Offer in Compromise: Eligibility and Application Process
The Offer in Compromise (OIC) program allows eligible taxpayers to settle a federal tax debt for less than the full amount owed. Administered by the Internal Revenue Service, the program operates under Internal Revenue Code § 7122 and is governed by detailed procedural rules published in IRS Form 656-B (Offer in Compromise Booklet). This page covers the eligibility criteria, application mechanics, three statutory bases for compromise, and the threshold factors the IRS uses to accept or reject an offer.
Definition and Scope
An Offer in Compromise is a formal agreement between a taxpayer and the IRS in which the agency agrees to accept a payment amount below the full assessed tax liability in full satisfaction of that liability. The program is distinct from an installment agreement, which requires full repayment over time, and from currently not collectible status, which suspends collection without resolving the underlying debt.
The statutory authority for OIC is Internal Revenue Code § 7122, which grants the Secretary of the Treasury discretion to compromise any civil or criminal case arising under the internal revenue laws. The IRS exercises this authority through its Office of Collections and the Centralized OIC (COIC) units located in Memphis, Tennessee, and Brookhaven, New York.
The program applies to individual taxpayers, married couples filing jointly, and business entities. It covers income taxes, payroll taxes (see payroll tax requirements), penalties, and interest — subject to certain exclusions for trust fund recovery penalties assessed against responsible parties.
How It Works
The OIC process follows a structured sequence of phases governed by the Internal Revenue Manual (IRM 5.8) and the procedures outlined in IRS Form 656-B.
Phase 1 — Pre-Qualification
Before submitting a formal offer, applicants use the IRS Offer in Compromise Pre-Qualifier tool (available at irs.gov) to determine basic eligibility. Taxpayers who are in an open bankruptcy proceeding are categorically ineligible (IRM 5.8.1.2).
Phase 2 — Application Submission
A complete OIC application requires:
- Form 656 — the formal offer document specifying the offered amount and basis for compromise
- Form 433-A (OIC) (for individuals) or Form 433-B (OIC) (for businesses) — detailed collection information statements disclosing assets, income, expenses, and liabilities
- A nonrefundable application fee of $205 (Rev. Proc. 2023-18), waived for low-income taxpayers meeting income thresholds at or below 250% of the federal poverty level
- An initial payment — either 20% of the offered amount (lump sum) or the first installment (periodic payment plan)
Phase 3 — IRS Investigation
An OIC examiner verifies the financial information submitted, cross-references third-party data (W-2s, 1099s, real property records), and calculates the taxpayer's Reasonable Collection Potential (RCP).
Phase 4 — Acceptance, Rejection, or Counter
The IRS accepts the offer if it equals or exceeds the RCP, rejects it if the RCP exceeds the offered amount, or may issue a counteroffer. Rejected offers can be appealed to the IRS Independent Office of Appeals within 30 days of the rejection letter (see IRS appeals process).
Common Scenarios
The IRS recognizes three statutory bases for compromise, each serving a distinct taxpayer situation:
1. Doubt as to Collectibility (DATC)
The most common basis. The taxpayer's assets and income are insufficient to pay the full liability within the remaining statute of limitations on taxes — typically 10 years from the date of assessment under IRC § 6502. The IRS calculates RCP as: Quick Sale Value of assets × applicable percentage + future income stream. For most cases, the future income multiplier is 12 months of remaining monthly disposable income for a cash offer, or 24 months for a deferred payment offer.
2. Doubt as to Liability (DATL)
Available when there is a genuine dispute about whether the assessed tax is legally correct. This basis requires Form 656-L (a separate form from standard Form 656). It does not require submission of financial information because collectibility is not at issue.
3. Effective Tax Administration (ETA)
Reserved for cases where full collection is technically feasible but would create economic hardship or would be inequitable and not in the public interest. The IRS applies this basis narrowly; it is not available when the hardship results from voluntary choices or when the taxpayer's situation falls within standard DATC parameters.
Decision Boundaries
The IRS rejects approximately 67% of OIC applications annually, according to the IRS Data Book (most recently covering fiscal year 2022). Understanding the threshold factors clarifies why most offers fail.
Accepted vs. Rejected: Key Distinguishing Factors
| Factor | Accepted Profile | Rejected Profile |
|---|---|---|
| Offered amount vs. RCP | Meets or exceeds RCP | Below calculated RCP |
| Tax compliance | All returns filed; current on estimated payments | Unfiled returns; non-compliant |
| Asset equity | Low equity after allowable expenses | Significant unencumbered assets |
| Income stability | Fixed or declining income | Rising income trajectory |
Taxpayers with significant home equity, active retirement accounts with accessible balances, or business assets that can be liquidated typically cannot reduce their RCP low enough to qualify under DATC. The tax lien and levy framework remains active during the OIC review period — collection activity is suspended, but a federal tax lien already filed continues to encumber assets.
Tax penalty abatement and OIC are not mutually exclusive; an examiner may address penalty amounts separately from the underlying tax and interest during the compromise negotiation.
Taxpayers who are rejected under OIC but still cannot pay in full may qualify for a long-term installment arrangement or currently not collectible status, both of which are addressed in adjacent sections of the IRS's collection resolution framework. Representation by a licensed professional — such as an enrolled agent — is not required but is commonly used given the financial disclosure complexity of Forms 433-A/B.
References
- Internal Revenue Code § 7122 — Compromises (House Office of the Law Revision Counsel)
- IRS Form 656-B: Offer in Compromise Booklet (IRS.gov)
- IRS Internal Revenue Manual, Part 5.8 — Offer in Compromise
- Rev. Proc. 2023-18 — OIC User Fee Schedule (IRS.gov)
- IRS Data Book — Fiscal Year 2022 (IRS.gov)
- IRS Offer in Compromise Pre-Qualifier Tool (IRS.gov)
- Internal Revenue Code § 6502 — Collection After Assessment (House Office of the Law Revision Counsel)