Offer in Compromise vs. a Payment Plan: Which Path Fits Your Situation?

An Offer in Compromise may reduce the total tax debt you owe, while a payment plan lets you pay the full balance over time. The right choice depends mainly on whether you can realistically afford to repay the full amount.

Neither option erases your obligation automatically. The IRS evaluates your income, expenses, assets, filing status, and ability to pay before deciding which option is appropriate.

Offer in Compromise

An Offer in Compromise, or OIC, is an agreement with the IRS to settle eligible tax liabilities for less than the full amount owed. It is generally intended for taxpayers who cannot pay the debt in full or through a payment plan, or for whom full payment would create financial hardship.

The IRS generally will not accept an OIC if you can pay the debt in full through a payment plan or have enough equity in assets to do so.

When an OIC May Fit

An OIC may be worth exploring if you have limited income and assets, cannot afford the monthly payment needed to repay the full balance, or face a genuine financial hardship.

The IRS may accept an offer when it agrees that the tax debt may not be accurate, that you lack sufficient income and assets to pay it, or that paying in full would be unjust or create an economic hardship.

What You Need to Apply

Before applying, you generally must file all required tax returns, make required estimated tax payments, and—if you are an employer—make required federal tax deposits for the current and prior two quarters. You also cannot be in an open bankruptcy.

Most OIC applications require a Form 656, a $205 application fee, and an initial payment. Some low-income taxpayers may qualify for a waiver of the fee and required payments.

Payment Plan

A payment plan, also called an installment agreement, lets you pay the IRS in smaller monthly payments rather than all at once. Unlike an OIC, it does not reduce the underlying tax balance.

A payment plan may be the better fit if you can afford regular payments over time and simply need more time to pay. The IRS offers short-term and long-term options through its Online Payment Agreement application.

When a Payment Plan May Fit

A payment plan may make sense if you have steady income, can cover necessary living expenses, and can make a realistic monthly payment. It can also be a practical option if an OIC is not available or is unlikely to be accepted.

The IRS notes that a taxpayer who can fully pay the liability through an installment agreement generally will not qualify for an OIC in most cases.

Differences

How to Decide

Start with a realistic budget. Add up your essential monthly expenses, compare them with your income, and determine whether you can afford a monthly IRS payment without falling behind on rent, food, utilities, or other necessities.

If you can afford to repay the full balance over time, a payment plan is often the more straightforward option. If full repayment is not realistic, use the IRS Offer in Compromise Pre-Qualifier to see whether an OIC may be worth considering.

What Happens If an OIC Is Denied

If the IRS rejects an OIC and you cannot pay the delinquent taxes in full, you may still qualify for another payment option.

If you already have an installment agreement and submit an OIC, you generally do not need to make installment payments while the offer is being processed. If the offer is not accepted and you have not added new tax debt, the IRS says the installment agreement will be reinstated without an additional fee.

Avoid Guaranteed-Settlement Claims

Be cautious of companies that guarantee an OIC approval or promise to settle tax debt for “pennies on the dollar.” The IRS provides a Pre-Qualifier tool, but using it does not guarantee that an OIC will be accepted.

You can apply for an OIC directly with the IRS, and you can also apply for a payment plan directly through the IRS. Before paying a third-party company, make sure you understand the fees, services, and likelihood of approval.

Next Step

Review your IRS notices and account balance, then compare your monthly budget with the payment required under a payment plan. If that payment is not affordable, consider the OIC Pre-Qualifier and other IRS options before committing to a paid tax-relief service.