An Offer in Compromise is an agreement between a taxpayer and the IRS when it may be unlikely that collection can be successful within the statute of limitations, usually 10 years. This is not something that can be used as a loophole or an unreasonable way out of paying taxes. The IRS will determine, under certain circumstances, when an OIC may be more successful at recovery of some taxes whereas an installment agreement or full immediate collections may not be.
There are three circumstances: Doubt as to Collectibility, Doubt as to Liability, Effective Tax Administration.
Doubt as to Collectibility, the most common type of offer. The taxpayer must demonstrate that he is unable to pay the taxes in full even by liquidating assets or by the installment agreement guidelines. Documentation must be provided showing current income, assets, projected income, etc. Such documentation creates the 'reasonable collection potential', with which the IRS determines what you can afford to pay. If your offer is below this amount, it will be rejected.
Doubt as to Liability. There is a legitimate doubt as to whether the taxpayer owes the tax, ie, an innocent spouse situation, and it may be too cumbersome for the IRS to take the case to court.
Effective Tax Administration. The taxpayer can pay and does owe the tax, but doing so would create a real economic hardship. Perhaps a child who requires ongoing medical care, or assets which if liquidated would prevent the taxpayer from earning a living and paying the tax.
Plainly speaking, the IRS would rather collect some tax than squeezing blood out of a rock or going through such an drawn-out process with an unclear prospect of a successful collection. So the Offer in Compromise exists, for taxpayers who have a real predicament, not for those who think they can 'beat the system!'