What are the Rules for an IRS Offer in Compromise?

The Offer in Compromise rules are less flexible than the marketing around them suggests. Most offers that fail do so for identifiable procedural reasons — missing filings, ownership issues on assets, active bankruptcy, or offer amounts below RCP. Understanding the rules before filing is the difference between a successful OIC and a lost 20% deposit. This chapter walks through the threshold rules, the RCP rules, the offer-structure rules, and the post-acceptance rules.

Our firm has filed hundreds of OICs, all structured to meet the procedural rules before any substantive RCP analysis. For the OIC overview, see What is an Offer in Compromise?. For the full guide, see The OIC Guide.

If the IRS rejected your OIC — or you’re unsure whether you qualify under the current rules:

OIC eligibility rules are mechanical — but the IRS’s Reasonable Collection Potential (RCP) calculation often overstates what you’re worth. A free 15-minute call covers whether your RCP analysis is accurate, which disallowances the IRS is likely to apply, and whether an OIC is a realistic option for your numbers.

Talk to Sam About Your OIC Eligibility — Free →    Or call: (619) 378-3138

This chapter covers the eligibility rules — who qualifies and on what terms. For the overview of what an offer in compromise is and how the program works end to end, start with what is an Offer in Compromise.

The Four Categories of OIC Rules

ThresholdEligibility Rules
CoreRCP Rules
StructuralOffer Structure
OngoingPost-Acceptance

Quick Reference

Jump to the rule category: threshold / eligibility, RCP calculation, offer structure, or post-acceptance. For the OIC rule lookup, see the OIC rules reference. To evaluate eligibility, a 15-minute consultation is free.

1. Threshold Rules: Eligibility Before RCP

The threshold rules determine whether the IRS will even consider an offer before any substantive analysis. Failing a threshold rule results in the offer being returned without substantive review, with the 20% deposit typically kept. Checking all four threshold rules before submission is the first step.

If this is you: You want to file an OIC but have not confirmed every threshold requirement. Before filing, verify all required returns are filed, no bankruptcy is open, the application fee (or low-income certification) is in place, and current-year estimated tax / withholding is current. Missing any one returns the offer.

The threshold requirements:

• Filing compliance. All required returns for the past six years (and possibly more) must be filed before an OIC will be considered. Delinquent returns must be submitted — even returns showing zero tax — before OIC filing.
• No active bankruptcy. OICs are not processed during an open bankruptcy. File after discharge, or pursue bankruptcy discharge of eligible tax directly.
• Application fee and 20% deposit. $205 fee plus 20% of the offer amount as deposit. Low-income taxpayers (at or below 250% federal poverty guideline) qualify for waiver of both with Form 656 certification.
• Current-year estimated tax / withholding. Taxpayers must be current on the current year’s estimated tax payments or withholding before OIC submission. The IRS uses this as a compliance indicator.

Threshold Check Procedure

1. Pull IRS wage and income transcripts. Identify missing returns.
2. File all required returns. Including zero-tax returns.
3. Verify no active bankruptcy.
4. Compute application fee / deposit or low-income certification.
5. Confirm current-year compliance. Estimated tax or W-4 adjustments.

2. RCP Calculation Rules: The Core of Every Offer

Reasonable Collection Potential (RCP) is the IRS’s calculation of how much could be collected from the taxpayer over the remaining CSED. The RCP calculation is the single most consequential number in any OIC. Offers at or above RCP are accepted; offers below are rejected.³

If this is you: You want to understand how the IRS will compute your RCP before you structure an offer. The RCP calculation follows Treas. Reg. §301.7122-1 and IRM 5.8.5, applying specific valuation rules to assets and income. Small calculation errors produce large differences in acceptable offer amounts.

RCP calculation components:

• Net Realizable Equity (NRE) in assets. Quick-sale value (80% of fair market value) minus encumbrances (loans, liens).
• Future income component. Disposable income × 12 (for lump-sum offers) or × 24 (for periodic offers).
• Disposable income calculation. Gross income minus allowable expenses under Collection Financial Standards.
• Collection Financial Standards. National (food, out-of-pocket health), local (housing and utilities by county, transportation by MSA).
• Special adjustments. Dissipated assets (assets liquidated prior to OIC), future income minimums (for business owners), valuation of closely-held interests.

RCP Calculation Procedure

1. Compute NRE for each asset. Quick-sale value minus loans.
2. Compute monthly disposable income. Under Collection Financial Standards.
3. Apply multiplier based on payment term. 12 for lump-sum; 24 for periodic.
4. Total RCP = NRE + future income component.
5. Compare RCP to balance. Offer must be at or above RCP.

3. Offer Structure Rules: Lump Sum vs. Periodic Payment

An OIC can be structured as a lump-sum cash offer or a periodic payment offer. The choice affects the RCP multiplier and the deposit / payment schedule. Structural choice should follow the RCP math and the taxpayer’s liquidity.

If this is you: You have a rough RCP in mind and need to choose the offer structure. Lump-sum offers pay within 5 months and use the 12-month income multiplier. Periodic offers pay over 6 to 24 months and use the 24-month multiplier. Lump-sum produces a lower RCP but requires immediate liquidity.

Offer structure rules:

• Lump-Sum Cash Offer. Paid in 5 or fewer installments within 5 months of acceptance. 20% deposit + remaining 80% at acceptance. RCP uses 12-month future income multiplier.
• Periodic Payment Offer. Paid over 6 to 24 months per IRS schedule. 20% initial + continuing monthly payments during review and after acceptance. RCP uses 24-month future income multiplier.
• Payment during review. Periodic payment offers require continuing monthly payments during the review period; these apply against the offer amount.
• Deposit application. 20% deposit is applied against the offer amount if accepted; kept by IRS and applied against balance if rejected.

4. Post-Acceptance Rules: The 5-Year Compliance Covenant

An accepted OIC carries a 5-year post-acceptance compliance covenant. Any default during the 5 years reinstates the full original liability plus interest and applies any offer amounts paid against the reinstated balance.

If this is you: You have had an OIC accepted or are about to. The 5-year compliance covenant is a real obligation. Future-year filings must be timely. Future-year taxes must be paid in full. Any default — even by mistake — reinstates the original balance. Commitment to 5 years of strict compliance is part of OIC cost.

The 5-year covenant requires:

• Timely filing of all future returns. Including extension-filed returns.
• Full payment of all future tax liabilities. Estimated tax, withholding, balance due.
• No new balance-due returns. A new liability in year 3 can terminate the OIC.
• No amendments that reduce previously-reported income. Amendments can be scrutinized.

Already have an accepted OIC? The 5-year compliance covenant requires perfect filing and payment compliance. Missing an estimated tax payment or late-filing a return can reinstate the full balance. Book a consultation to structure compliance monitoring.

OIC Rules Document Lookup

CSED and OIC Rules

• CSED tolls during OIC review. Plus 30 days.
• CSED must run at least 12 or 24 months beyond submission. OIC requires meaningful remaining CSED for the future income component.
• A rejected OIC adds tolling without benefit. Consider the CSED cost before filing.
• Accepted OIC ends collection. CSED becomes irrelevant.

OIC Rule Compliance and Acceptance Correlation

OIC Rule Violation Pathway

Threshold Rule Violation

Returns unfiled, bankruptcy open, or fees unpaid causes the offer to be returned as not processable. The 20% deposit is typically kept as a payment on the underlying balance. Correcting the violation and resubmitting is possible but takes additional time.

RCP Violation (Below-RCP Offer)

An offer below RCP is rejected on the merits. Appeal to IRS Appeals is available within 30 days. Appeals frequently accepts offers the initial reviewer rejected but still applies RCP rules.

Post-Acceptance Default

Any default during the 5-year covenant reinstates the full original liability plus interest. The offer amounts already paid are credited. The IRS issues a default letter and resumes collection on the reinstated balance.

The First 48 Hours Before Filing an OIC

1. Pull transcripts and verify filing compliance.
2. Confirm no active bankruptcy.
3. Check current-year estimated tax / withholding.
4. Run RCP calculation. Asset NRE + future income.
5. Choose offer structure. Lump-sum vs. periodic.
6. Prepare application fee or low-income certification.
7. Engage counsel if balance over $50,000.

★
Brotman Law has been recognized by Inc. Magazine as one of California’s fastest-growing law firms. We have submitted hundreds of OICs, with threshold compliance verified in every case to avoid the returned-offer / lost-deposit outcome. Our office is based in San Diego, and we represent clients throughout California and nationwide.

The ROI Question

A returned OIC produces lost deposit, lost time on CSED, and no settlement. Pre-filing rule verification almost always pays for itself by avoiding the returned-offer outcome. Professional scoping is lowest-cost at the earliest stage.

When to Engage an Attorney for OIC Rule Analysis

• Balance over $50,000. RCP calculation complexity.
• Business or self-employment. Valuation and going-concern issues.
• Multi-year unfiled returns. Filing sequence matters.
• Prior bankruptcy history. Interaction with OIC rules.
• Post-acceptance compliance monitoring. Avoiding the 5-year default.
• Prior OIC rejection. Appeals or resubmission.

Any of the above apply?

A 15-minute consultation is free. We verify threshold compliance, run RCP, and scope offer structure.

Get a Candid Assessment — Free →