You have probably seen advertisements promising to settle your tax debt for pennies on the dollar. That program is real — it is called an Offer in Compromise, or OIC. But it is not available to everyone, and the IRS accepts only about one in three applications. Understanding the requirements before you apply can save you time, money, and frustration.
What Is an Offer in Compromise?
An OIC is an agreement between you and the IRS that settles your tax debt for less than the full amount owed. The IRS accepts an offer when it believes the offered amount represents the most it can reasonably expect to collect within a reasonable period. In other words: if you genuinely cannot pay the full amount and your financial situation is unlikely to improve, the IRS may accept less.
The Three Types of Offers
There are three grounds for an OIC. Doubt as to Collectibility is the most common — you cannot pay the full amount now or in the foreseeable future. Doubt as to Liability means you genuinely dispute whether you actually owe the tax. Effective Tax Administration means you owe the tax and can pay, but doing so would create an economic hardship or be unfair. Each type requires different supporting evidence and documentation.
How the IRS Calculates Your Offer
The IRS uses a formula called Reasonable Collection Potential, or RCP. It looks at your assets (real estate, vehicles, bank accounts, retirement accounts) and your future income (monthly income minus allowable living expenses, multiplied by the months remaining in the collection statute). The RCP is the minimum the IRS will usually accept. If your offer is below your RCP, it will likely be rejected.
Beware of OIC Mills
Many companies advertise OIC services with unrealistic promises. They charge thousands of dollars upfront and submit offers they know will be rejected. Before hiring anyone, check their track record and be wary of guarantees. Many people can handle the OIC process themselves using the IRS Offer in Compromise Pre-Qualifier tool on the IRS website.