How do I apply for an IRS Offer in Compromise?

An Offer in Compromise (OIC) lets you settle your IRS tax debt for less than the full amount you owe. It sounds great, but the IRS only accepts about 33% of applications. Getting approved requires meeting specific criteria and filling out the right forms correctly.

Step 1: Check if you're eligible. Use the IRS Pre-Qualifier tool on irs.gov. You must be current on all tax filings (no missing returns), not be in an open bankruptcy proceeding, and have a valid extension for the current year's return if it's not filed yet. If you owe trust fund taxes as a business owner, you'll need a separate OIC for those.

Step 2: Determine which form to use. Most individuals file Form 656 (Offer in Compromise). You'll also need Form 433-A (OIC), which is a detailed collection information statement listing your income, expenses, assets, and liabilities. If you're self-employed or have business income, you'll also need Form 433-B (OIC).

Step 3: Calculate your offer amount. The IRS uses a formula called "Reasonable Collection Potential" (RCP). It adds up your net equity in assets (what your stuff is worth minus what you owe on it) plus your future income (monthly disposable income multiplied by either 12 or 24 months depending on your payment option). Your offer must be at least equal to the RCP or the IRS will reject it.

Step 4: Choose a payment option. Lump Sum Cash Offer: pay 20% of your offer amount with your application, then the balance within 5 months of acceptance. Periodic Payment Offer: pay your first proposed installment with the application, then continue monthly payments while the IRS reviews. You also need to continue making payments during the review period.

Step 5: Submit with the fee. The application fee is $205, unless you qualify for Low Income Certification (below 250% of the federal poverty level), which waives both the fee and the initial payment requirement.

Processing time: Expect 6 to 12 months for the IRS to review your application. During this time, the 10-year collection statute is paused. If your offer is rejected, you have 30 days to appeal. Many successful OICs are actually approved on appeal rather than on the first submission.

If your tax debt is over $10,000, consider hiring an enrolled agent, CPA, or tax attorney who regularly handles OICs. The form preparation alone can take 10 to 20 hours to do correctly.