Understanding Offer in Compromise
How the IRS actually evaluates an OIC in 2026 — and why most “pennies on the dollar” ads are wrong.
What an Offer in Compromise is
An OIC lets the IRS accept less than the full balance when it is unlikely to collect the rest, when liability is genuinely in doubt, or when full collection would be unfair. It is a real program. It is also on the IRS Dirty Dozen every year because “OIC mills” sell it to people who cannot qualify.
The IRS looks at your reasonable collection potential: equity in assets plus disposable monthly income times a multiplier (generally 12 or 24 months, depending on the payment option). If that number is close to what you owe, the offer is rejected. National and local expense standards, not your actual lifestyle, cap many expense categories.
You must be current to apply
- All required returns filed
- Current-year estimated payments made
- Federal tax deposits current if you have employees
- Not in an open bankruptcy
Three legal bases
- Doubt as to collectibility: the common path. You cannot pay in full before the collection statute expires.
- Doubt as to liability: the assessment is wrong. This is a legal argument, not a hardship story.
- Effective tax administration: you could pay, but doing so would create economic hardship or would be inequitable because of special circumstances.
2026 filing mechanics
- Form 656 plus Form 433-A (OIC) or 433-B (OIC).
- $205 application fee and the required initial payment, unless you certify as low-income on Form 656. Low-income applicants skip both.
- Use the IRS OIC Pre-Qualifier before you pay a firm a large retainer. If the tool says you do not qualify, believe it until a practitioner shows new facts.
- Expect 6–12 months. Collection is generally paused while a processable offer is pending, but the statute of limitations is also paused.
What we tell clients before they apply
An accepted offer requires five years of timely filing and payment afterward. Defaulting reinstates the original debt minus payments. If your income or home equity is too high, an installment agreement or Currently Not Collectible status is the honest answer — not a lowball offer that will be returned.