Offer in Compromise

The Offer in Compromise is the most advertised and least understood program in tax resolution. You've seen the version on late-night television: settle for pennies on the dollar, a special forgiveness window, call before it closes.

The reality is more useful than the advertisement, and considerably more precise.

An Offer in Compromise is a formal agreement in which the IRS accepts less than the full balance and writes off the rest. It genuinely happens. What it isn't is a negotiation, a hardship application, or a reward for a difficult situation. It's a calculation — and once you understand the calculation, you can tell fairly quickly whether it's worth pursuing in your case.

The IRS asks itself one question: how much could we realistically collect from this person if we pursued them for the remaining time available?

That figure is called Reasonable Collection Potential, and it's built from two components.

What you own. The equity in your assets — property, vehicles, bank accounts, investments, retirement accounts, business assets. Not the market value; the realisable equity.

What you could pay from future income. Your monthly income, less allowable living expenses, projected over a defined period. Critically, "allowable" means allowable under the IRS's own published standards for housing, transport, food and healthcare — not what you actually spend. Where your real costs exceed the standards, the difference generally doesn't count.

Add those together and you have RCP. Then the comparison is simple:

If RCP is less than what you owe, an Offer in Compromise becomes realistic.

If RCP is more than what you owe, it generally doesn't — no matter how large the balance or how difficult the circumstances.

This is why someone owing a very large amount can qualify while someone owing far less does not. It's arithmetic, not sympathy. And it's why nobody can tell you whether you qualify without doing the arithmetic on your actual numbers.

Before the calculation matters at all, three conditions have to be met. Applications fail on these more often than on the numbers.

An Offer in Compromise is a full financial disclosure, not a form. The IRS will examine your income, assets, expenses and recent financial history in detail, and it will verify what it's told.

• The submission consists of the offer itself, a detailed financial statement, supporting documentation for essentially every figure, an application fee, and an initial payment — with fee and payment waivers available for taxpayers meeting low-income criteria.
• The review takes months. Frequently many. An offer can be assigned, questioned, returned for more information, and reconsidered.
• Collection may continue in some respects while an offer is pending, and interest continues to accrue throughout.
• If accepted, the obligations don't end. You must stay compliant — filing and paying on time — for a period of years afterward. Defaulting on that can reinstate the entire original liability, less what you paid. This is the part that gets glossed over in advertising, and it's the reason we spend as much time on what comes after as on the application.
• If rejected, there are appeal rights with their own deadline. A rejection is not necessarily the end, and rejected offers are sometimes successfully appealed. A returned offer is different from a rejected one and carries no appeal right — which is one reason the completeness of the initial submission matters so much.

Most unsuccessful offers fail for reasons that had nothing to do with the merits.

• Filing compliance wasn't in place at submission.
• The offer amount didn't reflect the IRS's own formula. An offer materially below what RCP produces is not a negotiating position; it's a rejection waiting to happen.
• Asset equity was understated or missed — most often retirement accounts, vehicle equity, or a property interest the applicant didn't think counted.
• Expenses were claimed that the standards don't allow, so the disposable income figure came out higher than expected.
• Documentation was incomplete, causing the offer to be returned rather than decided.
• A dissipated asset — something sold or transferred shortly before applying — was identified.

None of these are exotic. They're the ordinary reasons a technically sound case doesn't succeed, and most are avoidable.

Being straight about this is more useful than selling it.

If your income comfortably covers your allowable expenses, or you hold meaningful equity, an Offer in Compromise is probably not your route. If your balance is modest relative to what you earn, it almost certainly isn't.

That doesn't mean you have to pay in full on demand. It means the answer is somewhere else:

• A payment plan, including a partial pay arrangement that may not retire the whole balance before the collection period ends
• Currently Not Collectible status if paying anything is genuinely beyond you
• Penalty abatement, which is frequently the fastest real reduction available and is very often overlooked
• Waiting out the collection statute, where enough time has already run — occasionally the correct strategy, and one you'd never hear from a firm paid to file applications

Katherine will tell you which of these your numbers point to, including when the answer is that you don't need her.