly paid after assessment.

The IRS may keep refunds, including interest, for tax assessed before the acceptance date. 

The same applies to refunds from amended returns for periods ending before acceptance. Retained refunds are applied to the tax debt and are not treated as payments toward the offer amount. Form 656-L has a similar provision for doubt-as-to-liability offers.

If the IRS defaults the offer, the taxpayer may become liable for the original tax debt, less payments made, plus interest and penalties that accrued from the time the liability arose. The IRS may then resume collection.

What Happens to a Federal Tax Lien After an OIC?

Submitting or accepting an OIC does not automatically remove an existing federal tax lien. The IRS may file a Notice of Federal Tax Lien while an offer is pending. 

If the IRS has filed a lien, it generally releases the lien within 45 days after it receives and verifies the final payment and confirms that the taxpayer has met the offer terms.

 If the taxpayer sells property subject to the lien before fully paying the offer, the IRS may claim the proceeds. See the Form 656-B booklet.

Offer in Compromise vs. Other IRS Payment Options

The IRS generally will not accept an OIC if the taxpayer can fully pay the liability through an installment agreement, available equity in assets, or a combination of both, unless special circumstances support a compromise. Review IRS Topic No. 202, Tax Payment Options, to compare options.

Offer in Compromise FAQs

Do interest and penalties continue during an Offer in Compromise?

Yes. Interest and penalties continue to accrue while the offer is pending and until its payment terms are met. A taxpayer who meets all terms pays only the agreed offer amount.

Can the IRS reject an OIC even if you cannot pay the full tax debt?

Yes. Inability to pay immediately does not guarantee acceptance. The IRS evaluates assets, income, expenses, Reasonable Collection Potential, the applicable compromise basis, and whether another payment method could satisfy the liability.

Can one Offer in Compromise cover personal and business tax debt?

It depends on the business structure. Separate Forms 656 are required for personal liabilities and for liabilities of separate entities such as corporations, partnerships, and LLCs. A sole proprietorship follows the individual OIC process.

Does an Offer in Compromise remove a federal tax lien?

Not immediately. Filing or accepting an OIC does not itself release an existing lien. The IRS generally releases a filed lien after the taxpayer pays the accepted offer amount in full and meets the offer terms.

Can you apply again after an Offer in Compromise is rejected or returned?

It depends on the IRS decision. A rejected offer can be appealed within 30 days by following the rejection letter's instructions. A returned offer may sometimes qualify for reconsideration or may require a new application, depending on why it was returned. 

Note: Offer in Compromise rules are fact-specific and may change. Taxpayers should review the current IRS Offer in Compromise guidance and Form 656-B instructions, or consult a qualified tax professional before submitting an offer.