Tax
Offer in Compromise (OIC)
An agreement with the IRS that settles a federal tax liability for less than the full amount owed, on the basis that the IRS is unlikely to collect the full balance within the collection statute.
An Offer in Compromise (OIC) is a formal settlement of federal tax debt. The IRS accepts less than the full liability when doing so is in the government's best interest, usually because the taxpayer's Reasonable Collection Potential (RCP) is less than what is owed and pursuing the balance would cost more than it recovers.
The math driving RCP is transparent. Take the taxpayer's monthly income, subtract IRS-allowable living expenses (housing, transportation, food, health care, using national and local standards), multiply what remains by 12 or 24 months depending on the payment method, then add the equity in every asset (home, retirement accounts, vehicles, business interests). That total is the minimum offer the IRS will consider under the Doubt as to Collectibility ground.
Two other grounds exist. Doubt as to Liability, used when the taxpayer disputes that the debt is actually owed, and Effective Tax Administration, used in unusual hardship cases where paying the full RCP would be inequitable (severe illness, dependence on retirement funds for medical care). The vast majority of accepted offers are Doubt as to Collectibility.
Form 656 is the offer itself, filed with Form 433-A(OIC) for individuals or 433-B(OIC) for businesses, a $205 application fee, and a 20% initial payment for a lump-sum offer or the first monthly installment for a periodic payment offer (both waived for low-income filers). The IRS has 24 months to accept, reject, or return the offer, or it is deemed accepted. The average processing time is 6 to 12 months.
Common pitfalls
- Filing an OIC when a straightforward installment agreement would clear the debt; the OIC has a 60% rejection rate, and a rejected offer takes 6–12 months out of your collection window
- Skipping the RCP math before filing; an offer below RCP is auto-rejected, and an offer materially above RCP overpays
- Missing the compliance requirement: all past returns must be filed and current-year withholding or estimates must be in place, or the IRS returns the offer without evaluation
- Ignoring the five-year tax-compliance condition after acceptance; any missed filing or payment in the five years after voids the OIC and reinstates the full debt plus interest
Related service
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