Offer in compromise: can you settle with the IRS for less?

Reviewed by Luella Willaman, Enrolled Agent · Last reviewed October 2026

How the IRS decides

Most offers are based on what the IRS calls doubt as to collectibility. The IRS adds up the equity in what you own and the money left over from your income each month after allowable living expenses. That total, called your reasonable collection potential, is roughly the minimum the IRS will accept.

Two less common grounds also exist: doubt as to liability, when there’s a genuine dispute about whether you owe the tax, and effective tax administration, when you could pay but doing so would cause serious hardship or be unfair because of exceptional circumstances.

Who is likely to qualify

• People whose income barely covers necessary living expenses, with little equity in property or savings.
• People whose debt is large compared with what the IRS could ever collect before the collection deadline runs out.
• People facing long-term hardship, such as illness, disability or age that limits future earnings.

You also must have filed all required tax returns, be current on this year’s estimated payments or withholding, and not be in an open bankruptcy.

Costs and payment options

The IRS charges a $205 application fee. You also choose how to pay your offer:

• Lump sum: send 20% of the offer with your application and pay the rest in up to five payments within five months of acceptance.
• Periodic payment: make the first payment with your application and keep paying monthly while the IRS reviews it, finishing within 24 months.

Individuals who meet the IRS low-income guidelines don’t pay the fee or the initial payment. Payments made with an offer are generally not refunded if the offer is rejected; they’re applied to your tax debt.

What happens after you apply

The IRS generally won’t levy while your offer is being considered, though the time it has to collect is extended while it’s pending. Reviews often take many months. If your offer is accepted, you must file and pay all taxes on time for the next five years, and the IRS keeps any refund for the year your offer is accepted. Missing those terms can undo the settlement.

Our approach

We run the same calculation the IRS will before you spend anything on an application. If an offer isn’t realistic, we’ll tell you, and show you options that fit better, such as an affordable payment plan, penalty relief, or hardship status. The IRS also has a free Offer in Compromise Pre-Qualifier tool you can try on its website.

Common questions

Is an offer in compromise really “pennies on the dollar”?

Sometimes the accepted amount is far less than the balance, but only when the IRS agrees it can’t collect more. The offer must generally equal what the IRS could collect from your assets and future income, so many people don’t qualify for a large reduction.

How much does it cost to apply for an offer in compromise?

The IRS application fee is $205, plus an initial payment based on the payment option you choose. Individuals who meet the IRS low-income guidelines don’t have to pay the fee or the initial payment.

How long does an offer in compromise take?

IRS reviews commonly take many months. During that time the IRS generally won’t levy, but the period it has to collect the debt is extended.

What happens if my offer is rejected?

You can generally appeal within 30 days of the rejection letter. Payments sent with the offer are usually kept and applied to your balance, and other options such as a payment plan may still be available.

Do I have to file all my tax returns first?

Yes. The IRS won’t consider an offer until all required returns are filed and you’re current on this year’s estimated payments or withholding.

Related: Payment plans · Penalty relief · Hardship status