How to Evaluate and Submit an IRS Offer in Compromise for Business Clients
An Offer in Compromise (OIC) allows a taxpayer to settle a federal tax debt for less than the full amount owed. Under IRC §7122, the IRS may accept an offer when the amount offered equals or exceeds the maximum it could reasonably collect through standard enforcement — not the maximum the client could manage to pay. The distinction matters: the OIC program is not a hardship discount but a mechanism for resolving debts that the IRS cannot collect in full within the remaining collection statute period. The program is procedurally demanding. Incomplete submissions are returned without consideration, the IRS has up to 24 months to investigate a submitted offer, and acceptance imposes a 5-year compliance obligation during which any failure to file or pay reinstates the original liability minus amounts already submitted. This guide covers every stage CPAs must manage: evaluating candidacy, calculating the correct offer amount, submitting a complete package, and guiding clients through post-acceptance compliance.
Prerequisites
- Complete IRS account transcripts for all tax periods at issue: assessed tax, penalties, interest, and the Collection Statute Expiration Date (CSED) for each period. Request via Form 4506-T or IRS e-Services
- Signed Form 2848 Power of Attorney authorizing representation before IRS Collection
- All unfiled returns identified and filed — the IRS will not consider an OIC while any required return is outstanding
- Current quarterly estimated tax payments or payroll tax deposits (for self-employed clients and businesses with open periods)
- IRS Form 656-B (Offer in Compromise Booklet), which contains the current application fee, official worksheets, and Collection Financial Standards reference tables
Step 1: Verify Pre-Submission Eligibility Requirements
Before calculating offer amounts or assembling a financial statement, confirm the client clears all mandatory eligibility filters. A submission that fails an eligibility check is returned without consideration — wasting the application fee and, critically, tolling the Collection Statute Expiration Date (CSED) during the IRS's processing period.
Mandatory eligibility conditions (all must be satisfied):
- All required federal tax returns must be filed. Unfiled returns — regardless of reason — disqualify the client until all are submitted and processed. If the client has overdue business returns, filing the appropriate extensions may be necessary to bring them current before submitting.
- No open bankruptcy proceedings. An active Chapter 7, 11, 12, or 13 case suspends OIC eligibility by operation of the automatic stay (11 U.S.C. §362). The OIC may be resubmitted after the proceeding is resolved.
- Estimated tax payments or federal tax deposits must be current. For self-employed clients, current-year estimated payments (Form 1040-ES) must be made prior to submission. For businesses, payroll tax deposits must be current through the submission date.
- No open innocent spouse election that remains unresolved for the same tax period.
CSED strategy: Before submitting, calculate how much time remains on the CSED for each period at issue. The CSED is generally 10 years from the date of assessment (IRC §6502(a)). Submitting an OIC tolls the CSED for the entire IRS review period, plus 30 days after rejection, plus any appeal period. A client with 14 months remaining on the CSED may be better served by a compliance-and-waiting strategy than by a submission that adds 18+ months to the IRS's collection window. For clients with years remaining on the CSED, that toll is typically acceptable.
Step 2: Identify the Correct OIC Ground
Three legal grounds support an OIC under IRC §7122. The applicable ground determines what financial evidence is required and what the IRS is evaluating.
Doubt as to Collectibility (DATC) is the most common ground and applies in the overwhelming majority of accepted offers. The client owes the tax but cannot pay it in full given current income, expenses, and asset equity. The IRS agrees to accept less because that amount represents the maximum it could realistically collect before the CSED expires. A DATC offer requires a full financial disclosure and a calculated offer amount equal to or exceeding the Reasonable Collection Potential (RCP).
Doubt as to Liability (DTAL) applies when the client disputes the underlying tax assessment. This ground is only available if the client did not have — or did not have a meaningful opportunity to use — normal administrative channels to contest the liability (examination, appeals, Tax Court). Clients who received a statutory Notice of Deficiency and allowed it to become final, or who signed an agreement waiving appeal rights, are generally precluded from DTAL. A DTAL offer must include a detailed factual and legal argument supporting the alternative liability calculation; it does not require the financial disclosure required for DATC.
Effective Tax Administration (ETA) applies when a client could theoretically pay the full liability but doing so would cause severe economic hardship or create a result that undermines sound tax administration. ETA offers are rarely granted and are not a substitute for DATC analysis. The IRS scrutinizes ETA claims carefully and requires documented extraordinary circumstances beyond ordinary financial difficulty.
Step 3: Calculate the Reasonable Collection Potential
Reasonable Collection Potential (RCP) is the floor for an acceptable DATC offer. The IRS will reject any offer below the amount it calculates it could collect through enforced action — levy, seizure, wage garnishment — within the remaining collection period. Accurate RCP calculation before submission is the single most important step in the process.
RCP formula: Net Realizable Value of Assets (NRV) + (Monthly Disposable Income × multiplier)
Net Realizable Value of Assets
NRV equals the quick sale value (QSV) of each asset minus any valid secured debt against it. The IRS defines QSV as 80% of fair market value for most assets — reflecting the discounted proceeds a forced sale generates. For a client owning a home worth $500,000 with a $430,000 mortgage balance, the NRV is: ($500,000 × 80%) − $430,000 = $400,000 − $430,000 = $0. Calculate NRV for every asset category:
| Asset Category | IRS Valuation Approach |
|---|---|
| Real property | 80% of FMV minus secured debt |
| Vehicles | 80% of NADA/KBB value minus loan balance |
| Bank and financial accounts | 100% of balance |
| Life insurance cash value | 100% of cash surrender value |
| Retirement accounts (401k, IRA) | Account balance minus income taxes and 10% early withdrawal penalty |
| Business assets (equipment, A/R) | 80% of FMV for equipment; 80% of collectible A/R |
Monthly Disposable Income (MDI)
MDI equals gross monthly income minus allowable monthly living expenses. Allowable expenses are not the client's actual spending — they are IRS Collection Financial Standards (IRS Publication 1854), which set fixed national and local allowances for food, clothing, out-of-pocket healthcare, transportation, and housing based on geographic location and household size. Actual expenses above the standards are generally disallowed. Apply the payment option multiplier to MDI:
| Payment Option | MDI Multiplier | Required Initial Payment |
|---|---|---|
| Lump Sum Cash (≤5 payments total) | × 12 | 20% of offer amount, nonrefundable |
| Periodic Payment (6–24 monthly installments) | × 24 | First monthly installment with application |
A client with MDI of $900/month and zero NRV has an RCP of $10,800 under the lump sum option or $21,600 under periodic payment. The offer must equal or exceed the applicable RCP.
Common calculation errors to avoid:
- Excluding retirement accounts. 401(k) and IRA balances are included in the asset analysis, adjusted for the tax and 10% penalty the client would incur on forced liquidation. The IRS does not exclude retirement assets simply because early withdrawal has costs.
- Using 100% FMV instead of 80% QSV. This overstates NRV, producing an offer higher than the IRS requires — leaving money on the table.
- Using actual living expenses instead of Collection Financial Standards. CFS controls; using the client's actual (higher) expenses understates MDI and produces an offer the IRS will reject as below RCP.
Step 4: Prepare the Collection Information Statement
The Collection Information Statement (CIS) is the financial disclosure document that supports the RCP calculation. The IRS verifies the CIS against bank statements, tax returns, credit reports, and public records. A material omission — an asset not listed, an income source not disclosed — gives the IRS grounds to reject the offer or, after acceptance, to rescind it.
- Form 433-A (OIC) — for individual taxpayers, including sole proprietors reporting income on Schedule C or Schedule E
- Form 433-B (OIC) — for partnerships, corporations, and LLCs treated as separate entities
Complete every section. Supporting documents required include bank statements for the preceding 3–12 months (all accounts), real property deeds, vehicle titles or registrations, retirement account statements, business financial statements, and a copy of the most recently filed tax returns.
The IRS accesses independent third-party data: Department of Motor Vehicles records, county assessor property records, Secretary of State business filings, and financial account information obtained by summons. A CIS that omits a known asset is not merely incomplete — it creates potential grounds for an IRS referral under IRC §7206 (false statements submitted to the IRS). Prepare the CIS based exclusively on documented, verifiable facts.
Step 5: Complete and Submit Form 656 With Required Payments
Form 656 is the formal OIC application. A separate Form 656 is required for each type of tax liability (individual, business, trust fund recovery penalty) if both are included in the offer.
Required Form 656 sections:
- Tax periods covered — list each specific period and form number (e.g., "Form 1040, tax years 2021, 2022, 2023"; "Form 941, quarters ending 3/31/2023 and 6/30/2023")
- Offer amount — must equal or exceed the calculated RCP for the chosen payment option
- Payment terms — lump sum cash or periodic payment, with the specific installment schedule if periodic
- OIC ground — check DATC, DTAL, or ETA and attach the applicable financial statement or legal memorandum
- Source of funds — disclose where the offer money originates; third-party funding (family member, business partner) must be clearly identified and does not disqualify the offer
Payments required at submission:
- Lump Sum Cash offer: 20% of the offer amount as a nonrefundable initial payment. If the IRS rejects the offer, the 20% is applied to the outstanding liability — it is not refunded.
- Periodic Payment offer: First monthly installment due with the application. Subsequent monthly installments must continue throughout the review period even before the IRS makes a determination. Missing a payment causes the offer to be returned.
- Application fee: Check IRS Form 656-B for the current amount (most recently $205). The fee is waived — along with the initial payment requirement — for clients who qualify for the Low-Income Certification (household income at or below 250% of the Federal Poverty Level per the current Form 656-B instructions).
Submit the complete package — Form 656, CIS (Form 433-A or 433-B OIC), supporting documentation, application fee, and initial payment — to the appropriate IRS OIC unit address listed in Form 656-B. Incomplete submissions are returned without IRS consideration.
Step 6: Manage the 24-Month IRS Review Period
After submission, the IRS has up to 24 months to accept or reject the offer. Under IRC §7122(f), if the IRS fails to make a determination within 24 months, the offer is deemed accepted by operation of law — a rarely triggered provision but a legally significant protection for submissions that fall into processing backlogs.
What happens during review:
- The CSED is tolled for the duration of the review period plus 30 days after rejection plus any appeal period. Monitor the tolled CSED and note the updated expiration date.
- Collection enforcement — levies, wage garnishments, bank account seizures — is generally suspended while the offer is under active consideration, per IRS Policy Statement 5-100. This is an administrative policy, not a statutory stay; confirm suspension status through the IRS Practitioner Priority Service after submission.
- The client must remain fully current: file all required returns on time, make all estimated payments or payroll deposits, and pay any new tax obligations as they become due. A compliance failure during review causes the offer to be returned.
- For periodic payment offers, installments continue during review and are applied to the outstanding liability.
IRS information requests: The IRS may issue additional document requests during review, typically with a 30-day response window. Respond within the stated deadline. Failure to respond causes the offer to be returned — not rejected — but resubmission requires updated financial documentation and new payments, effectively restarting the process.
Step 7: Respond to IRS Counteroffers and Appeals
The IRS will accept the offer as submitted, reject it, or propose a higher amount based on its own RCP calculation.
If the IRS proposes a higher amount: Review the IRS's revised calculation in detail. Common IRS adjustments include: applying 100% FMV rather than 80% QSV to assets; disallowing above-standard living expenses; including retirement account balances the client sought to exclude; or applying a different income figure based on historical returns rather than current income. If the IRS's number reflects a legitimate calculation difference, consider accepting. If it reflects a factual error — incorrect property valuation, disallowed expense that qualifies as a documented exception — respond in writing with supporting documentation within the response window stated in the IRS letter.
If the offer is rejected: The rejection letter explains the specific basis. Within 30 days of the rejection date, the client may appeal to the IRS Independent Office of Appeals by submitting IRS Form 13711 (Request for Appeal of Offer in Compromise). The Appeals officer who reviews the case was not part of the original determination; Appeals resolves a meaningful proportion of appealed OIC cases on terms more favorable than the initial rejection. The CSED continues to be tolled throughout the appeal period.
If the offer is rejected and the appeal is unsuccessful, the remaining options are: installment agreement under IRC §6159 (full-pay or partial-pay); Currently Not Collectible (CNC) status if the client's income covers only allowable expenses; or resubmission when circumstances change materially.
Step 8: Fulfill the 5-Year Post-Acceptance Compliance Period
Acceptance of an OIC creates a binding, ongoing compliance obligation under the terms of Form 656. For 5 years following the acceptance date, the client must:
- File all required federal tax returns on time
- Pay all federal taxes on time (including quarterly estimates)
- Complete all remaining installment payments if the offer was structured as a periodic payment
Default consequences: Any compliance failure during the 5-year period — a late-filed return, an unpaid balance, a missed installment — may cause the IRS to default the offer. A defaulted OIC reinstates the original full tax liability, minus payments submitted under the offer and any amounts that had already been applied to the liability before submission. Interest from the original assessment date also reinstates.
The compliance tail is the most frequently neglected element of OIC resolution. Clients who struggled with compliance before the OIC often remain at risk during the 5-year period. Establish a monitoring system: calendar estimated payment due dates, filing deadlines, and the 5-year compliance expiration date before the offer closes. For the document retention framework that supports post-OIC audit readiness — including how the statute of limitations applies to accepted offer years — see Document Retention Requirements for Business Clients: A CPA's Complete Guide.
Common Mistakes
Submitting before all returns are filed. The IRS returns an OIC without consideration if any required return is outstanding. File all delinquent returns — including overdue business tax extensions — before the OIC package is assembled.
Using actual living expenses instead of Collection Financial Standards. The IRS applies CFS, not actual expenses. Above-standard expenses are disallowed except in documented special circumstances (continuing medical costs, court-ordered payments). Using actual expenses understates MDI, produces an artificially low offer, and results in rejection or a counteroffer at the IRS's RCP.
Omitting assets from the Collection Information Statement. Retirement accounts, paid-off vehicles, out-of-state property, and business receivables are frequently missed. The IRS runs independent asset research. An omission discovered post-acceptance can rescind the offer and may generate a referral under IRC §7206.
Missing installment payments during review. For periodic payment offers, monthly installments must continue throughout the review period. A single missed payment causes the offer to be returned, requiring a fresh submission with current documentation and new payments.
Failing to analyze the CSED before submission. Submitting an OIC tolls the collection clock. A client with 10 months remaining on the CSED who submits an offer that takes 14 months to reject has extended the IRS's collection window by more than two years. Always calculate the CSED impact before advising submission.
Ignoring the 5-year compliance tail. A successful OIC closes the matter temporarily — but a single missed estimated tax payment in year four reinstates a six-figure liability. Build compliance monitoring into the client relationship through the full 5-year period.
FAQs
What percentage of OICs does the IRS accept?
Acceptance rates for offers the IRS fully investigates have historically ranged from approximately 35–45%, depending on the fiscal year (IRS Data Book, Table 16). The rate reflects offers that survive eligibility screening and reach substantive review — not all submissions. The most common rejection basis is an offer amount below the IRS's calculated RCP, which is why accurate calculation before submission determines outcomes more than any other factor. Offers returned for procedural deficiencies (missing documents, missed installments) are not counted in rejection statistics.
Does submitting an OIC stop IRS collections?
Generally yes, but not by statute. The IRS suspends levy and enforcement actions on accounts with offers under active consideration per IRS Policy Statement 5-100. This is an administrative practice, not a statutory stay — the IRS retains legal authority to collect if the taxpayer defaults on compliance requirements or if the offer is returned for procedural failure. Confirm suspension status through the IRS Practitioner Priority Service after submission and document the confirmation.
Can a business entity submit an OIC?
Yes. Business entities — corporations, partnerships, and LLCs — may submit an OIC for entity-level liabilities using Form 433-B (OIC) and a separate Form 656. Individual owners assessed a Trust Fund Recovery Penalty (TFRP) under IRC §6672 may separately submit an OIC for that personal liability. The two submissions are independent: resolving the business OIC does not eliminate the individual's TFRP liability, and vice versa.
What if the client cannot pay the 20% nonrefundable initial payment?
Clients whose household income is at or below 250% of the Federal Poverty Level qualify for the Low-Income Certification, which waives both the $205 application fee and the 20% nonrefundable initial payment requirement. Qualifying clients under the periodic payment structure also continue making installment payments only upon acceptance. For clients above the income threshold, the 20% must accompany the submission — no hardship waiver is available outside the formal low-income certification.
How long does the OIC toll the CSED?
The CSED is tolled for the entire period the offer is under active consideration, plus 30 days after rejection, plus any appeal period under IRC §6331(k)(3). A 20-month review followed by rejection and a 4-month appeal tolls the CSED for approximately 25 months. Calculate the cumulative toll before advising submission for clients with CSODs expiring within two years; in some cases, waiting out the statute is a better outcome than adding collection time through an unsuccessful OIC.
Can a client in an existing installment agreement apply for an OIC?
Yes. An existing installment agreement does not disqualify a client from submitting an OIC. Filing the OIC suspends the installment agreement while the offer is under review. If the offer is rejected, the installment agreement reinstates on the same terms unless the client requests a modification. Clients who entered an installment agreement when financial circumstances were materially better — and who can now demonstrate RCP below their total liability — are viable OIC candidates even while making installment payments.
What are the ethical risks for a CPA who prepares an OIC with exaggerated expenses?
Significant. A CPA who prepares a Collection Information Statement with fabricated or materially overstated expense figures faces OPR sanctions under IRS Circular 230 — including suspension or disbarment from IRS practice. IRS Criminal Investigation may refer the matter for prosecution under IRC §7206 (filing false statements with the IRS). The OIC's legitimate value comes from accurate RCP analysis, not manufactured favorable numbers. Always prepare the CIS based on documented, verifiable facts.
What happens if the client can't pay the balance found in an IRS examination?
An examination that produces an assessed liability the client cannot pay in full creates an immediate collection situation — the same framework the OIC addresses. For clients who received a CP2000 notice that escalated to a formal assessment or who lost an examination and cannot pay the result, the OIC evaluation process begins as described in this guide. The CSED starts running from the assessment date; submit the OIC evaluation before the collection clock loses too much time to installment payments or other interim arrangements.
Arvori helps CPAs track collection deadlines, CSED dates, and 5-year OIC compliance obligations across their client roster — so no deadline or compliance requirement goes missed. Learn more at arvori.app.