Knowledge Center Tax Advice for Specific Needs

What Is an Offer in Compromise and How Do I Settle My Tax Debt With the IRS?

An Offer in Compromise (OIC) is a formal agreement with the IRS that allows you to settle your tax debt for less than the full amount you owe. The program exists for taxpayers who cannot realistically pay their entire balance and for situations where collecting the full amount would create undue economic hardship.

The IRS accepted approximately 12,711 out of 30,163 offers submitted in 2023, according to the IRS Data Book. That is roughly a 42% acceptance rate among offers that were fully processed. Most rejections happen because of incomplete applications, unfiled returns, or offer amounts that fall below what the IRS calculates it could collect.

Doubt as to collectibility: You agree you owe the tax, but you cannot pay the full amount based on your income, expenses, and assets
Doubt as to liability: You have a legitimate legal dispute about whether you owe all or part of the tax debt
Effective tax administration: You could technically pay, but doing so would create severe economic hardship or would be unfair due to exceptional circumstances

Before applying, you can use the free IRS Offer in Compromise Pre-Qualifier Tool to estimate whether you might qualify and what your minimum offer amount could be.

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Here is how the program works, what it costs, and how to determine if it makes sense for your situation.

How Does the IRS Decide Whether to Accept My Offer?

The IRS does not accept offers based on hardship stories alone. It uses a specific calculation, the Reasonable Collection Potential (RCP), to determine the minimum amount it will accept. The RCP represents the most that the IRS believes it can realistically collect from you over a defined period.

The formula works like this:

RCP = Quick-sale value of your assets + (Monthly disposable income x 12 or 24 months)

Component	What the IRS Looks At
Quick-sale value of assets	The value of your home, vehicles, bank accounts, investments, and other property, discounted to 80% of fair market value to reflect a forced sale
Monthly disposable income	Your gross monthly income minus allowable living expenses (the IRS uses national and local standards for food, housing, transportation, and healthcare)
Multiplier	12 months if you choose the lump sum payment option; 24 months if you choose the periodic payment option

Your offer must equal or exceed your calculated RCP. If you offer less without documenting special circumstances, the IRS will either ask you to increase it or reject the offer.

Example: Sarah owes $45,000 in back taxes. Her assets have a quick-sale value of $5,000. Her monthly disposable income after allowable expenses is $200. If she chooses the lump-sum option, the minimum offer is $5,000 + ($200 x 12) = $7,400. She could potentially settle $45,000 in debt for $7,400.

The IRS allows specific expense categories based on national and local standards. These include food, clothing, housing, utilities, transportation, healthcare, and court-ordered payments. If your actual expenses exceed the IRS standards, you may need to justify the difference, or your disposable income calculation will be higher, which increases your minimum offer.

Who Qualifies for an Offer in Compromise?

Before the IRS will even review your offer, you must meet several basic eligibility requirements:

Filed all required tax returns: If you have unfiled returns, the IRS will send your application back without reviewing it. For Americans abroad who have fallen behind, the Streamlined Filing Compliance Procedures can help you get current before applying for an OIC.
Made all required estimated tax payments for the current year: If you are self-employed or have income not subject to withholding, your estimated payments must be up to date.
Made all required federal tax deposits for the current quarter (if you are a business with employees).
Not in an open bankruptcy proceeding: The IRS cannot process an OIC while a bankruptcy case is active.
Received a bill for at least one tax debt included in your offer: You cannot submit an offer for a liability that has not yet been assessed.

If you meet these baseline requirements, the IRS then evaluates your financial situation to determine whether your offer amount is acceptable. The IRS will not accept an offer if it believes it can collect more through other means, such as an installment agreement or a federal tax lien.

Who typically qualifies: Taxpayers with limited assets, low or moderate income relative to their debt, significant medical expenses, job loss, or other circumstances that make full payment unrealistic within the collection statute expiration date (typically 10 years from assessment).
Who typically does not qualify: Taxpayers with substantial assets, high income, or the ability to pay the full balance through an installment agreement within the collection period. The IRS will also reject offers it believes were submitted solely to delay collection.

What Does It Cost to Apply For an Offer In Compromise?

The OIC application requires a non-refundable $205 fee plus an initial payment. Both are applied to your tax debt if the offer is rejected.

Payment Option	Initial Payment With Application	If Accepted	If Rejected
Lump sum (pay in 5 or fewer installments)	20% of the total offer amount	Pay the remaining balance within 5 months of acceptance	Initial payment applied to your tax debt; not refunded
Periodic payment (pay over 6 to 24 months)	First monthly payment amount	Continue monthly payments during the IRS review and until the balance is paid	Payments made during review applied to your tax debt; not refunded

Low-income waiver: If your adjusted gross income is at or below the threshold on the Form 656 chart (based on family size and location), the $205 fee is waived, and no initial payment or monthly payments are required during the review period. The IRS will verify your eligibility for this certification.

How Do I Apply for an Offer in Compromise?

The application requires a complete financial disclosure. Here is what you need to submit:

Required Forms

Form	Who Files It	Purpose
Form 656	All OIC applicants	The offer itself: identifies the tax years, offer amount, payment terms, and reason for the offer
Form 433-A (OIC)	Individuals and self-employed taxpayers	Detailed financial statement: income, expenses, assets, bank accounts, investments, vehicles, real property
Form 433-B (OIC)	Business taxpayers (corporations, partnerships, LLCs)	Business financial statement: business income, expenses, assets, receivables
Form 656-L	Taxpayers disputing the liability itself	Used only for “doubt as to liability” offers (instead of Form 656)

All forms are included in the Form 656-B booklet (PDF), which contains instructions, worksheets, and the application checklist.

Supporting Documentation

You will need to provide copies of bank statements (typically 3 to 6 months), recent pay stubs or profit and loss statements, mortgage statements and loan balances, vehicle values, retirement account statements, and proof of allowable expenses such as medical costs or court-ordered payments. The IRS will verify everything you submit, so accuracy matters. Missing or inconsistent documentation is one of the most common reasons applications are returned without review.

Where to Submit

You can mail the completed package to one of the two IRS processing centers listed in the Form 656-B booklet. Individual taxpayers can also submit online through their IRS Individual Online Account. The Form 656 was revised in April 2025; make sure you use the current version.

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What Happens After I Submit My Offer?

The OIC review process typically takes several months and can stretch to a year or longer, depending on complexity and IRS backlog. Here is what to expect:

Collections pause: While the IRS reviews your offer, it generally suspends other collection actions such as wage garnishments and bank levies. However, the IRS may still file or maintain a federal tax lien to protect its interest.
Interest and penalties continue: The clock does not stop on the accrual of interest and penalties while your offer is pending. This means the total amount you owe continues to grow during the review period, even though the IRS is not actively collecting.
You must stay compliant: If you stop filing returns or making estimated payments while your offer is under review, the IRS will return your application and resume collection.
24-month rule: If the IRS does not make a decision on your offer within 24 months of receipt, the offer is automatically deemed accepted. This deadline does not include any appeal period.

If the IRS Accepts Your Offer

You must pay the agreed amount in accordance with the terms of your acceptance letter. You must also file all tax returns on time and pay all taxes owed for the next five years. If you fail to comply during this five-year period, the IRS can default your agreement and reinstate the original full tax debt, minus any payments already made.

If the IRS Rejects Your Offer

You have 30 days from the date of the rejection letter to file an appeal using Form 13711. The appeal is reviewed by the IRS Office of Appeals, which is independent from the unit that rejected your offer. Many rejected offers are reconsidered or modified on appeal.

If your offer was returned (sent back without review due to missing information or non-compliance), you can fix the issues and resubmit. A returned offer does not come with appeal rights, but it also does not count as a rejection.

How Does This Affect Expats?

For Americans living abroad, the Offer in Compromise program presents unique challenges and opportunities.

Unfiled returns are the biggest barrier: Many expats did not realize they needed to file U.S. returns while living overseas. The OIC program requires all returns to be filed before the IRS will review an offer. If you are behind, the Streamlined Filing Compliance Procedures allow you to file three years of delinquent returns and six years of FBARs with reduced or zero penalties, which can clear the path for an OIC application.
Many expats discover they owe less than they think: Before pursuing an OIC, it is worth determining whether you actually owe the amount the IRS says you do. The Foreign Earned Income Exclusion (up to $130,000 for the 2025 tax year) and the Foreign Tax Credit often eliminate or significantly reduce the underlying tax liability. If the IRS assessed taxes based on a substitute for return (where the IRS files a return on your behalf without applying expat-specific exclusions), the actual balance may be much lower once you file a proper return. In that case, you may not need an OIC at all.
IRS audit results can lead to OIC consideration: If you received a Form 4549 (Income Tax Examination Changes) after an audit and disagree with the assessment, you can pursue a doubt as to liability OIC using Form 656-L. If you agree with the assessment but cannot pay, doubt as to collectibility is the appropriate basis.
Foreign assets complicate the RCP calculation: The IRS considers worldwide assets when calculating your Reasonable Collection Potential. Foreign bank accounts, property, and investments all factor into the equation. Proper valuation and documentation of foreign assets, including currency conversions, are critical for accurate financial statements.
The OIC Pre-Qualifier Tool has limitations for expats: The IRS Pre-Qualifier Tool does not work for taxpayers living outside the United States (with some military exceptions). Expats should work directly with a tax professional to calculate their RCP and prepare their application.

Alternatives to an Offer in Compromise

An OIC is not the only tax relief option available. Depending on your situation, one of these alternatives may be more appropriate:

Option	Best For	How It Works
Installment Agreement	Taxpayers who can pay the full balance over time (up to 72 months)	Monthly payments; streamlined approval if you owe $50,000 or less under the IRS Fresh Start program
Currently Not Collectible (CNC)	Taxpayers with no ability to pay anything right now	IRS temporarily suspends collection; debt remains, but no payments are required until the financial situation changes
Filing proper returns	Expats whose liability was assessed by the IRS without applying expat exclusions	File actual returns with FEIE and FTC applied; may eliminate or drastically reduce the balance
Penalty abatement	Taxpayers who can demonstrate reasonable cause for late filing or payment	Reduces the penalty portion of the debt; the underlying tax and interest remain

For many expats, the most effective first step is filing proper returns with all applicable exclusions and credits.

How Greenback Can Help

Resolving tax debt as an American abroad involves navigating both the OIC program and the unique tax benefits available to expats. Your Greenback accountant can help at every stage.

Determining whether you actually owe the assessed amount: Many expats discover that once proper returns are filed with the FEIE and Foreign Tax Credit applied, the balance the IRS shows is significantly reduced or eliminated entirely. We start here before pursuing any settlement.
Getting your filing history current: If you have unfiled returns, we prepare your Streamlined Filing package to bring you into compliance, which is a prerequisite for any OIC application.
Preparing your OIC application: If you still have a balance after filing correct returns, we prepare the complete application package, including Form 656, Form 433-A (OIC), supporting documentation, and the RCP calculation with proper valuation of foreign assets.
Exploring alternatives: If an OIC is not the right fit, we help you evaluate installment agreements, currently not collectible status, penalty abatement, and other resolution paths.

No matter how late, messy, or complex your tax situation may be, we can help. You will have peace of mind, knowing that your taxes were done right.

If you are ready to be matched with a Greenback accountant, click the get started button below. For questions about tax debt resolution or working with Greenback, contact us, and one of our Customer Champions will be happy to help.

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This article is for informational purposes only and does not constitute tax, legal, or accounting advice. The Offer in Compromise program involves complex financial disclosure and IRS negotiation. For guidance on your specific tax debt situation, contact Greenback to speak with a tax specialist.