Offer in Compromise Explained

An Offer in Compromise lets you settle your IRS debt for less than the full amount. The IRS accepted over 17,000 offers in recent years. This is not a myth. It is a real program under IRC §7122, and it works.

But here is the part most people miss. The IRS does not care what you think you can afford. They run their own formula. It is called the Reasonable Collection Potential, and every decision comes down to that number.

How the IRS Calculates Your Offer

The RCP formula is straightforward. Take your monthly disposable income (gross income minus allowable living expenses), multiply it by either 12 (lump sum) or 24 (periodic payment), then add the net realizable equity in your assets. That is your floor. Offer less than the RCP and you get rejected.

Allowable living expenses are not your actual expenses. The IRS uses national and local standards published annually. Housing, transportation, food, clothing — they have a number for each. If your actual rent is $3,000 but the local standard is $2,200, the IRS uses $2,200.

Three Grounds for an OIC

Doubt as to Collectibility is the most common. You simply cannot pay the full amount before the collection statute expires. Doubt as to Liability is rare — you are genuinely disputing the tax. Effective Tax Administration is the hardest — you can pay but exceptional circumstances make collection unfair.

What You Need Before You Apply

Every tax return must be filed. Current year estimated payments must be current. You cannot be in an open bankruptcy. The application fee is $205, waived if you are below 250% of the federal poverty guidelines. Lump sum offers require a 20% down payment with the application.

After acceptance, you enter a five-year compliance period. File every return on time. Pay every tax on time. Slip up and the IRS can reinstate the full original balance. Talk to a tax attorney before you file.

Tax attorney Darrin Mish has spent 32 years getting taxpayers out of IRS trouble. Free consultation — no obligation.