An Offer in Compromise (OIC) is a legal mechanism that allows a taxpayer to settle an IRS tax debt for less than the full amount owed. It is not an automatic forgiveness program, nor a discretionary deal without limits. The IRS may accept an OIC only when the legal and regulatory standards are met. The IRS’s authority to compromise tax liabilities comes from IRC §7122, and the program is applied under Treasury Regulation 26 CFR §301.7122-1, which restricts offers to specific grounds. The IRS explains this framework in its official OIC program materials and in the Form 656-B Booklet, the primary guide for taxpayers.
How to Evaluate Whether You Meet the Requirements
1) Prior compliance: the entry gate
Before discussing how much to offer, the IRS first determines whether your case is “processable.” Your offer will be returned (not evaluated) if:
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- You have not filed all required tax returns.
- You are not current with your ongoing tax obligations (withholding or estimated tax payments).
- You are in an active bankruptcy proceeding.
These prerequisites are stated in the IRS’s official OIC guidance and FAQs.
2) Your case must fit one of the three legal grounds
Regulation 26 CFR §301.7122-1 allows acceptance only on these bases, and the IRS repeats them in its program overview:
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- Doubt as to Collectability (DATC): Applies when, based on your income and assets, it is unlikely the IRS can collect the full liability within the legal collection period. IRS policy explains that the offer amount must reflect what the IRS could reasonably collect.
- Doubt as to Liability (DATL): Used when there is a valid basis to conclude you do not owe the assessed amount (for example, a substantive error in the tax determination or misapplied payments). These cases focus on liability being incorrect, not on inability to pay.
- Effective Tax Administration (ETA): Even if the tax is correct and collectible, the IRS may accept less if full payment would cause severe economic hardship or would be unfair due to equity or public-policy considerations. This basis is explicitly recognized in the regulation and described by the IRS.
3) If your ground is DATC, the key indicator is your RCP
In practice, most OICs are based on DATC. The IRS then calculates your Reasonable Collection Potential (RCP)—the maximum amount the government could reasonably collect.
RCP = net realizable value of assets + future disposable income
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- Assets: cash, bank accounts, home equity, vehicles, investments, etc., valued at net realizable value (market value minus secured debt and selling costs).
- Disposable income: monthly income minus allowable living expenses based on IRS National and Local Standards.
- Future income component: the IRS projects disposable income over a set period depending on whether you propose a lump-sum or periodic payment offer. The law does not prescribe one fixed number of months; it is an administrative calculation applied case by case under IRS policy.
Practical rule: if your RCP equals or exceeds the total debt, the IRS will usually find the liability collectible in full, meaning you generally do not qualify under DATC.
4) A correct filing package is part of proving eligibility
To be evaluated, you must submit Form 656 and the appropriate financial statement (Form 433-A(OIC) for individuals or 433-B(OIC) for businesses), along with the application fee and required initial payment unless you qualify for the IRS low-income certification.
Relevance for Taxpayers
An Offer in Compromise matters most for taxpayers who need a final, legal resolution and who meet the IRS standards. You must show prior compliance, fit within a valid legal ground (DATC, DATL, or ETA), and—most commonly—demonstrate that your offer reflects your Reasonable Collection Potential.
Additionally, while an OIC is pending, the IRS generally suspends levy action under the program’s legal protections, providing real space for review and negotiation.
We Can Help!
Qualifying for an OIC requires more than a desire to pay less. If your financial reality makes full collection unlikely, there is a substantive error in the debt, or paying in full would cause severe hardship, an OIC may be the right legal path. Contact our office for a confidential consultation today.
