Offer in Compromise vs. Installment Agreement

Which IRS Settlement Option is Right for You?

When you owe the IRS more than you can pay, the anxiety can be overwhelming. Letters arrive with increasing urgency. Penalties and interest accumulate daily. The debt grows even as you struggle to figure out what to do about it. The good news is that the IRS offers legitimate programs to resolve tax debt—you don’t have to live under this weight indefinitely.

The two most common resolution options are the Offer in Compromise (OIC) and the Installment Agreement. Both can stop aggressive collection actions. Both provide a path forward. But they work very differently, qualify different taxpayers, and have different long-term implications. Choosing the wrong option—or pursuing one you don’t qualify for—wastes time and money while your debt continues to grow.

As an Enrolled Agent based in Whittier, Los Angeles County, California, I help taxpayers across the country resolve IRS debt. Some clients come to me convinced they qualify for an Offer in Compromise because they saw a TV commercial promising to settle their debt for “pennies on the dollar.” Others assume a payment plan is their only option when they might actually qualify for significant debt reduction. The right answer depends entirely on your specific financial situation.

This guide explains how each program works, who qualifies, and how to determine which option makes sense for your circumstances.

Understanding the Offer in Compromise: Settling for Less Than You Owe

An OIC-Offer in Compromise is exactly what it sounds like—you offer to pay the IRS less than your full tax debt, and if they accept, the remaining balance is forgiven. For taxpayers who genuinely cannot pay their full liability, an OIC provides a fresh start. The IRS writes off the difference, and you move forward without the debt hanging over you.

The appeal is obvious. If you owe $80,000 and the IRS accepts a $15,000 offer, you’ve eliminated $65,000 in debt. That’s life-changing for many taxpayers. But here’s what the TV commercials don’t tell you: the IRS rejects the majority of Offer in Compromise applications. The program isn’t designed to give everyone a discount—it’s designed to collect what the IRS believes it can actually collect from taxpayers who genuinely can’t pay more.

How the IRS Evaluates Your Offer

The IRS uses a specific formula to determine the minimum offer they’ll accept. This calculation, called your Reasonable Collection Potential (RCP), considers your assets (what you own), your income (what you earn), your allowable expenses (what you need to live), and the remaining time on the collection statute (how long the IRS has to collect).

The formula works roughly like this: the IRS calculates your equity in assets—your home, vehicles, bank accounts, investments, retirement accounts—and adds that to your future income potential. Future income is calculated as your monthly disposable income (income minus allowable expenses) multiplied by either 12 or 24 months, depending on how you’ll pay the offer.

If your RCP exceeds what you owe, you don’t qualify for an OIC. The IRS reasons that you can pay your full debt, so there’s no reason to accept less. This is why many hopeful applicants are rejected—their financial situation, when analyzed under IRS standards, shows they have the ability to pay.

The OIC Application Process

Applying for an Offer in Compromise requires substantial documentation. You’ll complete Form 656 (the offer itself) and Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. These forms require detailed financial disclosure—every bank account, every asset, every source of income, every monthly expense.

You’ll also need to submit a $205 application fee (waived for low-income applicants) plus an initial payment. For lump-sum offers (paid within 5 months of acceptance), you must include 20% of your offer amount with your application. For periodic payment offers (paid over 6-24 months), you must begin making proposed monthly payments while your offer is being considered—and these payments are non-refundable if your offer is rejected.

The IRS typically takes 6-12 months to process an Offer in Compromise, sometimes longer. During this time, the collection statute is suspended, but penalties and interest continue to accrue. If your offer is rejected, you’ve lost your application fee and any payments made, and you’re back where you started—with a larger balance.

Who Actually Qualifies for an OIC?

Successful OIC candidates typically share certain characteristics: they have limited equity in assets, modest income relative to their allowable expenses, and tax debts that exceed what the IRS could realistically collect over the remaining collection period. Fixed-income retirees, disabled individuals, and those who experienced significant income loss often qualify. High-income earners with substantial assets rarely do, regardless of how large their tax debt is.

Understanding Installment Agreements: Paying Over Time

An Installment Agreement is a payment plan that allows you to pay your tax debt in monthly installments over time. Unlike an OIC, you’re paying the full amount owed—you’re just doing it gradually rather than all at once. The IRS is generally more willing to grant installment agreements than offers in compromise because they’re still collecting everything they’re owed.

For many taxpayers, an installment agreement is the more realistic option. If you have steady income and can afford monthly payments, this path gets you into compliance and stops aggressive collection actions without the lengthy approval process and high rejection rate of an OIC.

Types of Installment Agreements

The IRS offers several types of installment agreements, each with different requirements and benefits.

Guaranteed Installment Agreement: If you owe $10,000 or less in combined tax, penalties, and interest, you can request this agreement without providing detailed financial information. The IRS must grant it if you agree to pay within three years and you’ve filed all required returns. This is the simplest option for smaller debts.

Streamlined Installment Agreement: For debts between $10,000 and $50,000, the streamlined agreement allows payment over up to 72 months without extensive financial disclosure. You’ll need to set up direct debit payments, but the approval process is relatively straightforward.

Non-Streamlined Installment Agreement: For debts exceeding $50,000, or if you need more than 72 months to pay, you’ll need to provide detailed financial information on Form 433-F or 433-A. The IRS will evaluate your ability to pay and determine an appropriate monthly payment amount.

Partial Payment Installment Agreement (PPIA): This hybrid option allows you to make payments that won’t fully satisfy your debt before the collection statute expires. The remaining balance is then written off. It’s less favorable than an OIC (you pay more over time) but more accessible for those who don’t qualify for offer acceptance.

The True Cost of an Installment Agreement

While installment agreements provide breathing room, they come with costs. Interest continues to accrue on your unpaid balance—currently at a rate that adjusts quarterly. The failure-to-pay penalty (0.5% per month, reduced to 0.25% while an installment agreement is in effect) also continues until your balance is paid.

There are also setup fees: $225 for a standard installment agreement, $107 for direct debit agreements, or $43 for low-income taxpayers. Online setup is cheaper at $69 for direct debit agreements.

Over a multi-year payment plan, the interest and penalties can add significantly to your total cost. A $30,000 debt paid over six years might cost $38,000 or more by the time you’re done. This is still better than enforced collection, but it’s important to understand what you’re actually paying.

Comparing the Two Options: Key Differences

Total Amount Paid

This is the most significant difference. An accepted Offer in Compromise means you pay less—sometimes dramatically less—than your full tax debt. An Installment Agreement means you pay everything you owe, plus accumulated interest and penalties. For large debts, this difference can be tens of thousands of dollars.

Qualification Requirements

Installment agreements are available to almost anyone who owes taxes and can make monthly payments. The IRS wants to collect, and payment plans facilitate that. Offers in Compromise have strict financial criteria—you must demonstrate that you cannot pay your full liability. Many taxpayers who want an OIC simply don’t qualify.

Processing Time

Installment agreements can often be set up within days or weeks, especially for smaller debts using the streamlined process. Offers in Compromise take 6-12 months or longer for the IRS to evaluate. If time is critical—if you’re facing liens, levies, or wage garnishment—an installment agreement provides faster relief.

Risk of Rejection

If you meet the basic requirements and can afford the payments, an installment agreement is almost certain to be approved. Offers in Compromise face much higher rejection rates—the IRS rejects more OICs than it accepts. A rejected OIC means lost fees, lost time, and a debt that’s grown larger while you waited.

Compliance Requirements

Both options require you to remain in compliance. For installment agreements, you must file all future returns on time and pay all future taxes when due—defaulting on either can terminate your agreement. For OICs, compliance requirements extend for five years after acceptance. Any failure to file or pay during this period can reinstate your original debt in full, eliminating the benefit of the settlement.

Which Option Should You Choose?

The right choice depends on your specific financial situation. Here’s a framework for thinking through the decision.

Consider an Offer in Compromise If…

You have limited assets and equity. You have low income relative to your necessary living expenses. Your tax debt is large relative to your ability to pay over the collection period. You’ve experienced a significant change in circumstances—job loss, disability, divorce, business failure—that makes your previous debt unpayable. You can wait 6-12 months for a decision and accept the risk of rejection.

Consider an Installment Agreement If…

You have steady income and can afford monthly payments. You have significant assets or equity that would inflate your RCP calculation. You need immediate relief from collection actions. Your debt is manageable over a 6-year payment period. You want certainty—installment agreements are almost always approved if you can make the payments.

Consider a Partial Payment Installment Agreement If…

You don’t qualify for an OIC but also can’t afford payments that would satisfy your debt before the collection statute expires. This middle-ground option allows you to pay what you can, with the unpaid remainder expiring when the statute runs out.

Common Mistakes When Choosing a Resolution Path

Believing the “Pennies on the Dollar” Promises

Late-night TV commercials make Offers in Compromise sound like a magic solution available to everyone. They’re not. The companies running these ads often charge thousands of dollars to file OICs for clients who never had a realistic chance of acceptance. When the offer is rejected, the client has lost their fees and wasted months of time.

Ignoring the Collection Statute

The IRS generally has 10 years from assessment to collect a tax debt. After that, the debt expires. For some taxpayers, the smartest strategy might be neither an OIC nor a traditional installment agreement, but a partial payment plan or even currently-not-collectible status while waiting for the statute to run. Understanding where you are in the collection period matters.

Underestimating OIC Complexity

The OIC application requires precise financial disclosure using IRS-specific standards. The allowable expense categories, asset valuation methods, and income calculations don’t always match common sense or what you’d put on a loan application. Errors in the application lead to rejection—and the IRS isn’t forgiving about mistakes.

Defaulting on Agreements

Getting an installment agreement or OIC accepted is only the beginning. You must stay in compliance—filing all returns, paying all current taxes, making all required payments. Default can reinstate your full original debt (for OICs) or put you back in active collection with accumulated penalties and interest (for installment agreements). Don’t enter an agreement you can’t maintain.

Frequently Asked Questions About IRS Settlement Options

Can I negotiate directly with the IRS?

Yes, you can represent yourself before the IRS. However, the OIC process in particular involves complex calculations and strategic decisions that significantly affect outcomes. The IRS isn’t going to help you present your case in the most favorable light—that’s your job or your representative’s job. Many taxpayers find that professional representation pays for itself through better results.

What if I can’t afford either option?

If you genuinely cannot pay anything, you may qualify for Currently Not Collectible (CNC) status. The IRS suspends active collection while you’re in CNC status, though interest and penalties continue to accrue. This isn’t a permanent solution, but it provides breathing room while your situation stabilizes—and if you remain in CNC status until the collection statute expires, the debt goes away.

Will the IRS file a tax lien?

The IRS typically files a Notice of Federal Tax Lien when you owe more than $10,000. An installment agreement doesn’t prevent this—the lien remains until your debt is paid or the statute expires. For OICs, the lien releases when your offer is paid in full. The lien affects your credit and can complicate property sales or refinancing.

How do I know what the IRS will accept for an OIC?

The IRS publishes the formulas they use to calculate Reasonable Collection Potential. You can estimate your minimum acceptable offer using the IRS Pre-Qualifier tool on their website. However, the actual calculation involves judgment calls about asset values, allowable expenses, and income that can significantly affect the result. Professional analysis often identifies opportunities or problems the calculator misses.

What happens to my refunds while I have an installment agreement?

The IRS will apply any refunds you’re owed to your outstanding balance. This actually works in your favor—it reduces your debt faster. However, some taxpayers rely on refunds for annual expenses and need to adjust their planning accordingly.

Can I switch from an installment agreement to an OIC?

Yes, you can apply for an Offer in Compromise even if you’re currently in an installment agreement. If your financial situation has deteriorated—you’ve lost income, depleted assets, or experienced hardship—you may now qualify for an OIC when you previously didn’t. Your installment agreement remains in effect while the OIC is being considered.

How long does an installment agreement last?

Installment agreements can extend up to 72 months (6 years) for streamlined agreements, or longer in some cases for non-streamlined agreements. The IRS generally wants agreements structured to pay your full balance before the collection statute expires. If your debt is too large to pay within the statute period at an affordable monthly rate, you may need to consider a PPIA or OIC instead.

What if my income changes after I set up an installment agreement?

If your financial situation changes significantly—either better or worse—you can request a modification to your installment agreement. If you can no longer afford your payments, acting quickly is important. Defaulting on your agreement is worse than proactively requesting a modification based on changed circumstances.

How Mike Habib, EA Can Help Resolve Your IRS Debt

Choosing between an Offer in Compromise and an Installment Agreement isn’t just about preference—it requires careful analysis of your financial situation, understanding of IRS procedures, and realistic assessment of your options. My practice focuses on helping taxpayers navigate these decisions and achieve the best possible resolution.

Honest Assessment of Your Options

I won’t tell you what you want to hear—I’ll tell you what’s realistic. If you qualify for an Offer in Compromise, I’ll help you pursue it. If you don’t, I’ll explain why and identify alternatives that actually work for your situation. Too many taxpayers waste money and time chasing OICs they were never going to get. Honest analysis upfront prevents that.

Flat Fee Engagements for Cost Certainty

Tax resolution can be a lengthy process, and hourly billing creates anxiety about costs spiraling out of control. Large firms charging $850 to $1,500 per hour can run up substantial bills before you even know whether your resolution will work. I offer flat fee engagements for IRS debt resolution, so you know exactly what you’re paying from the start. No surprises, no escalating invoices—just clear pricing that lets you make informed decisions.

Direct Access Throughout the Process

When you work with my practice, you work directly with me. Your questions are answered by the person handling your case. You’re not passed off to junior staff or stuck leaving messages that don’t get returned. IRS resolution matters too much for anything less than direct, consistent communication.

Experience With Complex Financial Situations

Before establishing my tax practice, I served as Controller at Xerox Corporation and Director of Finance at AEG. That corporate finance background shapes how I approach tax resolution—I understand financial statements, cash flow analysis, and asset valuation at a level that helps me present your situation effectively to the IRS. Whether you’re a business owner with complicated finances or an individual with straightforward circumstances, I bring the same analytical rigor to your case.

Nationwide Representation

As an Enrolled Agent, I’m authorized to represent taxpayers before the IRS regardless of where you live. Whether you’re in California, across the country, or overseas as an American expatriate, I can handle your IRS resolution. My Whittier, Los Angeles County location provides a base of operations, but my practice serves clients nationwide.

Comprehensive Resolution Services

My IRS debt resolution services include Offer in Compromise preparation and negotiation, installment agreement setup and modification, partial payment installment agreements, currently not collectible status requests, penalty abatement requests, lien and levy release, audit reconsideration for disputed assessments, and compliance with filing requirements to enable resolution.

Take the First Step Toward Resolution

IRS debt doesn’t improve with time. Interest accrues daily. Penalties accumulate monthly. The collection statute ticks down, but not fast enough to help most taxpayers. Every month you wait is a month the problem grows larger.

The right resolution strategy depends on your specific situation—your income, assets, expenses, the age of your debt, and the type of taxes owed. A proper analysis takes all these factors into account and identifies the path that gets you the best outcome.

Contact Mike Habib, EA to discuss your IRS debt situation. Initial consultations are designed to help you understand your realistic options—not to sell you services you don’t need. If we work together, you’ll receive a flat fee quote upfront so you know exactly what resolution will cost.

Based in Whittier, Los Angeles County, California, serving taxpayers with IRS debt nationwide and Americans living overseas.

Disclaimer: This article provides general information about IRS debt resolution options and is not intended as specific tax or legal advice for your situation. Tax laws and IRS procedures change, and individual circumstances vary significantly. Consult with a qualified tax professional before making decisions about resolving your tax debt.