An IRS offer in compromise (OIC) is a settlement in which the IRS accepts less than the full tax debt because the amount offered is about as much as it could realistically collect from you. You apply with Form 656, a Form 433-A (OIC) or 433-B (OIC) financial statement, a $205 fee and an initial payment, unless you qualify for the low-income waiver.
The math behind every IRS offer in compromise is the reasonable collection potential: the equity in your assets plus a set number of months of your leftover monthly income. Below is how that minimum offer is calculated, with a worked example. Figures reflect the April 2026 revision of the Form 656 Booklet and are current as of October 2026.
The program rests on section 7122 of the Internal Revenue Code, which says the Secretary "may compromise any civil or criminal case arising under the internal revenue laws".
The Treasury regulation recognizes three grounds for a compromise, set out in 26 CFR 301.7122-1:
If the real dispute is a joint return liability that belongs to a former spouse, innocent spouse relief may fit better, and our guide to Form 8857 and innocent spouse relief explains that route.
The Form 656 Booklet lists the conditions you must meet before the IRS will consider an offer. You must have filed every tax return you are legally required to file, have received a bill for at least one tax debt included in the offer, and have made all required estimated tax payments for the current year. A business owner with employees must also have made all required federal tax deposits for the current quarter and the two preceding quarters, which ties the offer directly to Form 941 deposits.
Several situations block an application outright. You cannot apply while you or your business is in an open bankruptcy proceeding. The booklet asks you to resolve any open audit or innocent spouse claim first, and the IRS will not consider an offer filed under a deactivated ITIN.
A business that owes payroll taxes faces one more gate. The booklet states that a business is not eligible unless the trust fund portion of the tax is paid or the IRS has made Trust Fund Recovery Penalty determinations on all potentially responsible parties. Our explainer on the Trust Fund Recovery Penalty covers how that personal assessment works.
Finally, the IRS says it generally will not accept an offer if you can pay the debt in full through a payment plan, equity in assets or both. If full payment is possible over time, a Form 9465 installment agreement is usually the realistic path.
The IRS offers a free Offer in Compromise Pre-Qualifier tool that lets you "see if you may be eligible for an offer in compromise (OIC)." The IRS adds that the tool "should only be used as a guide" and that its final decision rests on the completed application and its own investigation. Individuals can also prepare, pay for and submit the offer through their IRS Individual Online Account.
According to the Form 656 Booklet (Form 656-B, Rev. 4-2026), a complete package contains:
The booklet states that your offer amount "must be equal to or greater than the amount calculated in Form 433-A(OIC) or 433-B(OIC)." Our walkthrough of IRS Form 433-A covers the related collection information statement.
If you owe both individual and business tax, you file two Forms 656, each with its own fee and payment. When a representative prepares and files the package, they will need a power of attorney, and our guide to Form 8821 and Form 2848 explains the difference between the two authorizations.
Every offer requires a $205 application fee. The IRS keeps the fee unless the offer is not accepted for processing, and initial payments are generally applied to your tax debt if the offer fails.
Individuals and sole proprietors can skip the fee and all payments during review under the Low-Income Certification. You qualify if your adjusted gross income from your latest Form 1040, or your household's gross monthly income times 12, is at or below the figure for your family size. The April 2026 Form 656 lists these thresholds:
| Family size | 48 contiguous states, D.C. and territories | Alaska | Hawaii |
|---|---|---|---|
| 1 | $39,900 | $49,875 | $45,900 |
| 2 | $54,100 | $67,625 | $62,225 |
| 3 | $68,300 | $85,375 | $78,550 |
| 4 | $82,500 | $103,125 | $94,875 |
| 5 | $96,700 | $120,875 | $111,200 |
| Each person above 5 | add $14,200 | add $17,750 | add $16,325 |
If you qualify, your first payment is due 30 calendar days after acceptance unless another date is agreed. Businesses other than sole proprietors and offers filed for a deceased person cannot use the certification.
You choose one payment option on Form 656, and the choice changes both the initial payment and your minimum offer.
Lump sum cash offer. You send 20% of the total offer amount with the application and pay the balance in five or fewer payments within five months of acceptance. The 20% requirement comes from section 7122(c), which says a lump-sum offer "shall be accompanied by the payment of 20 percent of the amount of such offer."
Periodic payment offer. You send the first proposed monthly payment with the application and pay the rest in monthly installments, finishing within 6 to 24 months. You must keep making those monthly payments while the IRS reviews the offer. Missing one before the final decision letter lets the IRS return the offer, and a returned offer has no appeal rights.
The booklet also bars some sources of money. You cannot fund the offer with an expected or current tax refund, money already paid, funds taken by levy, or anticipated benefits from a capital or net operating loss.
Section 8 of Form 433-A (OIC) calculates the minimum offer amount in two parts.
The first part is net realizable equity in assets (Box A, plus Box B for business assets). Most assets are valued at 80% of current market value, a quick-sale figure, minus any loan balance. Individuals subtract $1,000 from total bank balances and $3,450 from the equity in one vehicle, or in two vehicles on a joint offer, though the booklet applies these allowances only after the IRS finds you cannot pay in full. The form notes that the reduction for retirement accounts may be larger than 20% because of taxes and withdrawal penalties.
The second part is future remaining income. Your monthly household income minus allowable monthly expenses gives Box F, the remaining monthly income. The booklet notes that the IRS generally does not allow private school tuition, college expenses, charitable contributions or other unsecured debt payments as expenses.
Asset equity plus the future income figure equals the minimum offer. Paying faster means a smaller multiplier and a lower required offer.
Assume a single taxpayer in Ohio owes $96,000 in income tax, penalties and interest. All returns are filed and current-year estimated payments are made. The figures below use the Form 433-A (OIC) formulas; actual expense allowances depend on what the IRS accepts during its review.
| Asset | Market value | x 0.8 | Less loan | Allowance | Net equity |
|---|---|---|---|---|---|
| Checking and savings | $6,500 | n/a | $0 | minus $1,000 | $5,500 |
| 401(k) (no loan) | $30,000 | $24,000 | $0 | none | $24,000 |
| Home | $320,000 | $256,000 | $245,000 | none | $11,000 |
| Car | $18,000 | $14,400 | $9,000 | minus $3,450 | $1,950 |
| Box A total | $42,450 |
Monthly gross household income is $6,200 and allowable expenses are $5,850, leaving $350 in Box F.
| Payment option | Future income | Minimum offer | Payment with Form 656 | Share of $96,000 owed |
|---|---|---|---|---|
| Lump sum | $350 x 12 = $4,200 | $46,650 | $9,330 (20%), then $37,320 within 5 months | 48.6% |
| Periodic (24 months) | $350 x 24 = $8,400 | $50,850 | First monthly payment (about $2,119 if spread evenly over 24 months) | 53.0% |
Annual gross income of $74,400 ($6,200 x 12) is above the $39,900 single-person threshold, so this taxpayer pays the $205 fee and the initial payment. The lump sum option lowers the required offer by $4,200 if the taxpayer can raise $46,650 within five months of acceptance. The 401(k) figure may fall if the IRS allows a larger reduction for tax and early withdrawal penalties.
The IRS Data Book for fiscal year 2025 (October 1, 2024 to September 30, 2025) reports that taxpayers proposed 38,797 offers in compromise and the IRS accepted 5,464 offers, amounting to $98.1 million. Table 4-1 of the same publication shows the prior year for comparison.
| Fiscal year | Offers received | Offers accepted | Amount accepted | Accepted per 100 received | Average accepted offer |
|---|---|---|---|---|---|
| 2024 | 33,591 | 7,199 | $163.4 million | 21.4 | $22,695 |
| 2025 | 38,797 | 5,464 | $98.1 million | 14.1 | $17,962 |
The ratio is a rough guide only, because offers accepted in a year may have been received in an earlier year.
According to the IRS offer in compromise page, the agency suspends most collection activity while it considers the offer and may file a notice of federal tax lien. The booklet adds that the IRS may levy assets up to the time an official signs the offer as pending, and that penalties and interest continue to accrue during review. If you already have an installment agreement, you do not have to make those payments while the offer is under consideration.
Section 7122(f) sets a time limit on the IRS. An offer is treated as accepted if the IRS does not reject it within 24 months of submission, and Form 656 explains that the period starts when the correct IRS site receives the offer. Time when a liability is in dispute in a judicial proceeding does not count toward the 24 months.
A returned offer, for example for unfiled returns, missed periodic payments or unanswered information requests, carries no appeal rights. A rejected offer can be appealed to the IRS Independent Office of Appeals, usually on Form 13711, Request for Appeal of Offer in Compromise. The regulation allows the appeal if you request it "within the 30-day period commencing the day after the date on the letter of rejection."
Before appealing, compare the IRS's asset values and expense allowances with your own figures line by line, since those inputs drive the minimum offer and show whether an appeal or a revised offer makes more sense. If the IRS moves toward a levy during or after the process, the Form 12153 Collection Due Process hearing is a separate right that can raise an offer as a collection alternative.
Acceptance comes with conditions set out in the offer terms of Form 656. You must file all required returns and pay all taxes, including quarterly estimated tax payments, on time through the fifth year after acceptance. If you miss those obligations, the IRS may default the offer, and you become liable for the original tax debt, less payments made, plus all accrued interest and penalties.
Other terms worth knowing:
Penalty relief is a separate process from an offer. If part of the balance is penalties that may qualify for reasonable cause or first-time relief, a Form 843 penalty abatement request can shrink the debt before you decide whether an offer is still needed.
What is the minimum amount the IRS will accept in an offer in compromise? For an offer based on doubt as to collectibility, the minimum is your reasonable collection potential. That is net equity in assets (mostly 80% of market value less loans) plus remaining monthly income times 12 for a lump sum offer or times 24 for a periodic payment offer.
How much does it cost to apply for an IRS offer in compromise? The application fee is $205 per Form 656. A lump sum offer also requires 20% of the offer amount up front, and a periodic payment offer requires the first monthly payment. Individuals who meet the Low-Income Certification thresholds pay neither the fee nor any payment during review.
How many offers in compromise does the IRS accept? In fiscal year 2025 the IRS received 38,797 offers and accepted 5,464, worth $98.1 million, according to the IRS Data Book. That works out to about 14 accepted offers for every 100 received in the same year.
What happens if I miss a tax payment after my offer is accepted? The IRS may default the offer if you fail to file or pay on time during the five years after acceptance. A defaulted offer brings back the original debt, less payments made, plus accrued interest and penalties.
Madras Accountancy supports US CPA firms, enrolled agents and their clients with tax preparation, bookkeeping clean-up and the financial records that collection cases depend on, including the asset, income and expense detail that goes into a Form 433-A (OIC) or 433-B (OIC). To talk through how that work could fit your firm, contact our team.
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