Offer in compromise: what the formula actually asks
The IRS may settle a liability for less than the full amount. The figure is not negotiated — it is calculated from your assets and your future income, and the calculation is what decides whether an offer is worth making.
THE CLOCK — 24 MONTHS, OR IT IS DEEMED ACCEPTED
An offer not rejected within 24 months of submission is deemed accepted by statute. While it is pending, levy action is generally barred — and the ten-year collection period is suspended for the same span plus a further 30 days, so an unsuccessful offer lengthens the time the debt can be collected.
Three grounds, and only one is common
Doubt as to collectibility is the ordinary case: there is genuine doubt the full amount could ever be collected. Almost every offer is made on this ground.
Doubt as to liability means there is a genuine dispute that the amount is owed at all. This is a different form and a different process, and it is the right instrument surprisingly often — where a return was prepared by the IRS on your behalf, or an assessment was made on information nobody ever checked. Where the liability itself is wrong, arguing about the payment is the wrong argument.
Effective tax administration applies where the tax could be collected but doing so would create an economic hardship, or would be unfair and inequitable given exceptional circumstances. It is narrow and rarely granted, and the cases that succeed usually involve serious illness or long-term incapacity.
The formula
Reasonable collection potential is the amount the IRS calculates it could collect, and an offer is generally accepted only where it equals or exceeds that figure. It has two components.
Net realizable equity in assets: what everything you own would produce, at a quick-sale valuation, less what is owed against it. Real estate, vehicles, bank balances, investments, retirement accounts, cash value in life insurance, business assets, and receivables.
Plus future income: your monthly income less allowable expenses, multiplied by a fixed number of months. That multiplier depends on which payment option you choose — a shorter multiplier for a lump sum offer, a longer one for a periodic payment offer.
Allowable expenses are the crux. The IRS uses national and local standards for food, clothing, housing, utilities, transportation and out-of-pocket health care rather than what you actually spend. A household spending above the standard on housing or vehicles will see the excess disallowed unless it is genuinely necessary, and that disallowance often turns a plausible offer into an impossible one.
REASONS OFFERS ARE RETURNED OR REJECTED
- A required return is unfiled, or current estimated payments or deposits are not being made
- The application fee or initial payment was not included and no low-income waiver applied
- Equity in assets, particularly a home or a retirement account, exceeds the offer
- Income is expected to rise, so future income is valued higher than the offer assumes
- Dissipated assets — property transferred or spent while the liability existed
- The offer is simply below the calculated collection potential
The cost of trying
An offer is not a free option, and this is the part the advertising leaves out.
There is an application fee and an initial payment, both waived for taxpayers within the published low-income limit. A lump sum offer requires a payment of a portion of the offered amount with the application and the balance in a small number of payments after acceptance. A periodic payment offer requires you to begin making the proposed monthly payments while it is being considered. Money paid in is applied to the liability and is not refunded if the offer fails.
The collection period is suspended while the offer is pending and for a further period after. A year spent on an unsuccessful offer therefore adds a year to the time the IRS has to collect — which directly damages the alternative strategy of waiting out the period.
And acceptance carries a condition: file and pay everything due for the next five years, or the compromise defaults and the original liability, less payments made, comes back.
Before making one, check the alternatives
The reason to be blunt about this is that offer in compromise is the most heavily marketed tax resolution product in the country, and the marketing is aimed at people for whom it is the wrong answer.
If your reasonable collection potential exceeds the balance, an offer cannot be accepted and applying costs money and time. If you have no lump sum available, a partial pay installment agreement reaches a similar destination without one. If your income barely covers necessary expenses, currently not collectible status stops collection immediately and costs nothing. If the underlying assessment is wrong — and it very often is where the IRS filed a return on your behalf — fixing the assessment reduces the debt more than any settlement would.
Where the numbers genuinely support it, an offer is an excellent outcome and worth pursuing properly. The work is finding out which case you are in before spending anything.
Where this comes from
The statutes behind this page, so you can check any of it rather than take it on trust.
- IRC §7122
- Authorizes compromise of a civil liability.
- IRC §7122(f)
- An offer is deemed accepted if not rejected within 24 months of submission.
- IRC §6331(k)(1)
- Bars levy while an offer is pending and for 30 days after rejection.
- IRC §6503(h) and §6331(i)(5)
- Suspension of the collection period while an offer is pending.
- Treas. Reg. §301.7122-1
- The three grounds and the standards applied to each.
This page explains what the IRS or the Massachusetts Department of Revenue does and cites the statute. It is not advice about your situation, which depends on facts none of this knows. Tell us what your letter says and what date is on it. Please do not send Social Security numbers or tax documents through the form.
Partial pay agreement
A monthly agreement deliberately set below what would pay the balance. It runs until the collection period expires, and whatever remains at that point is written off. For many people it achieves more than an offer in compromise and is far easier to obtain.
Currently not collectible
Where paying anything would leave you unable to meet basic living expenses, the IRS suspends active collection. Nothing is forgiven and the balance keeps accruing — but the collection period keeps running too, and for some accounts that is the entire strategy.
Form 433 financial statement
Nearly every resolution above the streamlined thresholds is decided on this form. It is not a budget you submit — it is an input to a calculation that uses national and local standards instead of what you actually spend.
Collection statute (CSED)
The IRS has ten years from assessment to collect, after which the balance becomes unenforceable. The period is regularly suspended, and almost every real account has a date later than ten years from the return.
Questions about offer in compromise.
- Can I really settle for a fraction of what I owe?
- Only where the calculated collection potential is a fraction of what you owe. The advertised outcomes are real cases; they are also selected cases. The figure comes from your assets and income, so the honest first step is running the calculation rather than asking what is typical.
- Does having a house rule me out?
- Not automatically, but equity in it counts toward the calculation at a quick-sale value less what is owed. Substantial equity usually means the collection potential exceeds a modest offer, and a different resolution fits better.
- Do retirement accounts count?
- Yes. The IRS looks at what could be realized, net of tax and any early withdrawal cost. Retirement savings are one of the most common reasons an offer that felt reasonable does not clear the threshold.
- What happens to my refunds?
- Refunds for periods before the offer are generally applied to the liability. The treatment of the refund for the year the offer is accepted has changed over time, so it is worth confirming the current rule rather than relying on older guidance.
- How long does it take?
- Months, commonly the better part of a year, and the statute deems an offer accepted if it has not been rejected within 24 months. Levy action is generally barred while it is pending.
- What if it is rejected?
- There is a 30-day right to appeal to the Independent Office of Appeals, and that appeal is often worthwhile because the disagreement is usually about specific valuations or expense allowances rather than the whole approach.
Tell us what the letter says and what date is on it.
Scope and price in writing before anything starts. Where what you need is something we do not do, you will be told that instead.
Please don't send Social Security numbers or tax documents through this form.