IRS Offer in Compromise Guide

What Is an Offer in Compromise?

An Offer in Compromise (OIC) allows eligible taxpayers to settle their IRS tax debt for less than the full amount owed. The IRS accepts OICs when the offered amount represents the most the IRS can reasonably expect to collect — based on your assets, income, and expenses. OIC is a legitimate IRS program designed for taxpayers who genuinely cannot pay their full tax liability. The IRS accepted approximately 13,000 OICs in 2023, with an average acceptance rate of about 40%.

Warning: The OIC industry is filled with companies that charge large upfront fees and promise settlements they cannot deliver. KDA evaluates OIC eligibility honestly — if you do not qualify, we tell you, and we recommend the approach that actually makes sense for your situation.

Do You Qualify?

To be eligible for an OIC, you must: (1) have filed all required tax returns, (2) have made all required estimated tax payments for the current year, (3) not be in an open bankruptcy proceeding, and (4) have received a bill for at least one tax debt included in the offer. Beyond these threshold requirements, the IRS will approve an OIC only if your Reasonable Collection Potential (RCP) is less than the full amount you owe.

How the IRS Calculates Your Offer

The IRS calculates your minimum acceptable offer using the Reasonable Collection Potential (RCP) formula:

RCP = Net Realizable Value of Assets + Future Income

Net Realizable Value is the quick-sale value of your assets (typically 80% of fair market value) minus any secured debt. Future Income is your monthly disposable income (income minus allowable living expenses) multiplied by either 12 or 24 months, depending on your payment terms. If the IRS calculates your RCP at $15,000 and you owe $80,000, an offer of $15,000 or more may be accepted.

The OIC Application Process

The OIC application requires Form 656 (the offer itself) and Form 433-A (Collection Information Statement) with supporting documentation for all assets, income, and expenses. The IRS has 24 months to accept or reject the offer — if they do not act within 24 months, the offer is deemed accepted. During the review period, collection action is suspended. If the offer is rejected, you have 30 days to appeal to the IRS Office of Appeals.

When OIC Is Not the Right Answer

OIC is not appropriate for every taxpayer with IRS debt. If your RCP exceeds your tax balance, an OIC will be rejected. In those cases, KDA evaluates: installment agreements (pay over time), Currently Not Collectible status (temporary suspension of collection), or waiting for the Collection Statute Expiration Date (CSED) — the IRS has 10 years from assessment to collect, and some older balances may be close to expiring.

California FTB Offer in Compromise

California FTB has its own OIC program, separate from the IRS. The FTB's program requires that you demonstrate you cannot pay the liability in full and that collection of the full amount would create economic hardship. KDA files FTB OICs when appropriate, coordinating them with any IRS resolution to ensure the combined outcome is optimal.