What Is an Offer in Compromise?
An OIC settles a tax liability for less than the full amount owed. Congress created the program recognizing it is sometimes in the best interest of both parties to accept reduced payment rather than pursue full collection of an uncollectible debt. The IRS accepts OICs on three grounds: doubt as to collectibility (most common), doubt as to liability, and effective tax administration.
The RCP Calculation
The Reasonable Collection Potential is the IRS estimate of maximum collectible amount: net equity in assets plus future income (monthly disposable income multiplied by 12 for lump-sum offers or 24 for periodic payment offers). The offer must equal or exceed the RCP. Understanding how the IRS values assets at quick-sale value and uses allowable expense standards is critical.
Filing Requirements
All returns must be current. The package includes Form 656, Form 433-A (OIC), $205 application fee, initial payment (20% for lump-sum, first monthly payment for periodic), and comprehensive supporting documentation. The review takes 6-12 months. The IRS generally suspends collection during review.
Common Rejection Reasons
Offer below calculated RCP, incomplete documentation, non-compliance during review, and disputes over valuations. Rejected offers can be appealed to the IRS Office of Appeals, where many initially rejected offers are ultimately accepted.
After Acceptance
The taxpayer must comply with all filing and payment obligations for five years. Default allows the IRS to rescind the offer and reinstate the original liability. This compliance period is non-negotiable.
An Offer in Compromise is not a gimmick. It is a legitimate program reflecting a straightforward calculation: what is the maximum the IRS can reasonably expect to collect?