How the IRS decides whether to accept an OIC

The IRS evaluates Offers in Compromise primarily by calculating Reasonable Collection Potential (RCP): the net equity in assets the IRS can seize or sell, plus any income the taxpayer can reasonably pay during the remaining collection period (generally the collection statute of limitations). If the RCP is less than the liability, an OIC may be accepted. The IRS also requires that the taxpayer be current with filings and estimated tax payments and that proposed terms are realistic.

Key elements the IRS reviews:

  • Reasonable Collection Potential (RCP): equity in homes, vehicles, bank accounts, investments, and business assets minus ordinary selling costs.
  • Future income available during the collection period: discretionary income after IRS-allowed living expenses.
  • Compliance: all returns filed and required federal tax deposits made for businesses and payroll taxes.
  • Offer structure and documentation: lump-sum versus periodic payments and supporting evidence for claimed hardship.

(For the IRS’s official guidance, see: Apply for an Offer in Compromise — IRS.)

Practical examples from practice

  • A taxpayer with limited home equity, no large savings, and documented medical expenses that reduce monthly disposable income can have an OIC accepted because their RCP is low. In one case, a client’s detailed expense records and conservative asset valuations helped the IRS conclude the collectible amount was far below the assessed tax.
  • Conversely, taxpayers with significant asset equity (second homes, investment accounts) are often denied unless they show why that equity is unavailable or limited (for example, bankruptcy liens or legal restraints).

Steps to improve your chance of approval

  1. Prepare a realistic RCP calculation. Include accurate market values and subtract reasonable selling costs.
  2. Document hardship and recurring expenses with bank statements, bills, proof of medical costs, and mortgage statements.
  3. Keep filings and deposits current; the IRS will usually reject offers from noncompliant taxpayers.
  4. Choose the right offer type: lump-sum cash offers require an initial payment (and generally achieve better acceptance odds) while periodic offers spread payments but require proof of ongoing ability to pay.
  5. If you’re low-income, ask about fee waivers and the IRS low-income certification.

For guidance on building documentation, see Preparing the Financial Documentation for an Offer in Compromise.

Common mistakes that reduce approval odds

  • Underestimating asset equity or failing to report ownership interests.
  • Weak or missing proof for monthly living expenses.
  • Submitting an offer that leaves the IRS with a higher collectible value than the offer amount.
  • Allowing tax compliance (filing or estimated tax payments) to lapse during processing.

Timeline and appeal options

The IRS typically takes about 6–12 months to process an OIC, though complex cases can take longer. If an offer is rejected, you can request administrative appeal with the IRS Office of Appeals or seek reconsideration; consult the rejection notice for specific steps and deadlines.

For procedural next steps after a denial, see How to Appeal an Offer in Compromise Rejection and Next Steps.

When to consider alternatives

If your RCP is higher than the amount you can offer, alternatives such as an installment agreement or Currently Not Collectible (CNC) status may better preserve cash flow while protecting assets. Compare options carefully — sometimes an installment plan or partial-payment plan is more appropriate than pursuing an OIC.

See When an Offer in Compromise Is Better Than an Installment Agreement for a comparison.

Professional tips

  • Be conservative in asset valuations and explicit about why assets are not easily collectible. In my practice, applicants who provide independent valuations or appraisals (vehicle clean-trade values, recent brokerage statements) get faster, more favorable reviews.
  • Organize documents by issue (assets, income, expenses) and include a reconciliation page that shows how you derived the offer amount.
  • Work with a tax pro when your financial picture is complex (business ownership, multiple properties, or significant disputed penalties).

Sources and disclaimers

This content is educational and not a substitute for personalized tax advice. For help tailored to your situation, consult a qualified tax professional or attorney.