How to Use an IRS Offer in Compromise to Settle Tax Debt

An Offer in Compromise (OIC) is an IRS program that lets some taxpayers settle their federal tax debt for less than the full amount owed, based on their true ability to pay. It is usually considered only after you file all required returns and the IRS reviews your income, expenses, and assets in detail, and approval is never guaranteed.

Quick summary: Is an Offer in Compromise right for you?

  • The Internal Revenue Service (IRS) is the only agency that processes Offers in Compromise for federal tax debt.
  • You typically must be current on all required tax filings before the IRS will consider your offer.
  • The IRS uses Form 656 (the actual offer) and Form 433-A(OIC) / 433-B(OIC) (financial information) to decide.
  • Most people must pay a nonrefundable application fee and initial payment with their offer.
  • Approval is based on your reasonable collection potential (what the IRS thinks it can realistically collect from you).
  • You can check basic eligibility using the IRS Offer in Compromise Pre-Qualifier tool on the official IRS site.
  • If accepted, you must stay current on all taxes for 5 years or your compromise can be revoked.

How an IRS Offer in Compromise Works in Real Life

An Offer in Compromise is a formal proposal where you say to the IRS, in writing, “Here is what I can realistically pay, based on my finances.” The IRS then decides whether accepting that lesser amount is better than continuing to try to collect the full balance from you.

The IRS typically looks at all federal individual and business taxes you owe and compares your tax debt to your income, necessary living expenses, and equity in assets (home, vehicles, savings, retirement accounts, business assets). If the IRS believes it can collect the full amount through normal collection tools (wage garnishment, bank levy, payment plans), it usually rejects the offer.

Key terms to know:

  • Offer in Compromise (OIC) — A formal agreement with the IRS to settle tax debt for less than you owe.
  • Reasonable Collection Potential (RCP) — The IRS’s calculation of what it thinks it can collect from your future income and assets.
  • Currently Not Collectible (CNC) — Status where the IRS temporarily stops collection because you can’t pay, but the debt still exists.
  • Doubt as to Collectibility — The most common OIC basis; it means there’s legitimate doubt you can pay the full amount before the collection period runs out.

Where to Go Officially and Your First Concrete Step

For a federal Offer in Compromise, the official system touchpoints are:

  • The IRS Offer in Compromise unit, which receives and reviews your application.
  • The Taxpayer Assistance Center (TAC), which is an in-person IRS office where you can get forms, basic guidance, and sometimes help reviewing documents by appointment.

A specific action you can take today is to use the IRS Offer in Compromise Pre-Qualifier tool on the official IRS website (look for a site that ends in .gov). This online tool asks about your income, expenses, assets, and tax debt and gives a rough idea whether you might be a candidate and what an acceptable offer might look like.

After you use the tool, what happens next is that you can print or write down the estimated offer amount and required forms, then decide whether to move forward. The next practical move is usually to call the IRS or a local Taxpayer Assistance Center to confirm filing requirements and get the latest forms; you might say: “I’m interested in applying for an Offer in Compromise, and I’d like to confirm that my tax filings are all current and which forms I need.”

Rules and procedures can change, and eligibility can vary based on your specific situation (for example, if you have an open bankruptcy case, are self-employed, or owe business payroll taxes).

What You Need to Prepare Before Filing an Offer

Before you even fill out the paperwork, the IRS typically expects you to:

  1. File all required tax returns — You usually must be fully compliant on filings, even if you can’t pay.
  2. Make required estimated tax payments — If you’re self‑employed or have other non‑wage income, you often must be current on estimated payments.
  3. Gather detailed financial information — This is used to complete the OIC financial forms and prove your claim.

Documents you’ll typically need:

  • Recent pay stubs or proof of income (such as Social Security award letters, unemployment statements, or self-employment income summaries).
  • Recent bank statements for all accounts (personal and business), often for the last 3 months or more.
  • Mortgage statements, vehicle loan statements, and proof of major monthly expenses (rent/lease, utilities, health insurance, child support, etc.).

For self-employed individuals or business owners, you’re commonly asked for business profit-and-loss statements, accounts receivable lists, and business asset details as well. Missing or incomplete documentation is one of the fastest ways to slow down or derail an OIC review.

Step-by-Step: How to Apply for an IRS Offer in Compromise

1. Confirm your basic eligibility

Use the IRS Offer in Compromise Pre-Qualifier tool or call the IRS to ask if an OIC is an option in your case. You’ll typically be ineligible if you are in open bankruptcy or have unfiled required tax returns.

What to expect next: You’ll get preliminary feedback (from the tool or the IRS representative) on whether it might be worth applying and what offer range might be considered reasonable.

2. Gather your financial and tax documents

Collect at least 3 months of income and expense records, recent bank and loan statements, and proof of any unusual or necessary expenses (such as court‑ordered payments, high medical bills, or special needs expenses). Ensure you have transcripts or copies of all filed returns for the years you owe.

What to expect next: As you gather documents, you may see whether your finances look like someone who can afford monthly payments, or whether an OIC is more realistic. If your records don’t match what’s on file, the IRS could request clarifications later.

3. Complete the official OIC forms

Most individuals use Form 656 (the offer form) and Form 433-A(OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals). Businesses generally use Form 433-B(OIC) if a business entity owes the tax.

You must decide on a payment option:

  • Lump Sum Cash — Typically 20% down with the offer, then the rest in up to 5 payments after acceptance.
  • Periodic Payment — Initial payment with your offer, then monthly payments while the IRS reviews the offer.

What to expect next: Filling these forms accurately often takes several hours, especially if your finances are complicated. Once completed, review every number and make sure it matches your supporting documents.

4. Pay the application fee and initial payment

Most applicants must include a nonrefundable application fee and a nonrefundable initial payment with their Form 656, based on the payment option chosen. Some low‑income applicants can qualify for a fee waiver and don’t need to send the initial payment.

What to expect next: The IRS will cash these payments even if your offer is later rejected, so do not send money you need for basic living expenses. You should receive an acknowledgment notice that your OIC package was received and is under initial review.

5. Mail your OIC package to the correct IRS address

Send your completed forms, application fee, initial payment, and supporting documents to the IRS Offer in Compromise address listed in the instructions for your area. Use a mailing method that provides tracking and proof of delivery.

What to expect next: After initial processing, the IRS assigns your case to an OIC examiner or specialist. You may receive letters asking for more documents, clarification on expenses, or updated financial information if review takes several months.

6. Respond promptly to IRS requests during review

During the review period, the IRS might ask for updated pay stubs, additional bank statements, or explanations for certain expenses. You typically have a specific deadline in the letter (for example, 30 days) to respond.

What to expect next: If you reply on time, your case continues. If you ignore the letter or miss deadlines, your offer can be returned or rejected without full consideration, and collection activity can resume.

7. Receive a decision and follow the terms

If your offer is accepted, you must pay the agreed amount according to the schedule and stay fully compliant (timely filing and paying all taxes) for five years after acceptance. If your offer is rejected, you usually have the right to appeal within 30 days from the date of the rejection letter.

What to expect next: If accepted and you comply, the IRS will forgive the remaining balance after you complete the payments. If you break the terms (for example, you don’t file or pay new taxes), the IRS can reinstate the original debt, minus what you already paid under the offer.

Real-World Friction to Watch For

Real-world friction to watch for
One common snag is that the IRS often disallows some of your claimed living expenses because they exceed its Collection Financial Standards, so the IRS may calculate that you can afford a higher offer than you feel you can pay. When this happens, you can usually submit proof that your higher expenses are necessary and unavoidable (such as medical documentation or court orders) and ask the reviewer to allow an exception.

Legitimate Help Options and How to Avoid Scams

For help with an Offer in Compromise, your main legitimate help options are:

  • IRS Taxpayer Assistance Center (TAC) — In‑person IRS offices where you can ask about forms, mailing addresses, and status updates; often by appointment only.
  • Low Income Taxpayer Clinics (LITCs) — Independent organizations (often nonprofits or law school clinics) that commonly help eligible low‑income taxpayers with IRS disputes, sometimes including OIC cases.
  • Enrolled agents, CPAs, or tax attorneys — Licensed professionals experienced with IRS collection procedures and OICs.

Because OICs involve money and sensitive personal information, watch for scam warning signs:

  • Companies that guarantee they can “settle your tax debt for pennies on the dollar” without first reviewing your full financial situation.
  • High-pressure sales tactics or requests for large upfront fees before any real review or forms are prepared.
  • Websites and emails that don’t end in .gov but pretend to be official government programs or claim to be “the IRS Fresh Start Program office.”

When seeking help, search for the official IRS site or your local Low Income Taxpayer Clinic using reputable sources, and look for .gov domains for official information. Call the phone number listed on the IRS or LITC site and say something like, “I’m interested in an Offer in Compromise and I’d like to know if you can help me understand the forms and whether I qualify.”

Once you understand these steps and make at least one contact through an official channel, you can move forward with gathering documents, completing the required IRS forms, and formally submitting your Offer in Compromise.