An “offer in compromise” is simply an offer to settle tax debt made by the taxpayer to the IRS that may result in a settlement agreement between the two.
The real driving force behind the process is that…like most creditors, the IRS is smart enough to know when a “bird in the hand” is worth more than “two in the bush”, i.e. if it really believes that it will get less in the end, it will agree to take what it can now, and call it a day.
The initial standard used to determine the “bird in the hand” value is whether the amount being offered by the taxpayer to settle the debt once and for all, is greater than or equal to the “reasonable collection potential” of that taxpayer. (RCP)