What Is an Offer in Compromise?

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax liability for less than the full amount owed. It is one of the most misunderstood — and most abused — programs in the tax relief industry.

The IRS will accept an OIC only when it believes the offered amount represents the most it can reasonably expect to collect from the taxpayer, taking into account their income, expenses, and assets. It is not a discount program. It is a mathematical determination.

The Three Grounds for an OIC

The IRS accepts Offers in Compromise on three grounds:

  1. Doubt as to Collectibility (DATC) — The most common basis. You can demonstrate that you cannot pay your full tax liability now or in the foreseeable future.
  2. Doubt as to Liability (DATL) — You dispute the legitimacy of the tax debt itself. This requires separate documentation challenging the assessment.
  3. Effective Tax Administration (ETA) — The full liability is technically collectible, but payment would create an economic hardship or would be inequitable given exceptional circumstances.

The vast majority of accepted offers are filed under Doubt as to Collectibility.

How the IRS Calculates Your Offer Amount

The IRS determines the minimum acceptable offer using a formula called Reasonable Collection Potential (RCP):

RCP = Net Realizable Asset Value + Future Income

Net Realizable Asset Value

This includes the quick-sale value of your assets — bank accounts, investment accounts, real estate equity, vehicles, business assets — minus any amounts owed on secured debts. The IRS uses 80% of the fair market value for most assets.

Future Income

The IRS calculates your monthly "disposable income" — your gross monthly income minus IRS-allowed monthly expenses. Under Fresh Start, for lump-sum offers, the IRS multiplies that disposable income by 12 months. For periodic payment offers, the multiplier is 24 months.

Example

Suppose you owe $40,000 and have:

  • $5,000 in net realizable assets
  • $200/month in disposable income after IRS-allowed expenses

Your RCP = $5,000 + (12 × $200) = $7,400

If the IRS agrees with those numbers, it might accept an offer of $7,400 to resolve a $40,000 debt. You can find out if the math works in your favor by clicking here to use our free eligibility guide.

What the IRS Looks at When Evaluating an OIC

The IRS reviews your Form 433-A (OIC) — a detailed financial statement covering:

  • All income sources (wages, self-employment, rental, pension, Social Security)
  • Monthly living expenses (compared against IRS Collection Financial Standards)
  • Bank accounts, retirement accounts, real estate, vehicles, business interests
  • Health conditions or other special circumstances

The IRS uses Collection Financial Standards — published tables of allowable monthly expenses for housing, transportation, food, and clothing — to cap what they consider "reasonable" expenses. If your actual expenses exceed these standards, the IRS may not give you full credit for them.

Common Reasons OICs Are Rejected

  • Unfiled tax returns — You must be in full filing compliance before the IRS will process an OIC
  • Income was understated — The IRS may verify income through wage data, 1099s, and third-party sources
  • Asset values were underestimated — IRS appraisers may disagree with your property valuations
  • Expenses exceed IRS standards — The IRS uses its own expense tables, not your actual spending
  • You can afford to pay — The math simply does not support an offer

How Long Does the OIC Process Take?

The IRS has up to two years to accept or reject an OIC. In practice, most decisions come within 6–12 months. During that time, the IRS collection clock (statute of limitations) is paused, and most collection activity is suspended while the offer is under review.

If rejected, you have 30 days to appeal through the IRS Office of Appeals.

OIC Mills: A Warning

The tax relief industry is full of companies that promise to "settle your IRS debt for pennies on the dollar" — often before evaluating whether you actually qualify. These companies charge thousands in upfront fees for OICs that have no realistic chance of acceptance.

The IRS itself has warned taxpayers about OIC mills — companies that mass-submit unqualified offers to collect fees. Before hiring anyone, verify their credentials (Enrolled Agent, CPA, or tax attorney), ask specifically whether they have reviewed your financials, and get a realistic assessment of your RCP.

The Bottom Line

An Offer in Compromise is a legitimate and powerful tool — but it is not available to everyone. The math has to work. If your RCP is lower than what you owe, an OIC may resolve your debt for a fraction of the balance. If your income and assets are too high, other options like an installment agreement or Currently Not Collectible status may be more appropriate.

Use our free eligibility guide to find out if an OIC may be right for your situation.