An offer in compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.

The Secretary of the Treasury is granted broad authority to compromise tax liabilities in IRC Section § 7122.

The Commissioner of Internal Revenue, under Treasury Regulation § 301.7122-1, is authorized to compromise a liability on any one of three grounds: Doubt as to Collectibility (DATC), Doubt as to Liability (DATL), or to promote Effective Tax Administration (ETA).

Delegation Order No. 5–1 in IRM 1.2, Organization, Finance, and Management, re-delegates the Commissioner's authority to compromise.

Policy Statement P-5-100 states:

Offers will not be accepted if it is believed that the liability can be paid in full as a lump sum, installment payments extending through the remaining statutory period for collection (CSED), or other means of collection, unless special circumstances exist.

A DATC offer amount must usually equal or exceed a taxpayer's reasonable collection potential (RCP) in order to be acceptable. The exceptions are that when special circumstances exist as defined in IRM 5.8.4.3, Effective Tax Administration and Doubt as to Collectibility with Special Circumstances, or when per IRM 5.8.11, Effective Tax Administration, the offer may be accepted on the basis of hardship or ETA.

The objectives of the OIC program are:

Revenue Procedure 2003-71, effective August 21, 2003-2 C.B. 517, defines the procedures applicable to the submission and processing of OIC tax liabilities. Notice 2006-68, 2006-31 I.R.B. 105, provides additional guidance regarding offers submitted on or after July 16, 2006. This handbook further describes, in detail, those processes.

The timeliness of case actions in an offer investigation is important not only to ensure the efficiency of the process, but also as a key component of taxpayer satisfaction in this program area. Managers and employees need to ensure that communications from taxpayers are addressed in a timely manner, and the timeliness of case actions ensure the length of the offer investigation process is as brief as reasonably possible. The guidelines for timely case actions outlined in this IRM are intended to provide structure for the overall offer process and to ensure investigations are completed in a responsive and efficient manner.

These guidelines are not intended as absolute measures of performance for individual employees. Performance evaluations of individual employees must be based on reviews of the actual work produced by the employees, and take into account any special circumstances that may have impacted the ability of the employees to meet the specified guidelines. In general, unwarranted inactivity gaps in an offer investigation should be avoided, and offer managers should establish controls to ensure that cases with unwarranted inactivity gaps are identified and addressed appropriately.

The IRS may not have the authority to accept an OIC when:

If there is any indication that one or more of the above conditions exist, contact Area Counsel for guidance.

In some instances, the DOJ may request the case be forwarded to them for inclusion in pending litigation. However, in DATC offers, DOJ generally requests the OI conduct the investigation and make a recommendation whether the offer should be accepted or rejected. In those cases, coordinate with Area Counsel to determine if the request should be worked as a courtesy investigation or if Collection has jurisdiction to process the offer.

The Collection function is responsible for processing and investigating the following offers:

An OIC is effective for the entire assessed liability for tax, penalties, and interest for the years or periods covered by the offer. All questions of tax liability for the years or periods covered by the agreement are conclusively settled. Neither the taxpayer nor the government can reopen a compromised tax year or period unless there was falsification of information or documents, concealment of ability to pay and/or assets, or a mutual mistake of a material fact which would be sufficient to set aside or reform a contract.

The Service will not consider an offer that is solely for a tax period or tax year that has not been assessed unless IDRS indicates a return has been received or an assessment is pending.

Taxpayers may submit, and the Service will consider, an offer to compromise taxes due on tax returns which have been filed but have not yet been assessed. However, before the offer can be accepted, the taxes must be assessed.

If IDRS does not indicate a return has been received, an assessment is pending, or unpaid liabilities already exist, the offer will be returned to the taxpayer.

A compromise will not be accepted on any tax liability which has become unenforceable due to the expiration of the statutory period for collecting the debt.

If a taxpayer desires to make a voluntary payment on a liability for which the statutory period for collection has expired, the payment should be accepted, but the taxpayer should be asked to sign a statement indicating that they are aware that collection of the tax is barred and that the payment will not be credited toward a specific liability. Attach the statement to the payment posting document and process the payment through normal remittance processing procedures. Do not treat these payments as offer payments, but should apply the payments to Excess Collections.

IRC Section § 6305 requires the Secretary of the Treasury to assess and collect certain child support obligations certified by the Secretary of Health and Human Services. These liabilities are identified on the non-master file with a master file tax code of 59.

The Secretary of the Treasury is not authorized to compromise these liabilities. However, the individual may seek a to pursue any available, equitable, or administrative action in a state court or before a state agency to determine the correct liability or to recover an amount collected under this section.

The full name, address, Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number (ITIN) of the taxpayer must be entered on Form 656. If the taxpayer(s) uses a mailing address that is different from the street address, the physical address must be included as well.

Taxpayers must indicate the basis(es) upon which they propose to compromise; DATC, DATL, and/or to promote ETA.

The total amount of money offered must be indicated. The amount offered may not include money already paid, expected future refunds, funds attached by levy, or anticipated benefits from capital/net operating losses.

Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms should be determined by the Offer Investigator and should not be limited to the proposal of the taxpayer.

The amounts and due dates of payments must be specified.

There are three (3) types of payment terms that the Service and the taxpayer may agree to:

A taxpayer may designate TIPRA payments (pre-acceptance) to a specific liability including trust fund. Once the offer has been accepted, the funds are applied in the government’s best interest and the taxpayer no longer has the right to designate payments.

Taxpayers must agree to all the standard conditions of the agreement as they are printed on the Form 656.

Offers accepted under DATL or ETA) based on Public Policy/Equity are not subject to the waiver of refund condition. See IRM 5.8.11, Effective Tax Administration, discussing Public Policy/Equity offer.