On what grounds can an offer be made?
| Ground | Meaning |
|---|---|
| Doubt as to collectibility | You cannot pay the full debt within the time the IRS has to collect it; the most common ground |
| Doubt as to liability | You dispute that the tax is owed |
| Effective tax administration | You could pay, but doing so would cause economic hardship or be unfair given exceptional circumstances |
Most accepted offers are based on collectibility.
How does the IRS calculate an acceptable offer?
Through reasonable collection potential: the net equity in your assets, such as bank balances, investments, vehicles and property after allowed reductions, plus your future disposable income. Disposable income is monthly income less allowable living expenses under IRS standards, multiplied by 12 months for a lump sum offer or 24 months for a periodic payment offer. An offer at or above this figure is generally acceptable.
The IRS uses national and local standards for food, clothing, housing, utilities and transport, so actual spending above those standards usually does not reduce the figure. Assets may be valued at quick-sale value, typically below market value.
What does an example look like?
A taxpayer owes $60,000. Their assets have $8,000 of net equity, and their income exceeds allowable expenses by $400 a month. For a lump sum offer, the reasonable collection potential is $8,000 plus 12 times $400, or $12,800. An offer of about that amount may be accepted. Someone with $2,000 of monthly disposable income would have far higher potential and would be better served by a payment plan.
How do you apply?
Check eligibility
All required returns filed, current-year estimates paid, and not in bankruptcy. The IRS's pre-qualifier tool helps.
Complete the financial statements
For individuals and, where relevant, businesses, with supporting documents.
Calculate the offer
At least the reasonable collection potential.
Submit Form 656
With the $205 fee and initial payment, unless the low-income waiver applies.
Respond to the IRS
The examiner may ask for more documents or a higher amount.
What payments are required?
For a lump sum offer, paid in five or fewer instalments, 20% of the offer is paid with the application, and the rest within five months of acceptance. For a periodic payment offer, the first proposed monthly payment is sent with the application and payments continue while the IRS considers it. Payments are generally not refunded if the offer is rejected; they are applied to the debt.
What happens after acceptance?
You must file and pay all taxes on time for five years, or the offer can be revoked. The IRS keeps any refund for the year the offer is accepted, and earlier ones. A notice of federal tax lien is released once the offer amount is paid. If the IRS has not decided within 24 months, the offer is generally treated as accepted.
What are the alternatives?
A payment plan, a partial payment plan, or temporary currently-not-collectible status for those with no ability to pay. Penalty abatement can also reduce the debt first. See IRS payment plans and reasonable cause abatement.
Be cautious of companies promising settlements before reviewing your finances; the IRS formula, not negotiation skill, decides most offers. You can apply directly, or through a CPA, enrolled agent or attorney.
Owe more than you can pay?
We work out what the IRS could collect, compare an offer with a payment plan or other options, and prepare and negotiate the offer.
Questions people ask
What is an offer in compromise?
An agreement to settle an IRS debt for less than the full amount, usually because you cannot pay it in full.
How does the IRS decide how much to accept?
By reasonable collection potential: net equity in assets plus future disposable income over 12 or 24 months.
How much does an offer in compromise cost to apply?
A $205 application fee plus an initial payment, both waived for qualifying low-income taxpayers.
What happens if my offer is rejected?
Payments made are generally applied to the debt, and you can appeal or choose another option.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IRS: Offer in compromise
- IRS: Form 656 Booklet, Offer in Compromise
- IRS: Offer in compromise pre-qualifier
Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.
Related guides
More in Deadlines, penalties and IRS notices
This guide is general information. It is not tax or legal advice for your situation.