IRS Offer in Compromise: Which Type Fits and How to File

Tax debt can feel overwhelming, but the IRS offers a program called Offer in Compromise (OIC) that could allow you to settle for less than what you owe if you qualify. Let’s break down the types, when you might need them, and the steps for filing.

The Three Main OIC Types

Doubt as to Collectibility
- What it is: For taxpayers who cannot pay the full debt, even with assets and future income.
- When you might need it: If your financial hardship means there’s simply no way the IRS could collect the total balance within the collection period.
Doubt as to Liability
- What it is: For those who believe they don’t actually owe the tax (due to IRS errors, incorrect assessments, or facts in dispute).
- When you might need it: If you have credible evidence your tax bill is wrong.
Effective Tax Administration
- What it is: You owe the tax and, technically, could pay, but paying in full would be unfair (for instance, you’re facing serious illness, disability, or other exceptional hardship).
- When you might need it: If payment in full would be unjust even though you have assets or income to pay.

Steps to File an Offer in Compromise

Step 1: Confirm Eligibility

File all required tax returns.
Receive a bill for at least one debt included in your application.
Make all required estimated payments for the current year.
Employers: make all required federal deposits for the last three quarters.

Step 2: Gather Documentation

Complete IRS Form 656 for the OIC.
Complete Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses (details about income, assets, expenses).
Include supporting documents to clarify your financial position or dispute.

Step 3: Choose Your Payment Option

Lump sum: Initial payment of 20% of your offer amount.
Periodic: Initial payment, followed by monthly installments.

Step 4: Pay the Application Fee

Non-refundable $205 application fee, unless you meet low-income certification guidelines.

Step 5: Submit Your Application Package

Send by mail to the IRS facility listed on Form 656-B, or via your IRS online account.
Keep copies for your records.

Qualification Criteria

You must show:

You meet the specific reasons for the OIC you’re applying for (doubt as to collectibility, doubt as to liability, or effective tax administration).
Your “reasonable collection potential” (RCP) is less than the amount you owe, or you have special circumstances for relief.
You provide all required documentation and do not falsify information; misrepresentation may result in penalties.

Bottom Line

Offers in Compromise are a powerful but rarely granted tax relief option—best for those who can demonstrate true inability to pay, legitimate disputes, or severe hardship. Consulting with an experienced tax professional greatly increases your chances of successful application and helps avoid wasted time or resources.

If you are considering an OIC or unsure about qualifying, reach out for personalized support. The right strategy can put overwhelming tax debt behind you—for good.