The IRS will take less than you owe, on its own arithmetic

Figures relate to tax year 2025-26 (UK) · 2025 (US)

People imagine a conversation. A figure proposed, a counter offer, something agreed in the middle.

An offer in compromise is not that. The IRS applies a formula to what you own and what you will earn, and that produces the amount they will accept.

So the work is in the arithmetic rather than the argument. Living abroad changes several inputs, and not usually in your favour.

Key takeaways

• An offer in compromise settles a tax debt for less than the full amount.
• Most accepted offers rest on doubt that the IRS could collect it all.
• The amount is driven by a formula, not by negotiation.
• Every return must be filed before an offer is considered.
• There is an application fee and a down payment, with exceptions.
• The IRS has two years to decide, or the offer is accepted automatically.
• Foreign assets and income all count towards the calculation.
• You must stay compliant for five years afterwards.

What is an offer in compromise?

An agreement to settle a tax liability for less than the full balance. According to IRS guidance on the programme, it can rest on doubt that you owe the tax, doubt that the IRS could collect it, or on hardship where collecting would be unfair. Almost every accepted offer rests on the second ground.

The first ground is rare, because arguments about whether you owe the tax belong in appeals instead.

The third is narrow, and the IRS reserves it for genuinely exceptional cases.

What is reasonable collection potential?

The formula at the heart of it, and the figure that decides your offer. The IRS adds the realisable value of your assets to a multiple of your monthly disposable income, and that total is what they expect. The IRS turns down anything below it, however sympathetic the story.

Disposable income means what remains after allowable living expenses, not after what you actually spend.

That distinction sinks most unsuccessful offers.

How are living expenses allowed?

Against national and local standards rather than your bank statements. The IRS publishes allowances for housing, transport, food and health, and generally ignores anything above them. Somebody living in London on a London budget finds those standards unforgiving.

The standards handle foreign living costs awkwardly, because they were built around American life.

Arguing for higher allowances takes evidence rather than assertion.

Do foreign assets count?

All of them, wherever they sit. A British house, a UK pension, an ISA and a current account all feed the asset side of the calculation. People sometimes assume assets outside America escape the formula. They do not.

Our guide to exchange rates on a US return covers converting the figures.

Equity in a British property frequently defeats an otherwise sensible offer.

What about a UK pension?

It counts, though how much depends on whether you can reach it. A pension you could draw today looks far more like cash than one locked for twenty years. The answer turns on the facts, so argue it carefully rather than conceding.

Our guide to UK pensions and US tax covers the wider treatment.

Early access charges and tax on withdrawal both cut the realisable figure.

A worked example

Take an illustrative example. An American in Bristol owes $90,000 across several years of unfiled returns now brought up to date.

She has £40,000 of equity in a flat, modest savings and disposable income of about £300 a month after allowable expenses.

The formula gives a collection potential well below the debt, so an offer around that figure stands a real chance.

Had the flat held £200,000 of equity, the same debt would leave no viable offer and only a payment plan.

What it costs to apply

Must every return be filed first?

Yes, without exception, and this stops a great many expat offers at the door. The IRS will not settle with somebody whose filing history has gaps, because they cannot see the real liability. So catching up comes first, rather than later as a tidying exercise.

Our streamlined filing service handles the catch-up where years are missing.

Bringing the returns up to date often changes the debt figure anyway.

What does it cost to apply?

An application fee and a down payment, unless you meet the low income exception. The lump sum route wants twenty per cent with the application, and the periodic route wants the first instalment. You do not get those payments back if the IRS turns the offer down.

They come off the debt rather than vanishing, which softens the blow.

Budget for them before applying, because they fall due at submission.

How long does a decision take?

Many months, and often more than a year. The IRS has two years from receipt to decide, and an offer they fail to decide in that window counts as accepted. From abroad the post alone adds weeks to every exchange.

Our guide to the IRS online account from the UK covers staying contactable.

Missing a request for information is the commonest way to lose an offer.

Does it stop collection?

Largely, while the offer sits pending, which is one of its practical attractions. The IRS generally suspends levy action while it considers the offer, and for a period after any rejection. Interest runs throughout, so the debt grows while you wait.

Our guide to IRS payment plans from abroad covers the alternative route.

A pending offer also keeps you outside the passport certification programme.

Does it protect your passport?

Yes, because a pending offer sits among the exceptions to the overdue debt rules. That matters most for somebody living here whose passport underpins their immigration position. The protection lasts while the IRS considers the offer, and while you pay an accepted one.

Our guide to passport certification for tax debt covers the programme.

A rejected offer loses that protection once the appeal period closes.

What happens if it is accepted?

You pay the agreed amount on the agreed terms, and the IRS writes off the rest. You then have to stay fully compliant for five years, filing and paying on time. Default within that period revives the whole original liability.

The IRS usually keeps any refund for the year it accepts the offer as well.

Five years of perfect compliance asks a lot of somebody with complex affairs.

What if it is rejected?

You have appeal rights, and the appeal is often worth using. Rejections frequently turn on a disputed asset value or an expense the examiner struck out, and evidence can shift both. An appeal costs far less than starting over.

Our guide to Form 2848 and IRS authority covers getting somebody appointed to argue it.

Check the appeal deadline on the rejection letter the day it arrives.

Is a payment plan better?

For most people with assets, yes, because the formula leaves no viable offer. An instalment plan spreads the debt without making you prove you cannot pay. It also protects your passport and halts collection the same way.

Our guide to paying tax owed after streamlined filing covers the usual route.

Most people who ask about settling end up on a payment plan.

Does the collection clock matter?

Considerably, so check it before you apply. The IRS generally has ten years to collect, and an offer suspends that clock while they consider it. An old debt close to expiry may be better left alone than revived.

Our guide to the statute of limitations covers the periods.

Applying can hand the IRS an extra year or more to collect.

Do state debts work the same way?

Each state runs its own programme, and several are far less generous. A federal settlement does nothing about a California or New York liability, which needs its own approach. Somebody who left a high tax state often runs two negotiations at once.

Our guide to state tax after you leave covers the state exposure.

Some states simply have no settlement route at all.

Can a firm promise to settle your debt?

No, and promises of that kind are the warning sign to walk away. The outcome follows a formula applied to your own figures, so nobody knows the answer before running it. Treat advertising that implies otherwise with real caution.

Any honest adviser will run the collection potential first and tell you whether an offer is realistic.

If the number does not work, no amount of advocacy changes it.

What records do you need?

Bank statements, property valuations, pension statements, payslips and a full list of outgoings. You convert everything to dollars and evidence it, so partial disclosure is worse than useless. The IRS checks what you report against what they already hold.

Foreign account data reaches them through exchange agreements, so omissions show up.

They return an incomplete submission rather than deciding it, costing months.

Does an offer in compromise damage your record?

Not in any way that follows you around commercially, because there is no public register of accepted offers. What does exist is a lien, which the IRS usually files while the debt is outstanding and releases once the agreed amount is paid. A British lender will rarely see any of it.

Our guide to UK bank account closures for Americans covers the banking side.

The lien matters mainly if you own American property while it sits in place.

Can you make a second offer in compromise?

You can, and people often do once their circumstances change. A rejection is not permanent, so somebody whose income falls or whose property equity drops may qualify later when they did not before. Each application starts the process again, with its own fee and its own down payment.

Keep the earlier calculation, because it shows exactly what has to change to succeed.

Reapplying too soon with the same figures simply repeats the rejection.

What if your spouse is British?

Their assets can still appear in the calculation, which couples rarely expect. Where accounts or property are held jointly, the IRS looks at your share and sometimes at the household position for expenses. A non-American spouse has no liability, but their finances are not invisible either.

Our guide to joint accounts for US UK couples covers shared ownership.

How assets are held is worth reviewing long before any application.

Is an offer in compromise common for expats?

Less common than people hope, because the typical profile works against it. Americans abroad who owe substantial tax often own property, hold a pension and earn steadily, and all three push the collection potential upwards. The route suits people with genuinely limited means rather than people with a liquidity problem.

In our practice most enquiries about settling end with a payment plan instead.

That is not a failure, because the plan solves the cash flow problem perfectly well.

How does the IRS value a British house?

At what it would realise on a reasonably quick sale, less the mortgage and less an allowance for costs. That usually means a discount on the open market figure rather than the agent's optimistic valuation. Converting to dollars at the right date matters too, because a strong pound inflates your asset position considerably.

A formal valuation is worth far more to the calculation than an online estimate.

Mortgage statements at the same date keep the net figure defensible.

What counts as disposable income abroad?

Your monthly income less the allowable expense standards, converted into dollars. The difficulty is that British costs rarely map onto American allowances cleanly, so council tax, childcare and commuting can all sit awkwardly. Presenting them under the nearest recognised heading, with evidence attached, works better than inventing new categories.

Multiply the monthly figure by the required number of months before judging whether an offer is realistic.

Small differences in monthly income move the total by thousands.

What happens to the debt while you wait?

It carries on growing, because interest runs throughout the process even though collection stops. A decision taking eighteen months adds meaningfully to the balance, which matters if the offer is ultimately rejected. The suspension protects you from enforcement rather than from the arithmetic.

Factor that growth in when comparing an offer against simply agreeing a payment plan now.

A plan started today stops the problem compounding while you consider options.

How to make an offer in compromise

1. Bring every outstanding return up to date first.
2. Check how much of the collection period actually remains.
3. Value every asset, British ones included, in dollars.
4. Work out monthly disposable income against the allowable standards.
5. Calculate the collection potential before deciding whether to apply.
6. Choose between the lump sum and periodic payment routes.
7. Pay the application fee and down payment unless exempt.
8. Stay contactable, and answer every information request promptly.

Mistakes and penalties we see with an offer in compromise

The first is applying with returns still outstanding, which stops the offer before anybody looks at it.

The second is leaving British property equity or a pension out of the asset schedule.

The third is offering a figure based on what feels affordable rather than on the formula.

The fourth is applying on an old debt and suspending a collection clock that was about to expire.

How US UK Tax Accountants helps

We calculate the collection potential before anything is filed, because that single figure tells you whether an offer is worth making at all.

Then we present the foreign assets properly, which is where most expat offers are won or lost. Our guide to the streamlined route covers bringing the returns up to date first.

If you owe more than you can pay, get in touch before you send anything to the IRS.

Last reviewed 24 October 2026. This article is general information and not personal tax advice, and settlement outcomes depend on your own figures.