Offer in Compromise
Learn how the IRS Offer in Compromise works, whether you qualify, and what the process looks like. Free consultation with a Rockwater Tax Enrolled Agent.
The IRS Offer in Compromise Explained.
An Offer in Compromise (OIC) (previously referred to by the IRS as the Fresh Start Program) is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liability for less than the full amount owed. The IRS accepts an OIC when it determines that the offered amount represents the most it can reasonably expect to collect, or when paying in full would create an economic hardship. There are three grounds for acceptance: doubt as to liability, meaning you dispute the amount owed; doubt as to collectibility, meaning the IRS doubts it can collect the full amount; and effective tax administration, meaning paying in full would be unfair given your circumstances.
What Is an Offer in Compromise?
An Offer in Compromise (OIC) (previously referred to by the IRS as the Fresh Start Program) is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liability for less than the full amount owed. The IRS accepts an OIC when it determines that the offered amount represents the most it can reasonably expect to collect, or when paying in full would create an economic hardship. There are three grounds for acceptance: doubt as to liability, meaning you dispute the amount owed; doubt as to collectibility, meaning the IRS doubts it can collect the full amount; and effective tax administration, meaning paying in full would be unfair given your circumstances.
Do You Qualify for an Offer in Compromise?
Eligibility is based on the IRS's calculation of your Reasonable Collection Potential (RCP), which accounts for your monthly income after allowable expenses multiplied by the remaining collection period, plus the net realizable value of your assets. The IRS will generally accept an offer that meets or exceeds the RCP. You must also be current on all filing requirements and not in an open bankruptcy proceeding. The IRS rejects a significant percentage of OIC applications, which is why understanding realistic eligibility before filing is important.
Expert Insight From Rockwater Tax
The Offer in Compromise is frequently marketed in a way that misrepresents how it actually works. Advertisements claiming people settled large debts for pennies on the dollar are technically possible but represent a small subset of cases involving very specific financial circumstances.
The IRS's formula for calculating what it will accept is precise and documented. We calculate your Reasonable Collection Potential before recommending an OIC to determine whether the amount you could offer is realistic. Filing an offer that will be rejected wastes time, delays resolution, and costs the application fee. Understanding realistic eligibility before filing is the most important step.For people who do qualify, the OIC is a genuinely powerful tool. For people who do not, there are usually better options including installment agreements, Currently Not Collectible status, or penalty abatement that will produce a faster and clearer result. The right answer depends on the numbers, not on which program sounds best.
The OIC Process
- We calculate your Reasonable Collection Potential to assess realistic eligibility
- We gather financial documentation including income, expenses, and asset values
- Your Enrolled Agent prepares and submits the OIC application with full supporting documentation
- The IRS reviews the offer, which typically takes 6 to 12 months
- If accepted, you fulfill the agreed terms. If rejected, we review the decision and determine whether to appeal or pursue an alternative resolution
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FAQ
Q: How long does the OIC process take?
A: Typically 6 to 12 months from submission to a final decision. During this time, the IRS generally pauses collection activity on your account.
Q: What happens if my offer is rejected?
A: You can appeal the rejection to the IRS Office of Appeals. If the appeal is denied, you can return to alternative resolution options.
Q: Do I have to keep paying during the OIC review?
A: You are not required to make payments on the existing debt while your OIC is pending, though interest and penalties continue to accrue.
Q: Is the OIC right for everyone?
A: No. The OIC is one of several resolution programs and is best suited for people whose Reasonable Collection Potential is significantly lower than the total debt. For others, a different program may produce a better result more quickly.
