An offer in compromise lets certain taxpayers settle an IRS debt for less than the full amount. It is not a shortcut: the IRS generally accepts an offer only if it matches what it believes you can pay.
This guide explains who qualifies, the three grounds for an offer, the fee, the two payment options, the low-income exception and what happens during and after the process, using IRS Topic 204 and the Form 656 booklet.
The IRS says an offer in compromise is an agreement that settles a taxpayer's liabilities for less than the full amount owed, and that someone who can fully pay through an installment agreement or other means generally will not qualify. To qualify you must have filed all required returns, have received a bill for at least one tax debt included in the offer and have made all required estimated tax payments for the current year; business owners with employees must also have made required federal tax deposits for the current quarter and the two preceding quarters. People in an open bankruptcy proceeding are not eligible, and open audits and innocent spouse claims should be resolved first, according to the IRS booklet. See our IRS payment plan guide if you can pay over time.
| Ground | What the IRS says |
|---|---|
| Doubt as to liability | There is a genuine dispute about the existence or amount of the correct tax debt under the law; use Form 656-L |
| Doubt as to collectibility | The taxpayer's assets and income are less than the full amount of the tax liability |
| Effective tax administration | The tax is legally owed and collectible in full, but paying in full would create economic hardship or be unfair and inequitable because of exceptional circumstances |
In most cases the IRS will not accept an offer below the reasonable collection potential (RCP), which includes what can be realized from assets such as real property, vehicles and bank accounts plus anticipated future income less allowed living expenses.
| Item | Amount or rule |
|---|---|
| Application fee | $205 (per Form 656 booklet); none for doubt as to liability or a qualifying low-income individual |
| Low-income exception | Adjusted gross income at or below 250 percent of the poverty guidelines, or household gross monthly income x 12 at or below 250 percent |
| Lump sum offer | Payable in 5 or fewer installments within 5 or fewer months after acceptance; 20% of the offer sent with Form 656, nonrefundable (not required for a qualifying low-income individual) |
| Periodic payment offer | 6 or more monthly installments within 24 months after acceptance; first installment with the form and monthly payments continue while the IRS evaluates; if you miss them the IRS may return the offer, with no appeal (not required for a qualifying low-income individual) |
Our illustration: a lump sum offer of $30,000 would require a 20% payment of $6,000 with the form plus the application fee, and a periodic offer of $30,000 over 24 months would be $1,250 a month. The low-income exception removes the fee and these payments while the offer is under consideration. These are examples of the rules, not a prediction of acceptance.
Collection is ordinarily suspended while an offer is pending, for 30 days after a rejection, and while a timely appeal is considered. If the IRS accepts, you agree to comply with the tax laws, the IRS keeps any refund due for returns filed through the acceptance date and, for collectibility and effective tax administration offers, you must timely file and pay for five years or the offer can default. If it rejects the offer you can appeal within 30 days of the letter. Joint debts: spouses or ex-spouses who are separated or divorced must submit separate offers. The IRS offers a pre-qualifier tool, but the IRS says its result does not guarantee acceptance. Penalty relief is a separate option: see our penalty abatement guide, and see our federal tax lien guide for liens.
IRS Topic 204: Offers in compromise, IRS: Form 656 Booklet, Offer in Compromise.