Offer in Compromise

You owe the IRS more than you can pay. You need a way out, legally, permanently, and without losing everything you have worked for.

North Star Law represents individuals and businesses in Offer in Compromise proceedings before the IRS, the most powerful tax debt resolution tool in the Internal Revenue Code, and the one most commonly botched by taxpayers who try it alone or hire the wrong firm. When an Offer is prepared correctly, filed on the right terms, and backed by accurate financial analysis, the IRS will accept pennies on the dollar and close your case permanently. When it is prepared incorrectly, the IRS rejects it, keeps your deposit, extends the collection statute, and leaves you worse off than before.

The difference between those two outcomes is almost entirely about who prepares the Offer. An attorney-CPA firm that understands both the legal framework and the underlying financial analysis produces Offers that get accepted. Tax resolution mills that file a one-size-fits-all package produce Offers that get rejected, and then charge you again to do it over.

How It Works: Four Steps From Offer to Acceptance

Step 1: Eligibility Analysis and Collection Statute Review

We pull your IRS transcripts, verify you meet the statutory prerequisites (filed all required returns, current on estimated tax or withholding, not in open bankruptcy), calculate the remaining collection statute under IRC §6502, and run a preliminary reasonable collection potential analysis to confirm the Offer math is viable before anything is filed.

Step 2: Financial Documentation and RCP Calculation

If the Offer is the right path, we quote a flat fee for the entire engagement before any work begins. You sign an engagement letter, we file Form 2848 (Power of Attorney) with the IRS, and from that point forward the IRS communicates with us, not with you. You know the total cost upfront and can pay over time through a payment plan.

Step 4: Negotiation, Appeals, and Acceptance

We respond to Offer Examiner information requests, negotiate contested valuation and expense issues, pursue IRS Appeals if the initial Offer is rejected, and see the case through to the closing letter that terminates the debt. Collection activity is suspended under IRC §6331(k)(1) throughout the pending period.

Step 3: Offer Preparation and Submission

We draft Form 656 with the Offer amount calibrated precisely to the lowest figure the IRS is statutorily required to accept, select between lump-sum and periodic payment structures based on which produces the lower total Offer, and submit the complete package with the application fee and required down payment.

Flat Fees. No Hourly Billing. Payment Plans Available.

We quote a fixed fee for your Offer in Compromise representation before we start, no hourly billing, no surprise invoices, no add-ons. You will know the total cost upfront. For clients who need to get started right away, we offer payment plans so the fee never becomes the obstacle to solving the problem.

What Is an Offer in Compromise?

An Offer in Compromise is a statutory agreement under IRC §7122 in which the IRS accepts less than the full balance owed in exchange for settling the tax debt permanently. The IRS is not doing you a favor when it accepts an Offer, it is making a calculated business decision that collecting the Offer amount now is better than chasing the full balance and potentially recovering nothing.

The statute authorizes the IRS to compromise a tax liability on three grounds: doubt as to liability (you dispute that you actually owe the tax), doubt as to collectibility (you owe the tax but cannot pay it), and effective tax administration (you owe the tax and could technically pay it, but collection would cause economic hardship or be unfair given your circumstances). The overwhelming majority of accepted Offers are based on doubt as to collectibility, and that is the framework discussed throughout this page.

An accepted Offer produces three powerful outcomes. First, the IRS releases all federal tax liens once the Offer amount is paid in full. Second, the tax debt itself is legally extinguished, you owe nothing further on the compromised years. Third, penalties and interest stop accruing as of the acceptance date. In exchange, you agree to file all tax returns and pay all taxes owed for the five years following acceptance. If you default on that five-year compliance requirement, the original tax debt can be reinstated.

The Reasonable Collection Potential Formula

Every Offer the IRS evaluates is measured against a single number: your reasonable collection potential, or RCP. This is the amount the IRS calculates it could collect from you through normal enforcement over the remaining period of the collection statute. If your Offer meets or exceeds your RCP, the IRS is generally required to accept it. If your Offer is below your RCP, the IRS rejects it.

The RCP formula has two components. The first is net realizable equity in your assets, your home, vehicles, retirement accounts, bank balances, business interests, and any other property, valued at quick-sale value, which the IRS generally sets at 80 percent of fair market value, reduced by the balance of any secured debt against each asset. The second is future disposable income, calculated as your monthly gross income reduced by allowable monthly living expenses under the Collection Financial Standards, multiplied by a future-income multiplier that depends on which payment option you choose.

For a lump-sum cash Offer (paid within five months of acceptance), the future income multiplier is 12. For a periodic payment Offer (paid over six to 24 months), the multiplier is 24. Those multipliers replaced the older 48-month and 60-month multipliers in 2012 under the Fresh Start initiative, and they dramatically reduced the typical accepted Offer amount. The strategic implication is significant: the same financial situation produces two very different Offer amounts depending on which payment structure the client chooses.

Every Dollar of RCP Calculation Matters.

The difference between a $15,000 accepted Offer and a $40,000 accepted Offer is often nothing more than how the preparer classified an asset or an expense. We know which lines the IRS scrutinizes and which ones they accept. Let us review your case before you file anything.

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The Collection Financial Standards, Where Offers Are Won or Lost

The IRS publishes Collection Financial Standards that set maximum allowable monthly expenses by category: food, clothing, and miscellaneous; housing and utilities; transportation operating costs; and out-of-pocket healthcare. These standards are not suggestions, they are the ceiling the IRS applies when calculating your future disposable income, and they vary by county (for housing) and by household size (for food and healthcare). An expense above the standard is generally disallowed unless you can prove necessity.

The practitioner's job is to ensure every expense category on Form 433-A (OIC) is documented at or near the allowable ceiling, and that every legitimate expense above the ceiling is properly substantiated. Common examples include court-ordered child support (allowed in full), medical expenses above the standard for a chronic condition (allowed with provider documentation), and secured debt payments on necessary vehicles (allowed up to the IRS operating allowance plus the actual loan payment up to local ownership costs).

Most rejected Offers trace back to expense errors. The taxpayer either accepted the national standard without documenting higher actual expenses, or claimed higher expenses without the documentation the IRS requires to allow them. The resulting future disposable income calculation produces an RCP that the Offer cannot meet, and the Offer is rejected. When we prepare an Offer, we build the expense analysis line by line, document every deviation from the standards, and ensure the submission package anticipates every question the Offer Examiner will ask.

How We Calculate the Right Offer Amount

The Offer amount is the number most clients fixate on, and it is the number that most tax resolution mills get wrong. The correct Offer amount is the lowest figure the IRS is statutorily required to accept under the RCP formula, no higher, no lower. An Offer priced too low is rejected outright. An Offer priced too high wastes money you do not need to pay.

Our approach starts with a rigorous RCP calculation built from the ground up. We value every asset using the correct IRS methodology, apply the quick-sale discount correctly, subtract secured debt properly, and identify exempt assets that should not be included at all. We calculate future disposable income using documented expenses at or above the Collection Financial Standards where supportable. We choose between lump-sum and periodic payment structures based on which produces the lower total Offer given the client's cash position.

We also consider timing. If a client is within 18 months of a significant collection statute expiration, the IRS may accept a lower Offer because its realistic collection window is shortening. If a client's income is declining or an asset is depreciating, filing sooner rather than later locks in the more favorable numbers. These timing strategies can move the accepted Offer amount by tens of thousands of dollars.

What the IRS Acceptance Statistics Actually Mean

The IRS receives roughly 60,000 Offers in Compromise each year and accepts roughly a third of them. That overall statistic is misleading because it includes thousands of Offers submitted without any supporting documentation, Offers calculated on incorrect financial data, and Offers filed by taxpayers who are not actually eligible under the basic prerequisites. For properly prepared Offers filed by qualified practitioners on behalf of eligible taxpayers, the acceptance rate is dramatically higher.

The eligibility prerequisites are straightforward but absolute. You must have filed all required tax returns. You must be current on estimated tax payments for the current year if you are self-employed, or current on tax withholding if you are an employee. You cannot be in an open bankruptcy proceeding. You must be able to pay the Offer amount within the payment terms you select. Failing any of these prerequisites produces an automatic rejection regardless of how accurate the financial analysis is.

The other hidden prerequisite is good-faith compliance going forward. If you have a history of unfiled returns or repeated assessment cycles, the IRS will scrutinize the Offer more skeptically and may require you to establish a period of current compliance before it will consider the package. We assess these compliance issues at the consultation stage and sequence the Offer preparation around them when necessary.

Why Choose North Star Law for Your Offer in Compromise

Most Offers in Compromise in the Houston market are prepared by one of three types of firms: national tax resolution mills with high volume and low quality, local CPAs who do a handful of Offers a year as an add-on service, and boutique tax controversy law firms. North Star Law is a boutique tax controversy firm led by an attorney who is also a licensed CPA. That combination matters because Offer preparation sits at the intersection of legal strategy and financial analysis.

A law firm without deep financial chops misses opportunities in the RCP calculation. A CPA firm without legal training misses procedural protections and negotiating leverage at Appeals. The attorney-CPA combination captures both. Phillip Zagotti founded North Star Law specifically to bring that combined credential to Houston-area taxpayers who have been underserved by the traditional market, either overcharged by mills or under-represented by general-practice firms.

Our practice is also limited in scope by design. We focus exclusively on federal tax controversy, IRS representation, bankruptcy, and related tax litigation. We do not dabble in Offers in Compromise between personal injury cases. Every Offer we file receives the attention of a dedicated attorney-CPA who has prepared and negotiated Offers across a wide range of financial situations and debt sizes.

Common Mistakes That Kill Offers in Compromise

The single most common mistake is filing an Offer while ineligible. Taxpayers with unfiled returns, open bankruptcy cases, or current-year estimated tax shortfalls routinely file Offers that are returned without consideration. The IRS keeps the application fee, the 20 percent down payment on lump-sum Offers (or the first periodic payment on payment plan Offers), and the collection statute is extended by the time the Offer was pending. We verify every eligibility prerequisite before we file.

The second most common mistake is undervaluing or overvaluing assets. Clients either understate what they own (hoping the IRS will not notice) or accept IRS valuations without challenge (when quick-sale discounts, exempt property rules, or encumbrance offsets should reduce the number). The IRS runs third-party data checks on every Offer, so hiding assets is counterproductive and can trigger fraud referrals. The correct approach is accurate disclosure paired with aggressive proper valuation.

The third is failing to document expenses correctly. Clients often list actual expenses that exceed the Collection Financial Standards without providing the documentation the IRS requires to allow them. The IRS then caps those expenses at the standard amount, inflates future disposable income, and rejects the Offer. When we prepare an Offer, we identify every expense above the standard in advance and build the documentation file before submission.

The fourth is accepting the first rejection as final. Rejected Offers can be appealed to the IRS Office of Appeals, where an independent Settlement Officer reconsiders the case. Appeals routinely accepts Offers that the original Offer Examiner rejected, particularly on disputed valuation and expense issues. We pursue Appeals on every rejected Offer where the initial examiner's analysis was flawed.

When an Offer in Compromise Is Not the Right Tool

Offers in Compromise are powerful, but they are not the right answer for every tax debt situation. A client with substantial asset equity and stable high income may find that the RCP calculation produces an Offer amount higher than the actual debt, in which case an installment agreement is the better path. A client facing immediate collection pressure may need a faster resolution tool like Currently Not Collectible status while long-term strategy develops. A client with a disputed liability should pursue audit reconsideration or a Collection Due Process hearing before attempting to compromise a debt that may not be legally owed.

We evaluate every tax resolution case against every available tool at the consultation stage. If an Offer in Compromise is not the right answer, we tell you so and recommend the resolution strategy that fits your actual situation. The decision between Offer, installment agreement, CNC status, bankruptcy discharge, and audit reconsideration often turns on small details of the debt profile, the collection statute, and the client's financial trajectory, and getting that initial decision right is the single most important step in the entire process.