What §7122 authorizes
Settlement is statutorily defined — not negotiated based on feelings.
The Offer in Compromise is authorized by IRC §7122(a): "The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense." The implementing regulation, 26 CFR §301.7122-1, identifies three grounds on which an OIC may be accepted: Doubt as to Collectibility (DATC), Doubt as to Liability (DATL), and Effective Tax Administration (ETA). Each ground has distinct procedural requirements, distinct forms, and a distinct legal framework.
Doubt as to Collectibility is the most common ground. DATC applies when there is doubt that the assessed tax can be collected in full before the §6502 collection statute expires. The IRS evaluates DATC by calculating Reasonable Collection Potential (RCP) under Treas. Reg. §301.7122-1(b)(2) and IRM 5.8.5. An offer at or above RCP may support acceptance, but acceptance is not automatic; the IRS reviews the applicable OIC ground and complete facts. An offer below RCP may be considered where special circumstances or effective tax administration apply, and cannot be rejected solely because of its amount.
Doubt as to Liability applies where there is genuine dispute about whether the tax is actually owed — for example, where the underlying assessment was made in error, the taxpayer had defenses that were not raised in audit, or a Substitute for Return under §6020(b) overstated the actual liability. DATL is filed on Form 656-L and does not require Form 433 financial substantiation. Effective Tax Administration applies in two sub-categories: (a) economic hardship under §301.7122-1(b)(3)(i) — collection in full would cause the taxpayer economic hardship (individual taxpayers only); and (b) public policy / equity under §301.7122-1(b)(3)(ii) — collection would be unfair or inequitable based on exceptional circumstances.
RCP — the controlling number
Net realizable equity in assets plus future income.
Reasonable Collection Potential is the IRS's calculation of how much it could realistically collect from the taxpayer over the remaining §6502 collection statute period. The RCP framework is set out in IRM 5.8.5 and includes two components:
Component 1 — Net Realizable Equity
For each asset, the IRS computes:
- ·Quick Sale Value (QSV) = 80% of Fair Market Value
- ·Minus encumbrances perfected before federal tax lien filing
- ·Minus statutory exemptions under IRC §6334
Applies to: cash, investments, retirement accounts, vehicles, real estate, business assets, life insurance cash value, accounts receivable
Component 2 — Future Income
Monthly disposable income × multiplier:
LUMP-SUM OIC
Future income × 12 months — lower RCP, generally preferred
PERIODIC-PAYMENT OIC
Future income × 24 months — higher RCP, when lump-sum not feasible
RCP FORMULA
RCP = Net Realizable Equity (NRE) + Future Income Component (FIC)
Strategic implication: lump-sum OIC produces a lower RCP than periodic-payment OIC because of the 12-month vs 24-month multiplier. For a taxpayer with $500/month disposable income, lump-sum adds $6,000 to the offer; periodic adds $12,000 — a $6,000 difference in the required offer amount.
Selecting the right basis
Doubt-as-to-Collectibility. Doubt-as-to-Liability. Effective Tax Administration.
§301.7122-1(b)(2) · Form 656 + Form 433-A(OIC)
Doubt as to Collectibility (DATC)
When it applies: the most common ground. DATC is appropriate when RCP is substantially less than the assessed liability — typically because the taxpayer has limited assets, modest income, or both.
Required Documentation
- · Form 656 (current revision, in the Form 656-B booklet on irs.gov)
- · Form 433-A(OIC) (individual) or 433-B(OIC) (business)
- · 3–12 months supporting financial documentation
- · $205 application fee or low-income certification
- · 20% lump-sum deposit or first periodic payment
Special Circumstances Variant
Per IRM 5.8.11, the IRS may accept an offer below RCP where the taxpayer demonstrates special circumstances (serious illness, dependent care, non-traditional income) that would make collection in full unfair.
§301.7122-1(b)(1) · Form 656-L only · No Form 433
Doubt as to Liability (DATL)
When it applies: there is genuine dispute about whether the underlying tax is actually owed.
Common Fact Patterns
- · Audit deficiency despite documented basis
- · Substitute for Return (§6020(b)) overstating liability
- · Trust Fund Penalty — not responsible or willful
- · Assessment barred by §6501 statute of limitations
- · Identity theft — fraudulent returns not attributable to taxpayer
Key Distinction
No Form 433 financial substantiation required — DATL is not based on inability to pay. Supporting documentation focuses on the substantive merits of the liability dispute. A Doubt as to Liability offer is filed on Form 656-L, separately from a Doubt as to Collectibility offer, which is filed on Form 656.
§301.7122-1(b)(3) · Form 656 · Individuals only (ETA-EH)
Effective Tax Administration (ETA)
When it applies: available only where DATC is not applicable — meaning RCP exceeds the liability. ETA allows compromise where full collection would cause hardship or be inequitable.
ETA — Economic Hardship §301.7122-1(b)(3)(i)
Collection in full would cause economic hardship. Individual taxpayers only. Typical: substantial retirement account or home equity but limited income — liquidation would cause hardship.
ETA — Public Policy / Equity §301.7122-1(b)(3)(ii)
Collection would be unfair or inequitable based on facts beyond taxpayer's control (serious illness, third-party fraud, natural disaster, erroneous IRS advice). Narrowest and least-commonly accepted.
Voluntary Compliance Prerequisite — §301.7122-1(b)(3)(iii)
The IRS will not accept an ETA offer if acceptance would undermine voluntary compliance with tax laws. Leading case: Murphy v. Commissioner, 125 T.C. 301 (2005), aff'd 469 F.3d 27 (1st Cir. 2006).
Procedural prerequisites — what must be in place
Four threshold rules. All required.
Four threshold requirements must be satisfied before the IRS will substantively review an OIC:
All required tax returns must be filed
Unfiled returns disqualify the OIC. The IRS will return the offer without review if any returns required during the prior 6 years are unfiled. Practitioner action: pull wage and income transcripts to identify missing returns before submission.
Taxpayer must not be in an open bankruptcy proceeding
OIC is not available during active bankruptcy — the bankruptcy court has jurisdiction over the debt resolution. Post-discharge or post-dismissal, OIC becomes available again.
Application fee and initial payment must be paid (or low-income certification submitted)
Application fee: $205 (2026 figure — non-refundable). Lump-sum offer: 20% of offer amount with submission. Periodic-payment offer: first proposed monthly installment with submission. Low-income certification (household income ≤ 250% of federal poverty guidelines): waives both the $205 fee and the initial payment.
Current-year estimated tax / withholding must be current
The IRS uses current-year compliance as a leading indicator of post-acceptance compliance. Verify W-4 withholding adequacy or current-year estimated tax payments before submission.
What happens after submission
Submission to acceptance — typically 6–12 months.
Phase 1
4–8 weeks
Initial Processing
IRS confirms the application is complete, has the required fee/deposit (or low-income certification), and meets threshold eligibility. If complete, the offer is loaded into the AOIC system and assigned to an Offer Examiner. Offers that are not processable are returned without review. Under the Form 656 Booklet rules, payments the IRS keeps are applied to your tax balance, not refunded.
Phase 2
3–9 months
Substantive Review
The Offer Examiner reviews Form 433-A(OIC), verifies income through third-party records (wage and income transcripts, bank deposit analysis), verifies asset values through public records, and applies the Collection Financial Standards to allowable expenses. During review, IRC §6331(k)(1) prohibits IRS levy on the periods covered by the offer.
Phase 3
written determination and disposition
Resolution
Accepted: payment per elected structure (lump-sum within 5 months; periodic over 6–24 months). Rejected: you have 30 days from the rejection letter to request Appeals review on Form 13711. Returned: typically for threshold failures; fees forfeited but offer can be resubmitted after correction.
Phase 4
5-year compliance covenant (Form 656, Section 7)
Post-Acceptance
Timely filing of all returns, timely payment of all taxes, no new tax debt — for 5 years following acceptance. Default reinstates the full original liability plus accrued interest and penalties from the original assessment date. Payments made under the OIC are credited against the reinstated balance.
Statutory acceptance by operation of law
If the IRS doesn't decide within 24 months, the offer is deemed accepted.
IRC §7122(f) — Statutory Text
"Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer."
Practical limitations per IRM 8.23.1:
- The 24-month clock runs from submission date through IRS determination (acceptance, rejection, return, withdrawal)
- Once rejected within 24 months, subsequent reopening does not restart the deemed-acceptance clock
- Periods during which the offer is on hold pending taxpayer-requested extensions may toll the 24-month clock
- Deemed acceptance has occurred only rarely in practice — the IRS systemically tracks pending offers to avoid it
Transparent pricing — OIC engagements
Fees & Engagement
| Service | Fee |
|---|---|
| Notice Review | $97 |
| Case Analysis | Case Analysis: $497 |
| OIC resolution work | Fixed by work type and amount owed |
| Representation (Form 2848) | $1,000 |
Case Analysis is $497 regardless of balance owed, tax years, complexity or urgency. The $97 Notice Review is credited toward the $497 Case Analysis. The $150 Transcript Pull is a separate service and is not credited. Phase 2 work is priced in the published ranges on our IRS fee page, or quoted in writing after the Case Analysis. Fixed fees, confirmed in writing before work begins. Not a guarantee of any IRS outcome. We never charge a percentage of tax saved.
The engagement letter is the controlling document; no specific outcome or timeline is guaranteed. OIC acceptance depends on the taxpayer's actual financial circumstances, the accuracy of the RCP calculation, and IRS discretion. Texas CPAs are bound by the rules of the Texas State Board of Public Accountancy.
Frequently Asked Questions
OIC Questions — Direct Answers
Will the IRS accept less than the full balance on a $50,000 tax debt?
What is the difference between RCP and the offer amount?
I can't afford the $205 fee or the 20% down payment. Can I still file an OIC?
Can the IRS collect from me while my OIC is being reviewed?
I had an OIC rejected before. Can I file another one?
What is the 5-year compliance covenant and what happens if I default?
Ebot Mbi, CPA, EA
Texas CPA #127163 · IRS Enrolled Agent · Founder, ebotCPA
CPA licensed by the Texas State Board of Public Accountancy and IRS Enrolled Agent licensed by the U.S. Department of the Treasury. Practice focuses on federal tax resolution including OIC preparation, IRS Appeals representation, and IRS collection matters. ebotCPA is located at 4425 West Airport Freeway, Suite 595, Irving, TX 75062.
For Taxpayers
Wondering if OIC is right for you?
Free — Free Notice Decoder / free path. The free decoder explains your notice from its type and date. No documents are uploaded at the free step. $97 — Notice Review. Send us your IRS notice along with your own transcripts. We tell you what the notice is, what it means, and what the issues appear to be at a high level. This is information, not tax advice. $150 per tax year — Transcript Pull. Don't have your transcripts, or can't get them? We pull them for you under Form 8821 and send them with written findings. Many clients use their transcripts to bring their filings up to date with their own tax preparer. $497 — Case Analysis. We pull your transcripts, analyze your whole situation, and give you a written do-it-yourself plan. $1,000 — Representation. Power of attorney (Form 2848) and we represent you before the IRS. Flat $1,000. The $97 Notice Review is credited toward the $497 Case Analysis. The $150 Transcript Pull is a separate service and is not credited. Fixed fees, confirmed in writing before work begins. Not a guarantee of any IRS outcome. We never charge a percentage of tax saved. We pull your transcripts, run a preliminary RCP calculation, and explain whether an offer appears realistic before you engage us to prepare one.
Case Analysis: $497For EA Candidates & Practitioners
Studying §7122 for your EA exam or representing a client?
The full practitioner walkthrough — IRC §7122 statutory framework, Treas. Reg. §301.7122-1, RCP calculation under IRM 5.8.5, the three OIC grounds, Murphy v. Commissioner, §6331(k)(1) levy prohibition, §7122(f) deemed acceptance, IRM 8.23.1 Appeals procedure, and Bluebook citation index — is on the practitioner page.
Read the practitioner pageIRS Forms Referenced