IRS Offer in Compromise: How to Settle Your Tax Debt for Less
The IRS Offer in Compromise program allows qualifying taxpayers to settle their entire tax debt for less than the full amount owed. Only about 30–40% of submitted offers are accepted. Understanding the IRS's formula before you apply is the difference between a strategic filing and a wasted effort.
What is an IRS Offer in Compromise and who qualifies?
An IRS Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount owed. The IRS accepts an OIC when it determines the offer equals the most it can reasonably expect to collect given your income, expenses, and asset equity. Roughly 30–40% of submitted offers are accepted. The IRS uses a formula called 'reasonable collection potential' to evaluate every offer.
- Reasonable Collection Potential (RCP)
- Reasonable collection potential is the IRS's formula for calculating the minimum amount it will accept in an offer. RCP equals monthly disposable income multiplied by remaining months on the collection statute, plus net realizable equity in assets. The IRS will not accept an offer below this calculated amount.
IRS Offer in Compromise: Three Submission Bases
| Feature | Doubt as to Liability | Doubt as to Collectibility | Effective Tax Administration |
|---|---|---|---|
| What it means | You dispute the tax is legally owed | You owe it but cannot pay in full | Paying in full would cause economic hardship |
| Most common type | |||
| RCP formula applies | Modified | ||
| Documentation required | Legal/factual dispute docs | Form 433-A + financials | Form 433-A + hardship evidence |
| Success rate | Higher (if valid dispute) | 30–40% of submitted | Rare, narrow criteria |
How to Submit an IRS Offer in Compromise: 4 Steps
- 1
Calculate your Reasonable Collection Potential (RCP)
Use IRS Form 433-A to document income, expenses, and assets. Disposable income equals monthly income minus IRS-allowed expenses (national standards for food/clothing/housing, actual amounts for transportation and health care). Multiply by remaining months on statute, then add net asset equity.
- 2
Complete IRS Form 656 (and 433-A)
Form 656 is the OIC application. Include your offer amount (must equal or exceed RCP), payment terms (lump sum or short-term periodic), and the basis for your offer. Attach Form 433-A with documentation and a $205 application fee (waived for low-income applicants).
- 3
Submit and wait (typically 6–12 months)
The IRS assigns your case to an offer examiner who verifies your financial information. During this time, the collection statute is paused. You must continue filing and paying current taxes. The examiner may request additional documentation.
- 4
Negotiate or appeal the IRS decision
If rejected, you have 30 days to appeal to the IRS Office of Appeals. An experienced CPA can often negotiate a revised offer or identify errors in the examiner's RCP calculation that affect the outcome.
Who Qualifies for an IRS Offer in Compromise?
The IRS has a pre-qualifier tool at irs.gov, but it is a rough screen — not a definitive answer. A proper qualification analysis requires a CPA to run the actual RCP formula with your real numbers. Generally, you may qualify if:
- Your monthly disposable income (after IRS-allowed expenses) multiplied by the remaining collection statute period is less than your total balance owed
- Your net realizable equity in assets (cash, investments, real estate equity, business assets) is limited
- You are current on all required tax filings (no outstanding unfiled returns)
- You are not currently in bankruptcy proceedings
- You have made required estimated tax payments for the current year
Common disqualifiers include significant home equity, large retirement account balances, or monthly income that would allow repayment within the statute period through an installment agreement.
How the IRS Calculates Your RCP
The RCP formula has two components:
RCP = (Monthly Disposable Income × Remaining Collection Months) + Net Realizable Equity in Assets
Monthly disposable income is your monthly gross income minus IRS-allowed expenses. The IRS uses National Standards for food, clothing, and personal care (a fixed allowance by household size) and Local Standards for housing and transportation. Some actual expenses (health care, court-ordered payments) are also allowed. The IRS does not allow all of your actual expenses — only those it deems necessary and reasonable.
Net realizable equity in assets means the quick-sale value of your assets minus any secured loans. For real estate, the IRS uses 80% of fair market value minus the mortgage balance. For cars, IRAs, and brokerage accounts, the IRS uses actual value minus early-withdrawal penalties and secured loans.
If paying over a lump sum (within 5 months), the IRS multiplies disposable income by 12. If paying in installments over 24 months, the multiplier is 24. Your CPA will calculate both scenarios to determine the lowest possible offer amount.
What Happens After Your OIC Is Accepted
Once the IRS accepts your offer:
- You must pay the agreed amount according to your payment terms (lump sum within 5 months, or installments within 24 months)
- You must file all required tax returns on time and pay all taxes for the next 5 years
- The IRS keeps any tax refund due in the year of acceptance (and any year the offer covers) — this is not applied to your offer amount
- Any federal tax liens filed before acceptance remain until the offer amount is paid in full, then the IRS releases them within 30 days
- If you default on the terms within 5 years, the IRS can reinstate the full original tax debt minus payments made
Frequently Asked Questions
Explore all IRS resolution strategies including installment agreements, tax lien removal, and audit representation on our IRS Tax Resolution Services page.
Need Help With Your IRS Issue?
Our licensed CPAs run the actual IRS RCP calculation with your real numbers — so you know before you apply whether an Offer in Compromise is worth pursuing or whether another resolution strategy is better for your situation.