Key Takeaways
- The IRS doesn’t accept offers in compromise from just anyone. There are patterns, based on IRS policy, on which offers get approved.
- Before believing the “too good to be true” advertisements in the tax industry, use this article to assess if it’s a realistic option.
- Use these 7 signals to quickly gauge whether it’s worth your time to pursue, or if you should explore other options instead.
Why It Matters
If you owe back taxes and feel like there’s no way out, you may have come across the IRS Offer in Compromise (OIC) as a potential solution. On paper, it sounds too good to be true: you could settle your tax debt for less than what you owe (or as some of the late-night commercials say, “for pennies on the dollar”). And in a minority of situations, that’s exactly what happens.
But here’s the reality: most people who apply for an Offer in Compromise with the IRS won’t get approved.
In fiscal year 2024, the IRS received 33,591 OIC applications but accepted only 7,199 of them, which works out to about a 21% approval rate (source: ). In other words, roughly four out of five offers are declined or returned, often after months of waiting and paperwork.
Let’s make sure the table is set properly. A taxpayer (or business) must first qualify, that is, you cannot pay before the collection statute expiration with your assets and monthly payments. Then, the offer amount must be calculated according to the IRS’s formula.
So how can you tell if you’re a realistic candidate for an OIC? We’ll walk you through 7 key signals that could indicate a chance of success. If these apply to your situation, an OIC could be worth pursuing, especially when paired with support from a licensed tax professional.
Keep in mind: the OIC is a math formula, not a negotiation. These signals are a quick way to see if it’s worth investigating this payback option further. Let’s get started.
Signal #1: You Have Little to No Equity in Assets
One of the biggest things the IRS looks at when deciding whether to accept your Offer in Compromise is how much money you could realistically pay, not just from your paycheck, but also from selling or borrowing against what you own.
That means your assets matter.
The IRS reviews everything from your home and vehicles to bank accounts, retirement accounts, and even life insurance. If you have substantial equity (the value after subtracting any loans or debts) in those assets, the IRS expects you to use that to pay your tax debt.
On the other hand, if you:
- Don’t own a home, or owe nearly as much as it’s worth
- Drive an older car that isn’t worth much
- Have minimal savings or retirement funds
…then you have a good starting point.
The IRS uses a specific form, IRS Form 433-A (OIC), to calculate the “quick sale” value of your assets. They don’t always expect you to sell everything, but they want to know how much you could come up with if you had to.
Tip: Don’t guess. Use fair estimates and be ready to show documentation like bank statements or property assessments.
If there’s not much equity for the IRS to pursue, that’s a signal in your favor.
Signal #2: Your Monthly Income Barely Covers Necessary Living Expenses
Even if you don’t have many assets, the IRS will still ask: “Can this person pay their tax debt over time using their income?”
That’s where your monthly income and expenses come in.
The IRS compares how much you make each month to how much you spend on necessary living expenses — things like food, housing, utilities, car payments, and health insurance. If there’s very little money left over after covering those basics, it can work in your favor.
Who determines the cost of expenses? The IRS. It uses something called Collection Financial Standards, which set average expense limits based on where you live and how many people are in your household. So, if your actual expenses are above the IRS’s standards, you will not be given credit for the additional expenses. From the IRS’s perspective, the difference is considered disposable income that can go toward past due taxes.
Using the IRS’s standards, if the formula leaves you will little to no leftover cash each month, the IRS may agree that you don’t have the ability to pay and therefore could be considered for an Offer in Compromise.
On the flip side, if you have lots of extra income each month, the IRS will usually expect you to set up a payment plan instead.
Tip: Be detailed and accurate when filling out your expenses. You’ll use Form 433-A (OIC) or Form 433-B (OIC) depending on whether you’re an individual or business.
If your budget leaves little room for payments, it’s another signal in your favor.
Signal #3: You’re Current on All Filing Requirements
Before the IRS will even consider your Offer in Compromise, you need to be caught up on all your required tax returns. If you’ve skipped a year (or several), the IRS won’t even process your offer. It’s an automatic rejection.
This step might seem basic, but many people miss it.
You don’t need to have paid off past balances (that’s the whole point of an OIC), but you must have filed all legally required returns up to the current year. This includes your individual tax returns (like Form 1040), and for business owners, things like employment tax returns (Forms 941 or 940).
If you’re not sure whether you’re caught up, you can request your tax return transcripts using your IRS Online Account, or call the IRS and ask for a list of missing returns.
Tip: If you’re missing filings, prioritize those now, especially before completing your Offer in Compromise paperwork. Just understand that getting a late tax return processed can take months, depending on the tax year and other circumstances.
Signal #4: You Don’t Expect a Major Change in Income Soon
The IRS isn’t just interested in what you earn now. They also consider what you’re likely to earn in the future. That’s because your future income potential plays a major role in how they calculate whether to accept your Offer in Compromise.
If your current income is low but likely to go up soon (ex: you’re between jobs or recovering from a temporary setback), the IRS may reject your offer. They might reason that you’ll be able to pay your full debt (or closer to it) once your situation improves.
On the other hand, if you’re retired or nearing retirement, on a fixed income like Social Security or disability, or earning a steady but modest income, that signals long-term financial hardship, which strengthens your case.
The IRS uses Form 433-A (OIC) to review your average income over time, often looking back six to twelve months. They’ll also ask questions about your job history, education, and other factors that indicate whether higher income is realistic.
Tip: Be transparent. If your income has been consistent for the past year or more and there’s no expected change, make that clear in your application. Stability and predictability are key.
Signal #5: Your Collection Statute Expiration Date (CSED) Is Running Out
The IRS doesn’t have forever to collect on your tax debt. By law, they generally have 10 years from the date your tax was assessed to collect the balance due. This time limit is called the Collection Statute Expiration Date, or CSED.
If your CSED is approaching, like within a year or two, that’s a factor that works in favor of the taxpayer.
Why? Because time is running out. If they don’t approve your offer or take other collection action before the statute runs out, they legally have to let the debt go.
Here’s the catch: If you have tax debt from multiple years, each year has its own CSED. So while the debt from one year might expire soon, your more recent balance could still have enough time for the IRS to require a payment plan. The IRS will look at the total picture, not just the oldest year.
To strengthen your case, you’ll want to show that:
- A significant portion of your debt is nearing expiration, and
- You don’t have the income or assets to pay the full amount before that happens
You can request your account transcripts from the IRS (or your tax pro can) to determine your CSEDs. An offer that lets the IRS collect something before the clock runs out is often better than them getting nothing after it does.
Important Fact: The Collection Statute Expiration Date is extended during the offer review time.
Signal #6: You’re Not Involved in Ongoing Bankruptcy
One of the IRS’s strictest rules about Offers in Compromise is this: they will not process an OIC while you are in an open bankruptcy proceeding. It’s a legal barrier, not a judgment call.
If you’ve filed for bankruptcy, whether Chapter 7 or Chapter 13, the IRS must work through the bankruptcy court, not the Offer in Compromise program. This rule exists because bankruptcy may discharge some or all of your tax debt, and the courts take priority over IRS collection procedures.
That said, if your bankruptcy has been discharged or dismissed, you can apply for an OIC afterward. In fact, for some taxpayers who still owe taxes after bankruptcy, an OIC can be an option to consider.
Tip: If you’re considering both bankruptcy and an OIC, speak to a tax professional or bankruptcy attorney. The two processes don’t mix, but one may be better depending on your full financial picture.
If you’re not in active bankruptcy and have no plans to file soon, you’ve cleared a major eligibility hurdle for the IRS Offer in Compromise.
Signal #7: Your Offer Aligns with the IRS’s Reasonable Collection Potential Formula
When the IRS reviews your Offer in Compromise, they aren’t pulling a number out of thin air. They use a strict financial formula called Reasonable Collection Potential (RCP) to decide how much they think you could pay over time. This formula is combined with other factors described in the other sections.
If your offer is at or above your RCP, your chances of approval go way up. If it’s far below, the IRS will likely reject it.
RCP is a combination of:
- Net equity in assets (what you own, minus debts), and
- Future disposable income over a specific period (typically 12–24 months depending on your offer terms).
For example, if you have $75,000 in asset equity and $800 of leftover income each month, your RCP might be:
$75,000 + ($800 × 12 months) = $84,600
In this case, your offer will need to be at least $84,600 to stand a good chance of being accepted.
Tip: Use a calculator or worksheet to run the numbers before submitting anything. If your initial offer is way off, you’ll waste time and may trigger a rejection.
If your offer is based on real numbers and reflects what the IRS believes they can collect, you’re on the right track.
Conclusion and Next Steps
Submitting an Offer in Compromise to the IRS is not something to take lightly. It involves paperwork, scrutiny, and patience. But if these signals apply to you, it’s an indication that an offer is a legitimate consideration.
To recap, you may be an offer candidate if:
- You have little to no equity in assets
- Your income barely covers living expenses
- You’re current on all required tax filings
- Your income is stable with no major increases expected
- Your tax debt is aging and the IRS may run out of time to collect
- You’re not in bankruptcy
- Your offer amount lines up with the IRS’s collection formula
If this sounds like you, consider taking the next step. Whether you go it alone with a DIY tool or team up with a tax professional, the key is understanding what the IRS is looking for and making sure your situation aligns with IRS policy.
