Offer in Compromise: Can You Settle Your IRS Tax Debt for Less?

2025 Updates

• The application fee remains $205; however, low-income certification waives both the fee and the initial payment.
• Online Account tools allow digital submission, eligibility check, and payment tracking.
• Stricter review for asset valuation and financial documentation, especially for higher-income applicants.
• The acceptance rate for OICs in 2025 is approximately 36.55%, which is slightly over one-third of the submissions.
• Standard five-year compliance period after acceptance, with tax returns and payments due on time.
• National Standards for allowable expenses are updated yearly.

For official details, see the IRS Newsroom (2025 OIC Guide) and Form 656 Booklet.

Eligibility & Requirements

To qualify for an Offer in Compromise in 2025, applicants must prove that paying the full tax debt would create financial hardship. Key requirements include:

• All required returns filed
• Current on estimated payments (or deposits for businesses)
• No open bankruptcy cases
• Demonstrate that assets and income cannot cover total liability (reasonable collection potential)

Applicants must complete Form 656 and Form 433-A (OIC), providing detailed financial disclosures. The IRS weighs income, expenses, asset equity, and special situations. Use the IRS Pre-Qualifier Tool for a quick self-check.

• Low-income waiver applies if AGI meets IRS thresholds
• Online Account lets applicants check status and manage payments digitally in 2025

Comparison Table: Settling IRS Tax Debt

How to Apply: Step-by-Step Checklist

1. Visit the IRS Offer in Compromise Pre-Qualifier Tool to check if you’re eligible.
2. Gather documentation: recent tax returns, income records, assets, and liabilities.
3. Download Form 656 Booklet and complete Form 656 & Form 433-A (OIC).
4. Calculate offer amount (IRS determines minimum; offer should match or exceed reasonable collection potential).
5. Attach $205 application fee and initial payment (unless low-income waiver applies).
6. Submit by mail or via IRS Online Account; retain copies for records.
7. Respond promptly to IRS requests for further info or clarification.
8. Track status via IRS tools and update mailing address as needed.
9. If accepted, pay the offer amount and remain compliant for 5 years.
10. If rejected: appeal within 30 days or consider alternatives.

Timeline: Most decisions take 6–24 months; digital submissions may see faster review in 2025.

Costs, Risks & Limitations

• Nonrefundable $205 application fee (unless waived).
• Initial payment required with submission; forfeited if offer is rejected
• Professional fees if using aid from a CPA or tax attorney
• All refunds due before OIC acceptance are applied to the tax debt
• Strict eligibility; not everyone qualifies
• Public record for one year after acceptance
• Agreement failure or new tax debt during a five-year period voids OIC; full debt reinstated
• Applications may be returned or denied if documents are missing or inaccurate.
• IRS may place a lien/levy if compliance terms are breached

OIC mills (third-party promoters) may charge high upfront fees without improving the odds of winning. Always consult the IRS warning before hiring help.

Troubleshooting & Changes

• Update contact info if moving or changing phone/email
• Respond quickly to IRS requests for documents to avoid delays or returns
• If the offer is rejected, appeal within 30 days using the IRS instructions
• If terms must be changed, only request a one-time payment extension within two years from the accepted date
• Failure to pay on time or noncompliance (missing filings/payments) voids the agreement, reinstates the full debt, and reinstates liens or levies
• Cannot add new tax debt to an accepted OIC; must resolve separately
• If the payment method changes, coordinate with the IRS monitoring examiner

Alternatives & When to Choose Them

• Installment Agreement: If you can pay the full debt over time, you lower barriers, but the full debt plus interest remains. Official IRS Payment Plans
• Currently Not Collectible Status: If unable to pay even basic expenses, stops collection, and the debt is not resolved. IRS Delays the Collection Process
• Partial Payment Installment Agreements: If you can make small payments but not the full debt, it allows partial monthly payments, which are reviewed regularly. IRS Payment Plans
• Bankruptcy: May discharge tax debts under strict rules; consult an expert before considering. IRS Bankruptcy Tax Guide

State tax debts: Apply separately to your state’s Offer in Compromise program. NYS OIC Program

Worked Example: 2025 Scenario

Scenario: Sam owes $41,000 in federal tax debt. His assets (car, home equity, savings) total $9,500. His net monthly income, after deducting necessary living expenses, leaves him with $112 disposable per month. Sam completes Form 433-A (OIC) and Form 656, and calculates an offer amount as follows:

• Total available assets: $9,500
• Disposable income × 12: $112 × 12 = $1,344
• Reasonable Collection Potential (RCP): $9,500 + $1,344 = $10,844

Sam submits an offer to settle for $10,900. He attaches the $205 application fee and an initial payment of $2,180 (20% of the offer). His low-income status waives further payments until the IRS makes a decision. If accepted, Sam pays $10,900; any prior refunds get applied, and he must stay compliant for five years.

Common Mistakes & Pro Tips

• Failing to file all required returns before applying
• Understating income or omitting assets leads to automatic denial
• Offering less than reasonable collection potential (RCP)—IRS will reject or invite a higher offer
• Ignoring IRS requests for more info
• Applying while in active bankruptcy—auto-returned
• Using unqualified third-party promoters (OIC mills) who overpromise

• Check eligibility with IRS official tools before submitting
• Prepare accurate supporting documentation for income, assets, and expenses
• Consider professional help for complex cases
• Keep copies and track communication

Take Action Now

The IRS Offer in Compromise program can help eligible taxpayers settle federal tax debt for less. Ready to get started? Use the official Pre-Qualifier Tool and download the latest Form 656 Booklet. Consider consulting a licensed tax pro for help with forms or strategy. If you are not eligible, consider comparing alternatives or requesting a payment plan with the IRS.

FAQs

• What is an Offer in Compromise? It’s a way to settle IRS tax debt for less, based on strict eligibility rules.
• Who qualifies for OIC? Taxpayers are unable to pay the full debt, or paying creates hardship. Must file all returns and be up-to-date on payments.
• How much does it cost? $205 application fee (waived for low-income) plus an initial payment if not waived.
• How long does it take? Most cases resolve in 6–24 months; complex cases may take longer.
• Can I apply online? Yes, IRS Online Account supports eligibility checks, submission, and payment tracking in 2025.
• Will this affect my credit? Accepted OICs release federal tax liens, but processing may temporarily impact credit files.
• What happens if my OIC is rejected? You may appeal within 30 days or apply for an installment agreement.
• Can I settle state tax debts? State programs are separate; check with your state’s department of revenue.
• Is full payment required after OIC acceptance? Only the accepted offer amount is owed; future compliance is needed for five years.
• What happens to refunds? IRS will keep any refund owed before OIC acceptance; future refunds may also be retained.
• Can the OIC be changed or canceled? No changes are allowed after acceptance; a one-time extension for payment may be possible.
• Will I need professional help? A licensed CPA or enrolled agent is helpful for complex/large debts, but many can apply directly.

Sources

• IRS Newsroom – Offer in Compromise (2025)
• Offer in Compromise | IRS.gov
• Offer in Compromise FAQs | IRS.gov
• Form 656 Booklet | IRS.gov
• IRS OIC Pre-Qualifier Tool
• New York State OIC Program
• IRS Installment Agreements
• Temporary Delay of Collection Process
• IRS Bankruptcy Tax Guide

Disclaimer

Disclaimer: This article is for informational and educational purposes only. It is not tax, legal, or financial advice. Consult an IRS agent, licensed CPA, or tax attorney for personalized assistance.