You may qualify if you cannot pay the full balance through a payment plan or the equity in what you own, or if paying in full would cause an economic hardship. The IRS generally accepts an offer only when it equals the most the IRS could expect to collect within a reasonable time, based on your income, allowable expenses and asset equity. You also have to be current on your filings and certain payments, and not in an open bankruptcy.
An offer in compromise settles a tax debt for less than the full amount, but it turns on a financial review, not on negotiating a number. Below is how the IRS decides, what an application involves, and what happens while it is pending. Kathryn Meyer's page on IRS collections and enforcement explains how an offer compares with the other ways to resolve a balance.
How an offer moves, step by step
- Check eligibility. Returns filed, a bill received, current estimated payments and deposits, no open bankruptcy. The IRS's Offer in Compromise Pre-Qualifier tool gives a first look.
- Build the financial statement. Form 433-A (OIC) or 433-B (OIC), with the household's income, expenses and assets, and the documents behind them.
- Choose the payment option and amount. Lump sum or periodic, with the minimum figured from equity and future income.
- Submit Form 656 with the application fee and the initial payment, unless the low-income certification applies.
- The IRS investigates. It may ask for more documents; levies stop while the offer is pending.
- Decision. Acceptance with five years of compliance terms, or rejection with 30 days to appeal on Form 13711.
On what grounds can you make an offer?
| Ground | What you are saying | Form |
|---|---|---|
| Doubt as to collectibility | Your assets and income are not enough to pay the full liability | Form 656 with Form 433-A (OIC) or 433-B (OIC) |
| Effective tax administration: economic hardship | You could pay in full, but doing so would cause an economic hardship | Form 656 with the financial forms |
| Effective tax administration: public policy or equity | You could pay in full, but exceptional circumstances make full payment unfair | Form 656 with the financial forms |
| Doubt as to liability | You have a legitimate doubt that you owe part or all of the tax | Form 656-L |
The IRS's Form 656-B booklet says not to file a liability offer and an ability-to-pay offer at the same time: any doubt about whether you owe the tax should be resolved first. If the dispute is about an audit result you never had a chance to contest, audit reconsideration may be a better first step.
Are you eligible to apply?
According to the booklet and the IRS offer page, before an offer can be considered you must:
- have filed every tax return you are legally required to file;
- have received a bill for at least one of the debts in the offer;
- have made all required estimated tax payments for the current year;
- if you are an employer, have made the required federal tax deposits for the current quarter and the two before it; and
- not be in an open bankruptcy proceeding, since debts in bankruptcy are generally resolved there.
The IRS also asks you to resolve any open audit or pending innocent spouse claim before submitting. If it finds that required returns were not filed, it keeps the initial payment against the debt, returns the offer, and that decision cannot be appealed.
How does the IRS figure the minimum offer?
The IRS's own forms walk through the math. On Form 433-A (OIC) you list the equity in your assets and your monthly income and expenses. Expenses are measured against the IRS Collection Financial Standards: national standards for food, clothing and similar items and for out-of-pocket health care are allowed for your household size without proof of what you spent, while housing, utilities and vehicle costs are generally allowed at the lesser of what you actually spend or the local standard for where you live. The 2026 amounts, and how each standard is applied, are set out in how the IRS decides what you can afford to pay. Whatever monthly income is left over is multiplied by a set number of months:
| How you will pay the offer | Future income counted |
|---|---|
| Lump sum: 5 or fewer payments within 5 months of acceptance | Remaining monthly income x 12 |
| Periodic: monthly payments over 6 to 24 months | Remaining monthly income x 24 |
The minimum offer is the asset equity plus that future income figure. A hypothetical: if your allowable expenses leave $200 a month and you choose a lump sum, the future income part is $2,400, added to your available equity. The forms warn that these multipliers do not apply if the IRS concludes you can pay the whole debt within the time it has left to collect, which is why the collection deadline matters to an offer. The IRS can also allow actual expenses above the standards if you document that the standards leave you without adequate means for basic living expenses.
What do you send, and how are payments handled?
The application is Form 656, the $205 application fee, the financial statement (Form 433-A (OIC) for individuals, 433-B (OIC) for businesses) with supporting documents, and an initial payment under the option you choose. Under section 7122(c), a lump-sum offer must include 20% of the offer amount, and a periodic offer must include the first proposed monthly payment. With a periodic offer you keep paying monthly while the IRS reviews it, and a missed payment can be treated as withdrawing the offer. Payments are generally not returned; they are applied to the tax, and you may say which year and debt they go to.
The IRS also charges a $205 application fee, which is non-refundable; if the IRS cannot process the offer because you were not eligible, it returns the application and the fee and applies any offer payment to your balance. Business debts and individual debts go on separate Forms 656, and each Form 656 needs its own fee and initial payment. Individuals whose adjusted gross income is no more than 250% of the federal poverty level, as the IRS applies it in its low-income certification guidelines, do not have to send the application fee or the offer payments with the application, or make monthly payments while it is under review. The booklet also says an offer cannot be paid with an expected tax refund, money already paid, or funds taken by a levy.
What happens while the offer is pending?
- Levies stop. Section 6331(k) bars a levy while the offer is pending, for 30 days after a rejection, and while a timely appeal of the rejection is pending. The IRS says it suspends other collection activity too.
- A lien may still be filed, and liens on file are not released until the offer terms are met.
- The collection period is extended while the offer is pending.
- Interest and penalties keep running, and refunds for earlier years can be kept and applied to the debt.
- Existing payment plan payments do not have to continue while the offer is considered.
- Two-year rule. Under section 7122(f), an offer not rejected within 24 months after it was submitted is treated as accepted, not counting periods when the liability is in dispute in court; the IRS adds that any appeal period is not counted either.
What if the offer is accepted, or rejected?
An accepted offer has conditions. You must meet every term on Form 656, and if you fail to file or pay any tax that comes due during the five years after acceptance, the IRS may default the offer and reinstate the original debt, less payments made, plus interest and penalties. Information about accepted offers is available for public inspection.
If the offer is rejected, the IRS says you may appeal within 30 days using Form 13711, Request for Appeal of Offer in Compromise. Section 7122(e) requires an independent review inside the IRS before a rejection is sent, and gives you the right to take the rejection to the Independent Office of Appeals.
Is an offer the right choice?
The IRS's advice is to explore every other payment option first, and it generally will not accept an offer if you can pay in full through a payment plan or your asset equity. If you can pay nothing at all right now, currently not collectible status may fit better. The IRS also tells taxpayers to check the qualifications of anyone they hire to help with an offer. An accepted offer is one of the arrangements the IRS lists as stopping certification of a seriously delinquent tax debt, explained in whether unpaid taxes can cost you your passport.
What changes the answer
- How assets are valued. Form 433-A (OIC) counts real estate and retirement accounts at 80 percent of current market value minus loans, and the form notes the reduction for retirement accounts can be larger because of taxes and withdrawal penalties.
- Who is in the household. Household income and expenses are reviewed together, and your share of them is figured from everyone who contributes.
- Joint and separate debts. If spouses have joint debts and either has separate debts, such as a trust fund recovery penalty, each files a separate Form 656; separated or divorced spouses cannot make a joint offer (Form 656-B).
- Time left to collect. If the IRS can collect the full balance before the collection deadline, it generally will not accept less.
- Where the money comes from. An offer cannot be paid with an expected refund, money already paid or funds taken by a levy, and using IRA or 401(k) money can create a new tax debt.
- Hardship or exceptional facts. Effective tax administration offers rest on hardship or fairness rather than inability to pay.
For example: figuring an offer from the forms
For example, imagine a self-employed consultant who owes $95,000. Her only significant asset is a car worth $15,000 with a $10,000 loan; at 80 percent of value, $12,000, less the loan, her equity is $2,000. After the IRS standards for her household, she has $300 a month left over. With a lump-sum offer, future income counts at 12 months, $3,600, so the minimum offer would be about $5,600, and 20 percent of the offer would go with the application. With a periodic offer, future income counts at 24 months, $7,200, for a minimum of about $9,200. Whether the IRS accepts depends on its own review of her figures and the time left to collect. This is a hypothetical, not a real case or result.
Common mistakes with offers
- Applying with unfiled returns. The IRS returns the offer and keeps the payment, and that decision cannot be appealed.
- Choosing an offer amount first. The minimum comes from the financial statement, not from what seems fair.
- Leaving out assets or household income. Incomplete disclosure undermines the review and the offer.
- Missing periodic payments while the offer is pending. A missed payment can be treated as withdrawing the offer.
- Falling behind after acceptance. Late filing or payment in the next five years can bring the original debt back.
What to do this week
- Confirm every required return is filed and current-year estimated payments or deposits are made.
- Run the IRS pre-qualifier with your real numbers.
- Gather three to six months of bank statements, pay records, loan balances and asset values.
- Compare your actual housing, utility and vehicle costs with the local standards for your county.
- Check how long the IRS has left to collect each balance.
- Decide whether a payment plan or hardship status would resolve the debt more simply.
Frequently asked questions
Can you make an offer while a payment plan is in place?
Yes. The IRS says existing installment payments do not have to continue while the offer is considered, though interest and penalties keep running.
Will the IRS file a lien while the offer is pending?
It may. Liens already filed are released only after the offer terms are met; see whether a federal tax lien can be released or withdrawn.
Can penalties be removed instead of compromised?
Sometimes, and relief can shrink the balance before any offer. See whether IRS penalties can be removed.
Is an offer the same as a Collection Due Process hearing?
No, but an offer can be proposed in a Collection Due Process hearing as a collection alternative; see what a Collection Due Process hearing is.
Does bankruptcy affect an offer?
You cannot apply while in an open bankruptcy case. Whether the taxes could be discharged is a separate question, covered in whether income taxes can be discharged in bankruptcy.
Who sees an accepted offer?
Information about accepted offers is available for public inspection, according to the IRS.
Getting a candid view before you apply
An offer rises or falls on honest financial disclosure and careful preparation. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and can review your finances, the collection deadline and the alternatives with you before an application is filed. To discuss an offer, contact the firm or call (571) 560-8674.