How the OIC Works
The IRS accepts OICs when the offered amount equals or exceeds the taxpayer's Reasonable Collection Potential (RCP) — the maximum the IRS believes it could collect if it pursued full collection. If your financial situation genuinely limits collectibility, an OIC can settle a large liability for significantly less.
Three Grounds for an OIC
- Doubt as to Collectibility (most common) — taxpayer cannot fully pay the liability within the remaining collection statute
- Doubt as to Liability — genuine dispute about the correct amount owed
- Effective Tax Administration — taxpayer could technically pay but doing so creates economic hardship or would be inequitable
Basic Eligibility
- All required tax returns must be filed
- Current year estimated tax payments must be made
- No open bankruptcy proceeding
- $205 application fee (waived for low-income)
The 5-Year Compliance Requirement
An accepted OIC is permanent — provided the taxpayer files all returns and makes all tax payments for the 5 years following acceptance. Default on the compliance period revives the original liability.
Disclaimer: This glossary entry is for general educational purposes only and does not constitute legal or tax advice. Laws change frequently and vary by individual circumstances. Consult a licensed California attorney or CPA for guidance on your specific situation.