An offer in compromise (OIC) is an agreement between the IRS and a taxpayer (either an individual or a business) to settle tax debts for less than the total amount owed. The taxpayer must demonstrate legitimate reasons why they cannot pay the entire tax liability. The IRS generally approves 1/3 of the proposed OIC requests. Per the IRS database for 2023, the IRS received 30,163 OIC requests and accepted 12,711 of those requests.1
For example, Adam owes the IRS $50,000 in taxes plus interest of $15,000. He is unable to pay the total balance owed and can demonstrate economic hardship before the IRS. Adam and the IRS agreed to reduce the amount owed from $65,000 to $20,000.
Taxpayers file their OIC initial application using IRS Form 656 (Offer In Compromise), which includes either Form 433-A or Form 433-B. The taxpayer must also pay an application fee unless they meet the Low-Income Certificate Guidelines.
Taxpayers can find more information on Form 656 and the OIC procedures on the IRS website.