Eligibility basics
You qualify if paying in full would create economic hardship, there's genuine doubt as to liability, or collection would be inequitable. The IRS calculates Reasonable Collection Potential (RCP) from your income, expenses, and asset equity. An offer must exceed RCP.
How RCP actually gets calculated
The formula is asset equity plus a multiple of your monthly disposable income: twelve months of it for a lump-sum offer, twenty-four for a periodic-payment offer. Disposable income is measured against IRS allowable expense standards, not your actual lifestyle, which is where most self-prepared offers go wrong. A car payment, private school tuition, or credit card minimums the standards don't allow can make paper income appear where none exists.
What it takes
Form 656, Form 433-A (OIC) or 433-B (OIC), $205 application fee, 20% down payment for lump-sum offers or first installment for periodic offers, and heavy documentation of income, expenses, and assets. We prepare and submit.
The timeline and what happens while you wait
Offers take months to over a year to work. Collection generally pauses while the offer is pending, but you must stay current on all filings and estimated payments; a missed requirement returns the offer unprocessed. If the offer is rejected, you have 30 days to appeal with Form 13711, and appeals reverse or improve a meaningful share of rejections.
After acceptance
The settlement isn't unconditional. You must file and pay on time for the next five years; default and the original debt, minus payments made, comes back. Refunds for the year of acceptance may be applied to the debt. For the right facts, an OIC is a genuine fresh start; for the wrong facts, it's a year of paperwork ending in a rejection letter, which is why the RCP math comes first.
A word about OIC mills
The firms advertising settlement of tax debt for 'pennies on the dollar' charge large fees before anyone runs the eligibility math. The IRS publishes the acceptance formula; anyone can run it before paying a dime. If the numbers say the offer won't fly, an installment agreement or CNC status is the honest answer.
Common questions
- Will everyone qualify?
- No. If the IRS can collect the full amount through a 10-year installment plan, an OIC is rejected. Most OIC clients have limited income and minimal equity.
- How long does an OIC take?
- Typically six months to more than a year from submission to decision, plus appeal time if rejected. If the IRS doesn't act within two years, the offer is deemed accepted by statute.
- What happens to my offer payments if the IRS says no?
- The application fee and payments submitted with the offer are applied to your tax debt, not refunded. That's another reason to verify eligibility before applying.
- Can I include multiple tax years in one offer?
- Yes. An offer covers all assessed liabilities you list, and it should list everything, because debts left out survive the settlement.
Related
Tax Relief & Back Taxes
Back tax filings, installment agreements, penalty abatement, and offer-in-compromise support for taxpayers behind with the IRS. We file first, then negotiate.
IRS Installment Agreement
Monthly payment plans are the most common IRS collection resolution. Streamlined agreements up to $50,000 skip financial disclosure. KG Tax files Form 9465.
Related tax topics
Innocent Spouse Relief
Form 8857 can remove joint-return liability when your spouse omitted income or claimed bad deductions without your knowledge. Three types of relief, explained.
Responding to Tax Identity Theft
Someone filed a return under your SSN. File Form 14039, keep filing on paper, and request an IP PIN for future years. Resolution currently takes 180-plus days.
Responding to an IRS CP2000 Notice
A CP2000 is an automated IRS underreporter inquiry: third-party income doesn't match your return. You have 30 days to respond. How to agree or dispute.
Responding to an IRS CP14 Balance-Due Notice
The CP14 is the first balance-due letter after filing. Pay within 21 days, dispute the amount, or set up an installment agreement before collection escalates.