Offer in Compromise

What Is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS has the authority to accept an OIC when it determines that the amount offered represents the most it can expect to collect within a reasonable period of time.

This program exists because the IRS recognizes that rigid insistence on full payment in every case is neither practical nor equitable. When a taxpayer genuinely cannot pay the full liability and the offer reflects their true collection potential, the OIC provides a path to resolution that serves both the taxpayer’s and the government’s interests.

Reasonable Collection Potential

The cornerstone of any Offer in Compromise is the Reasonable Collection Potential, or RCP. This is the IRS’s calculation of how much it could realistically collect from a taxpayer through enforced collection actions. The RCP takes into account the equity in the taxpayer’s assets plus future income that exceeds necessary living expenses over the remaining collection period.

The IRS will generally not accept an offer that is less than the calculated RCP. This means that the financial analysis underlying the offer must be thorough, accurate, and properly documented. We conduct a comprehensive review of assets, income, and allowable expenses to determine the lowest defensible offer amount before submission.

The Financial Analysis

Preparing an Offer in Compromise requires a detailed financial disclosure using IRS Forms 433-A (for individuals) or 433-B (for businesses). Every asset must be identified and valued, every source of income documented, and every expense categorized according to the IRS’s allowable living expense standards. Bank statements, investment accounts, real property valuations, vehicle values, and retirement accounts are all scrutinized.

The financial picture presented to the IRS must be complete and defensible. Omissions or inaccuracies can result in rejection of the offer or, worse, trigger additional scrutiny. We work closely with each client to compile the necessary documentation and present the financial analysis in the most favorable light while maintaining full compliance with IRS requirements.

When an OIC Is — and Isn’t — Appropriate

Not every taxpayer is a candidate for an Offer in Compromise, and submitting one when the circumstances do not support it wastes time and money. The IRS rejects the majority of offers submitted, often because the taxpayer has the ability to pay the full liability through an installment agreement or because the offer amount is below the calculated RCP.

An OIC may be appropriate when the total liability significantly exceeds the taxpayer’s ability to pay over the remaining collection statute, when the taxpayer has limited equity in assets and modest income relative to necessary expenses, or when there is genuine doubt as to the liability itself. It is generally not appropriate when the taxpayer has substantial equity, high income, or when compliance issues — such as unfiled returns — have not been resolved.

We conduct a thorough pre-qualification analysis before recommending an OIC. If the numbers do not support an offer, we advise clients on alternative resolution strategies — such as installment agreements or currently-not-collectible status — that may better serve their situation.

The OIC Process

The OIC process begins with the submission of Form 656, the Offer in Compromise application, along with the required financial disclosure forms, supporting documentation, and the application fee. The taxpayer must also be current on all filing obligations and, in most cases, make estimated tax payments during the pendency of the offer.

Once submitted, the IRS assigns the offer to an examiner who reviews the financial documentation, may request additional information, and determines whether the offer amount is acceptable. This process can take twelve months or longer. During the review period, the IRS is generally prohibited from levy action. If the offer is accepted, the taxpayer must comply with all tax obligations for a five-year monitoring period. If rejected, there is a right to appeal within 30 days.