Offer in Compromise: The Complete Guide

Updated October 4, 2026. New to the topic? Start with the short version: Can I Settle My IRS Debt for Less? Offer in Compromise Basics.

An Offer in Compromise (OIC) lets you settle a federal tax debt for less than the full balance. The IRS will accept an offer when it represents the most the government can expect to collect from you within a reasonable time. This guide walks through the full set of rules in plain English, using only the Internal Revenue Code, Treasury regulations, the Internal Revenue Manual (IRM), and current IRS forms: Form 656-B (Rev. 4-2026) and the Collection Financial Standards effective June 29, 2026.

1. The Legal Basis

IRC §7122 gives the IRS authority to compromise any civil tax case before it is referred to the Department of Justice. The regulations (Treas. Reg. §301.7122-1) allow a compromise on three grounds:

You cannot submit a doubt-as-to-liability offer and an ability-to-pay offer at the same time. Resolve any dispute about the amount first.

2. Eligibility: When the IRS Won't Even Look at Your Offer

An offer that fails these requirements is returned, not rejected — and a returned offer has no appeal rights.

• All required returns filed. If a return is missing, the IRS keeps your initial payment (applied to your debt) and returns the offer and fee.
• A bill received for at least one debt in the offer. If you just filed a return, wait for the bill and include a copy of any return filed within 10 weeks of the offer.
• Current-year estimated payments made, and if you are an employer, federal tax deposits made for the current quarter and the two preceding quarters.
• No open bankruptcy for you or your business.
• Open audits and innocent spouse claims resolved first.
• No deactivated ITIN. Reactivate it with Form W-7 before applying.
• The IRS cannot compromise tax periods referred to the Department of Justice, liabilities reduced to judgment, court-ordered restitution, or IRC §965 liabilities with a §965(i) election.
• Businesses with trust fund taxes (income tax and the employee share of Social Security and Medicare withheld from wages): the business is not eligible unless the trust fund portion is paid or the Trust Fund Recovery Penalty has been determined for all responsible persons (except victims of payroll service provider fraud or failure).

3. The Central Number: Reasonable Collection Potential

The IRS generally accepts an offer that equals or exceeds your reasonable collection potential (RCP). Form 433-A (OIC), Section 8, builds it in three pieces:

Minimum offer = equity in personal assets (Box A) + equity in business assets (Box B) + future remaining income (Box G or Box H)

But first, the IRS runs a full-payment test: can you pay the whole balance through an installment agreement over the time left to collect, from equity in your assets, or a combination of both? If yes, a doubt-as-to-collectibility offer will generally not be accepted, and the special allowances described below (the $1,000 bank and $3,450 vehicle reductions) are not applied. The IRS also adds the interest and penalties that will accrue.

4. Valuing Your Assets

Assets are generally counted at quick sale value (QSV) — 80% of fair market value — minus loans secured by the asset. Foreign assets count too. Form 433-A (OIC) applies these rules and allowances:

Dissipated assets. If you sold, transferred, borrowed against or gave away assets for less than full value, or spent the proceeds on things other than necessary living expenses or earning income, after the tax was assessed (or within six months before or after the assessment), the IRS can add their value to your RCP. It generally looks back three years from the year you submit the offer (IRM 5.8.5.18). For example, significant voluntary 401(k) contributions made after the tax was assessed, or within three years before the offer, may be counted.

5. Your Remaining Monthly Income

Start with your household's gross monthly income: wages, Social Security, pensions, net business income (with depreciation added back, since non-cash deductions aren't allowed), rental income, distributions, interest and dividends, child support and alimony received, gig income, and contributions from other household members. Non-taxable income counts too.

Then subtract allowable monthly expenses. Some follow national standards, some are capped at local standards, and the rest are allowed at actual cost if they are necessary:

• National Standards: allowed in full without proof of what you spend; add $397 for each person beyond four.
• Out-of-pocket health care: $90 per person under 65 and $163 per person 65 or older, on top of health insurance premiums.
• Housing and utilities: the lesser of your actual cost or the IRS standard for your county and household size.
• Vehicle ownership: the lesser of your actual loan or lease payment or $703 per vehicle (up to two; a single taxpayer is normally allowed one).
• Vehicle operating costs: the lesser of actual cost or the standard for your region or metro area (for example, $291 for one car in the South region, $423 in the Miami metro area).
• Public transportation: $220 per household; allowed in full if you have no vehicle.
• At actual cost: health insurance, court-ordered payments, child/dependent care, term life insurance, current taxes, secured debts, government-guaranteed student loans, employer-required retirement contributions or union dues, and payments on delinquent state or local taxes.

Generally not allowed: credit card and other unsecured debt payments, private school or college tuition, charitable contributions, voluntary retirement contributions, and whole-life insurance premiums. The IRS says the miscellaneous standard is meant to cover items like these.

6. How Many Months of Income Count

The IRS generally has 10 years from assessment to collect a tax (its "collection statute expiration date," or CSED). Under IRM 5.8.5.25, if fewer than 12 or 24 months remain on the collection period for all the periods in your offer, the IRS uses the number of months actually left.

7. A Worked Example (2026 Standards)

Maria is single, lives in Palm Beach County, Florida, and owes $48,000. Her most recent tax was assessed in April 2024, so the IRS has about 90 months left to collect.

• Full-payment test: equity without the allowances ($2,800 + $3,800 + $9,600 = $16,200) plus $73 × 90 months ($6,570) = $22,770. That is less than $48,000, so she cannot pay in full, and an offer is possible.
• Lump-sum offer: $11,750 + ($73 × 12) = $12,626. She sends $2,525 (20%) plus the $205 fee with the application.
• Periodic offer: $11,750 + ($73 × 24) = $13,502, paid over up to 24 months.

If Maria's remaining income were $700 a month instead, the full-payment test would give $16,200 + ($700 × 90) = $79,200 — more than she owes. The IRS would then expect a payment plan, not an offer.

8. Fees, Payments and Low-Income Certification

• Application fee: $205 per Form 656.
• Initial payment: 20% of a lump-sum offer, or the first monthly payment of a periodic offer.
• Fees and payments are non-refundable and are applied to your tax debt. You can designate which tax year and debt they go to.
• You cannot fund the offer with an expected tax refund, money already paid, funds seized by a levy, or the expected benefit of a loss carryover. If you withdraw from an IRA or 401(k) to pay, you may create new tax debt.

Low-Income Certification (individuals and sole proprietors only): if your adjusted gross income, or your household's gross monthly income × 12, is at or below these amounts, you pay no fee and make no payments while the offer is under review. Your first payment is due 30 days after acceptance.

9. Who Files What

• Individuals and sole proprietors: Form 656 + Form 433-A (OIC).
• Corporations, partnerships and LLCs: a separate Form 656 + Form 433-B (OIC). You can't compromise your individual share of a partnership debt; the partnership files its own offer.
• Joint debts: spouses can file one joint offer. If either spouse also has separate debts, each files their own Form 656. If you are legally separated and living apart, or divorced, you must each file separately. If you lived in a community property state (AZ, CA, ID, LA, NM, NV, TX, WA, WI) in the last 10 years, the form asks about it.
• Household income includes anyone who helps pay the bills; the IRS may figure your share of household income and expenses.
• Each Form 656 needs its own $205 fee and initial payment, unless you qualify for Low-Income Certification.

You can apply online through your IRS Individual Online Account, or mail the package to the IRS Centralized Offer in Compromise unit in Memphis or Brookhaven, depending on your state (see the checklist in Form 656-B). The IRS recommends running your numbers through its Pre-Qualifier tool first.

10. While Your Offer Is Pending

• The IRS suspends other collection activity. It may still levy up to the point it signs your offer as pending.
• The IRS may file a Notice of Federal Tax Lien.
• The time the IRS has to assess and collect is extended while the offer is pending.
• You don't have to make payments on an existing installment agreement; it can be reinstated if the offer isn't accepted.
• Periodic offers: keep making your monthly payments, or the offer is returned without appeal.
• Interest and penalties keep accruing.
• The IRS keeps refunds (with interest) for tax periods ending before acceptance; they don't count toward your offer.
• Answer IRS information requests on time — a late reply means the offer is returned without appeal rights.
• Keep filing and paying all current taxes, or the offer can be returned.
• If the IRS doesn't decide within 24 months of receiving the offer (not counting time the liability is in court), the offer is deemed accepted (IRC §7122(f)).

11. After the Decision

Accepted. Pay the offer exactly as agreed. For the 5 years after acceptance you must file every return and pay every tax on time; you must also promptly pay any tax later assessed for years before acceptance that weren't in the offer. If you don't, the IRS can default the offer and reinstate the original debt minus what you paid, plus interest and penalties. Liens are released only after the offer terms are met. If you sell property while the lien is still in place, sale proceeds may go to the IRS. Certain information from accepted offers is open to public inspection.

Rejected. You can appeal to the IRS Independent Office of Appeals within 30 days using Form 13711. Before a rejection is sent, the IRS must give it an independent administrative review (IRC §7122(e)).

Returned. An offer returned as not processable (missing returns, missed periodic payments, unanswered requests, open bankruptcy) cannot be appealed. Fix the problem and resubmit.

12. When an Offer Isn't the Right Tool

If you can pay in full over time, the IRS will expect an installment agreement. If you can't pay anything right now, the IRS may place your account in currently not collectible status. If most of your balance is penalties, penalty relief (first-time abatement or reasonable cause) may cut the debt first. IRS Publication 594 explains the collection process and these options.

Try Our Calculator

Our free Offer in Compromise Calculator follows Form 433-A (OIC) step by step: the eligibility checklist, the 2026 expense standards for every U.S. county, asset equity with all the allowances, the full-payment test, and your fee and initial payment. We checked it against 23 published examples, including U.S. Tax Court decisions and IRM examples.

Bottom Line

An Offer in Compromise is a math problem with strict entry rules. Get compliant first (every return filed, current-year payments made), value your assets the way the IRS does, apply its expense standards rather than your actual budget, and compare the result with what you owe. If the numbers work, a well-documented offer can settle a debt you could never pay in full. If they don't, another collection alternative is usually the better choice.

This article is general information, not tax advice for your specific situation.

Official Sources

• 26 U.S. Code §7122, Compromises
• Treas. Reg. §301.7122-1, Compromises
• IRS Form 656-B, Offer in Compromise Booklet (Rev. 4-2026), with Form 656, Form 433-A (OIC) and Form 433-B (OIC)
• IRS, Offer in compromise
• Internal Revenue Manual 5.8.4, Investigation
• Internal Revenue Manual 5.8.5, Financial Analysis
• IRS Collection Financial Standards (effective June 29, 2026)
• IRS Form 13711, Request for Appeal of Offer in Compromise
• IRS Publication 594, The IRS Collection Process
• IRS Offer in Compromise Pre-Qualifier tool

Back to the short version: Can I Settle My IRS Debt for Less? Offer in Compromise Basics.