Tax
Definition
An Offer in Compromise is an agreement between a taxpayer and the IRS that settles a tax liability for less than the full amount owed. The IRS accepts OICs when there is doubt as to collectibility, doubt as to liability, or when paying in full would create economic hardship. Despite frequent advertising, OICs are difficult to qualify for — the IRS accepts roughly 30–40% of applications.
The IRS evaluates OIC applications based on Reasonable Collection Potential (RCP): the sum of the taxpayer's net realizable asset equity plus future income capacity. The IRS will generally not accept an offer below RCP. RCP calculation: (net equity in assets × 0.8 for quick sale value) + (monthly disposable income × 12 or 24 depending on payment terms). To apply, taxpayers must: be current on all filing requirements; not be in an open bankruptcy; submit Form 656 with the application fee ($205) and initial payment; and provide complete financial disclosure via Form 433-A (individuals) or 433-B (businesses). Two payment options: Lump Sum Cash (20% with application, balance within 5 months if accepted) and Periodic Payment (first monthly payment with application, continue during consideration). OIC applications put a hold on collections while under review (plus 30 days after rejection). The IRS rejects most OICs because the taxpayer can pay in full through installment agreements.
The OIC process is complex, disclosure-intensive, and the IRS accepts offers only when the math supports it — not based on hardship stories alone. A tax professional can accurately calculate your RCP, determine whether you realistically qualify, and structure and negotiate an offer that maximizes your chances of acceptance. Improperly filed OICs waste the application fee and can expose financial information without result.