IRS Offer in Compromise Guide
The IRS Offer in Compromise (OIC) program is one of the most heavily promoted tax resolution paths in the United States. Commercial firms, often called 'tax relief mills,' advertise this program as a way to settle your tax liability for 'pennies on the dollar.' While the OIC is a legitimate program, the qualification metrics are extremely strict, and the IRS rejects the vast majority of applications they receive. Understanding the exact mathematical formulas the IRS uses to evaluate your offer is essential before applying.
How the IRS Evaluates an Offer
An Offer in Compromise is an agreement between you and the IRS to resolve your tax liability for less than you owe. The IRS will only accept an offer if they determine that your liability cannot be collected in full before the 10-year statute of limitations expires.
The IRS bases this decision on a strict mathematical formula called your Reasonable Collection Potential (RCP). The RCP calculates your net equity in assets plus your projected future income, which represents the maximum amount the IRS believes it can collect from you.
The Reasonable Collection Potential Formula
To find your RCP, the IRS adds the Quick Sale Value (QSV) of your assets to your monthly disposable income projected over 12 or 24 months. QSV is typically calculated as 80% of your assets' fair market value.
Your disposable income is calculated by taking your gross income and subtracting standard, IRS-approved living expenses. If your calculated RCP is less than your outstanding tax liability, the IRS may accept your offer; otherwise, your offer will be rejected.
Application Steps and Payment Options
Applying for an OIC requires submitting Form 656 (Offer in Compromise) and Form 433-A (Collection Information Statement). You must provide detailed documentation of your assets, income, bank accounts, and household expenses.
You must also choose a payment option: a Lump Sum Cash Offer (requiring a 20% upfront payment with the application) or a Periodic Payment Offer (requiring monthly payments while the IRS evaluates your application). These payments are non-refundable.
Frequently Asked Questions
Evaluating an Offer in Compromise typically takes the IRS between six and twelve months. By law, if the IRS does not reject or accept your offer within two years of filing, your offer is considered accepted.
If your offer is rejected, you have the right to file an appeal within 30 days. Alternatively, you can evaluate alternative tax resolution paths like an installment agreement or Currently Not Collectible status.
No. The IRS will immediately reject any OIC application if you have outstanding, unfiled tax returns. You must be in strict compliance with all filing laws before applying.
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