Offer in Compromise — Settle Your IRS Tax Debt for Less Than You Owe
An Offer in Compromise is the IRS program that allows qualifying taxpayers to settle a tax debt for less — sometimes significantly less — than the full amount owed. It is not a loophole and it is not available to everyone. But for taxpayers who genuinely cannot pay their full liability before the collection statute expires, it is one of the most powerful resolution tools in federal tax law.
The IRS accepted roughly 13,000 offers in a recent year, out of more than 36,000 submitted. That acceptance rate should tell you something: most OICs fail not because the taxpayer didn’t qualify, but because the submission was incomplete, the financial disclosures were inconsistent, or the offer amount was calculated incorrectly. Preparation matters enormously.
My name is Philip Falco. I am a tax attorney and a licensed CPA practicing in downtown Denver. I have been handling IRS collection cases, including Offer in Compromise submissions, since 1997. The CPA credential is not incidental to this work — the IRS evaluates your offer using a specific financial formula, and knowing how to construct that analysis correctly is the difference between an offer that gets accepted and one that gets rejected or countered at an amount you cannot pay.
If you want to know whether you qualify, call (303) 626-7000) for a consultation. If you want to understand the process first, keep reading.
How the IRS Decides Whether to Accept an Offer
The IRS does not accept OICs based on sympathy or negotiating skill. It runs a formula. Understanding that formula is the first step to knowing whether you are a realistic candidate.
The formula produces what the IRS calls your Reasonable Collection Potential — your RCP. Your offer must equal or exceed your RCP for the IRS to accept it. If your offer is below your RCP, the IRS will reject it or counter with the RCP figure.
RCP is calculated as:
Net realizable value of your assets + Future income stream
Net realizable value means the quick-sale value of everything you own — equity in real estate, vehicles, bank accounts, retirement accounts, business interests, and other assets — minus a small exemption for basic necessities. The IRS uses 80% of fair market value as the quick-sale figure, not full appraised value.
Future income stream is calculated by taking your monthly disposable income — what remains after the IRS subtracts its allowable expenses from your gross income — and multiplying it by a factor based on payment type:
- Lump sum offer (paid within 5 installments): disposable income × 12
- Periodic payment offer (paid over 6–24 months): disposable income × 24
The IRS allowable expenses are not your actual expenses. They are based on National Standards (food, clothing, personal care), Local Standards (housing and transportation for the Denver metro area), and certain actual expenses for health care, childcare, and a handful of other categories. Knowing these standards cold — and knowing how to document your actual expenses against them — is where the CPA credential does real work. Many practitioners present financial packages that inadvertently overstate disposable income by failing to claim every allowable expense. That error alone can sink an otherwise legitimate offer.
The Three Grounds for an Offer in Compromise
The IRS considers OICs submitted on one of three legal grounds. The vast majority of accepted offers are based on Doubt as to Collectibility.
Doubt as to Collectibility
You acknowledge the tax is owed but demonstrate that you cannot pay it in full before the 10-year collection statute expires. Your RCP is less than the total liability. This is the most common and most practical ground for most taxpayers.
To be a strong candidate on this ground, you generally need a combination of: limited liquid assets, limited equity in real property, modest income relative to allowable expenses, and a total debt large enough that installment payments would not satisfy it within the remaining collection period.
Doubt as to Liability
You assert that the tax itself was incorrectly assessed — that you do not owe what the IRS claims, or that the amount is wrong. This is pursued when there was a disputed audit outcome, an assessment made without a proper examination, or a legal error in the underlying determination. It is less common but powerful when the facts support it. Note that Doubt as to Liability OICs are submitted without Form 433-A — the financial analysis is not relevant when the issue is whether the liability exists at all.
Effective Tax Administration
The rarest ground. You concede both that the tax is correct and that you could technically pay it — but paying it would create an economic hardship or would be fundamentally inequitable given your circumstances. This applies in situations involving serious illness, a fixed-income elderly taxpayer with a large one-time liability, or other genuinely exceptional facts. The IRS has significant discretion here and grants these sparingly.
What Makes a Strong OIC Candidate
Not everyone qualifies, and part of what I do in an initial consultation is give you an honest answer about whether an OIC is realistically available to you — or whether an installment agreement, Currently Not Collectible status, or another approach would be more appropriate.
Strong OIC candidates typically have one or more of these characteristics:
- A large tax debt relative to income and assets — generally $10,000 or more, often much more
- Limited equity in real property (if you own a home with significant equity, that equity becomes part of your RCP and can make an OIC impractical)
- Monthly income that, after allowable expenses, leaves little or no disposable income
- Self-employment income or income that has recently decreased significantly
- Collection statute running out — the fewer years remaining on the 10-year CSED, the lower the future income component of your RCP
- Unfiled returns that are now filed and current
OIC is a poor fit when: you have significant home equity, substantial retirement account balances, a high and stable income, or the debt is relatively modest and payable through an installment agreement. In those situations, I will tell you directly and recommend the appropriate alternative.
What the OIC Process Looks Like
An Offer in Compromise is not a phone call or a brief letter. It is a formal submission that typically runs 40–60 pages of financial documentation, analysis, and legal argument. Here is what the process involves when I represent you:
Step 1 — Transcript Pull and Case Analysis
Before I prepare anything, I pull your complete IRS account transcripts. These show me every assessment, every notice issued, every payment applied, and crucially, the remaining time on your Collection Statute Expiration Date (CSED). The CSED directly affects your RCP calculation and I need to know exactly where we stand before making any submission decisions.
Step 2 — Financial Analysis and RCP Calculation
I prepare your Collection Information Statement (Form 433-A for individuals, Form 433-B for businesses) and calculate your RCP using IRS National and Local Standards for the Denver metropolitan area. This is the most consequential step — an incorrectly calculated RCP produces either an offer too low to be accepted or a payment you cannot actually make.
Step 3 — Offer Amount Determination
Based on the RCP analysis, I determine the minimum offer amount that has a realistic chance of acceptance. In some cases, there is legitimate room to present the financial picture more favorably — not by misrepresenting facts, but by ensuring every allowable expense is documented and every asset is properly valued. That is the professional judgment I bring.
Step 4 — Submission
I prepare and file Form 656 along with the complete financial package and the application fee. Once submitted, the IRS generally suspends active collection — levies and garnishments typically do not continue while an OIC is under review. The collection statute is also tolled (paused) for the duration of the review period plus 30 days.
Step 5 — IRS Review and Negotiation
The IRS typically takes 6–12 months to work through an OIC submission. During that period, an IRS offer examiner reviews your financials and may request additional documentation. Counteroffers are common. I handle all communication with the IRS during this period and respond to any requests or proposed adjustments on your behalf.
Step 6 — Acceptance, Rejection, or Appeal
If accepted, you pay the agreed amount according to the payment terms in your offer and remain compliant with all filing and payment requirements for five years. If rejected, you have the right to appeal to the IRS Office of Appeals — a meaningful right that I exercise when the facts support it.
Colorado Department of Revenue OIC — A Step Most Attorneys Miss
If you owe both federal and Colorado state income taxes, the federal OIC is only part of the solution. The Colorado Department of Revenue has its own OIC program — but it works differently than the IRS program in one critical respect: the Colorado DOR will not accept an OIC unless the IRS has already accepted one for the same tax year and type.
This means the Colorado OIC is a sequential process, not a parallel one. You resolve the federal liability first, then use that acceptance to approach the state. Once you have an accepted federal OIC, the Colorado submission requires:
- IRS Form 656 stamped with the IRS received date
- IRS Form 433-A
- Proof of IRS acceptance and payment
- IRS Record of Account transcripts
- Colorado DR 6596 (Statement of Income and Expenses)
- Colorado DR 3023 (OIC Terms and Conditions, initialed on every term)
- Written statement of special circumstances
- Disclosure of any property transfers
Important Colorado-specific rules: the state’s OIC program is a one-time opportunity — if the Colorado DOR has previously accepted an OIC from you, you are ineligible. If the offer is accepted, the full amount is due within 15 days. And unlike the IRS, which typically suspends collection activity while reviewing an offer, the Colorado DOR will continue existing collection actions (such as wage garnishments) while your submission is under review.
I handle both the federal and Colorado submissions when both liabilities are in play, coordinating the sequencing so that nothing falls through between the two processes.
Frequently Asked Questions
How much does an Offer in Compromise typically settle for?
There is no standard percentage — the offer amount is determined entirely by your individual RCP calculation. Some offers settle for a few thousand dollars on a six-figure debt. Others settle for 40 or 50 cents on the dollar. The number is a function of your specific asset values, income, allowable expenses, and the remaining collection statute — not a negotiating position you choose in isolation.
What happens to penalties and interest while the OIC is pending?
Interest continues to accrue on the underlying liability during the OIC review period. Penalties also continue to accrue. This is one reason that submitting a strong, complete package from the outset matters — a submission that requires extensive back-and-forth with the IRS means more time for interest to accumulate before the case closes.
Does the IRS stop collection while my offer is pending?
Generally yes. Once the IRS acknowledges receipt of your OIC, it is required to suspend most collection activity — levies, garnishments, and similar enforcement — for the duration of the review. The collection statute is also tolled. This is one practical reason to file an OIC even in cases where acceptance is uncertain.
Can I file an OIC if I have unfiled tax returns?
No. The IRS will return your OIC without consideration if you have any unfiled returns. Before submitting, all required returns must be filed and current estimated tax payments must be up to date. Getting into compliance before filing is part of the preparation process.
What is the application fee?
The IRS charges an application fee to submit an OIC. Low-income taxpayers who meet IRS poverty guideline thresholds may qualify for a fee waiver. The current fee schedule is available on IRS Form 656.
Can the IRS come after me again after accepting an OIC?
Once the IRS accepts an OIC and you pay the agreed amount, the liability is settled. The IRS cannot reopen the matter simply because your financial situation improves after acceptance. However, if you default on the payment terms or fail to remain compliant with all filing and payment obligations for the five-year period following acceptance, the IRS can rescind the acceptance and reinstate the original liability.
What if the IRS rejects my offer?
A rejection is not the end of the road. You have the right to appeal to the IRS Office of Appeals within 30 days of the rejection letter. Appeals officers operate independently of the collection division and often take a fresh look at the financial analysis. If the appeal does not resolve the matter, a Collection Due Process hearing or other alternatives remain available.
How is working with a CPA-attorney different from working with a tax resolution firm?
Tax resolution firms typically employ a mix of enrolled agents, non-attorney CPAs, and sales representatives. Your case may be handled by different people at different stages, and the person who signed you up may not be the person preparing your OIC. When you hire me, one licensed professional — a tax attorney and CPA — handles the financial analysis, prepares the submission, communicates with the IRS, and is personally accountable for the work. There is no handoff.
If You Are Considering an Offer in Compromise
The most important first step is an honest assessment of whether you qualify. Not everyone does, and pursuing an OIC that is unlikely to succeed costs time, money, and delays resolution. I will tell you directly what I see in your situation and what I recommend — whether that is an OIC, an installment agreement, Currently Not Collectible status, or a combination of approaches.
Call (303) 626-7000 to schedule a consultation. My office is at 730 17th Street, Suite 900 in downtown Denver.
This page is for general informational purposes and does not constitute legal advice. Tax situations vary significantly by individual facts. Contact our office to discuss the specifics of your case.