Choose OIC for recent tax debt only; choose bankruptcy for old tax debt plus other debts.
October 12, 2026
Both can dramatically reduce what you owe, but they work differently. An OIC negotiates with the IRS to settle for less, while bankruptcy can eliminate qualifying tax debt through court proceedings.
This guide compares offer in compromise vs. bankruptcy side by side, including eligibility, costs, timelines and outcomes. Plus, when to seek help by comparing tax relief companies or bankruptcy attorneys.
The odds have also shifted. In FY2025, the IRS accepted 5,464 of the 38,797 offers it received, per IRS Data Book Table 4-1. That's down from 7,199 accepted in FY2024, and a full review can take up to 24 months, the IRS says as of October 2026.
Choose an OIC when your income and asset equity can't cover the debt and taxes are your main problem. Choose bankruptcy when old income taxes meet the 3-2-240 rules (explained below) or other debts are piling up too.
Your specific circumstances, like debt age, total amount, other debts, income and assets, determine which option fits you.
An OIC tends to fit people whose main problem is tax debt and whose ability to pay is low.
Only tax debt: No other significant debts like credit cards or medical bills that bankruptcy could eliminate.
Recent tax debt: Recent tax debt that bankruptcy can't discharge because it fails the 3-2-240 rules.
Little asset equity: The IRS counts home, vehicle and savings equity in the minimum offer it will consider.
A business: You want to avoid a public filing. First, learn how payroll tax debt and trust fund penalties work.
Low collection potential: Your income and assets are much lower than your total debt under IRS formulas.
Bankruptcy tends to fit people whose income taxes are old enough to discharge or whose other debts are also unmanageable.
Old tax debt: Your debt meets all 3-2-240 discharge criteria.
Multiple debt types: You have credit card debt, medical bills or personal loans beyond taxes.
Active wage garnishment: Filing triggers an automatic stay, a court freeze on most collection. It doesn't stop IRS audits or assessments.
Lower income: You may qualify for Chapter 7 and have few non-exempt assets.
Rejected OIC: A rejection alone doesn't make bankruptcy a fit. It helps only if your taxes also meet every discharge rule.
Bankruptcy is a court process, so talk with a licensed bankruptcy attorney before you file. If an OIC looks closer to your situation, see how to choose professional help below.
An OIC settles only federal tax debt, while bankruptcy can also cover other debts if strict rules are met. Here's how they compare as of October 2026.
Factor | Offer in Compromise | Bankruptcy (Chapter 7) | Bankruptcy (Chapter 13) |
Cost | $205 fee (waived for low-income) + offer amount | $338 court fees (filing, administrative and trustee fees combined) + attorney fees (vary) | $313 court fees (filing and administrative fees combined) + attorney fees (vary) |
Timeline | Up to 24 months for review | Varies by case | 3-5 years |
Credit impact | No bankruptcy record; it's an IRS agreement | Up to 10 years | |
Success rate | 5,464 of 38,797 offers accepted (FY2025) | Depends on meeting every discharge test | Discharge only after completing the plan |
Assets | Keep assets, but equity raises your offer | Non-exempt assets may be sold | Keep property, pay through plan |
Debt eliminated | Balance above the accepted offer | Qualifying income tax that meets every timing rule | Qualifying debt after plan completion |
Other debts | Federal tax debt only | Most dischargeable debts | Restructures most debts |
Court fees have been in effect since Dec. 1, 2023. Attorney fees aren't set by law and vary by market.
If neither option fits, an IRS payment plan lets you pay over time. The IRS now offers Simple payment plans, and short-term plans of 180 days or less have a $0 setup fee as of October 2026. The IRS also advises exploring other payment options before you submit an offer.
Read our guide on how to pay your taxes to compare methods. If your balance is large or collection has started, a tax professional can review your account.
An Offer in Compromise is a settlement program where the IRS may agree to accept less than the full amount owed. It's an option only if you can't reasonably pay through income, assets or installment payments.
The IRS considers offers on three grounds:
Doubt as to collectibility: You can't pay the full debt within the collection period.
Doubt as to liability: You have a legitimate dispute about whether you owe the debt. These offers use Form 656-L.
Effective tax administration: Paying in full would create economic hardship or be unfair.
Accepted offers totaled $98.1 million in FY2025, according to the IRS Data Book (updated June 2026). You'll see two "acceptance" figures reported, and they measure different things:
Data Book ratio (about 14%): Offers accepted in FY2025 divided by offers received that year. Many accepted offers were filed in earlier years.
Decided-case rate (about 53% so far in FY2026): The share of offers reaching an accept-or-reject decision that were accepted. Returned, withdrawn and pending offers are left out.
About 53% of offers that reached a decision were accepted so far in FY2026, versus about 51% over the same period of FY2025. That's according to IRS figures reported by CNBC in September 2026.
In plain terms, about 1 in 7 offers received gets accepted, but about half of offers that reach a final decision do. Neither figure is your personal odds.
You can apply only if you're current with your filings and not in bankruptcy. Before the IRS will consider your offer, you must have filed all tax returns and made current year estimated payments. You also can't have an open bankruptcy proceeding.
Employers must also have made federal tax deposits for the current quarter and the two prior quarters, per IRS Form 656-B. You'll need to show a genuine inability to pay through the IRS's reasonable collection potential calculation.
The IRS's Offer in Compromise Pre-Qualifier checks these basics and calculates a preliminary offer amount. The IRS says it's a guide only, and the final decision rests on your full application.
The IRS offer in compromise process has three steps, and the full review can take up to 24 months. Instructions are in the Form 656-B booklet, revised in April 2026.
Step 1: Application (Form 656)
Application fee: $205, waived for low-income individuals.
Initial payment: 20% of the offer (lump sum) or the first monthly payment (periodic).
Financial documentation: Income, expenses, assets and debts.
Step 2: IRS review for OIC
Processing time: Up to 24 months, depending on IRS inventory and case complexity.
Deemed acceptance: Under 26 U.S.C. 7122(f), an offer not rejected within 24 months of submission is treated as accepted. Some periods don't count, so don't plan on waiting it out.
Interest: Interest and penalties keep accruing during review. The IRS rate for individuals is 7% for Q4 2026.
Requests: The IRS may request more documents or propose a counteroffer.
Step 3: OIC acceptance or rejection
If accepted: Pay the offer and stay compliant through the fifth year. You can't request a payment plan or new offer during that time.
Refunds: Per Form 656-B, the IRS may keep refunds for returns assessed before it accepts your offer.
If rejected: You can appeal within 30 days using Form 13711.
If returned: You can't appeal a returned offer, such as one sent back for missing information.
You'll pay at least your reasonable collection potential (RCP), the IRS's estimate of what it could realistically collect from you. The IRS calculates your offer using a strict formula:
Reasonable Collection Potential = Available equity in assets + Future income
Think of it like a buyer pricing a used car by its real condition, not the sticker. The IRS prices your debt by what your finances can produce, not by the size of your bill.
Future income equals monthly disposable income multiplied by 12 months (lump sum) or 24 months (periodic payment). The IRS uses IRS Collection Financial Standards for allowable expenses, not your actual expenses.
Example: Say you owe $30,000, have $1,000 in asset equity and $200 a month left after allowable expenses. Your minimum lump-sum offer would be $1,000 + ($200 × 12) = $3,400. Without an accepted offer, you'd owe the full $30,000 plus interest and penalties.
BestMoney's calculation from IRS Data Book figures puts the average accepted offer at about $18,000 in FY2025 ($98.1 million across 5,464 offers). If you're also handling a legal or insurance payout, see our guide to taxes on settlement money.
Bankruptcy can discharge, or legally wipe out, qualifying income tax debt through a court process. Unlike an OIC, which you can pursue by settling with the IRS yourself, bankruptcy is a legal court process. It can eliminate qualifying tax debts completely if specific conditions are met.
Chapter 7 can discharge qualifying tax debt outright, while Chapter 13 repays tax debt through a court-approved plan. The key difference is how the debt is treated and whether it can be discharged.
Chapter 7 bankruptcy: Certain income tax debts may be discharged if they meet the timing rules. The taxes can't involve fraud or willful tax evasion.
Chapter 13 bankruptcy: Plans last 3 years if income is below the state median, or generally 5 years if above. Priority taxes are paid in full.
In Chapter 13, older dischargeable tax debts may be paid at a reduced amount or eliminated at the end of the plan. Under either chapter, you must complete credit counseling from an approved agency within 180 days before filing, according to U.S. Courts.
Factor | Chapter 7 (Liquidation) | Chapter 13 (Reorganization) |
Timeline | Varies by case | 3 years (income below state median) or generally 5 years |
Assets | Non-exempt assets may be sold | Keep property, pay debts over time |
Income requirement | Means test applies if income is above the state median | Available to higher earners |
Tax debt treatment | Qualifying debt discharged | Priority tax paid through plan; older qualifying debt discharged after completion |
Credit impact | Up to 10 years | Up to 10 years |
Chapter 7 may suit you when your tax debt qualifies for discharge and you have limited assets. Chapter 13 may suit you if you have recent, nondischargeable tax debt or need time to catch up on missed payments. A bankruptcy attorney can confirm which chapter, if any, fits your case.
Only income tax that passes every timing test, with no fraud or evasion, qualifies for discharge. Bankruptcy won't eliminate all tax debt automatically, and missing even one requirement means the debt survives bankruptcy.
Federal law in 11 U.S.C. 523 and 11 U.S.C. 507 sets these tests, often called the 3-2-240 rule:
3-year rule: The tax return's due date, including extensions, was at least 3 years before you file.
2-year rule: You filed the return at least 2 years before your bankruptcy filing.
240-day rule: The IRS assessed the tax at least 240 days before you file. Time an OIC was pending, plus 30 days, pauses this clock.
No fraud or evasion: You didn't file a fraudulent return or willfully evade the tax.
Income tax only: Trust fund taxes withheld from employees can't be discharged. Other employment taxes follow a separate 3-year lookback.
Your assessment date appears on your IRS account transcript.
Example: Your 2023 tax return was due April 15, 2024, and you filed on time. The IRS assessed it in May 2024. It may qualify for discharge in a bankruptcy filed after April 15, 2027, the 3-year mark.
These dates matter down to the day, so have a bankruptcy attorney or tax professional check your transcripts. If your debt doesn't pass, compare the OIC and payment plan routes covered above.
Business owners should weigh public filing, entity type and how payroll taxes are treated. Your business structure affects which options are open to you.
An OIC may let a business resolve federal tax debt without a public court case.
An OIC is an IRS agreement, not a public court case
Business and individual tax debts need separate Forms 656 and fees, per Form 656-B
Bankruptcy options for a business depend on how the business is set up.
A corporation or partnership can't get a Chapter 7 discharge; only individuals can, per U.S. Courts Chapter 7 basics
Chapter 13 is only for individuals, including sole proprietors, per U.S. Courts Chapter 13 basics
For scale, the IRS received 38,797 offers in FY2025, per the IRS Data Book. Courts logged 26,941 business bankruptcy filings in the 12 months ending June 30, 2026, according to U.S. Courts Table F-2. That count covers filings for all reasons, not just tax debt.
Start by gathering your financial records, since both options require extensive documentation. Careful preparation can help you avoid delays.
You need proof of your income, expenses and assets, plus an IRS collection information statement.
Documents needed for an OIC application:
Three months of bank statements and pay stubs
Asset valuations (home, vehicles, investments)
Monthly expense documentation
Collection Information Statement (Form 433-A (OIC) or 433-B (OIC), April 2026 versions)
Before applying for an OIC:
File all unfiled tax returns
Make current year estimated payments
Calculate your reasonable collection potential
Consider hiring a tax professional
You need income and tax records, a full list of debts and assets, and a completed credit counseling course.
Documents needed for bankruptcy filing:
Recent income records from all sources
Recent tax returns
Complete list of debts, creditors and assets
Recent credit report and monthly expense records
Before filing for bankruptcy:
Complete credit counseling with a U.S. Trustee-approved provider
Request IRS transcripts to verify 3-2-240 eligibility
Check whether the means test applies to you
Identify exempt vs. non-exempt assets
Consult a bankruptcy attorney
Choose a credentialed professional who handles your specific path: a tax pro for an OIC or a bankruptcy attorney for Chapter 7 or 13. Choose carefully, since the right representative can shape your outcome.
Look for Enrolled Agents, CPAs or tax attorneys with specific OIC experience. Ask about their total fees and what happens if your offer is rejected. The IRS itself urges you to check the qualifications of any tax professional you hire to file an offer.
Avoid these red flags:
Guarantees of specific settlement amounts
Upfront fees before reviewing your case
Claims of special IRS relationships
Choose a licensed attorney in your state with bankruptcy specialization and tax debt discharge experience. Ask whether your debt qualifies for discharge, whether to file Chapter 7 or 13, and what the total cost includes.
Avoid these warning signs:
Non-attorney bankruptcy petition preparers
Promises that all tax debt will be eliminated
Attorneys with no bankruptcy specialization
Start by determining whether your tax debt is dischargeable in bankruptcy using the 3-2-240 rules. If it meets bankruptcy timing tests, Chapter 7 may discharge the qualifying income tax.
If the debt is too recent or you have low collection potential, an Offer in Compromise may be better. The critical first step is reviewing your debt age, when returns were filed and when the IRS assessed the tax.
If you only owe federal income tax and have low income: Start with the OIC sections and the IRS Pre-Qualifier.
If you owe old income tax plus credit cards or medical bills: Focus on the bankruptcy and discharge sections.
If you own a business with payroll tax debt: Read the business owner section, since trust fund taxes can't be discharged.
If you have home equity or savings: Expect that equity to raise your minimum offer.
If an offer was already returned or rejected: Review the appeal rules and discharge tests before your next step.
Yes, if your taxes meet the discharge rules. The IRS won't consider an offer during an open bankruptcy, and a pending offer extends the 240-day assessment clock.
An OIC only covers federal tax, so you'll need to negotiate state tax debt separately. State income taxes face the same federal bankruptcy tests, but state rules vary.
Bankruptcy can't discharge trust fund taxes withheld from employees. An OIC can include the trust fund recovery penalty or business payroll debt if IRS preconditions are met.
The full investigation can take up to 24 months, depending on IRS inventory and case complexity. If the IRS doesn't reject your offer within 24 months, federal law generally treats it as accepted.
Per the IRS OIC FAQs, the IRS generally won't start a new levy while your offer is pending. But it may not release an existing levy and may file a lien. In bankruptcy, the automatic stay pauses most collection but not IRS audits or assessments.
This guide relies on secondary research, not a BestMoney survey. BestMoney's editorial team reviewed the IRS Data Book for FY2025, Form 656-B (Rev. 4-2026), IRS offer in compromise pages and the U.S. Courts fee schedule and Table F-2. We also reviewed U.S. Trustee Program guidance, the U.S. Code via Cornell Law School's Legal Information Institute and CNBC's September 2026 report on IRS offer data.
The average accepted offer is BestMoney's own calculation: $98.1 million in accepted offers divided by 5,464 accepted offers, both from the FY2025 IRS Data Book.
IRS, Data Book FY2025, Table 4-1: Delinquent Collection Activities
IRS, Collections, Activities, Penalties and Appeals statistics page
IRS, Offer in Compromise program page
IRS, Offer in Compromise FAQs
IRS, Form 656-B, Offer in Compromise Booklet (Rev. 4-2026)
IRS, About Form 656
IRS, Offer in Compromise Pre-Qualifier
IRS, Collection Financial Standards
IRS, Interest Rates for the Fourth Quarter of 2026
IRS, Payment Plans and Installment Agreements
U.S. Courts, Chapter 7 Bankruptcy Basics
U.S. Courts, Chapter 13 Bankruptcy Basics
U.S. Courts, Bankruptcy Court Miscellaneous Fee Schedule
U.S. Courts, Table F-2, 12 Months Ending June 30, 2026
U.S. Trustee Program, Means Testing
U.S. Trustee Program, Credit Counseling and Debtor Education
Cornell Law School LII, 26 U.S.C. 7122
Cornell Law School LII, 11 U.S.C. 362, 507 and 523
Cornell Law School LII, 15 U.S.C. 1681c
CNBC, IRS Offers in Compromise Report, Sept. 18, 2026
The right tax debt relief path starts with your dates and your numbers. Take these steps next:
Pull your IRS account transcripts to find return filing and assessment dates.
Run the IRS Offer in Compromise Pre-Qualifier to estimate a preliminary offer.
Compare professional tax debt relief help by reviewing our best tax relief companies.
Talk to a bankruptcy attorney if your income tax debt passes the 3-2-240 tests.
Carissa Rawson is a personal finance expert at BestMoney.com, focusing on loans and money management. Her writing has been featured in Forbes, Business Insider, and USA Today. In addition to her editorial work, Carissa speaks at major travel events and offers guidance on optimizing personal finances.
