Short answer
An offer in compromise settles your federal tax balance for less than the full amount when the IRS agrees it cannot collect more. The IRS adds the quick-sale equity in your assets to 12 (IRS.gov, April 2026) or 24 (IRS.gov, April 2026) months of leftover monthly income. That total is your reasonable collection potential. Most offers need a $205 (IRS.gov, 2026) fee (2026); low-income filers skip it.
Key takeaways
- The IRS generally accepts an offer only when it equals or exceeds your reasonable collection potential (RCP): asset equity plus future remaining income.
- Fresh Start (IR-2012-53) cut the future-income look from 4 years to 1 for lump-sum offers and from 5 years to 2 for periodic offers.
- A lump-sum offer needs 20% (IRS.gov, April 2026) of the offer up front; a periodic offer is paid over 6 to 24 months (IRS.gov, April 2026), with payments continuing during review.
- The IRS keeps refunds for tax assessed before acceptance, extends the collection statute while the offer is pending, and deems an offer accepted if it has not decided within 2 years (IRS.gov, 2026).
- Run the free IRS Pre-Qualifier before paying anyone: if you can pay in full through a payment plan, the IRS will generally reject the offer.
The three grounds for an offer
Form 656 makes you pick one reason for your offer. Almost every offer filed under the Fresh Start Initiative uses the first.
| Ground | What it means | Who it fits |
|---|---|---|
| Doubt as to collectibility | You agree you owe the tax, but your assets and income cannot pay it in full before the collection statute runs out. | Most individuals and businesses. You must offer at least the minimum amount calculated on Form 433-A (OIC) or 433-B (OIC). |
| Effective tax administration | You could pay in full, but doing so would cause economic hardship, or collecting would be unfair for public policy or equity reasons (for example, a payroll provider stole your deposits). | Rare. The economic hardship version is open to individuals only, and you must attach a detailed explanation. |
| Doubt as to liability | You dispute that you owe some or all of the tax. | Filed on a separate form, Form 656-L. Do not file it together with a collectibility offer; resolve the dispute first. |
Before any ground is considered, you must meet the entry rules in the Form 656-B booklet: every required return filed, a bill received for at least one of the tax periods in the offer, current-year estimated payments made, and, if you have employees, federal tax deposits made for the current quarter and the two before it. You cannot apply while you are in an open bankruptcy, and the IRS asks you to finish any open audit or innocent spouse claim first.
How the IRS calculates reasonable collection potential
The IRS approves an offer when the amount “represents the most we can expect to collect within a reasonable period of time.” It measures that with reasonable collection potential (RCP), which is built from two parts on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
Part 1: net realizable equity in your assets
Cash and bank balances count at full value. Most other assets, including vehicles, real estate, retirement accounts and business equipment, count at quick-sale value: fair market value reduced by a fixed discount printed on the form, because a forced sale rarely brings full price. You then subtract any loan secured by the asset. What is left is the equity the IRS could reach. The form notes that the reduction for retirement accounts can be larger because of the taxes and penalties you would owe on a withdrawal.
Part 2: future remaining income
Take your household’s average gross monthly income, subtract allowable monthly expenses, and you get remaining monthly income. Food, clothing, housing, transportation and out-of-pocket health care are measured against the IRS Collection Financial Standards, not what you actually spend. The IRS generally will not count private school tuition, college costs, charitable giving or payments on unsecured loans and credit cards as expenses. Remaining monthly income is then multiplied:
- Lump-sum offer (paid in 5 months (IRS.gov, April 2026) or less after acceptance): remaining monthly income x 12.
- Periodic payment offer (paid over 6 to 24 months): remaining monthly income x 24.
Your minimum offer is the asset equity plus that future income figure. The Form 656-B booklet (Rev. 4-2026) sets out these steps line by line, and the offer must be more than zero.
What Fresh Start changed in 2012
Before May 2012 the IRS looked at 4 years of future income for short-term offers and 5 years for longer ones. In IR-2012-53 it cut those to 1 year and 2 years, allowed payments on federally guaranteed student loans and delinquent state and local taxes in some cases, and widened the miscellaneous living-expense allowance. Those multipliers are still the rule in 2026, which is why the Fresh Start Initiative is most closely tied to the offer program. See the 2011-2012 rules vs 2026 rules.
Worked example: estimating a minimum offer
Example (assumed figures). A single wage earner owes $60,000 in back taxes and has filed every return. The numbers below are invented to show the arithmetic, not typical results.
| Item | Value used | Counts toward RCP |
|---|---|---|
| Checking and savings | $3,000 balance | $3,000 |
| Car | Assumed quick-sale value $12,000, minus $8,000 loan | $4,000 |
| 401(k) | Assumed quick-sale value $7,600, no loan | $7,600 |
| Net realizable equity | $3,000 + $4,000 + $7,600 | $14,600 |
| Remaining monthly income | $5,200 gross income minus $4,900 allowable expenses | $300 a month |
- Lump-sum offer: $300 x 12 = $3,600 of future income. Minimum offer = $14,600 + $3,600 = $18,200. The initial payment is 20% of the offer, $3,640, sent with the application along with the $205 fee. The remaining $14,560 is due in 5 or fewer payments within 5 months of acceptance.
- Periodic offer: $300 x 24 = $7,200 of future income. Minimum offer = $14,600 + $7,200 = $21,800. Spread over 24 months that is about $908 a month, starting with the application and continuing while the IRS reviews it.
Paying faster lowers the minimum by $3,600 here, but it needs cash up front. In this example the offer is realistic only because $18,200 is well below the $60,000 owed and the person cannot pay that balance before the collection statute ends. If the same person had $70,000 of home equity, the equity alone would exceed the balance, and the IRS would expect full payment. Our offer in compromise estimator runs these steps for you, and the official IRS Offer in Compromise Pre-Qualifier uses the current IRS expense standards.
Lump-sum vs periodic payment offers, fees and low-income certification
| Feature | Lump-sum offer | Periodic payment offer |
|---|---|---|
| Paid with the application | 20% of the offer amount (non-refundable) | The first monthly payment (non-refundable) |
| Rest of the offer | 5 or fewer payments within 5 months of acceptance | Monthly, within 6 to 24 months |
| Payments during IRS review | None required after the initial payment | Required every month; missing one can get the offer returned with no appeal |
| Future income counted | 12 months | 24 months |
| Application fee | $205 | $205 |
Each Form 656 needs its own fee and initial payment. Spouses with only joint balances can file one form. If either spouse also has a separate balance, or you want to settle both personal and corporate or partnership taxes, you file two. Money paid with an offer is applied to your account. It is not returned if the offer is rejected, withdrawn or returned. The one exception is when the IRS cannot process the offer at all, for example because a return is unfiled; then the fee is sent back.
Low-Income Certification
Individuals and sole proprietors whose adjusted gross income, or household gross monthly income x 12, is at or below 250% (IRS.gov, 2026) of the federal poverty guidelines skip the fee, the initial payment and the monthly payments during review. On Form 656 (Rev. 4-2026) the limit is $39,900 (IRS.gov, April 2026) for a household of one and $82,500 (IRS.gov, April 2026) for a household of four in the 48 contiguous states and D.C. Alaska and Hawaii have higher limits. Low-Income Certification removes the upfront cost. It does not lower the offer amount the IRS expects.
How to apply: Individual Online Account or paper Form 656
- Check eligibility for free. Use the IRS Pre-Qualifier or the eligibility check in your Individual Online Account. Neither result guarantees acceptance.
- Get compliant. File all required returns, make this year’s estimated payments and, for employers, the last three quarters of deposits.
- Complete the financial statement. Form 433-A (OIC) for individuals and sole proprietors, Form 433-B (OIC) for corporations, partnerships and LLCs, with the supporting documents each form lists.
- Complete Form 656. List every tax period, pick one ground, choose lump sum or periodic, and offer at least your calculated minimum.
- Pay and send. Pay the $205 fee and the initial payment (unless you qualify for Low-Income Certification) through EFTPS, your online account or separate checks. Individuals can file the whole offer online through the Individual Online Account. Otherwise mail the package to the Memphis or Brookhaven address in the Form 656-B checklist.
The online route is new. The IRS says individuals can now “check eligibility, make payments and file” an offer from their online account, which also prepares the forms and calculates a potential offer amount. Businesses still mail Form 656 and Form 433-B (OIC), though they can pay through their Business Tax Account. Common mistakes that get offers returned or rejected are covered in 8 mistakes that get your offer rejected.
What happens while your offer is pending
The IRS says a full offer investigation can take up to 24 months. During that time:
- Most collection stops. The IRS suspends other collection activity. It can still levy up to the moment an IRS official signs the offer as pending, and it does not have to release a levy served before you filed.
- A lien may be filed. The IRS may file a Notice of Federal Tax Lien, although its FAQ says it normally waits until it decides the offer.
- The collection clock stops running. The collection statute is extended while the offer is pending, so filing an offer to run out the clock does not work. See the 10-year collection statute.
- Penalties and interest keep accruing on the full balance until the offer is accepted and paid.
- Payment plan payments pause. You do not have to pay an existing installment agreement during review. If the offer fails and you have not run up a new balance, the plan is reinstated with no extra fee.
- Refunds are kept. The IRS keeps any refund, with interest, for a return assessed before the date it accepts the offer, and the refund does not count toward the offer. Taxpayers in economic hardship can ask the Taxpayer Advocate Service or the IRS for help.
- You must stay current. File and pay every new return and estimated payment on time, and answer every IRS information request by its deadline, or the offer can be returned without appeal rights.
Accepted, rejected or returned: what comes next
Accepted. You must meet every term in Section 7 of Form 656. That includes filing and paying on time through the fifth year after acceptance; missing it lets the IRS default the offer and reinstate the original balance, less payments, plus penalties and interest. The lien is released only after the offer amount is paid in full. You cannot amend returns for the years covered, and certain details of accepted offers go into a public inspection file.
Rejected. You have 30 days (IRS.gov, 2026) from the date on the rejection letter to ask the IRS Independent Office of Appeals to review it, using Form 13711 or a signed letter. Compare the IRS income and asset worksheets that come with the letter to your Form 433-A (OIC) and dispute specific items with documents; “I just can’t pay” is not enough. See how to appeal a rejected offer.
Returned. A returned offer (for missing returns, missed payments, unanswered requests or an open bankruptcy) has no appeal right. Fix the problem and refile.
How many offers does the IRS accept?
In fiscal year 2025 taxpayers submitted 38,797 offers and the IRS accepted 5,464, worth $98.1 million (IRS Data Book 2025, Table 4-1). In FY2024 the figures were 33,591 and 7,199. These are not acceptance rates: offers accepted in a year were often filed the year before, and returned or withdrawn offers are counted as received. The data does not support the “most offers are rejected” or “high acceptance” percentages that circulate online. It does show that most people who owe resolve their balance another way, usually with a payment plan.
Offer in compromise vs a payment plan
| Question | Offer in compromise | Payment plan (installment agreement) |
|---|---|---|
| Do you pay the full balance? | No, if accepted: you pay your RCP | Yes, plus penalties and interest (unless it is a partial payment plan) |
| Who qualifies? | People who cannot pay in full before the collection statute ends | Almost anyone who has filed; the Simple Payment Plan needs no financial statement |
| Cost to apply | $205 plus the initial payment (waived for low income) | $29 (IRS.gov, 2026) to $178 (IRS.gov, 2026) setup fee, less for low income |
| Time to a decision | Months, up to 24 | Often immediate online |
| Collection statute | Extended while pending | Keeps running while the plan is in effect |
| Financial disclosure | Full Form 433-A (OIC) with documents | None for simple plans; Form 433-F or 433-A for larger ones |
If the Pre-Qualifier shows you can pay in full over time, start with IRS payment plans. If you can pay nothing right now, currently not collectible status may fit better. Compare all three on payment plan vs offer vs CNC.
When professional help is worth it: when you have home or business equity, self-employment income, a household with a non-liable spouse, or special circumstances that justify an offer below the formula. The valuation arguments are where offers are won or lost. If your income is low, a Low Income Taxpayer Clinic can help for free or a small fee. Be wary of anyone who quotes a settlement before seeing your IRS transcripts and financials. The IRS 2026 Dirty Dozen list warns about “OIC mills” that overpromise and charge high fees to people who don’t qualify.
Frequently asked questions
It calculates your reasonable collection potential: the quick-sale equity in your assets, minus secured loans, plus your remaining monthly income (income minus allowable expenses) multiplied by 12 for lump-sum offers or 24 for periodic offers. The offer generally must equal or exceed that figure.
The IRS says the full investigation can take up to 24 months, depending on its inventory and your case. If it has not decided within 2 years of receiving the offer, the offer is accepted by law. Appeal time does not count toward that period.
Yes, individuals can. The IRS says you can check eligibility, prepare the forms, make payments and file the offer through your Individual Online Account. Businesses still mail Form 656 and Form 433-B (OIC) but can pay through their Business Tax Account.
The IRS keeps any refund, including interest, for a return assessed before the date it accepts your offer, and applies it to your balance. The refund does not count as a payment toward the offer. If that causes economic hardship, contact the Taxpayer Advocate Service.
No. The IRS does not require installment agreement payments while it considers an offer. If the offer is not accepted and you have no new balance, the plan is reinstated with no extra fee. A periodic offer, though, requires its own monthly payments throughout the review.
Yes. File Form 13711 or a signed letter within 30 days of the date on the rejection letter, listing each item you disagree with and your supporting documents. A returned offer, as opposed to a rejected one, cannot be appealed.
The offer program existed before 2011, but the Fresh Start Initiative changed how offers are calculated. IR-2012-53 cut the future income the IRS counts from 4 years to 1 for lump-sum offers and from 5 years to 2 for periodic offers, and allowed more living expenses. There is no separate Fresh Start application; you file Form 656.
Not as a promise anyone can make. The amount is set by your assets and income, not by negotiation skill. In June 2026 the FTC and Nevada settled with a relief company that promised “pennies on the dollar” before reviewing anyone’s taxes, and the IRS warns about “OIC mills.” Use the IRS Pre-Qualifier to see if you are a candidate.
Sources
- IRS: Offer in compromise
- IRS Form 656-B, Offer in Compromise Booklet (Rev. 4-2026)
- IRS: Offer in compromise FAQs
- IRS Offer in Compromise Pre-Qualifier
- IRS: Appeal your rejected offer in compromise
- IRS IR-2012-53: More flexible offer-in-compromise terms (May 21, 2012)
- IRS Data Book 2025 (Publication 55-B), Table 4-1
- IRS: Collection Financial Standards
- IRS: Dirty Dozen tax scams for 2026
- FTC: FTC, Nevada settle with tax-relief scammers (June 2026)
- 26 U.S.C. 7122, Compromises
We check every figure against IRS.gov and log changes on the key figures page.
Want a professional to look at your options?
Free consultation, no obligation. If we take your case, the flat fee is quoted upfront before any work begins. If you can handle it yourself through IRS.gov, we will tell you. No outcome is guaranteed.
This page is general information about IRS rules, not tax or legal advice for your situation. IRS figures change; each one links to its official source and the date we last checked it.