01
The three grounds
Doubt as to Liability (DATL) — you don't owe it. Doubt as to Collectibility (DATC) — you can't pay it. Effective Tax Administration (ETA) — you could pay it, but doing so would be inequitable. DATC is by far the most common.
Resolution Programs
The IRS Offer in Compromise Procedure
An Offer in Compromise (OIC) under IRC §7122 settles tax debt for less than the full amount owed. The IRS accepts an OIC only when the offered amount matches or exceeds the taxpayer's Reasonable Collection Potential (RCP). Understanding the RCP formula is the difference between an accepted offer and a rejected one.
Checklist Summary
An at-a-glance view of every step covered in this guide.
- Step 1: Confirm compliance — all returns filed, current-year estimated payments up to date.
- Step 2: Build Form 433-A (OIC) using quick-sale values and IRS expense standards.
- Step 3: Calculate RCP; if it's below the balance, an OIC is viable.
- Step 4: Submit Form 656 with $205 application fee and 20% initial payment (lump-sum offer).
- Step 5: Respond to the OIC examiner's requests within deadlines; consider Appeals if rejected.
Key Forms & Notices
- Form 656 (OIC)
- Form 433-A (OIC)
- Form 433-B (OIC)
Statutes & Authority
- IRC §7122
- Treas. Reg. §301.7122-1
Timeline Summary
Jump to any stage
02
The RCP formula
RCP = Net Realizable Equity (NRE) in assets + Future Income (FI). NRE is quick-sale value (80%) minus encumbrances. FI is monthly disposable income multiplied by 12 (lump-sum offer) or 24 (periodic-payment offer). Match RCP, get accepted; miss it, get rejected.
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Allowable expenses
The IRS uses national and local standards for food/clothing, housing, transportation, and out-of-pocket healthcare. Documented expenses above the standards are typically disallowed unless narrowly justified (e.g., high medical costs).
How the Procedure Works
- 1Confirm compliance — all returns filed, current-year estimated payments up to date.
- 2Build Form 433-A (OIC) using quick-sale values and IRS expense standards.
- 3Calculate RCP; if it's below the balance, an OIC is viable.
- 4Submit Form 656 with $205 application fee and 20% initial payment (lump-sum offer).
- 5Respond to the OIC examiner's requests within deadlines; consider Appeals if rejected.
Frequently Asked Questions
What percentage of OICs get accepted?
The IRS accepts roughly 30–35% of submitted OICs annually. Properly prepared offers — with accurate 433-A OIC and RCP-matching numbers — accept at much higher rates.
How long does an OIC take?
6–12 months on average from submission to acceptance. Collection is paused while the OIC is pending, plus 30 days after rejection.
Can I file an OIC with unfiled returns?
No. Filing compliance is a hard prerequisite. All required returns for the last 6 years must be filed before the IRS will process the offer.
What happens if my OIC is rejected?
You have 30 days to appeal to the Independent Office of Appeals via Form 13711. Collection remains suspended during the appeal, and Appeals accepts a meaningful percentage of previously rejected offers.
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