Offer in Compromise Attorney — IRS Tax Settlement and OIC Representation

Written by Sam Brotman, J.D., LL.M. (Taxation), MBA, CPA — Managing Attorney, Brotman Law  ·  Updated May 2026

The IRS accepted about 13,000 OICs in a recent year out of roughly 36,000 submitted — an acceptance rate of around 36%. Most rejections are not arbitrary. They happen because the offer was below what the IRS calculated it could collect. A well-prepared OIC that accurately reflects the taxpayer's financial position should be accepted; the problem is that a lot of offers are filed without a realistic RCP analysis, and the IRS keeps the 20% deposit either way.

I work as an IRS attorney and handle OIC submissions, rejected offer appeals, and the California FTB compromise program. Before I recommend filing an OIC, I run the RCP numbers. If the math doesn't work, I tell you — and we talk about whether a partial-pay installment agreement or waiting out the Collection Statute Expiration Date makes more sense.

What an Offer in Compromise Is

An Offer in Compromise is a binding settlement with the IRS — once accepted, the remaining balance is forgiven in exchange for the offer amount. The OIC program is authorized by IRC § 7122 and has been part of the Internal Revenue Code since 1992. The IRS expanded OIC eligibility under the IRS Fresh Start program in 2012, which liberalized the asset and income calculations that determine whether an offer will be accepted. For more on what the IRS Fresh Start program changed, see that page.

There are three types of OIC, each built on a different legal theory. Most offers are filed under doubt as to collectibility. The other two are much narrower.

The application process is the same regardless of which basis you use. You file Form 656 (the OIC application) along with Form 433-A OIC (for individuals) or Form 433-B OIC (for businesses), a $205 application fee, and either a 20% non-refundable deposit on the proposed offer amount (for lump sum offers) or the first month's installment payment (for periodic payment offers). Low-income taxpayers who qualify under the IRS's certification may have the fee and deposit waived.

Processing typically takes six to twelve months from submission to a determination. While an OIC is pending, IRS collection activity is paused. But the Collection Statute Expiration Date — the IRS's ten-year window to collect — is tolled for the entire period the offer is under consideration, plus thirty days after any rejection. That tolling is an important strategic variable.

The Three OIC Bases — How They Actually Work

The three OIC bases are not interchangeable — each requires a different factual showing, and the IRS evaluates them differently. Choosing the right basis (or recognizing that more than one applies) is part of what makes OIC preparation substantive legal work rather than a form-filling exercise.

Doubt as to Collectibility (DATC)

DATC is by far the most common OIC basis. The theory is simple: the taxpayer cannot pay the full balance, even over time. The IRS will accept a DATC offer if it is at or above the taxpayer's Reasonable Collection Potential — its calculation of what it could collect from you before the Collection Statute expires.

RCP = net realizable equity in assets + future income over 12 months (lump sum offer) or 24 months (periodic payment offer). If your offer is below RCP, the IRS will reject it as a matter of policy. If it is at or above RCP, the IRS is effectively required to accept it.

Doubt as to Liability (DATL)

DATL is used when the underlying tax liability is wrong — an erroneous assessment, incorrect math, or a balance that has already been satisfied. You file Form 656-L (not the standard Form 656) with a legal or factual argument that the IRS's assessment was incorrect.

The short version: DATL is really an audit dispute in a different wrapper. It is used when the taxpayer cannot contest the liability in Tax Court — usually because they missed the 90-day petition window after receiving a Notice of Deficiency. There is no RCP calculation for a DATL offer; the question is whether the legal or factual argument has merit.

Effective Tax Administration (ETA)

ETA is the narrowest basis and the least commonly accepted. The theory is that the taxpayer could theoretically pay the full balance, but collection would create economic hardship or would be fundamentally unfair given extraordinary circumstances. The IRS treats ETA narrowly — it is not a general hardship exception, and the IRS's acceptance rate on ETA offers is extremely low.

ETA is most often used for situations where collection of the full balance would leave an elderly or disabled taxpayer without the resources to meet basic living expenses — circumstances the IRS recognizes as genuinely inequitable even when RCP technically supports collection.

How the IRS Calculates RCP

The IRS's Reasonable Collection Potential calculation is the controlling number in almost every OIC — and it is one of the most frequently misunderstood aspects of the process. Get the RCP wrong and the offer gets rejected. Get it right and the offer has to be accepted.

RCP has two components: the net realizable equity in your assets, and your future income available for collection.

Asset Calculation

The IRS values assets at quick-sale value — typically 80% of fair market value. This applies to cash and bank accounts, real property equity, vehicles, business interests, retirement accounts, and accounts receivable for businesses. Most taxpayers are surprised by two categories in particular.

First, retirement accounts. The IRS includes the value of IRAs, 401(k)s, and other retirement accounts in the RCP calculation, reduced by early withdrawal penalties and income tax that would be owed on the distribution. The net number can still be significant.

Second, business equity. If you own a profitable business, the IRS may value it at a multiple of its earnings — not just the net asset value on the balance sheet. A business generating $150,000 a year in net income is not worth $0 to the IRS just because your equipment is old.

Future Income Calculation

This is where most offers run into trouble. The IRS does not use your actual disposable income to calculate the future income component. It uses the National and Local Collection Financial Standards — standardized tables that cap how much of your expenses count against your income for purposes of the RCP calculation.

What that means in practice: the IRS's allowable housing expense for your county may be lower than what you actually pay in rent. The allowable transportation expense may not cover your car payment. The IRS is not interested in your actual bills — it is interested in what the standards allow. If your real expenses exceed the standards, your RCP will be higher than you expect.

Lump sum offer: the IRS multiplies monthly disposable income (using its standards) by 12 and adds asset equity.

Periodic payment offer: the multiplier is 24 instead of 12, which means the minimum offer is higher — but you can pay it over time as the IRS processes the offer.

Example: if your net realizable equity in assets is $30,000 and your monthly disposable income under IRS standards is $500, your minimum lump-sum offer is $36,000 ($30,000 + $500 × 12). A periodic payment offer would require at least $42,000 ($30,000 + $500 × 24).

I run this calculation for clients before they file — and before they send a 20% deposit that the IRS will not return regardless of what happens to the offer.

Why Most Offers Get Rejected

The IRS rejects approximately 65% of submitted OICs, and most rejections come down to one thing: the offer was below RCP. The math didn't work. Understanding why helps you avoid filing an offer that was never going to be accepted.

The most common reasons offers fail:

• Undervalued assets — the taxpayer forgot to account for retirement account equity, home equity, or a business interest the IRS values differently
• Overstated expenses — the taxpayer used actual bills rather than IRS Collection Financial Standards, which are often lower
• Business equity — a profitable business pushes RCP up in ways that are not obvious from the balance sheet
• Pending income — a bonus, inheritance, or lawsuit settlement arriving within the next twelve months gets factored into the future income calculation
• Incomplete documentation — the IRS returns an application that is missing required documentation rather than rejecting it; a returned offer is not the same as a rejection and does not trigger the 30-day appeal window

One distinction worth understanding: an offer that is returned for missing documentation (Form 656 incomplete, deposit missing, financial forms not submitted) is not a rejection. It does not exhaust your right to appeal, and it does not start the 30-day clock. The IRS sends back the application and you can correct and refile.

After a rejection: you have 30 days from the date of the rejection letter to appeal to the IRS OIC Appeals Unit. I handle those appeals. The Appeals conference is a real opportunity — the Appeals officer reviews the examiner's determination independently and can accept an offer the examiner rejected if the numbers support it.

OIC vs. Other Resolution Options

An Offer in Compromise is one of several IRS collection resolution options — and it is not the right fit for every situation. Whether it makes more sense than an installment agreement, a partial-pay installment agreement, or Currently Not Collectible status depends on the RCP analysis and the remaining time on the Collection Statute.

For clients dealing with a California balance alongside federal debt, the FTB has its own OIC program under Form 4905-BE. A federal OIC does not settle a California balance — the two programs are separate and evaluated independently. In some situations, a California FTB OIC can be negotiated in parallel with the federal offer.

If you want me to run the analysis before you decide which path makes sense, book a free 15-minute call. If you have already filed and the offer came back rejected, I can usually review the rejection and file an appeal within the 30-day window. For the broader picture of what is available in collections, see the IRS collections attorney page — it covers the full range of resolution options. And if you are also looking at your overall exposure, my tax attorney page covers the broader scope of what I handle.