The IRS Will Sometimes Accept Less Than You Owe — But the Math Has to Work

The IRS accepted 21.4% of Offers in Compromise in 2024. That’s the lowest rate in recent years — down from 42% just the year before.

That number doesn’t mean the program doesn’t work. It means most people apply without understanding how the IRS calculates what it will accept. They submit a number that feels right. The IRS runs its formula. The numbers don’t match. The offer gets rejected.

Here’s how it actually works.

What an Offer in Compromise Is

An Offer in Compromise (OIC) is a formal agreement between you and the IRS to settle your tax debt for less than you owe. The IRS has the authority to accept these under IRC Section 7122.

There are three grounds for an OIC:

Doubt as to Collectibility — you don’t have the assets or income to pay the full amount, even over time. This is the most common ground and the one most business owners use.

Doubt as to Liability — you don’t actually owe what the IRS says you owe. There’s a legal or factual dispute about the tax itself. This is separate from an appeal — you’re not saying the IRS assessed it wrong; you’re saying the underlying amount is wrong.

Effective Tax Administration — you could theoretically pay, but doing so would cause severe hardship or would be inequitable given the circumstances. This is a high bar and rarely the right route for business owners.

Most small business owners submitting an OIC are going the Doubt as to Collectibility route. Everything below focuses on that.

The Number the IRS Uses: Reasonable Collection Potential

The IRS won’t accept an OIC for less than your “reasonable collection potential,” or RCP. This is the core of the formula, and it’s what trips most applicants up.

RCP = value of your assets + your projected future income (minus necessary living expenses) over either 12 months or 24 months, depending on how you pay.

Asset side: The IRS values your assets — bank accounts, equity in your home or business, vehicles, retirement accounts — and applies a quick-sale discount of around 20%. If you have a home worth $600,000 with a $400,000 mortgage, they’re counting roughly $160,000 in available equity (80% of the $200,000 net).

Income side: Take your average monthly income, subtract allowable living expenses (the IRS uses national and local standards for these — not your actual budget), and multiply by 12 or 24. If you’re paying a lump sum, they use 12 months. If you’re paying in installments over the offer period, they use 24 months.

If your RCP calculation comes out to $50,000, the IRS won’t accept an offer for less than $50,000. It doesn’t matter if you owe $300,000.

The practical question is: what does your RCP actually work out to? Some business owners have more equity or income than they realize. Others — especially those with a bad year or recent business losses — genuinely have a low RCP, and an OIC is the right tool.

What You Need to Qualify Before You Apply

The IRS won’t review your offer if you haven’t done these things first:

• Filed all required tax returns
• Made all required estimated tax payments for the current year
• If you have employees: made all required federal tax deposits for the current quarter and the two preceding quarters

If any of those are missing, the IRS rejects the offer on procedural grounds without ever looking at your financials.

The application requires Form 656 (the offer agreement) and Form 433-B(OIC) if you’re a business entity, or Form 433-A(OIC) if you’re filing as an individual. There’s a $205 application fee, which is waivable if your household income falls below a specific threshold.

You also cannot be in an open bankruptcy proceeding. The automatic stay that comes with bankruptcy and the OIC process don’t coexist.

What Happens While Your Offer Is Pending

All IRS collection activity pauses while your offer is under review — no levies, no liens being enforced, no wage garnishments. That pause alone is sometimes worth the application.

The IRS has 24 months to accept or reject your offer. If they don’t respond within that window, the offer is automatically accepted. (That almost never happens — but it’s in the statute.)

Processing currently takes somewhere between 6 and 18 months depending on the IRS’s workload and the complexity of your case.

Interest and penalties continue to accrue on the original balance during that period. They stop accruing on the agreed amount once your offer is accepted and you pay.

When an OIC Is the Wrong Move

A few situations where you should probably not apply:

You have equity. If you have substantial home equity, retirement account balances, or business assets the IRS can reach, your RCP will likely be high enough that the IRS won’t accept a significant discount. An installment agreement to pay the full amount over time might be more realistic.

You’re current on payments. If you have steady income and can realistically afford a payment plan, the IRS generally expects you to use one. The OIC is designed for situations where full payment — even spread over years — genuinely isn’t possible.

You owe payroll taxes. The trust fund recovery penalty, which the IRS can assess personally against business owners who didn’t remit payroll taxes, is treated separately and can follow you even through business dissolution. The trust fund penalty post has more on that. Payroll debts complicate an OIC significantly.

You just want to delay. Filing a frivolous OIC to buy time is something the IRS knows to look for. It can trigger a fraud referral and makes any future legitimate OIC application harder.

For situations where you owe but can’t pay in full, the full menu of IRS options — including installment agreements, currently-not-collectible status, and penalty abatement — is worth understanding before deciding whether an OIC is right for you.

The Difference Between a Good Offer and a Rejected One

The most common reason offers fail: the amount offered is too low relative to the RCP, and the applicant didn’t do the calculation first.

The second most common reason: incomplete or inconsistent documentation. The IRS compares your Form 433 to your bank statements, your tax returns, your credit reports. If numbers don’t line up, the case gets flagged for additional review or rejected outright.

A well-prepared OIC takes time. You’re building a factual record that demonstrates, in the IRS’s own framework, what you can and can’t pay. That’s not something to rush or file yourself if the amount at stake is significant.

This post covers general information about the IRS Offer in Compromise program as of July 2026 and is for informational purposes only. OIC eligibility, calculation of reasonable collection potential, and strategy depend heavily on individual facts. Nothing here is legal or tax advice specific to your situation. Geiger Tax & Accounting provides tax and accounting services — contact us at (631) 532-5622 or info@geigertax.com if you're dealing with an IRS balance and want to understand your options.