Offer in Compromise: How It Works, Who Qualifies, and the RCP Math
An offer in compromise, authorized by 26 U.S.C. § 7122, settles a federal tax debt for less than the full balance. The IRS generally accepts one only when the offer equals or exceeds its reasonable collection potential: asset equity plus 12 or 24 months of future income. As of October 2026 the application fee is $205 (waived for low-income individuals).
This guide follows the current Form 656-B booklet (Rev. 4-2026): the three grounds, who is eligible, the reasonable collection potential (RCP) formula, payment options, what happens after filing, and why offers are returned or rejected. Other routes are in our tax relief options overview.
Deadline to know: a rejected offer can be appealed within 30 days of the rejection letter’s date, on Form 13711 or in a signed protest. irs.gov says a later appeal “won’t be accepted.”
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How an offer in compromise works: the three grounds
Form 656-B calls an offer “an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed.” Policy Statement 5-100, in IRM 5.8.1, says the IRS accepts one “when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential.” The regulation at 26 CFR 301.7122-1 sets out three grounds.
| Ground | What it means | Form |
|---|---|---|
| Doubt as to collectibility | Assets and income are less than the full liability. | Form 656, Form 433-A (OIC) or Form 433-B (OIC) |
| Doubt as to liability | A genuine dispute over whether, or how much, tax is owed; not available after a final court decision. | Form 656-L; no fee; offer of $1.00 or more |
| Effective tax administration | Full payment is possible but would cause economic hardship (individuals only), or exceptional circumstances make it inequitable. | Form 656 with a detailed explanation |
A liability offer and an ability-to-pay offer cannot be filed at the same time. Unlike an installment agreement, which pays the full balance, or currently not collectible status, which pauses collection, an accepted offer settles the listed periods once its terms are met.
Who qualifies for an offer in compromise
Form 656-B requires, before an offer can be considered:
- All required tax returns filed (see our unfiled returns guide). Otherwise the payment is applied to the debt and the offer returned, and “You cannot appeal this decision.”
- A bill received for at least one debt in the offer.
- Current-year estimated tax payments made.
- For employers, federal tax deposits made for the current quarter and the two preceding quarters.
Taxpayers in an open bankruptcy are “not eligible to apply.” A business owing trust fund taxes must first pay that portion or have Trust Fund Recovery Penalty determinations made. Restitution, judgments and periods referred to the Department of Justice cannot be compromised.
irs.gov adds that the IRS generally will not accept an offer “if you can pay your tax debt in full through a payment plan and/or equity in assets.” IRM 5.8.1 applies that to installments “extending through the remaining statutory period for collection,” generally 10 years from assessment under § 6502.
The IRS’s online OIC Pre-Qualifier, linked from the irs.gov offer in compromise page, and the Individual Online Account both “check your eligibility and compute a preliminary offer amount,” according to Form 656-B, which adds that the result does not mean the offer will be accepted.
The RCP formula: how the minimum offer is calculated
IRM 5.8.1 says a collectibility offer generally “must equal or exceed” reasonable collection potential. IRM 5.8.4 builds RCP mainly from net equity in assets and future income, plus amounts collectible from third parties; assets transferred before the offer may also be counted.
Asset equity
IRM 5.8.5 values assets at quick sale value, “normally” 80 percent of fair market value, minus senior loans. Form 433-A (OIC) applies this as current market value times .8 minus loan balances. The booklet allows individuals $1,000 of a bank balance and $3,450 against a car’s value, but only after the IRS finds the debt cannot be paid in full.
Future income
Future income is monthly income minus allowable expenses under the IRS Collection Financial Standards that § 7122(d)(2) requires. Private school, college, charitable gifts and unsecured debt payments are generally not allowed. Form 433-A (OIC) multiplies “Remaining Monthly Income” by 12 for an offer paid within 5 months, or by 24 for one paid in 6 to 24 months. IRM 5.8.4 adds “or the remaining statutory period, whichever is less.”
Arithmetic illustration only
Made-up inputs, not an IRS example or a prediction: a $20,000 vehicle times .8 is $16,000; minus a $6,000 loan, equity is $10,000. With $300 of remaining monthly income, the lump sum figure is $10,000 plus $3,600, or $13,600; the periodic figure is $10,000 plus $7,200, or $17,200. Form 656 allows a lower offer only with a written explanation of special circumstances.
Lump sum vs periodic payment offers
| Lump sum | Periodic payment | |
|---|---|---|
| With the application | 20% of the offer plus the fee | First monthly payment plus the fee |
| During review | Balance not due until acceptance | Monthly payments continue; a missed one may return the offer |
| After acceptance | 5 or fewer payments within 5 months | Paid within 24 months in total |
| Income multiplier | 12 | 24 |
Section 7122(c)(1) requires the 20 percent payment for lump-sum offers. As of October 2026 irs.gov lists a $205 fee per offer, and the booklet requires a separate Form 656 and fee for individual and business debt. Under § 7122(c)(3), individuals at or below 250 percent of the poverty level owe no fee or payments during review. The April 2026 Form 656 sets that limit at $39,900 for a household of one and $82,500 for four in the 48 contiguous states.
Form 656 says payments “will not be returned even if I withdraw the offer or the IRS rejects or returns the offer”; they are applied to the debt. The fee comes back only if the offer is not accepted for processing.
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What happens after you submit an offer
irs.gov says individuals can submit an offer in their IRS Individual Account; others mail it to the Memphis or Brookhaven offer unit. Once the offer is processed, the IRS says it will “suspend most collection activities,” extend the collection period and may file a lien notice.
Levies
Section 6331(k)(1) bars levy while an offer is pending, for 30 days after a rejection, and during an appeal filed in that window. An offer is pending once accepted for processing, which Form 656 ties to an IRS official’s signature; before that the IRS may levy and keep the proceeds, and it may “either retain or release” an existing wage levy. See our bank levy guide.
The collection clock and the 24-month rule
The IRS time to collect page says an offer suspends the collection period during review, 30 days after a rejection and during an appeal. Section 7122(f) deems an offer accepted if not rejected within 24 months of submission, excluding time the tax is disputed in court. IRM 8.23.1 counts from receipt at the Memphis or Brookhaven unit. irs.gov also excludes “the time during an appeal,” which the statute does not mention.
During review
- Penalties and interest keep accruing.
- Payments on an existing installment agreement for the same debt are not required.
- Refunds for tax assessed before acceptance are kept and do not count toward the offer.
- All new returns and payments must be filed and paid on time.
Why offers are returned or rejected
A returned offer has no appeal rights. IRM 5.8.7 says a “not processable” return does not suspend the collection statute and the fee is refunded; a later return keeps the fee. Common return reasons:
- Unfiled returns or missed estimated payments or deposits.
- No fee or initial payment, or a missed periodic payment.
- Not answering an IRS information request on time.
- Bankruptcy during review, or an offer filed “solely to delay” collection.
For rejections, IRM 5.8.7 says the most common reason is that “more can be collected than was offered.” An offer may also be rejected as not in the government’s best interest, for example when high monthly payment ability and a long collection period would yield far more through a partial payment plan, or on public policy grounds.
The IRS Appeals page allows 30 days from the rejection letter. On Form 13711 the taxpayer lists each disputed item from the Income/Expense and Asset/Equity tables sent with the letter; Appeals says “I just can’t pay” without an explanation will not help.
After acceptance: five years of compliance
Form 656 requires timely filing and payment “for the five year period beginning with the date of acceptance,” with no new installment agreement or offer in that time. On default, the booklet says the taxpayer owes “the original tax debt, less payments made, and all accrued interest and penalties.”
irs.gov says liens are not released until the offer is paid in full. Publication 594 lists meeting an accepted offer’s terms as a release reason, and § 6325(a) requires release within 30 days after a liability is satisfied. See our federal tax lien guide.
When an attorney matters
Form 656-B points taxpayers to the Taxpayer Advocate Service and, below certain income levels, to Low Income Taxpayer Clinics. Taxpayers often ask an attorney when the tax itself is disputed (Form 656-L needs a written explanation and evidence), when the case rests on hardship or exceptional circumstances, when business trust fund taxes are involved, when assets were transferred before the offer, or when a rejection is being appealed. A representative signs Form 13711 with Form 2848 attached.
See our attorney vs CPA vs enrolled agent guide, the IRS tax attorney cost guide, and how to check a tax relief company before paying for settlement help.
Related guides
Frequently Asked Questions
How much does an offer in compromise cost in 2026?
As of October 2026, irs.gov lists a $205 application fee plus a first payment: 20% of a lump sum offer, or the first monthly installment of a periodic offer. Low-income individuals pay neither during review, and a Form 656-L liability offer has no fee.
How is the minimum offer amount calculated?
Form 433-A (OIC) adds net asset equity, generally 80% of current market value minus loans, to remaining monthly income times 12 for a lump sum offer or times 24 for a periodic offer.
Can the IRS levy while an offer in compromise is pending?
Generally no. Section 6331(k)(1) bars levy while the offer is pending, for 30 days after a rejection and during a timely appeal. The IRS may levy until an official signs the offer as pending, and may keep an existing continuous wage levy.
What happens if the IRS does not decide an offer within two years?
Under § 7122(f), an offer not rejected within 24 months of submission is deemed accepted. The IRS counts from the day its Memphis or Brookhaven unit receives the offer.
What if my offer in compromise is rejected?
The rejection can be appealed to the IRS Independent Office of Appeals within 30 days of the letter date, on Form 13711 or in a signed protest. A returned offer has no appeal rights.
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Ray Neu
Ray Neu is the publisher of IRSAttorneys.net. A former law enforcement officer with a background in criminal justice and digital publishing, he oversees editorial direction, partnership standards, and compliance review for the site. He is not an attorney and does not provide legal advice; all tax law content is sourced and reviewed against the standards documented on the Editorial Team & Standards page.
Sources
- IRS: Offer in compromise
- IRS Form 656-B, Offer in Compromise Booklet (Rev. 4-2026) (PDF)
- IRS Form 656-L, Doubt as to Liability (Rev. 7-2026) (PDF)
- IRS Form 13711, Request for Appeal of Offer in Compromise (PDF)
- IRS: Appeal your rejected offer in compromise
- IRS: Time IRS can collect tax
- IRS Publication 594 (PDF)
- IRM 5.8.1, Offer in Compromise Overview
- IRM 5.8.4, Investigation
- IRM 5.8.5, Financial Analysis
- IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing
- IRM 8.23.1, Appeals Offer in Compromise Overview
- 26 U.S.C. § 7122
- 26 U.S.C. § 6331
- 26 U.S.C. § 6325
- 26 U.S.C. § 6502
- 26 CFR 301.7122-1
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Results described on this website are not a guarantee, warranty, or prediction of the outcome of any tax matter. Every situation is different. Prior results do not guarantee a similar outcome. Article content reflects general information about federal tax procedure as of the last reviewed date and may not reflect subsequent changes in IRS policy, regulations, or case law.