The Ultimate Guide to Offer in Compromise

An Offer in Compromise (OIC) is a settlement with the IRS for less than you owe. It's not a discount program. The IRS will accept an OIC only when it decides that collecting the full balance is either impossible (Doubt as to Collectibility) or inequitable (Effective Tax Administration), or when there's genuine dispute about whether the tax is actually owed (Doubt as to Liability). Most OICs are Doubt-as-to-Collectibility cases. Most rejected offers were filed without the financial analysis the IRS actually does.

You must be current on all required tax filings (no missing returns), current on estimated tax payments for the year, and unable to pay the full balance within the remaining Collection Statute Expiration Date. The IRS calculates your Reasonable Collection Potential (RCP) using Form 433-A (OIC) or 433-B (OIC). If your offer is below RCP, the IRS will reject it. If your offer is at or above RCP, the IRS is statutorily required to accept it under IRC §7122.

Reasonable Collection Potential equals the quick-sale value of your assets (typically 80% of fair market value) plus your future income over either 12 or 24 months, depending on the payment terms you elect. The 12-month multiplier applies to lump-sum cash offers; 24-month applies to periodic-payment offers. Future income is calculated using IRS Collection Financial Standards, which cap allowable monthly expenses. The standards routinely produce a higher RCP than the taxpayer's actual disposable income.

The application fee is $205 (waived for low-income taxpayers under the IRS's poverty guidelines). A lump-sum offer requires a 20% deposit at filing. A periodic-payment offer requires the first proposed payment with the application, with subsequent monthly payments due during the review. Both the deposit and any payments made are non-refundable if the offer is rejected, though they apply to your tax debt.

Yes. You have 30 days from the rejection letter to file Form 13711 (Request for Appeal of Offer in Compromise) with the IRS Office of Appeals. Appeals officers have authority to settle the offer at a different number if the original examiner's RCP analysis was wrong. Appeals also sometimes refers the matter for further investigation. If Appeals upholds the rejection, the only remaining option is to pay the tax and file a refund claim, or pursue alternative resolution like installment agreement or CNC status.

The Collection Statute Expiration Date (CSED) is suspended while an OIC is pending plus 30 days after rejection. This is the practical trade-off: filing an OIC stops most collection action and pauses the 10-year clock under IRC §6502. A rejected OIC that took 12 months to process effectively adds 12+ months to the IRS's collection window. Worth knowing before filing — sometimes waiting out the CSED is the better strategy.

An OIC settles the debt for less than owed; an installment agreement (IA) pays the full balance over time. Different filings, different IRS criteria. An IA is generally easier to obtain but doesn't reduce what you owe. A Partial-Pay Installment Agreement (PPIA) is a hybrid — you pay what you can afford, the CSED runs, and the IRS writes off the unpaid balance at expiration. PPIAs are often the right answer when an OIC is borderline.

Three: (1) RCP analysis showed assets or income above the offer amount — the most common reason; (2) missing or incomplete financial documentation; (3) not current on filings or estimated payments. The IRS will not accept an OIC if you owe taxes for any year that's not filed, or if you're behind on the current year's withholding or estimated payments. Compliance must come before settlement — that's a fixed precondition.