IRS Offer in Compromise Approvals Fall in 2025

For taxpayers, the stakes are immediate. The offer in compromise program is one of the few formal paths for settling a tax debt for less than the amount owed, and experts say it is disproportionately used by lower-income households with limited assets. With accepted offers falling to a level Nina Olson, former national taxpayer advocate, called unprecedented, more people appear to be getting trapped in interest, penalties and collection actions instead of securing a fresh start.

For the Treasury, the economics are more complicated. The IRS collected just $98.1 million through accepted compromise offers in fiscal 2025, less than half the $214.5 million in 2023. That suggests the agency may be tightening access to a tool that can produce near-term revenue losses on paper, but also brings delinquent taxpayers back into the system and can deliver collections that might otherwise never be realized.

The shift matters to investors because it points to a tax system under operational stress. The decline has coincided with steep IRS staffing cuts under the second Trump administration, with a Treasury inspector general report saying the workforce shrank by about 31,000 people, or 28%, from the start of 2025 to January 2026. That kind of contraction raises the odds of slower processing, more manual bottlenecks and more inconsistent enforcement, all of which can ripple through tax compliance, consumer balance sheets and federal cash flow.

The data also leave open a more subtle possibility: the issue may not be purely policy, but execution. The IRS said the acceptance rate for cases that reached a formal determination held steady in fiscal 2026, suggesting the real drop could be happening earlier, as more applications are returned for errors or missing information. If so, the problem is as much complexity as austerity — a sign that a cumbersome process is failing the very taxpayers it is supposed to help.

That tension runs through the program’s design. The IRS weighs a taxpayer’s “reasonable collection potential,” including income, expenses and assets, before deciding whether to settle. In theory, that protects the government from writing off debts that can still be paid. In practice, experts say discretion matters, and a more cautious IRS can simply steer more people into “currently not collectible” status, where balances keep accruing interest and penalties and the government can still pursue liens or refunds.

The result is a policy choice with distributional consequences. If approvals remain depressed, low-earning taxpayers could face larger outstanding balances, more forced collections and a lower chance of ever clearing their debts. If the agency is instead preserving revenue by rejecting more deals and keeping accounts open, it may win more in the short run but risk deeper long-term noncompliance among households already under financial strain.

The immediate question for markets and policymakers is whether the trend reflects a temporary processing backlog or a structural hardening of IRS behavior. If staffing shortages and application complexity are the main drivers, approvals could recover once the agency stabilizes. If the lower acceptance rate reflects a lasting shift in enforcement strategy, the tax system may be moving away from negotiated relief and toward a more punitive model — one that could lift collections at the margin but worsen stress for millions of debt-laden taxpayers.