Overview

A reasonable Offer in Compromise (OIC) persuades the IRS that the amount you offer is the most it can realistically collect from you. The agency compares your assets, income, and necessary expenses against Collection Financial Standards and uses that information to compute a “reasonably collectible” amount. If your offer equals or exceeds that calculation and your paperwork is accurate and documented, the IRS may accept the OIC.

(For official guidance see the IRS Offer in Compromise page: https://www.irs.gov/individuals/offer-in-compromise and IRS Collection Financial Standards: https://www.irs.gov/collections/collection-financial-standards.)

What the IRS actually looks for

The IRS centers its review on three main components:

  • Asset equity: The market value of assets minus allowable liens or encumbrances. The IRS expects offers to reflect any reasonably collectible equity in vehicles, rental property, investment accounts, or other nonexempt assets.
  • Reasonably Collectible Income (RCI): Monthly disposable income after allowable living expenses. The IRS multiplies disposable income by a collection period to estimate what can be collected over time.
  • Documentation and consistency: Complete, truthful paperwork (Form 656 and Form 433 series) with supporting evidence for income, expenses, asset values, and debts.

These elements form the backbone of the IRS calculation. The agency will accept an offer if it meets or exceeds the amount it determines is reasonably collectible (combined equity + present value of RCI).

Required forms and fees

  • Form 656, Offer in Compromise — the formal offer. (Find this at the IRS site.)
  • Form 433-A (individuals) or Form 433-B (businesses) — Collection Information Statements, which detail income, expenses, and assets.
  • Application fee: $205 (may be waived if you qualify for the low-income certification). See Form 656 instructions and IRS guidance for the current fee and exceptions.
  • Initial payment: Depends on the offer type. For lump-sum offers the IRS typically requires an initial payment with the application (see Form 656 instructions). Low-income applicants may have different requirements.

Always check current Form instructions on irs.gov before filing; amounts and procedures can change.

What to include in your written offer

Your offer packet should be complete and easy to review. At a minimum include:

  1. Completed Form 656 with the exact dollar amount of your offer and the payment terms you propose.
  2. Form 433-A or 433-B with all pages completed.
  3. Third-party documentation supporting income and expenses: recent pay stubs, bank statements, invoices, Social Security award letters, proof of benefits, and medical bills.
  4. Proof of asset values: vehicle titles and valuations (Kelley Blue Book or NADA), recent brokerage statements, appraisals for real estate if relevant, and documentation for any liens or mortgages.
  5. A clear cover letter that summarizes why the offer is reasonable—highlight income instability, one-time losses, medical crises, or business downturns.
  6. Any evidence of hardship that isn’t obvious in the forms: eviction notices, collection letters, bankruptcy filings, or letters from creditors.

Include only accurate, contemporaneous documentation. The IRS will verify items and can reject offers with inconsistent or missing evidence.

How the IRS converts your numbers into a “reasonable” offer

The IRS steps through a standard methodology:

  1. Determine equity in assets — market value minus secured debt.
  2. Calculate monthly disposable income — gross monthly income minus allowed living expenses under Collection Financial Standards and other allowable deductions.
  3. Estimate the collectible amount — equity plus a multiplier applied to monthly disposable income (this represents what the IRS believes you can pay over time).

While the IRS does not publish a single public multiplier formula for every case, the result is that your offer must generally equal or exceed the agency’s calculation of reasonably collectible resources.

Offer types and payment terms

There are two common offer types:

  • Lump-sum (short-term) offers: Offer to pay in five or fewer installments, starting with an initial payment with the application.
  • Periodic payment (long-term) offers: Propose regular payments while the IRS evaluates the offer and for an agreed period if accepted.

Which option is most persuasive depends on your cash flow. Lump-sum offers are often favored when you have accessible liquid funds; periodic offers may work better if you have steady but modest disposable income.

Practical examples (illustrative)

  • Example A — Equity-first: A taxpayer has $1,500 equity in a car and $2,000 in a brokerage account (after penalties and taxes). Monthly disposable income is $100. If the IRS concludes it can collect the $3,500 equity plus some stream of monthly payments, a reasonable offer might be $4,700 to $5,000 depending on the collection window and allowable expenses.
  • Example B — Low-income: A single-parent with little asset equity and monthly disposable income of $20 may qualify for a low-income certification. The application fee and initial payment could be waived, and the IRS may accept a nominal offer or find the account uncollectible.

These examples are simplified. Your case will depend on exact documentation and IRS calculations.

Common mistakes that sink offers

  • Incomplete or inconsistent documentation on Form 433 or Form 656.
  • Inflating or underreporting expenses to manipulate disposable income calculations.
  • Failing to disclose all assets (including accounts held abroad or in a business).
  • Using stale values for assets without current statements or appraisals.
  • Submitting an offer far below the IRS’s reasonably collectible calculation without a strong explanation.

If the IRS suspects fraud or gross misrepresentation, it can deny the offer and pursue collection aggressively.

How to improve your odds — professional tips

  • Be precise and conservative with numbers: use current statements and market values.
  • Use IRS Collection Financial Standards where applicable rather than ad-hoc expense categories. The IRS publishes national and local standards for housing, utilities, transportation, and food; aligning your expense claims with these standards reduces objections. (See IRS Collection Financial Standards: https://www.irs.gov/collections/collection-financial-standards.)
  • Attach a concise cover letter that ties financial documents to the numbers on Form 433 and Form 656. In my practice, a clear narrative reduces back-and-forth requests from the IRS.
  • Consider low-income certification if your income qualifies; it waives the application fee and can change payment requirements.
  • Keep the offer realistic. Offers perceived as “low-ball” are usually denied.
  • If you’re self-employed or own a small business, include current profit-and-loss statements and business bank records. The IRS evaluates business assets separately and may convert business equity into collection expectations.

What to expect on timing and next steps

Processing times vary. Historically, many offers take anywhere from 6 to 12 months to reach a decision, and complex offers can take longer. The IRS may request additional documentation; respond quickly and completely to avoid delays.

If the IRS denies your offer, you can request a review or appeal and sometimes reapply when financial circumstances change. See these related guides on FinHelp for practical next steps and documentation checklists:

(These internal links provide step-by-step checklists, examples, and common pitfalls.)

Alternatives and when an OIC is not the best choice

An OIC is not always the right path. Alternatives include:

  • Installment agreements — when you can pay over time and the IRS can collect more via steady payments.
  • Currently Not Collectible (CNC) status — if you have no ability to pay at the moment.
  • Bankruptcy — in narrow circumstances, certain tax debts may be discharged through bankruptcy (consult a bankruptcy attorney).

Choosing the correct option requires comparing total collectibility, cost, and long-term consequences.

Final checklist before you file

  • Complete Form 656 and the correct Form 433 series.
  • Gather income, bank, and asset documentation dated within the IRS’s requested timeframes.
  • Verify valuations and provide support for each asset.
  • Decide on lump-sum vs. periodic payment and include the correct initial payment or low-income waiver.
  • Attach a short narrative describing the financial hardship and why the IRS should accept less than full payment.

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Tax outcomes depend on individual facts and current law. For case-specific guidance, consult a licensed tax professional, enrolled agent, or tax attorney.

Authoritative sources

In my 15+ years working with taxpayers on OIC submissions, the most successful offers were complete, well-documented, and realistic. A clear, honest presentation of your finances reduces processing time and increases the chance the IRS will view your offer as reasonable.