Offer in Compromise: Can You Really Settle for Less? (2025)

Last Updated: December 2025

You've probably heard the radio ads: "Settle your tax debt for pennies on the dollar!" The Offer in Compromise (OIC) program is real — but the reality is very different from what those ads suggest.

In FY 2024, the IRS received 33,591 offers and accepted only 7,199 — an acceptance rate of about 21%. That means nearly 4 out of 5 people who apply are rejected.

This guide explains what an OIC actually is, who really qualifies, and how to avoid wasting time and money on a settlement that was never realistic.

What Is an Offer in Compromise?

An Offer in Compromise is a formal agreement with the IRS to settle your tax debt for less than the full amount owed. If accepted, you pay the agreed amount, and the rest of your debt is legally forgiven.

The IRS accepts offers for three reasons:

1. Doubt as to Collectibility — You can't afford to pay the full amount (most common)
2. Doubt as to Liability — You legitimately dispute that you owe the tax
3. Effective Tax Administration — You could pay, but doing so would create exceptional hardship

The vast majority of accepted offers are based on Doubt as to Collectibility — meaning the IRS agrees that they're unlikely to collect more than your offer, even if they tried.

The "Reasonable Collection Potential" Formula

Here's what the ads don't tell you: The IRS uses a strict formula called Reasonable Collection Potential (RCP) to determine the minimum offer they'll accept.

RCP = (Equity in Assets) + (Monthly Disposable Income × 12 or 24 months)

Let's break that down:

Equity in Assets

The IRS looks at what you own and calculates the "quick sale value" (typically 80% of fair market value): - Home equity - Vehicle equity - Bank accounts - Investments and retirement accounts - Other property

Monthly Disposable Income

The IRS subtracts "allowable expenses" from your income: - Housing and utilities (IRS has local standards) - Food and clothing (IRS national standards) - Transportation (IRS standards) - Health insurance and out-of-pocket medical - Court-ordered payments (child support, alimony) - Taxes (current year)

What's left is your "disposable income" — money the IRS believes you could pay toward your debt.

The Multiplier

• Lump sum offer (paid within 5 months): 12 months of disposable income
• Periodic payment offer (paid over 6-24 months): 24 months of disposable income

The bottom line: Your offer must be at least equal to your RCP, or the IRS will reject it.

A Real-World Example

Scenario: You owe $50,000 to the IRS.

Your finances: - Home equity: $10,000 (after quick sale adjustment) - Car equity: $2,000 - Bank accounts: $500 - Monthly income: $4,000 - IRS-allowed expenses: $3,700 - Disposable income: $300/month

RCP Calculation (lump sum offer): - Assets: $10,000 + $2,000 + $500 = $12,500 - Future income: $300 × 12 months = $3,600 - Minimum acceptable offer: $16,100

If you offered $5,000, the IRS would reject it — they calculate they could collect $16,100 from you instead.

But here's the thing: If your RCP is $16,100 and you owe $50,000, an accepted offer would settle your debt for about 32 cents on the dollar. That's meaningful — but it's not "pennies on the dollar."

Who Actually Qualifies for an OIC?

Based on the RCP formula, good candidates for OIC typically have:

✅ Little or no asset equity — Renting, older vehicle, minimal savings
✅ Low disposable income — Expenses consume most of their income
✅ Large debt relative to ability to pay — The math doesn't work for full payment
✅ Stable but modest situation — Not expecting significant income increases

Who usually doesn't qualify:

❌ Homeowners with significant equity — The IRS sees this as an asset you could tap
❌ People with retirement accounts — These count as assets (with some exceptions)
❌ Higher earners — More disposable income = higher RCP
❌ People who could pay through an installment agreement — IRS prefers full payment over time

The IRS explicitly states: "We generally won't accept an OIC if we believe that you can pay your full tax liability in a lump sum or through a payment agreement."

Current Acceptance Rates

The OIC acceptance rate has dropped significantly:

The sharp drop in 2024 may reflect stricter IRS review or a backlog of marginal applications. Either way, the odds are not in your favor unless you clearly meet the criteria.

Average accepted offer in FY 2024: Approximately $22,700

What You Need to Apply

Forms Required

• Form 656 — Offer in Compromise application
• Form 433-A (OIC) — Collection Information Statement (detailed finances)
• Form 656-B Booklet — Instructions and required documents

Application Fee

• $205 (non-refundable, even if rejected)
• Waived for low-income applicants (at or below 250% of poverty level)

Payment with Application

For lump sum offers: - 20% of your offer amount must be submitted with the application - This payment is non-refundable — even if your offer is rejected - The remaining 80% is due within 5 months of acceptance

For periodic payment offers: - First proposed monthly payment submitted with application - You must continue making monthly payments while the IRS reviews your offer - Payments continue until the offer is accepted, rejected, or you withdraw

Documentation Typically Required

• Proof of income (pay stubs, tax returns, benefit statements)
• Bank statements (last 3 months)
• Investment and retirement account statements
• Property valuations (home, vehicles)
• Proof of expenses (rent/mortgage, utilities, medical, etc.)
• Loan balances

The OIC Process and Timeline

1. Pre-Application

Before applying, ensure: - All required tax returns are filed - You're current on estimated tax payments (if self-employed) - You're not in an open bankruptcy

Tip: Use the IRS Pre-Qualifier tool at IRS.gov to get a rough sense of whether you might qualify.

2. Submission

Mail your complete application (Form 656, 433-A OIC, fee, and initial payment) to the appropriate IRS address.

3. Initial Review

The IRS checks for completeness. If something's missing, they'll return the offer (and keep your fee).

4. Assignment and Investigation

An Offer Examiner reviews your financial information, may request additional documents, and calculates your RCP.

This typically takes 6-12 months — sometimes longer.

5. Decision

You'll receive one of three outcomes: - Accepted — You pay the agreed amount under the terms specified - Rejected — IRS explains why and may suggest a higher amount they'd accept - Returned — Application incomplete or you became non-compliant

6. Appeal (If Rejected)

You have 30 days to appeal a rejection to the IRS Independent Office of Appeals.

The 2-year rule: If the IRS doesn't decide within 2 years, your offer is automatically accepted. This rarely happens, but it's a protection.

What Happens If Your Offer Is Accepted

Acceptance comes with strings attached:

Immediate Requirements

• Pay the remaining balance according to the terms (lump sum within 5 months, or continue periodic payments)
• Any tax refund for the year of acceptance is forfeited to the IRS

5-Year Compliance Period

For the next 5 years, you must: - File all tax returns on time - Pay all taxes owed on time - Stay current on estimated taxes (if applicable)

If you violate these terms: The IRS can void the compromise, reinstate the original debt (minus payments made), and resume collection.

Lien Release

The IRS will release any federal tax liens within 30 days of you completing the offer terms (final payment and verification).

What Happens If Your Offer Is Rejected

Most offers are rejected. If yours is:

1. Read the rejection letter carefully — It explains why and often includes a counteroffer amount
2. Consider the counteroffer — If the IRS says they'd accept $25,000 instead of your $15,000 offer, evaluate whether that's feasible
3. Appeal within 30 days — If you believe the examiner made errors, appeal to IRS Appeals
4. Explore other options — Installment agreement, Currently Not Collectible status, or partial payment plan

Note: Your 20% payment and application fee are not refunded if rejected. They're applied to your tax balance.

Red Flags: The OIC "Mill" Scam

The FTC and state attorneys general have sued numerous "tax relief" companies for misleading OIC advertising. Here's what to watch for:

🚩 "Pennies on the Dollar" Promises

No one can promise a specific settlement before analyzing your finances. If they guarantee 90% reduction before seeing your numbers, they're lying.

🚩 Guarantees Before Analysis

Legitimate professionals will tell you OIC is a maybe — not a sure thing. Anyone guaranteeing acceptance is setting you up for disappointment.

🚩 Large Upfront Fees

Some companies charge $5,000-$10,000+ upfront, then do minimal work. If your offer is rejected (likely), you're out that money.

🚩 "Everyone Qualifies"

OIC has strict eligibility requirements. Many people simply don't qualify based on the RCP formula.

🚩 Pressure Tactics

"Act now before the IRS takes everything!" The IRS has a process. You have time to make an informed decision.

What Happens with Scam Companies

1. They sign you up with big promises
2. They collect a large upfront fee
3. They file a power of attorney (so they can access your IRS records)
4. They submit an offer that was never realistic
5. The IRS rejects it
6. They keep your fee and move on to the next victim

When OIC Makes Sense

An Offer in Compromise is worth pursuing if:

✅ You genuinely cannot pay your full balance — not even over 10 years
✅ Your RCP calculation suggests a significantly lower amount than you owe
✅ Your financial situation is stable (not expecting big income increases)
✅ You can afford the application fee and 20% down payment
✅ You're prepared for a 6-12+ month process
✅ You'll commit to 5 years of full compliance if accepted

OIC is probably not for you if:

❌ You have significant home equity or retirement savings
❌ You have steady income that would cover an installment agreement
❌ You're expecting a major income increase soon
❌ You just don't want to pay what you owe

DIY vs. Professional Help

You Can Apply Yourself

The IRS provides all forms and instructions in the Form 656-B booklet. If you're organized and patient, you can submit your own offer.

Advantages of DIY: - No professional fees - You control the process - You learn your own finances thoroughly

Risks of DIY: - Mistakes can result in returned offers and lost fees - May not present expenses in the most favorable way - No one to negotiate if IRS proposes higher amount

When to Hire a Professional

Consider professional help if: - Your debt is large ($50,000+) - Your situation is complex (business taxes, multiple years, etc.) - You've never done this before and want guidance - You need someone to negotiate with the IRS on your behalf

Good professionals will: - Analyze your finances before committing to anything - Give you an honest assessment of your chances - Explain the process and timeline clearly - Charge reasonable fees (not $10,000 upfront) - Have verifiable credentials (EA, CPA, or attorney)

Alternatives to OIC

If OIC isn't realistic for your situation, consider:

Installment Agreement

Pay the full balance over time (up to 72 months). Most common solution. Learn more →

Currently Not Collectible

If you can't afford basic expenses, the IRS may pause collection. Learn more →

Partial Payment Installment Agreement

Pay what you can monthly; remaining balance may expire after 10 years.

Penalty Abatement

Even if you can't reduce the tax, you may be able to remove penalties (up to 25% of your debt). Learn more →

Key Takeaways

1. OIC is real, but selective — Only about 21% of offers are accepted
2. The IRS uses a formula — Your offer must meet or exceed your Reasonable Collection Potential
3. "Pennies on the dollar" is marketing — Actual settlements average around $22,700
4. It takes 6-12+ months — This is not a quick fix
5. Acceptance comes with conditions — 5 years of full compliance required
6. Beware of scams — Companies promising guaranteed results are lying
7. Alternatives exist — Payment plans and hardship status help most people

Next Steps

Want to see if OIC might work for you?

1. Use the IRS Pre-Qualifier Tool for a rough estimate
2. Take our quiz to see which options fit your situation
3. Gather your financial documents
4. Get an honest assessment from a qualified professional

Need help evaluating your options?

📞 Call: (XXX) XXX-XXXX
Monday - Friday, 9AM - 5PM EST
Free consultation, no obligation.

We'll give you an honest assessment — even if that means telling you OIC isn't realistic and another option is better.

Sources

• IRS.gov: Offer in Compromise
• IRS Form 656-B Booklet (2024)
• IRS Data Book FY 2024
• FTC Consumer Alerts on Tax Relief Scams
• Internal Revenue Manual, Offer in Compromise Procedures

This guide is for educational purposes only and does not constitute tax advice. OIC eligibility depends on individual circumstances — consult a qualified tax professional for advice specific to your situation.