The three grounds
IRC 7122(a) lets the Secretary compromise any civil or criminal case arising under the internal revenue laws before it is referred to the Department of Justice. IRM 5.8.1.2.1 defines an offer as an agreement between the taxpayer and the government that settles a liability for less than the full amount owed. Every Form 656 must state its basis, and IRM 5.8.1.15.2 lists three:
| Ground | What it means | Where to read more |
|---|---|---|
| Doubt as to collectibility (DATC) | The taxpayer cannot pay the full liability within the collection period. The offer must generally equal or exceed reasonable collection potential (RCP). | Reasonable collection potential |
| Doubt as to liability (DATL) | A genuine dispute over whether the tax is owed or how much. Filed on Form 656-L, with no fee and no financial statement. | Doubt as to liability offers |
| Effective tax administration (ETA) | The tax is owed and collectible in full, but full collection would cause economic hardship or would be unfair on public policy or equity grounds. | Effective tax administration offers |
There is also a hybrid the IRM calls doubt as to collectibility with special circumstances (DATCSC): the taxpayer cannot pay in full, and hardship or equity factors justify accepting less than RCP. IRM 5.8.1.2.2(4) says DATC offers must generally equal or exceed RCP, but “offers may be accepted for less than the RCP amount in cases that involve special circumstances”.
The governing policy is Policy Statement 5-100, quoted in IRM 5.8.1.2.2: the IRS “will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential.” The same section is equally direct about the limit: “Unless special circumstances exist, the IRS will not accept an offer if the total tax liability can be paid in full as a lump sum, by installment payments extending through the remaining statutory period for collection, or by other means of collection.” That second sentence is why most DATC investigations start with a full-pay test (IRM 5.8.5.2) before anyone computes RCP.
Who can file
The Form 656 Booklet (Rev. 4-2026) sets four conditions before an offer can be considered: the taxpayer has filed all required returns, has received a bill for at least one liability included in the offer, has made all required estimated tax payments for the current year, and, for a business owner with employees, has made all federal tax deposits for the current quarter and the two preceding quarters. If returns are missing, the booklet says the IRS will apply any initial payment to the debt and return only the offer and fee, and the taxpayer cannot appeal.
Other bars and timing rules from the booklet and the IRM:
- Open bankruptcy. A taxpayer in an open bankruptcy is not eligible. IRM 5.8.10.2.1 says an offer filed during bankruptcy is returned as not processable, and an offer pending when the taxpayer files is returned as a processable return. In Chapter 7 the IRS can consider an offer after discharge; in Chapters 11, 12 and 13, after plan payments are complete or the case is dismissed. See bankruptcy and tax debts.
- Open audit or innocent spouse claim. The booklet says to resolve these first.
- Trust fund taxes. A business is not eligible unless the trust fund portion is paid or the IRS has made trust fund recovery penalty determinations on all potentially responsible persons (with an exception for victims of payroll service provider fraud or failure). See the trust fund recovery penalty.
- Liabilities the IRS cannot compromise. Cases referred to the Department of Justice for all periods, court ordered restitution, liabilities reduced to judgment, and IRC 965 liabilities subject to an IRC 965(i) election.
- A pending DATL offer. The booklet tells taxpayers not to file a DATL offer and a DATC or ETA offer at the same time.
The package and the fee
A DATC or ETA package contains Form 656, Form 433-A (OIC) for individuals and sole proprietors and/or Form 433-B (OIC) for entities, supporting documents, the application fee and the initial payment. The booklet states plainly: “Offers require a $205 application fee.” Individuals can prepare and submit the offer, and make the payments, through the Individual Online Account; paper packages go to the Centralized Offer in Compromise unit in Memphis or Brookhaven depending on the state of residence (the address table is on page 29 of the booklet). See Form 656, Form 433-A and the offer package checklist.
Two filing rules catch people. Spouses with joint debt plus a separate debt (including a TFRP) each file their own Form 656, and each Form 656 carries its own fee and initial payment. A taxpayer with both individual and business debt files two Forms 656, and the booklet notes an individual cannot compromise their share of a partnership debt; the partnership must file its own offer.
Figures change with the form. The $205 fee, the low-income table and the payment terms on this page come from the Form 656 Booklet (Rev. 4-2026); the IRS revises the booklet regularly, and IRM 5.8.10.7 shows how much the statute consequences of an offer have depended on which Form 656 revision was signed. Before quoting a fee or a deadline to a client, open the current booklet rather than relying on a number from an earlier revision, including this one.
Low-income certification waives the fee and all offer payments for individuals (including sole proprietors). IRC 7122(c)(3) ties it to adjusted gross income that does not exceed 250 percent of the applicable poverty level; IRM 5.8.1.12 says the IRS may also use reported gross monthly income multiplied by 12. The income table is printed on Form 656 itself, so use the current revision. Deceased taxpayers and entities other than sole proprietors do not qualify. Low-income status also protects the offer on the merits: IRC 7122(d)(3)(A) requires the IRS guidelines to provide that an employee “shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer.”
Payment terms
| Option | With the offer | Balance | Future income months used in RCP |
|---|---|---|---|
| Lump sum cash | 20% of the offer amount | 5 or fewer payments within 5 months of acceptance | 12 months, or the remaining collection period if shorter |
| Periodic payment | First proposed monthly payment | Monthly within 6 to 24 months, and payments continue while the offer is evaluated | 24 months, or the remaining collection period if shorter |
Sources: Form 656 Booklet (Rev. 4-2026); IRM 5.8.1.15.4; IRM 5.8.5.30. Under IRC 7122(c)(1)(B)(ii), missing a periodic payment while the offer is being evaluated may be treated as a withdrawal, and the booklet says the IRS may return the offer with no appeal. Payments made with an offer are generally kept and applied to the liability even if the offer is not accepted; the taxpayer may designate how pre-acceptance payments apply, but the fee cannot be designated (IRM 5.8.1.15.4).
What happens while it is pending
An offer becomes pending when the IRS accepts it for processing, not when it is mailed or received. IRC 6331(k)(1) says so for the levy bar: “an offer is pending beginning on the date the Secretary accepts such offer for processing.” Treas. Reg. 301.7122-1(d)(2) repeats it: “An offer to compromise becomes pending when it is accepted for processing.” In practice that is the date a delegated IRS official signs and dates the Form 656 after the processability review; IRM 5.8.2.4.1 calls that the official offer pending date and requires it to match the TC 480 date. The IRS received date is a different date with a different job: under IRM 5.8.2.3 it starts the 24-month deemed-acceptance clock of IRC 7122(f) once the offer reaches the Centralized Offer in Compromise site. The pending date matters because the statutory protections run from it:
- No levy. IRC 6331(k)(1) bars levy while the offer is pending, for 30 days after a rejection, and while a timely appeal of the rejection is pending. IRM 5.8.1.16 states: “Collection by levy on property owned by the offer taxpayer is prohibited while the offer is pending and for 30 days thereafter if the offer is rejected, unless collection is in jeopardy.” A levy served before the offer was submitted does not have to be released, and the booklet warns that the IRS may levy up to the time the official signs the offer.
- Liens can still be filed. IRM 5.8.1.16(7) says there is no prohibition on filing a Notice of Federal Tax Lien while an offer is pending, although outside jeopardy the request is usually made after the final determination. See federal tax liens.
- The CSED stops. Under current law the collection statute is suspended while the offer is pending, for 30 calendar days after a rejection, and while Appeals considers the rejection (IRM 5.8.10.7(6)). An offer returned as not processable does not suspend the statute (IRM 5.8.7.2). See the CSED and what suspends it.
- Installment agreement payments pause. The booklet says existing installment agreement payments are not required while the offer is considered, and the agreement is reinstated if the offer is not accepted and no new debt has accrued.
- Refunds are offset. Systemic offset under IRC 6402(a) continues until acceptance, and the refund does not count toward the offer amount. The rule changed for offers accepted on or after November 1, 2021 (below).
- Interest and penalties continue to accrue.
How the IRS evaluates it
For DATC offers, IRM 5.8.4.3 says the decision “usually rests on whether the amount offered reflects the RCP.” RCP has four components: net realizable equity in assets, future income after allowable expenses, amounts collectible from third parties (for example through a transferee or nominee lien), and assets available to the taxpayer but beyond the government's reach (IRM 5.8.4.3.1). The detailed valuation rules are on the RCP page, and the RCP calculator runs the arithmetic.
Collateral agreements. When the investigation shows a likely future recovery that RCP does not capture, the IRS may condition acceptance on a collateral agreement, a separate contract that adds terms to Form 656 (IRM 5.8.6.2). The usual forms are Form 2261, Collateral Agreement - Future Income (Individual), and Form 2261-A for corporations, which require annual payments of a percentage of future income above a floor and an annual Form 3439, Statement of Annual Income; other collateral agreements reduce the basis of depreciable assets or waive net operating losses, capital losses or the capital loss from a defunct corporation in a TFRP offer. IRM 5.8.6.2.1 limits future income agreements to cases where a substantial increase in income is expected, such as a student about to graduate or a professional working below prior earnings, and forbids them for speculation, lottery-type events or potential inheritances. Two points protect the taxpayer: the IRM says “Do not use a collateral agreement to accept an offer amount less than the taxpayer's reasonable collection potential,” and the taxpayer may instead raise the offer by the amount the government could expect to recover under the agreement. Refusing an appropriate collateral agreement can be a basis for rejection as not in the best interest of the government. Amounts accruing under a collateral agreement but unpaid at the CSED are overpayments; the agreement cannot extend the collection statute.
Two further tests apply even when the offer matches RCP. First, IRM 5.8.4.3(4) tells examiners to compare the offer with what a partial payment installment agreement would collect before the CSED; when the gap is substantial, acceptance may not be in the government's interest and the taxpayer is given the chance to raise the offer or withdraw and enter the agreement. Second, an offer can be rejected as not in the best interest of the government or on public policy grounds even when it exceeds RCP (IRM 5.8.1.2.2(5); IRM 5.8.7.7.1, which requires second level manager approval for that basis).
Courts defer to these judgments. When a rejected offer reaches the Tax Court through a CDP hearing, review is for abuse of discretion only: the court does not decide what offer it would have accepted (Murphy v. Commissioner, 125 T.C. 301 (2005)), it upholds rejections of offers substantially below the RCP computed under the IRM (Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009)), and it will not order the IRS to compromise a correctly computed tax because the taxpayer considers the statute unfair (Speltz v. Commissioner, 124 T.C. 165 (2005)). The Tax Court's own position is that it may look beyond the administrative record, but where the appeal lies to a circuit that applies the record rule, including the Eighth (Robinette) and Ninth (Keller), it may not. The holdings are described on the CDP page and the ETA page; the point for the offer file is that the examiner's computation, and the taxpayer's documented response to it, is the record a court will read.
The IRS can return an offer “solely to delay collection” when that purpose would be apparent to an impartial observer. IRM 5.8.4.7.1 sets limits: “An offer is not considered submitted solely to delay collection just because there is an imminent CSED issue” or because a rejected offer is being appealed. A resubmission that is not materially different from a prior rejected offer is the usual trigger; a change in employment, marital status, asset values or newly raised special circumstances can make it materially different.
Return, rejection, withdrawal, acceptance
| Outcome | What it means | Appeal? |
|---|---|---|
| Not processable return | Fails threshold rules (for example bankruptcy, missing fee). Fee refunded; collection statute not suspended (IRM 5.8.7.2). | No |
| Processable return | Accepted for processing, then returned (for example unfiled returns, missed estimated payments or deposits, no response to a request for information). The IRS keeps the fee. | No. The booklet says: “You do not have the right to appeal if the IRS returns your offer.” IRM 5.8.7.3 allows return reconsideration in some cases. |
| Rejection | Reviewed by independent administrative review before it is sent (IRC 7122(e)(1)). | Yes, within 30 days of the rejection letter, usually on Form 13711 (IRM 5.8.7.7.5) |
| Withdrawal | Voluntary, or treated as withdrawn for missed periodic payments. | No |
| Acceptance | Settles the listed periods on the contract terms of Form 656. | Not applicable |
Appeal timeliness follows the mailbox and weekend rules described in IRM 5.8.7.7.5. A taxpayer who misses the 30-day window has waived the Appeals hearing on that offer, which Form 656 states in its terms. If the offer was submitted as part of a CDP hearing, Appeals keeps jurisdiction and the examiner sends a predetermination letter instead of a rejection letter (IRM 5.8.7.7.1). See collection due process hearings and the Independent Office of Appeals.
Deemed acceptance is real but rare. IRC 7122(f): “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.” Periods in which a liability in the offer is in dispute in a judicial proceeding are excluded, and Form 656 says the clock does not start until the correct site receives the offer.
After acceptance
An accepted offer is a contract. Form 656 (Rev. 4-2026) requires the taxpayer to file and pay all returns, estimated taxes and deposits on time through the fifth year after acceptance, and the booklet says a default leaves the taxpayer liable for the original debt, less payments, plus accrued interest and penalties. The taxpayer also agrees not to file amended returns for the compromised periods. The IRS must make certain information from accepted offers available for public inspection.
The refund rule. Older offers required the taxpayer to forfeit refunds for tax periods through the calendar year of acceptance. That ended for offers accepted on or after November 1, 2021. IRM 5.19.7.10 states the current rule: “Beginning November 1, 2021, the IRS is no longer keeping any refund, including interest, in accordance with IRC 6402(a) for an original tax return assessed (TC 150) in the year of offer acceptance (TC 780).” Form 656 (Rev. 4-2026) Section 7(e) now says the IRS will keep any refund, including interest, for tax assessed before the date the offer is accepted, that systemic offsets continue under IRC 6402(a) up to the acceptance date, and that a refund on an amended return for a tax year ending before acceptance will be offset as well. The booklet's example: a 2024 return filed April 15, 2025 and assessed May 26, 2025 has its overpayment offset before an offer accepted July 1, 2025, so that refund is lost; a return that posts after the acceptance date is not. An offset that took place before acceptance cannot be reversed except for clerical error (IRM 5.19.7.10), so a client expecting a large refund should think about when the return is filed relative to the acceptance date, and a hardship taxpayer can ask for an offset bypass refund before acceptance.
The lien is not released at acceptance. IRM 5.12.3.5.3: “the NFTL is released upon payment of the offered amount.” See federal tax liens. If a property sale is needed to fund the offer, the booklet warns that sale proceeds may be applied to the liability while the lien remains, which is why discharge or subordination is often requested alongside the offer.
When an offer is not viable, the usual alternatives are an installment agreement, a partial payment agreement, or currently not collectible status; IRM 5.8.7.10 tells the examiner, when an offer cannot be accepted, to “recommend the best collection alternative based on their reasonable collection potential” and to solicit a withdrawal and help with an installment agreement or a currently not collectible determination where appropriate.
Questions practitioners ask
Can an offer be filed while a revenue officer is assigned?
Yes. The booklet asks the taxpayer to tell the assigned employee that an offer is being sent. The levy protection begins when the offer is signed as pending, not on mailing, so a levy can still be served in the gap.
Does the IRS refund the initial payment if the offer is rejected?
Generally no. Form 656 states that offer payments are kept even if the offer is withdrawn, rejected or returned, and are applied to the liability. The fee is refunded only when the offer is not accepted for processing.
Can one spouse compromise a joint liability alone?
Yes. The booklet allows a taxpayer to submit a Form 656 to compromise their own responsibility for a joint debt. IRM 5.8.5.24 explains how the non-filing spouse's income and expenses are treated in computing RCP.
Is an offer the right tool for penalties only?
Usually not. The Form 656-L pre-qualifier directs penalty-only disputes to abatement. See First Time Abate and reasonable cause.
Does submitting an offer extend the collection statute?
Yes, for a processable offer. The CSED is suspended while it is pending, for 30 days after rejection, and during an appeal (IRM 5.8.10.7). A not processable return does not suspend it, and a processable return suspends it only while the offer was pending, with no 30-day tail (IRM 5.8.7.2.2).
Will the IRS keep this year's refund if the offer is accepted?
Only if the return was assessed before the acceptance date. For offers accepted on or after November 1, 2021, the IRS no longer keeps refunds on original returns assessed in the year of acceptance (IRM 5.19.7.10; Form 656 Section 7(e)). Offsets that already happened before acceptance stand.
What is a collateral agreement?
A separate contract the IRS may require with an accepted offer, most often Form 2261 or 2261-A for a share of future income when a substantial increase is expected (IRM 5.8.6.2). It cannot be used to accept less than RCP, and the taxpayer may raise the offer instead.