An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS to resolve a tax liability for less than the full amount owed. The IRS will accept an OIC only when the offered amount represents the most it can reasonably expect to collect from the taxpayer, given their income, expenses, and assets.

Grounds for Acceptance

Doubt as to Collectibility (DATC) — The most common basis. You cannot pay your full liability now or in the foreseeable future. The math of your income, expenses, and assets supports an offer below the full balance.

Doubt as to Liability (DATL) — You dispute the accuracy of the tax debt itself. Separate supporting documentation is required.

Effective Tax Administration (ETA) — The full liability is technically collectible, but payment would create economic hardship or would be fundamentally inequitable given exceptional circumstances.

How the IRS Calculates Reasonable Collection Potential (RCP)

The IRS calculates the minimum acceptable offer using:

RCP = Net Realizable Asset Value + Future Income

  • Net Realizable Asset Value: 80% of fair market value of all assets (cash, real estate equity, investments, vehicles) minus secured debt balances
  • Future Income: Your monthly disposable income (gross income minus IRS-allowable expenses) multiplied by 12 months (lump sum offer) or 24 months (periodic payment offer)

Under Fresh Start, the switch from 48–60 months to 12 months for lump-sum offers dramatically increased the number of taxpayers who can make a viable offer.

Payment Options for an OIC

Lump Sum Cash Offer: Pay 20% of the offer amount when submitting (non-refundable), then pay the remainder within 5 months of IRS acceptance.

Periodic Payment Offer: Make monthly payments throughout the evaluation period (6–24 months), then continue payments per the accepted offer terms.

The Application Process

Submit Form 656 (Offer in Compromise) along with Form 433-A (OIC) — a detailed financial statement. The filing fee is $205 (waived for applicants at or below the federal poverty level). The IRS has up to 2 years to accept or reject.

During review: levies are generally suspended, the collection statute (CSED) is tolled, and a federal tax lien remains in place.

Prerequisites

Before submitting an OIC, you must:

  • Have filed all required federal tax returns
  • Not be in an open bankruptcy proceeding
  • Have made all required estimated tax payments for the current year
  • Have made all required federal tax deposits for the current quarter (if a business owner)

If the IRS Rejects Your Offer

You have 30 days to appeal the rejection through the IRS Office of Appeals. If the appeal is also denied, you can petition the U.S. Tax Court.

OIC Mill Warning

Companies that promise to "settle your IRS debt for pennies on the dollar" without reviewing your financials are engaging in predatory practices. Verify any representative is a licensed Enrolled Agent, CPA, or tax attorney — and get a realistic RCP estimate before paying any fees.