01
The types of Offer in Compromise
Three legal grounds exist, but because Effective Tax Administration splits into two practical categories, taxpayers commonly see four. Doubt as to Collectibility (DATC): the tax is owed but income and assets are insufficient to pay in full — Form 656 with Form 433-A (OIC) and/or 433-B (OIC). Doubt as to Liability (DATL): a genuine dispute over whether the tax is legally owed — Form 656-L. Effective Tax Administration – Economic Hardship: enough income or assets exist to pay, but doing so would create serious hardship — Form 656 with 433-A (OIC). Effective Tax Administration – Public Policy or Equity: exceptional circumstances make full collection unfair — Form 656 with the applicable financial statement. Do not file a DATL offer simultaneously with a DATC or ETA offer; the correctness of the tax should be resolved before ability to pay is evaluated.
02
The forms that matter
Form 656-B is the instruction booklet — start here. Form 656 is the actual agreement identifying the taxpayer, tax periods, reason, offer amount, and payment terms; separate Forms 656 may be required for individual vs. separate business-entity liabilities. Form 433-A (OIC) discloses individual and sole-proprietor finances (household income, accounts, digital assets, retirement, real estate, vehicles, life-insurance cash value, expenses, and the minimum-offer calculation). Form 433-B (OIC) covers corporations, partnerships, and other separate entities. Form 656-L handles DATL offers — no application fee, no initial payment, minimum $1 offer, written explanation and evidence required. Form 656-PPV is for subsequent periodic payments. Form 2848 authorizes a representative to advocate before the IRS (Form 8821 only allows information access — it does not permit representation). Form 13711 is used to appeal a rejected offer within 30 days.
03
Payment terms: lump-sum vs. periodic
Lump-sum offer: 20% of the total offer with the application, balance in five or fewer payments within five months of acceptance; the RCP calculation uses 12 months of remaining monthly income. Example: a $20,000 lump-sum offer requires $4,000 up front and $16,000 within five months of acceptance. Periodic-payment offer: first proposed monthly payment with the application, continued monthly payments during the investigation, total paid over 6–24 months; the calculation uses 24 months of remaining monthly income. Missing periodic payments during the investigation can cause the offer to be returned without appeal rights, and payments already made are applied to the tax debt and are not refunded.
04
Low-income certification and the application fee
The current application fee is $205 per required Form 656. Qualifying individuals and sole proprietors may be exempt from the fee, the initial payment, and monthly periodic payments during the investigation — qualification is based on family size, location, and AGI (from the most recently filed return) or annualized current household income. The certification must be properly claimed on Form 656. If accepted, required payments generally begin within 30 days unless different terms are approved. Offer payments are nonrefundable and are applied to the tax debt even if the offer is later rejected, returned, or withdrawn; the application fee may be returned when the IRS determines the offer cannot be processed.
05
Rejection vs. return — and what happens after acceptance
A rejected offer is evaluated on the merits and carries a 30-day right to appeal via Form 13711 to the Independent Office of Appeals. A returned offer closes the case for a procedural or compliance problem (missing documents, failure to remain current, missed periodic payments) and generally does not carry appeal rights. After acceptance, the taxpayer must pay according to the accepted terms, timely file all required returns, timely pay all new taxes, and remain compliant for the five-year period beginning with acceptance. Default can cause the IRS to reinstate the original liability, less payments made, plus penalties and interest. Federal tax liens are generally not released until the accepted amount is paid and the terms are satisfied.
