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Key Facts
- Federal level: An offer in compromise is an agreement that can settle federal tax liabilities for less than the full amount owed.
- Federal level: The recognized grounds are doubt as to liability, doubt as to collectibility, and effective tax administration.
- Federal level: Filing an offer does not guarantee acceptance; the IRS evaluates eligibility, facts, financial information, and compliance.
- Federal level: Required returns, estimated payments, and federal tax deposits generally must be current before an offer can be considered.
- Federal level: A returned offer and a rejected offer are different; a timely appeal is available for rejection but generally not for return.
- Federal level: Accepted offers impose continuing terms, including future filing and payment compliance.
An offer in compromise, or OIC, is a federal collection agreement between a taxpayer and the IRS. When accepted and completed, it resolves included tax liabilities for less than their full assessed balance.
It is not a general discount program. The IRS verifies the legal basis, collection potential, financial disclosures, compliance history, proposed amount, and special circumstances before deciding whether compromise serves the governing standard.
The three grounds for compromise
Doubt as to liability
This ground applies when a genuine dispute exists about the existence or amount of the correct tax liability. It focuses on whether the debt is legally correct, not simply whether payment is difficult.
The IRS uses Form 656-L for this ground. Financial-collection forms and payments used for collectibility offers generally are not the core of a liability dispute.
Doubt as to collectibility
This ground applies when the taxpayer’s assets and income are insufficient to pay the liability in full. The IRS analyzes reasonable collection potential using verified assets, income, allowed expenses, and future ability to pay.
A low offer is not accepted merely because it is affordable. The proposed amount normally must reflect the calculation required by current Form 656-B unless special circumstances justify a different result.
Effective tax administration
This ground can apply where full collection is possible but would create economic hardship, or where exceptional circumstances make collection inequitable and compromise would not undermine voluntary compliance.
Effective-tax-administration offers require facts beyond ordinary inconvenience. The regulation directs attention to hardship or compelling public-policy or equity considerations.
Eligibility before filing
Current Form 656-B requires all legally required returns to be filed, at least one bill for an included debt, required current-year estimated payments, and required federal tax deposits for an employer. An open bankruptcy case prevents IRS consideration of an offer.
Eligibility is not acceptance. Passing the pre-qualifier or being allowed to submit starts the evaluation rather than deciding it.
Taxpayers who can pay through equity, income, or an IRS payment plan may find that a compromise is not supported by the collectibility calculation.
Forms and financial disclosure
Doubt-as-to-collectibility and effective-tax-administration offers generally use Form 656 plus Form 433-A (OIC) for individuals or self-employed people and Form 433-B (OIC) for businesses, as applicable. The April 2026 Form 656-B booklet contains the current package and instructions.
The financial statement requests cash, investments, retirement assets, real property, vehicles, business interests, income, household contributions, and expenses. Supporting statements and valuations allow the IRS to verify the disclosure.
A spouse’s income can be relevant to allocating shared household expenses even when the spouse does not owe the liability. Inclusion in the household analysis does not automatically make that spouse liable for the tax.
Lump-sum and periodic-payment offers
Federal law distinguishes lump-sum and periodic-payment offers. A lump-sum offer proposes payment in five or fewer installments and generally requires an initial payment of 20% of the offered amount with the application.
A periodic-payment offer proposes six or more installments and generally requires the first proposed installment with filing, followed by proposed payments while the IRS evaluates the offer. Current form instructions control payment routing and exceptions.
Qualifying individuals who properly claim the low-income certification can be exempt from the application fee and initial or periodic offer payments during consideration. Doubt-as-to-liability offers also use different fee and payment treatment.
What the IRS evaluates
For collectibility, the analysis usually begins with net realizable equity in assets and a measure of future income after allowed expenses. National and local collection standards can affect which living expenses are allowed.
Actual spending is not automatically accepted in full, and every asset is not automatically counted at face value. Exemptions, encumbrances, quick-sale valuation, dissipated assets, income changes, and special circumstances can affect the calculation.
The IRS may request additional information and set a response deadline. Incomplete, inconsistent, or stale documentation can delay consideration or cause the offer to be returned.
Collection activity while an offer is pending
Submission can restrict levy action while an offer is pending and during specified appeal periods, subject to statutory exceptions. It does not automatically release a filed federal tax lien.
The collection limitations period is suspended while the offer is pending and for applicable additional periods. Delaying collection without a supportable offer can therefore carry consequences.
Tax refunds can be applied according to the terms and law governing the offer year. The current Form 656 terms should be read before assuming a future refund will be returned.
Returned, rejected, withdrawn, and accepted
Returned
The IRS can return an offer that is not processable or no longer eligible—for example, because required information, fees, payments, returns, or current obligations are missing, or bankruptcy intervenes. A return is generally not an appealable rejection, although a corrected offer may sometimes be submitted later.
Rejected
A rejection is a merits decision not to accept the proposed compromise. Section 7122 requires independent administrative review before rejection, and IRS guidance provides 30 days from the rejection letter to request Appeals consideration.
Withdrawn
A taxpayer can withdraw a pending offer under the applicable procedures. Withdrawal ends consideration without creating an accepted compromise.
Accepted
Acceptance creates binding terms. The taxpayer must make promised payments, comply with filing and payment requirements for the stated future period, and satisfy other Form 656 conditions.
Default can allow the IRS to terminate the compromise and reinstate collection of the original liability, reduced by payments and credits as provided by the agreement.
Liens, levies, and an accepted offer
An offer does not immediately erase the federal tax lien. Current IRS materials explain that a notice generally remains until the offer is fully paid and the included liability is released under the applicable rules.
Because lien release, withdrawal, and compromise are distinct actions, acceptance should not be described as instant removal of every public record or creditor issue.
Practical preparation
Begin with current account transcripts and a list of every tax period and entity to be compromised. Separate individual, joint, sole-proprietor, partnership, and corporate liabilities because multiple applications can be required.
Reconcile bank statements, pay information, asset values, loans, household expenses, and current compliance before calculating the offer. Use the latest Form 656-B revision and preserve a complete copy of the submission and delivery evidence.
This article concerns federal IRS compromise authority. State and local taxing agencies use separate statutes, forms, eligibility standards, and settlement programs; these federal sources do not establish state rules.
