If you owe the IRS, you may feel stuck between impossible payments and aggressive collection actions. Two of the most common solutions are an Offer in Compromise (OIC) and an Installment Agreement (IA). Often called a payment plan.
Both can help, but they work in very different ways. Understanding the differences can help you choose the right path.
What Is an Offer in Compromise (OIC)?
An OIC allows you to settle your IRS debt for less than the full amount owed if you qualify. It’s designed for taxpayers who cannot realistically pay their entire balance.
To apply, you must file Form 656 with a detailed financial disclosure (Form 433-A for individuals or Form 433-B for businesses).
The IRS reviews your “reasonable collection potential”. That is, your income, expenses, assets, and future earning ability.
Only if the IRS determines that you cannot pay the full amount will your offer be considered. Approval rates are relatively low, with fewer than 40% of offers accepted each year.
What Is an Installment Agreement (IA)?
An IA allows you to pay your debt in monthly installments until it’s paid in full. Thanks to the IRS Fresh Start changes, taxpayers who owe $10,000 or more in combined tax, penalties, and interest may qualify for a streamlined plan of up to 72 months using Form 9465 (Installment Agreement Request).
Unlike an OIC, an IA does not reduce the total debt. Penalties and interest continue to accrue until the balance is paid. The IRS may also file a federal tax lien to protect its interest, even if you are in a payment plan.
Key Differences Between OIC and IA
- Debt Reduction:
- OIC: Can reduce your overall tax debt if accepted.
- IA: Full balance plus interest and penalties must be paid.
- OIC: Can reduce your overall tax debt if accepted.
- Eligibility Requirements:
- OIC: Strict — must prove inability to pay in full.
- IA: Broader — available to most taxpayers, especially if under $50,000 owed.
- OIC: Strict — must prove inability to pay in full.
- Risk of Rejection:
- OIC: High risk, most offers are denied.
- IA: Low risk, provided you can make required payments.
- OIC: High risk, most offers are denied.
- Effect on IRS Collections:
- OIC: May stop levies or garnishments once accepted.
- OIC: May stop levies or garnishments once accepted.
IA: Prevents new enforcement actions if you remain current, but liens may still be filed.
- Debt Reduction:
Which Is Better?
The best solution depends on your situation. If you truly cannot pay your full balance, an Offer in Compromise may provide long-term relief.
If you can afford monthly payments and want to avoid aggressive enforcement, an Installment Agreement is often the safer route.
For example, a taxpayer owing $60,000 with limited income may try to settle for $10,000 through an OIC.
Another taxpayer owing $20,000 with steady wages may choose a 72-month IA at about $280 per month. Both solutions can work, but only if eligibility requirements are met.
Why Professional Guidance Matters
Choosing between OIC and IA requires careful analysis of your finances. A tax professional can help determine whether you qualify for an OIC or if an IA is more realistic. They may also recommend broader strategies like Tax Relief or Business Tax Resolution if your situation involves multiple years or business liabilities.
OIC vs. IA Conclusion
Both Offer in Compromise and Installment Agreements give taxpayers a way to resolve IRS debt. The right option depends on your income, assets, and ability to pay. Eligibility is determined by the IRS, and results cannot be guaranteed. With expert guidance, you can choose the best path to protect your finances and resolve your tax debt.
Before comparing payment plans and settlements, you may want to understand exactly how the IRS evaluates an Offer in Compromise. Our article on Offer in Compromise: IRS Tax Debt Settlement Explained provides the full breakdown.