Offer in Compromise (OIC)

Detailed Explanation

An Offer in Compromise under IRC Section 7122 lets a taxpayer settle federal tax debt for less than the full amount when collection of the full balance would create economic hardship or is otherwise doubtful. There are three statutory bases: Doubt as to Collectibility (the most common, where assets and future income won't cover the debt within the collection statute), Doubt as to Liability (the taxpayer disputes whether they actually owe), and Effective Tax Administration (full payment would cause an economic hardship despite ability to pay). The taxpayer files Form 656 (Offer in Compromise) along with Form 433-A (OIC) or 433-B (OIC) for individuals or businesses, providing detailed financial disclosure: bank balances, real estate equity, vehicles, retirement accounts, monthly income, and allowable living expenses (per IRS Collection Financial Standards). The IRS computes Reasonable Collection Potential (RCP) as roughly: net realizable equity in assets PLUS future income for either 12 months (lump-sum offer) or 24 months (periodic payment offer). The minimum acceptable offer is generally the RCP. A non-refundable application fee ($205) and a 20% down payment of the offer amount (lump-sum) or first installment (periodic) are required at submission, although low-income taxpayers can request a waiver. Once submitted, the IRS suspends most collection activity (no levies on new accounts, but existing levies and liens may continue). Processing takes 6 to 12 months. Once accepted, the taxpayer must file and pay all federal taxes timely for 5 years; default revives the original liability. Acceptance rate has historically been around 30 to 40%, with most rejections due to RCP exceeding the offer.