Offer in Compromise: The Honest Assessment

An Offer in Compromise lets you settle an IRS tax debt for less than the full amount owed. That much is true. What the radio ads and the “pennies on the dollar” firms do not tell you is the rest: the IRS accepted only 21% of offers in 2024, down from 42% the year before. The application fee is $205 (waived for low-income applicants). You must include a 20% deposit of the offer amount with the application, and the deposit is non-refundable if the IRS rejects the offer. The IRS evaluates every offer against a formula called the Reasonable Collection Potential (RCP), and if the formula says the IRS can collect more through other means (installment agreement, levy, lien), the offer will be rejected. This page covers the formula, the real qualifying criteria, the alternatives that may cost you less, and when an OIC is genuinely the right move.

What is the Reasonable Collection Potential formula?

The RCP is the IRS’s estimate of what it could collect from you through normal enforcement: seizing assets and garnishing income or levying bank accounts over the remaining collection statute (usually 10 years from assessment under IRC 6502). The IRS will not accept an offer for less than the RCP. The formula has two components.

Net equity in assets. The IRS calculates the fair market value of everything you own (bank accounts, investments, real estate, vehicles, retirement accounts, life insurance cash value, business assets), subtracts any encumbrances (mortgages, car loans), and applies a “quick sale value” discount of 80% on most assets. So if you own a house worth $400,000 with a $300,000 mortgage, the net equity is ($400,000 x 0.80) - $300,000 = $20,000. Bank accounts and investment accounts are taken at full value (no quick sale discount).

Future income. The IRS calculates your monthly gross income, subtracts allowable living expenses (using IRS collection financial standards for food, housing, transportation, and health care, plus actual payments on secured debts), and multiplies the remaining “disposable income” by a factor. For a lump-sum offer (paid within five months), the multiplier is 12 months. For a periodic payment offer (paid over 6-24 months), the multiplier is 24 months. If your monthly disposable income is $800 and you choose the lump-sum path, the future income component is $800 x 12 = $9,600.

The RCP equals net equity in assets plus future income. In the example above: $20,000 (equity) + $9,600 (future income) = $29,600. That is the floor of your offer. Offer less, and the IRS rejects it without further analysis. Offer at or above the RCP, and the IRS evaluates the other qualifying criteria.

The IRS publishes the calculation on Form 656-B (OIC Booklet) and Form 433-A (OIC). The forms ask for a complete financial disclosure: every asset, every income source, every expense. Understating assets or income is the fastest way to get an offer rejected and flagged for further examination.

Why did the acceptance rate drop from 42% to 21%?

The IRS does not publish the specific reasons for year-to-year changes in OIC acceptance rates, so anything claimed about the cause is inference. Several factors are plausible. The IRS increased its enforcement staffing and processing capacity with Inflation Reduction Act funding, which may have led to more rigorous RCP analysis. Rising asset values (particularly real estate) increased the net equity component of the RCP, pushing the formula floor higher than many applicants expected. And the 42% figure in 2023 was itself elevated from historic norms (the rate has typically been between 25% and 35%), possibly reflecting pandemic-era financial hardship that temporarily depressed RCP calculations.

The practical implication: if you file an OIC based on a 42% acceptance rate expectation, you are using last year’s map. The 21% rate means four out of five offers are rejected, the $205 fee is gone, and the 20% deposit is gone. Run the RCP formula yourself (or with a professional) before applying. If the math does not work, the application is a $205 lesson.

What are the qualifying criteria?

Before the IRS even evaluates the RCP, the offer must pass threshold requirements:

1. You have filed all required tax returns. The IRS will not process an OIC if any returns are missing.
2. You are current on estimated tax payments for the current year (if applicable).
3. You are not in an open bankruptcy proceeding (bankruptcy has its own tax-debt resolution mechanism under 11 USC 523(a)(1)).
4. You have a valid extension for any return that is currently due.
5. If you are a business owner with employees, you are current on federal tax deposits.

If you owe $100,000 but have not filed your 2025 return, the IRS will reject the offer on procedural grounds before looking at the merits. Get compliant first.

The IRS evaluates offers under three grounds, though 99% of offers are filed under one: “doubt as to collectibility,” meaning the taxpayer cannot pay the full amount within the remaining collection period. The other two grounds (doubt as to liability, and effective tax administration for exceptional circumstances) are far less common and have different standards.

Should I do a lump-sum or periodic payment offer?

Two payment structures. A lump-sum offer requires payment of the full offer amount within five months of acceptance, with a 20% non-refundable deposit submitted with the application (IRC 7122(c)(1)(A)). A periodic payment offer is paid in installments over 6 to 24 months from acceptance, with the first proposed installment submitted with the application.

The lump-sum offer uses a 12-month multiplier on future income (see the RCP formula walkthrough for worked examples), which produces a lower RCP floor. The periodic payment offer uses a 24-month multiplier, which produces a higher floor but lets you spread the payment over two years. For most taxpayers, the lump-sum offer produces a lower total amount, but requires access to a larger upfront sum. If you can borrow the lump-sum amount (from family, a home equity line, or retirement savings), the total cost is usually lower.

What are the alternatives to an OIC?

Before filing an offer, evaluate whether a different resolution costs less in total.

Installment agreement. If you can pay the full amount over 72 months (or the remaining collection statute, whichever is shorter), an installment agreement avoids the OIC application fee, deposit risk, and financial disclosure. The IRS charges a setup fee ($31 to $225 depending on the method and your income) and interest accrues, but there is no risk of rejection. For balances under $50,000, the IRS offers streamlined installment agreements with no financial statement required. The tradeoff: you pay the full balance plus interest, but you avoid the deposit risk and the 79% rejection rate.

Currently Not Collectible (CNC). If your monthly income does not cover allowable living expenses, the IRS may place your account in CNC status, meaning it stops active collection. Interest and penalties continue to accrue, but the IRS will not levy, garnish, or seize. The collection statute (10 years from assessment) continues to run. If the statute expires while the account is in CNC, the debt is legally uncollectible. For taxpayers near the end of the collection statute with limited assets, CNC may be better than an OIC because the debt expires without payment.

Bankruptcy. Income taxes older than three years (measured from the due date of the return), for which the return was filed more than two years ago and assessed more than 240 days ago, are generally dischargeable in Chapter 7 bankruptcy under 11 USC 523(a)(1). If your tax debt meets these timing rules and you have limited assets, bankruptcy may eliminate the debt entirely. This is a legal determination, not a tax determination, and requires consultation with a bankruptcy attorney.

Partial-pay installment agreement (PPIA). Under IRC 6159(a), the IRS can accept an installment agreement that will not fully pay the debt before the collection statute expires. The IRS reviews the PPIA every two years and can modify it if your financial situation improves. For taxpayers whose RCP is too high for an OIC but who cannot afford full-pay installments, a PPIA may be the middle ground.

How does an OIC work for cross-border filers?

For US citizens or green card holders living in Canada, the OIC has additional complications. The IRS’s financial disclosure (Form 433-A) requires reporting all worldwide assets, including Canadian real estate, Canadian retirement accounts (RRSPs, TFSAs, locked-in accounts), Canadian bank and investment accounts, and any interest in Canadian businesses. The RCP formula applies to these assets the same way it applies to US assets: fair market value, quick sale discount, net of encumbrances.

Canadian retirement accounts present a specific issue. The IRS treats RRSP and RRIF balances as assets available for collection, even though withdrawing from them triggers Canadian tax under the ITA and US tax under the IRC (unless the treaty election applied). The IRS may factor in the gross value of the RRSP without netting the Canadian tax that would be owed on withdrawal, which inflates the RCP. If this happens, the response is to document the net realizable value (gross balance minus Canadian withholding tax and income tax on withdrawal).

The collection statute also has cross-border implications. If the IRS records a Notice of Federal Tax Lien and then seeks to enforce it against Canadian assets, enforcement depends on the treaty’s Article XXVIA (Assistance in Collection). Canada can assist in collecting US tax debts, and the US can assist in collecting Canadian tax debts, but only for debts that have been finally determined (post-objection, post-appeal). An OIC filed while living in Canada should account for the practical enforceability of IRS collection against Canadian assets.

What happens after the IRS accepts (or rejects)?

If accepted, you must comply with all filing and payment obligations for five years after the offer is accepted. If you miss a return or fall behind on taxes during that five-year period, the IRS can void the offer and reinstate the full original balance (minus payments already made). This is the compliance trap that catches people: the tax debt that prompted the OIC was often caused by a pattern (self-employment income with no estimated payments, for example), and if the pattern continues, the OIC unravels.

If rejected, you have 30 days to appeal the rejection to the IRS Independent Office of Appeals. The appeal is worth filing if you believe the IRS miscalculated the RCP (used the wrong asset values, did not apply the quick sale discount correctly, used overstated income, or applied the wrong expense standards). Appeals officers have more discretion than the OIC examiners and can settle on terms the examiner could not.

The 20% deposit submitted with a lump-sum offer is applied to the tax debt if the offer is rejected. It does not come back. This is the real cost of an offer that does not work: $205 fee plus 20% of the offer amount, gone.

What should I do next?

Run the RCP formula yourself before deciding on an OIC. Add up the quick sale value of your assets, subtract encumbrances, add your bank balances at full value, and add your monthly disposable income multiplied by 12 (lump-sum) or 24 (periodic). If the result is close to or exceeds what you owe, an OIC will not help. Consider an installment agreement or CNC instead. If the RCP is well below what you owe and you can fund the offer, an OIC may be the right path.

If the tax debt originated from a CP2000 notice or other underreporter adjustment, verify that the underlying assessment was correct before settling it.

If the debt includes payroll taxes and you are personally liable under the Trust Fund Recovery Penalty, the TFRP amount is included in the OIC and can be compromised like any other personal tax liability.

Get compliant first: all returns filed, current-year estimates paid, no open extensions. Then prepare Form 433-A (OIC) with complete and accurate financial disclosure. The IRS will verify everything.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.