Offer in Compromise (OIC): A Practical Guide to Settling IRS Debts

Feb 01, 2026By SN Accountancy

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Understanding Offer in Compromise (OIC)

Dealing with the IRS can be daunting, especially when you owe more than you can afford to pay. An Offer in Compromise (OIC) provides a potential solution by allowing you to settle your tax debt for less than the full amount you owe. This program is designed for taxpayers who cannot pay their full tax liability or doing so would create financial hardship.

Before diving into the OIC process, it's crucial to understand that not everyone qualifies. The IRS considers your ability to pay, income, expenses, and asset equity. In this guide, we'll walk you through how to determine if you're eligible and how to apply.

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Eligibility for Offer in Compromise

To determine eligibility for an OIC, the IRS looks at several factors. Key considerations include:

  • Income: Your current income and potential future earnings.
  • Expenses: Necessary living expenses, including housing, transportation, and healthcare.
  • Asset Equity: The value of your assets such as property, vehicles, and investments.

The IRS will only accept an OIC if they believe it represents the most they can reasonably expect to collect within a reasonable period.

Types of Offer in Compromise

There are three main types of OICs:

  1. Doubt as to Collectibility: You cannot pay your tax debt in full.
  2. Doubt as to Liability: There is a legitimate dispute about the amount you owe.
  3. Effective Tax Administration: Paying the full amount would cause economic hardship or would be unfair and inequitable.
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Steps to Apply for an OIC

Applying for an OIC involves several steps. Here's a practical guide:

Step 1: Complete the Application

You'll need to fill out Form 656, Offer in Compromise, and Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. Make sure to provide accurate and complete information to avoid delays.

Step 2: Submit the Initial Payment

Depending on the payment option you choose, you'll need to submit an initial payment with your application. There are two options:

  • Lump Sum Cash Offer: Pay an initial 20% of the total offer amount.
  • Periodic Payment Offer: Make the first payment with the application and continue to pay monthly installments while the IRS evaluates your offer.
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After Submitting Your Offer

Once you submit your OIC, the IRS will review your application and may request additional information. The process can take several months, so patience is key. During this time, the IRS will suspend collection activities, giving you some breathing room.

If your offer is accepted, you'll need to comply with all the terms, including filing all future tax returns and making agreed payments. If your offer is rejected, you have the right to appeal within 30 days.

Benefits of an Offer in Compromise

An OIC can provide significant relief by reducing your tax debt and stopping collection activities. It allows you to resolve your tax issues and move forward without the burden of overwhelming debt. If you're overwhelmed by tax debt, consulting a tax professional can provide valuable guidance through the OIC process.