What Is 26 USC 7122? The IRS Offer in Compromise
An IRS Offer in Compromise, authorized by 26 USC 7122, provides a structured path for taxpayers to permanently resolve their federal tax liability.
An Offer in Compromise (OIC) is an Internal Revenue Service (IRS) program that allows certain taxpayers to resolve their tax debt for less than the full amount owed. Authorized under Internal Revenue Code section 7122, an OIC is a formal agreement between a taxpayer and the government. The program provides a resolution for those with significant tax burdens they cannot fully pay. Acceptance also encourages the taxpayer to comply with all future tax obligations.
Grounds for an Offer in Compromise
The IRS considers an Offer in Compromise based on one of three grounds established in Treasury Regulation § 301.7122-1. The first, Doubt as to Liability, applies when a dispute exists over the accuracy of the tax debt. A taxpayer might use this basis if they believe the IRS assessed tax on income that was not theirs or miscalculated the amount due, and the taxpayer has not had a prior opportunity to contest it.
A common reason for an OIC is Doubt as to Collectibility, which applies when a taxpayer’s income and assets are less than the full tax debt. For example, a person who has lost their job with minimal savings and whose assets would not cover the liability may qualify. The IRS provides a pre-qualifier tool on its website to help individuals determine eligibility on this basis.
The third ground is Effective Tax Administration (ETA). This applies when a taxpayer could pay the full amount, but doing so would cause significant economic hardship. An ETA case might involve an elderly taxpayer on a fixed income who would have to sell their primary home to pay the tax debt. The IRS may also grant an ETA offer to promote fairness.
Information and Forms for Submission
To apply for an OIC, taxpayers submit Form 656, Offer in Compromise, with a detailed financial statement. Individuals use Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, while businesses file Form 433-B (OIC), Collection Information Statement for Businesses. For offers based on Doubt as to Liability, taxpayers use Form 656-L, and a financial statement is not required. These forms are available on the IRS website.
For Form 433-A or 433-B, you must compile an inventory of all assets, including cash, bank accounts, real estate, vehicles, and investments. You will also need to document all sources of monthly income and provide a list of allowable living expenses, which are subject to national and local standards set by the IRS.
The data from Form 433 is used to calculate your reasonable collection potential, which helps determine the minimum amount you can offer on Form 656. The offer must be made in writing and signed under penalty of perjury.
A non-refundable $205 application fee is required, though it may be waived for taxpayers meeting Low-Income Certification guidelines. Low-income applicants are also not required to send an initial payment. All other applicants must include an initial payment and choose between two structures: a Lump Sum Cash Offer or a Periodic Payment Offer. A Lump Sum offer requires an initial payment of 20% of the total offer, with the balance due in five or fewer installments within five months of acceptance. A Periodic Payment offer requires the first proposed monthly payment with the application and subsequent payments while the IRS considers the offer.
The IRS Offer in Compromise Process
After the application is submitted, the IRS will send a letter acknowledging its receipt and confirming it is under consideration. The IRS will not levy against a taxpayer’s property while the offer is pending.
The offer is assigned to an OIC examiner for investigation. The examiner will review the financial information provided and may contact the taxpayer for clarification or to request additional documents.
There are three potential outcomes for an OIC application: acceptance, rejection, or return if it is non-processable due to missing information. The taxpayer will receive a written notification of the decision. The IRS has 24 months from the submission date to make a decision; if no decision is made within that time, the offer is automatically accepted.
If an offer is accepted, the taxpayer enters a five-year compliance period. During this time, they must file all required tax returns and pay all taxes on time. Failure to meet these responsibilities can result in the IRS defaulting the agreement, which reinstates the original full tax liability.
Appealing a Rejected Offer
If the IRS rejects an Offer in Compromise, the taxpayer can appeal the decision. The taxpayer has a 30-day window from the date on the rejection letter to file an appeal with the IRS Office of Appeals, which provides an independent review of the case.
To initiate the appeal, the taxpayer submits Form 13711, Request for Appeal of Offer in Compromise. The Office of Appeals is a separate entity within the IRS that conducts an impartial review. An appeals officer re-evaluates the offer based on the information provided to determine if the rejection was appropriate.