Overview
This article explains, step by step, how the IRS evaluates Offers in Compromise (OICs), what the agency looks for in financial disclosures, and practical strategies to improve your chances. I draw on more than 15 years working with taxpayers and tax professionals to point out common pitfalls, realistic expectations, and helpful resources.
1. What starts the evaluation: forms, fees, and payments
- Submit Form 656 (Offer in Compromise) plus the appropriate financial statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. Include the application fee (nonrefundable) and any initial payment required by the payment option you choose. As of 2025, the standard application fee has been $205; verify the current fee on the IRS site before filing (IRS, Offers in Compromise).
- The IRS treats incomplete or inconsistent applications as a weak start. The agency will request missing documents and may suspend the review until you provide them.
Source: IRS — Offers in Compromise, Publication 1854 (see References).
2. Core concept: Reasonable Collection Potential (RCP)
RCP is the IRS’s central metric. It represents what the IRS believes it can reasonably collect from you, now or in the near future. The IRS calculates RCP as:
- Current asset equity (cash, marketable assets, equity in real estate, etc.)
- Plus collectible future income (monthly disposable income multiplied by a reasonable number of months)
How the IRS treats each category:
- Assets: The IRS uses the equity value (what you could realistically liquidate), not the full market price. They allow certain exemptions and use nationally published standards for vehicle equity and other items.
- Income: The IRS counts monthly income after allowed living expenses. The IRS recognizes some reasonable living expenses (using national and local standards) but will closely scrutinize personal and business expenses.
For a detailed walkthrough of the RCP calculation, see our guide: “Calculating Reasonable Collection Potential for an Offer in Compromise: A Walkthrough.”
3. Document review and verification
After you submit, the IRS will review your paperwork and verify the data. Expect the IRS to:
- Request bank statements, pay stubs, tax returns, proof of expenses, and appraisals or titles for assets.
- Cross-check income and reported assets against third-party data, including payroll records, financial institutions, and tax transcripts.
- Ask follow-up questions or require corrected forms if figures don’t match source documents.
In my practice, applications that present reconciled, clearly labeled documentation get faster responses and avoid unnecessary repeated requests.
4. How the IRS evaluates offers against RCP
The IRS evaluates whether the offered amount meets or exceeds RCP. There are three common outcomes:
- Offer >= RCP: Likely acceptance (absent other problems). If the offer equals or exceeds RCP, the IRS generally accepts because it cannot reasonably do better through enforced collection.
- Offer < RCP but justified by special circumstances: Possible acceptance if there are compelling reasons (e.g., serious hardship or unique collection barriers).
- Offer << RCP: Likely rejection. If the IRS believes it can collect more through levy, liens, or future income, the offer is unlikely to be accepted.
Remember: RCP is not a subjective “cap.” It’s a numerical benchmark grounded in the financial data you supply and IRS standards.
5. Special grounds IRS can consider beyond RCP
The IRS can accept an OIC for three primary reasons listed in Publication 5 (and explained in Publication 1854):
- Doubt as to liability — a legitimate dispute over the amount owed.
- Doubt as to collectibility — the taxpayer cannot pay the full amount under any reasonable collection strategy (this is where RCP governs).
- Effective tax administration — exceptional circumstances make collection unfair or inequitable even though full payment might be possible (e.g., serious terminal illness, extreme public policy concerns).
Most accepted offers rely on “doubt as to collectibility.” Claims under effective tax administration require strong, well-documented evidence.
Sources: IRS Offers in Compromise; Publication 1854.
6. Payment options and how they affect evaluation
The IRS offers different payment options on Form 656. The two most common are:
- Lump-sum cash offer: Submit a portion of the offer with the application and the remainder in five or fewer payments.
- Periodic payment offer: You submit periodic payments while the IRS reviews your case and, if accepted, continue paying until the agreed amount is paid.
Tip: Choosing the periodic payment option signals your ability to pay future income. The IRS will factor those ongoing payments into RCP.
7. Typical timeline and what slows the process
- Initial review and requests for documents: 4–8 weeks.
- In-depth audits or asset valuation queries: additional 2–6 months.
- Final decision: often 6–12 months from a fully documented submission; complex cases can take longer.
Frequent causes of delay:
- Incomplete forms or missing signatures.
- Unreconciled bank account balances.
- Delays in third-party verifications.
8. Real-world examples (anonymized)
Case A — Medical hardship: A salaried taxpayer with $45,000 in tax debt had limited savings and high medical bills. Our RCP calculation showed the IRS could realistically collect about $8,500. We submitted a lump-sum offer near the RCP with full documentation; the IRS accepted.
Case B — Business owner with liquid assets: A business owner reported significant equipment equity. After the IRS valued those assets, RCP rose well above the proposed offer. The OIC was denied; the taxpayer instead negotiated an installment agreement while selling nonessential equipment.
These examples show that accurate asset valuation and honest expense reporting are decisive.
9. Common mistakes to avoid
- Underestimating RCP by omitting bank accounts, investment accounts, or retirement distributions.
- Overstating monthly expenses without documentation.
- Failing to provide current year tax returns — the IRS typically requires all returns filed.
- Submitting incorrect payment option information on Form 656.
10. If the IRS rejects your offer
You have options:
- Appeal the rejection within the Appeals Office (generally 30 days after the rejection notice). See our guide: “Options After a Denied Offer in Compromise” for next steps.
- Reapply with a stronger financial package if your situation materially changes.
- Consider alternatives such as an installment agreement or currently not collectible status.
For help preparing a stronger package, see our article: “Preparing a Strong Financial Package for an Offer in Compromise.”
Frequently Asked Questions (short)
Q: Can the IRS seize assets while reviewing my OIC?
A: The IRS generally suspends aggressive enforcement while a properly filed OIC is pending, but it can still file liens or take steps to secure collection. Do not assume full protection — document and request holds where applicable.
Q: What if my income changes during the review?
A: You must notify the IRS of material changes. The agency may reopen the evaluation and adjust RCP accordingly.
Q: Is the application fee refundable?
A: No. The application fee is generally nonrefundable, though exceptions exist for low-income taxpayers.
Practical tips to improve acceptance odds
- Be complete and consistent: Reconcile bank statements and payroll records before submission.
- Use conservative, documented asset valuations: If you claim an asset is hard to sell, prove it.
- Review allowable living expenses: Use IRS national and local standards where applicable and be prepared to justify deviations.
- Consider professional help: A qualified tax practitioner can spot valuation errors, present effective tax administration arguments when appropriate, and manage appeals.
In my practice, submitting a clear ‘‘package’’—one PDF with labelled exhibits—reduces processing time and improves clarity for the IRS examiner.
Professional disclaimer
This article is educational and does not constitute legal or tax advice. Tax laws and IRS procedures change; confirm current forms, fees, and instructions at the IRS website or consult a licensed tax professional for individualized guidance.
References and authoritative sources
- IRS — Offers in Compromise: https://www.irs.gov/individuals/irs-offers-in-compromise
- IRS Publication 1854 — Offers in Compromise (procedures for examiners): https://www.irs.gov/pub/irs-pdf/p1854.pdf
- Form 656 and Forms 433-A (OIC) / 433-B (OIC): available on IRS forms pages
Internal resources
- Calculating Reasonable Collection Potential for an Offer in Compromise: https://finhelp.io/glossary/calculating-reasonable-collection-potential-for-an-offer-in-compromise-a-walkthrough/
- Preparing a Strong Financial Package for an Offer in Compromise: https://finhelp.io/glossary/preparing-a-strong-financial-package-for-an-offer-in-compromise/
- Options After a Denied Offer in Compromise: https://finhelp.io/glossary/options-after-a-denied-offer-in-compromise/
If you want, I can convert this content into a printable checklist for submitting an OIC or draft a templated documents list you can bring to a tax professional.
