What is an IRS Offer in Compromise and how does it work?

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS to settle tax debt for less than the full amount owed. The IRS accepted approximately 17,000 OICs in a recent year, out of about 36,000 applications. The IRS evaluates your offer based on your Reasonable Collection Potential (RCP), which is the amount the IRS believes it can realistically collect from you. RCP is calculated as: (monthly disposable income x remaining months on collection statute) + (quick sale value of your assets). If your RCP is less than your total tax debt, you may qualify for an OIC. There are three types: Doubt as to Collectability (most common, where you can't pay the full amount), Doubt as to Liability (you dispute the underlying tax amount), and Effective Tax Administration (you can pay but doing so would cause an unfair economic hardship or inequity). The application fee is $205 (waived for low-income applicants), and you must submit an initial payment with the application: 20% for lump sum offers or the first monthly payment for periodic payment offers.