An IRS Offer in Compromise is a formal agreement between a taxpayer and the IRS that settles a federal tax liability for less than the full amount owed. It is authorized under Internal Revenue Code § 7122 and governed by the regulations at 26 C.F.R. § 301.7122-1. When an OIC is accepted and the taxpayer fulfills all of its terms, the underlying federal tax debt is permanently resolved.

The OIC program is often misrepresented in advertising. Late-night commercials and internet ads frequently suggest that the IRS will settle virtually any debt for “pennies on the dollar” with a simple phone call. The reality is considerably different. The IRS is a sophisticated creditor with powerful collection tools, including tax liens, levies on wages and bank accounts, and seizure of assets. It will accept less than the full amount owed only when it concludes that doing so produces the best outcome for the federal government, meaning the offer is at least as much as it could reasonably expect to collect from you through normal collection processes.

That said, the OIC program is a legitimate and valuable resolution tool for taxpayers who genuinely cannot pay their full tax debt, who have a credible dispute about the amount owed, or who face exceptional circumstances that make full collection inequitable. It is one of several resolution mechanisms available through the IRS’s collection infrastructure, which our firm handles under both our tax debt and collections defense and civil tax controversies practice areas.

There are three distinct legal grounds under which a taxpayer may submit an OIC. Understanding which ground applies to your situation is the foundational question, because each has different documentation requirements, a different form, and a different evaluative standard.

Doubt as to Collectibility (DATC)

Doubt as to Collectibility is by far the most commonly used ground for an OIC. It applies when the taxpayer’s assets and income are insufficient to pay the full tax liability within the remaining period of the Collection Statute of Limitations. Under this ground, the IRS evaluates the taxpayer’s Reasonable Collection Potential (RCP), described in detail in the RCP section below. The IRS will not accept a DATC offer for less than the RCP.

Doubt as to Liability (DATL)

Doubt as to Liability applies when there is a genuine dispute about whether the tax was correctly assessed in the first place. This might arise when a taxpayer was audited without a meaningful opportunity to present evidence, when new information surfaces after the assessment, when a return was prepared with errors that affected the liability, or when the IRS made a computational or legal error in determining the amount owed.

DATL offers are submitted on Form 656-L (not Form 656) and have no application fee. Because the legal or factual dispute must be substantive and credible, these offers are closely tied to tax controversy and audit defense work. Our IRS and state tax audits and IRS and state tax appeals practice areas frequently intersect with DATL analysis.

Effective Tax Administration (ETA)

ETA is the narrowest and most difficult ground to satisfy. It applies in two situations: (1) the taxpayer can pay the full liability, but doing so would create economic hardship, or (2) compelling public policy or equity considerations exist that make collection of the full amount unjust. The IRS applies a high standard to ETA offers and requires a showing of truly exceptional circumstances, such as a catastrophic medical situation that would be destroyed by full collection, or situations where the tax liability arose from events entirely beyond the taxpayer’s control.

Because ETA does not require a showing of inability to pay, it is sometimes relevant for taxpayers with assets but genuine hardship. However, it is rarely granted without substantial legal advocacy and documentation.

Before the IRS evaluates the merits of an OIC, it screens every submission for processability. If your offer fails threshold requirements, it may be returned without consideration. Whether the $205 application fee is kept or returned depends on the reason for the return and whether the offer was treated as processable; for example, if required tax returns were not filed, the IRS generally returns the application fee but applies any initial payment to the tax debt.

Hard requirements for processability

• All required federal tax returns must be filed. The IRS will not consider an OIC from a taxpayer with outstanding unfiled returns, regardless of the reason. Filing compliance must be established before submission.
• All required estimated tax payments must be current. Self-employed taxpayers and others who must make quarterly estimated payments must be current for the current year at the time of submission.
• All required federal employment tax deposits must be current. Business owners who are responsible for payroll tax deposits must be current in those obligations.
• You must not be in an open bankruptcy proceeding. The IRS cannot legally accept an OIC while a taxpayer is in a pending bankruptcy case. Bankruptcy’s automatic stay and its own treatment of tax debt conflicts with the OIC process.
• The tax debt must be valid and not already fully resolved. You cannot submit an OIC for a debt that is already paid, discharged in bankruptcy, or otherwise resolved.

Low-income certification and fee waiver

Taxpayers whose total monthly income is at or below 250% of the federal poverty guidelines may qualify for the low-income certification, which waives the $205 application fee and also waives the requirement to submit the initial payment with the offer. The income thresholds are updated periodically by the IRS and are published in the Form 656 instructions. For many Maryland taxpayers facing significant tax debt, the low-income certification provides meaningful financial relief during an already stressful process.

Who is generally a good candidate for a DATC offer?

While every case is fact-specific, taxpayers who are most likely to have a viable DATC offer tend to share one or more of the following characteristics:

• Significant tax debt relative to their asset base and annual income
• Limited equity in real property, retirement accounts, or other collectible assets
• Fixed or constrained income with limited discretionary cash flow after necessary living expenses
• A debt that has accrued substantial penalties and interest, making the original tax amount a small fraction of the total balance
• A Collection Statute Expiration Date (CSED) that is approaching, which limits the IRS’s remaining collection window

Conversely, taxpayers who have substantial equity in real estate, retirement accounts, or other assets, or who have significant disposable income after allowable expenses, are less likely to have a viable OIC because the IRS’s RCP calculation will typically approach or exceed the full debt.

The centerpiece of every DATC offer evaluation is the IRS’s calculation of your Reasonable Collection Potential (RCP). Your offer must equal or exceed the RCP or it will be rejected. Understanding how the IRS computes RCP is the most important analytical step in determining whether an OIC is viable and what amount to offer.

The basic RCP formula is:

Asset valuation: what the IRS looks at

The IRS does not use fair market value for your assets. It uses quick sale value, which IRS guidance generally defines as approximately 80% of fair market value, reflecting what could be obtained in a forced or expedited sale. Importantly, the IRS considers virtually all assets: bank accounts, investment accounts, retirement accounts, real estate equity, vehicles, business assets, and cash value life insurance policies.

Each asset category has specific treatment in the IRS’s financial analysis. For example, retirement account value is not automatically ignored. In OIC analysis, the IRS generally treats the equity in an IRA, 401(k), or similar account as the amount that could be accessed, reduced by applicable tax consequences and any early withdrawal penalty, if applicable. Maryland business owners should be particularly attentive to how business assets, equipment, and receivables are valued in the OIC submission.

Income analysis: the Collection Financial Standards

The IRS does not allow every expense a taxpayer incurs. It uses the IRS National Standards (for food, clothing, and other necessities), Local Standards (for housing and transportation, which vary by geographic area including Maryland counties and metropolitan areas), and Other Necessary Expenses (for expenses that are necessary for health, welfare, and production of income) to determine your allowable monthly expenses.

Any monthly income remaining after these allowable expenses is your “monthly disposable income” for RCP purposes. If your actual monthly expenses are higher than IRS standards permit, those excess amounts are not counted, which can result in the IRS calculating a higher RCP than your actual financial position might suggest. This is one of the most consequential aspects of OIC preparation, and an area where experienced representation can make a significant difference.

Home equity and the OIC

For Maryland homeowners, equity in a primary residence is often the single largest factor in the RCP calculation, and one of the most challenging variables to manage. The IRS will calculate the quick sale value of your home, subtract the outstanding mortgage balance, and treat the remaining equity as collectible. If that equity alone approaches or exceeds your total tax debt, the DATC offer may not be viable, regardless of your monthly cash flow.

This does not necessarily mean an OIC is unavailable in every case. The specific facts, the age of the debt, the collection statute, and other factors can all affect the analysis. However, significant home equity is a significant hurdle for DATC offers, and it must be addressed directly in the submission documentation.

Required forms and documentation

For a Doubt as to Collectibility or Effective Tax Administration offer, the core submission package consists of:

• Form 656 (Offer in Compromise), which identifies the tax years and amounts included in the offer and specifies the basis and proposed amount
• Form 433-A (OIC) for individual taxpayers, or Form 433-B (OIC) for business entities, which are detailed financial disclosure statements covering all income, assets, expenses, and liabilities
• Application fee of $205, unless the low-income certification applies
• Initial payment in accordance with the selected payment option (see payment options below), unless the low-income certification applies
• Supporting financial documentation: bank statements (typically 3 months), pay stubs or income documentation, recent tax returns, mortgage statements, vehicle loan statements, retirement account statements, business financial statements if applicable, and documentation for any claimed allowable expenses that exceed IRS National Standards

For a Doubt as to Liability offer, the submission uses Form 656-L and a detailed written statement explaining the factual or legal basis for the dispute, along with supporting documentation.

After submission: what the IRS does

1. Initial screening (processability review): The IRS Centralized OIC (COIC) unit reviews the submission to ensure it meets all threshold processability requirements. If the submission is not processable (for example, because of unfiled returns or an open bankruptcy), the offer is returned to the taxpayer.
2. Assignment to an OIC Examiner: Once deemed processable, the offer is assigned to an IRS OIC examiner (also called a revenue officer or specialist, depending on the case type) who conducts the substantive financial analysis.
3. Financial verification: The examiner will verify the financial information submitted on Form 433-A (OIC) or 433-B (OIC) against IRS records, third-party data (bank records, county property records, financial institution data), and may contact the taxpayer or their representative for additional documentation.
4. RCP determination and offer comparison: The examiner computes the IRS’s own RCP and compares it to the offered amount. If the offer amount is below the IRS’s RCP calculation, the examiner will typically issue a counteroffer or rejection.
5. Decision: The offer is accepted, rejected, or a counteroffer is proposed. If rejected, the taxpayer has 30 days to file an appeal with the IRS Independent Office of Appeals.

Processing timeline

IRS OIC processing times have historically ranged from several months to over a year. Complex cases, high-asset submissions, and business entities generally take longer. Incomplete or poorly documented submissions significantly extend the timeline because each request for additional information adds processing time. One important provision under IRC § 7122(f): if the IRS does not act on a timely submitted, processable OIC within two years of the date it was received, the offer is deemed accepted by operation of law.

There are two payment structures for a DATC or ETA offer submitted on Form 656. The choice of payment structure affects not just how you pay, but also how the IRS calculates the minimum amount it will accept.

In most cases, the lump sum cash offer results in a lower required offer amount because the future income component of the RCP uses a 12-month multiplier rather than 24 months. For taxpayers who have access to a lump sum through any means (savings, a loan from a family member, the proceeds of an asset sale), the lump sum cash offer is generally the more favorable structure.

A significant proportion of OIC submissions are either returned as non-processable or rejected on the merits. Understanding the most common failure points is essential for any taxpayer considering this option.

1. Unfiled tax returns or non-current estimated tax payments

This is the most absolute disqualifier. If you have any unfiled federal income tax returns or are behind on quarterly estimated tax payments, the IRS will return the offer without consideration. Getting fully current on all filing obligations is the required first step, without exception.

2. Offer amount below the IRS’s RCP calculation

The most common reason for rejection on the merits is that the taxpayer’s proposed offer amount is lower than the IRS’s independently calculated RCP. If the IRS calculates that it could collect $40,000 through standard collection processes and the taxpayer offers $15,000, the offer will be rejected unless the taxpayer can demonstrate that the IRS’s asset or income figures are wrong. This requires accurate, well-documented financial disclosure, not a low-ball figure with thin supporting documentation.

3. Incomplete or inaccurate Form 433-A (OIC) or 433-B (OIC)

The financial disclosure forms for an OIC are detailed and require thorough documentation. Missing bank statements, undisclosed assets, unverified income figures, unsupported expense claims, and inconsistencies between the form and the supporting documents are all common triggers for either a return of the offer or an adverse RCP determination. The IRS examiners are trained to identify discrepancies, and incomplete submissions are frequently used to infer that the taxpayer has more assets or income than disclosed.

4. Undisclosed assets or income

The IRS cross-references OIC submissions against tax transcripts, Form 1099 data, county property records, financial institution data, and other third-party sources. Taxpayers who omit assets (sometimes inadvertently, sometimes not), understate income, or fail to disclose interests in businesses or real estate face not only rejection but potential fraud exposure. Full and accurate disclosure is both a legal obligation and a practical necessity.

5. Failure to maintain compliance during the review period

After submitting an OIC, the taxpayer must remain compliant. New unfiled returns, missed estimated tax payments, or a new tax liability that arises during the review period can result in the offer being rejected even if it was otherwise viable. The IRS is not willing to settle historical debt for a taxpayer who is simultaneously accumulating new debt.

6. Attempting to exclude trust fund tax liabilities inappropriately

Business owners who owe payroll taxes may have both a business-level liability and personal liability for the Trust Fund Recovery Penalty (TFRP) under IRC § 6672. An OIC that resolves the business entity’s payroll tax debt does not automatically resolve the responsible individual’s personal TFRP liability. These must be addressed separately, and failing to account for this in the submission strategy leads to incomplete resolutions.

7. Misunderstanding the basis for the offer

Taxpayers who submit a Doubt as to Liability offer when the appropriate vehicle is an appeal through the IRS Office of Appeals, or who submit a DATC offer when they clearly have sufficient assets and income to pay the debt, or who submit an ETA offer without meeting the narrow exceptional circumstances standard, will almost certainly be rejected. Matching the right legal theory to the facts is a threshold strategic decision that requires legal analysis, not guesswork.

A Maryland taxpayer who owes both federal tax debt and Maryland state tax debt faces two separate collection systems. An accepted IRS OIC does not resolve Maryland state tax obligations, and the Maryland Comptroller does not defer to IRS decisions. Maryland has its own Offer in Compromise program through the Comptroller of Maryland. The published FAQs identify the Hearings and Appeals Division in connection with the program, and collections activity may continue while the application is being reviewed.

Legal authority

Maryland’s OIC authority is found in Maryland Code, Tax-General Article § 13-606, which authorizes the Comptroller to compromise a tax claim when it concludes that doing so is in the best interest of the state. The statute provides broad discretion to the Comptroller, and the program is less formalized than the federal process. Maryland does not publish the same level of detailed procedural guidance as the IRS, which makes navigating the state process more difficult without experienced counsel.

How the Maryland OIC program differs from the IRS program

• Standardized Maryland forms are available: Maryland publishes Form MD 656 for the Offer in Compromise application and Form MD 433-A for financial disclosure in qualifying cases. Applications may be submitted to the Comptroller’s Offer in Compromise Program, and Maryland’s process remains separate from the IRS’s federal OIC process.
• Maryland-specific financial analysis: The Comptroller applies its own financial analysis criteria, which do not necessarily mirror the IRS’s Collection Financial Standards. Maryland-specific cost-of-living data, state tax rates, and other factors are relevant.
• Types of Maryland tax debt that may qualify: The Maryland OIC program can apply to Maryland income tax, Maryland withholding tax, Maryland sales and use tax, and other state tax liabilities administered by the Comptroller. Certain local property taxes are administered by county governments, not the Comptroller.
• No automatic coordination with IRS: The federal and Maryland OIC processes run independently. Taxpayers with both federal and Maryland debt should ideally develop a coordinated resolution strategy that addresses both simultaneously, to avoid a situation where the federal settlement is accepted but the Maryland liability results in aggressive state collection action.

Maryland penalty and interest relief

Maryland also has separate penalty and interest relief mechanisms in some situations. Depending on the facts, seeking abatement or other administrative relief may be faster and more realistic than an OIC, and those approaches may need to be evaluated alongside the OIC process.

An OIC is not the right tool for every taxpayer with tax debt. For some, the full liability is manageable through a structured payment plan. For others, the RCP is too high for an OIC to produce meaningful savings. Understanding the alternatives is part of any responsible tax debt analysis.

Installment agreements

An IRS installment agreement allows a taxpayer to repay the full tax debt (plus accruing interest and penalties) in monthly installments over time. There are several types, ranging from streamlined agreements (available for debts under certain thresholds with simplified application requirements) to Partial Payment Installment Agreements (PPIAs), which allow for monthly payments below the full accrual rate when the taxpayer’s financial situation does not support full payment before the CSED expires.

Installment agreements are easier to obtain than OICs and do not require the same intensive financial disclosure, but they do not reduce the principal debt. For taxpayers with manageable income and a debt that can be retired in a reasonable timeframe, an installment agreement may be the most straightforward path forward.

Currently Not Collectible (CNC) status

When a taxpayer’s income is insufficient to cover even basic allowable living expenses, the IRS may place the account in Currently Not Collectible status. While in CNC, active collection (levies, wage garnishments) is suspended. However, the debt remains in full, interest and penalties continue to accrue, and the IRS will periodically review the taxpayer’s financial situation. CNC status can be a useful bridge while a taxpayer’s financial situation stabilizes or while building a case for an OIC.

Penalty abatement: First Time Penalty Abatement and Reasonable Cause

The IRS imposes a variety of penalties, including the failure-to-file penalty, the failure-to-pay penalty, and the failure-to-deposit penalty for payroll taxes. These penalties can represent a substantial portion of the total balance owed. Two administrative relief mechanisms are available: First Time Penalty Abatement (FTA), which is available to taxpayers with a clean compliance history for the prior three years, and Reasonable Cause abatement, which is available when the taxpayer can demonstrate that their failure was due to circumstances beyond their control. Penalty abatement does not reduce tax principal, but it can meaningfully reduce the total balance owed and may be pursued alongside or instead of an OIC. See our post on navigating a civil tax controversy for a broader look at the resolution landscape.

Innocent spouse relief

When tax debt arises from a joint return, one spouse may qualify for innocent spouse relief under IRC § 6015 if the other spouse’s errors or omissions caused the underpayment and the requesting spouse did not know or have reason to know of the understatement. This is a distinct program from the OIC and is worth evaluating for married or formerly married taxpayers facing joint federal tax liabilities.

Bankruptcy and tax debt

Certain older income tax liabilities may be dischargeable in a Chapter 7 bankruptcy proceeding if they meet specific timing requirements: the tax return was due more than three years before the bankruptcy filing, the return was actually filed more than two years before the filing, and the assessment was made more than 240 days before the filing, among other conditions. Payroll taxes and trust fund penalties are generally not dischargeable. The intersection of tax debt and bankruptcy law is complex, and the decision to pursue bankruptcy for tax relief requires careful analysis. Critically, an open bankruptcy proceeding disqualifies a taxpayer from submitting an OIC, so these paths must be pursued one at a time.

There is no legal requirement to have an attorney submit an OIC on your behalf. Taxpayers can and do submit OICs on their own. But the OIC process is document-intensive and highly technical, and competent representation can meaningfully affect case strategy, financial presentation, responses to IRS inquiries, and appeals.

Strategic decisions that require legal analysis

Before a single form is filled out, there are strategic decisions that require legal and financial analysis: Which of the three OIC grounds applies? Is the DATC theory viable given the RCP, or is DATL a better path? Are there penalty abatement opportunities that should be pursued first to reduce the balance before an OIC is submitted? Is the CSED close enough that waiting could be strategically valuable? Should the OIC be submitted while an installment agreement is in place or after it is suspended? These are not questions with generic answers.

Accurate RCP computation and documentation

The difference between a viable and non-viable OIC often comes down to the accuracy of the RCP calculation and the quality of the financial documentation. An attorney who handles OIC cases regularly knows how to apply IRS Collection Financial Standards correctly, how to value assets in the manner the IRS will accept, how to document allowable expense claims above the National Standards thresholds (for items like out-of-pocket medical expenses, vehicle operating costs, and other necessary expenses), and how to present the financial picture in a way that is both complete and accurate.

A common DIY error is either overstating the offer amount (paying more than necessary because the taxpayer did not know how to minimize the RCP calculation within the rules) or understating it (resulting in rejection because the offer was below the correctly computed RCP). Both are costly mistakes that experienced representation avoids.

Responding to IRS information requests and counteroffers

Once an offer is submitted, the IRS examiner will often request additional documentation or issue a preliminary adverse finding. These interactions require a prompt, organized, and legally informed response. An attorney who understands the IRS’s internal review process and the specific grounds on which an examiner’s RCP calculation can be challenged can often turn an initial adverse determination into an accepted offer through the response and negotiation process.

Navigating the appeal if the offer is rejected

If the offer is rejected, the 30-day window to appeal to the IRS Independent Office of Appeals is a critical deadline. The appeal is a formal proceeding with its own standards. It is the last administrative opportunity to resolve the OIC before all remedies require litigation. A properly prepared appeal, focused on the specific factual or legal errors in the examiner’s determination, is substantially more likely to succeed than a generic request for reconsideration. Our firm handles these proceedings as part of our IRS and state tax appeal practice.

Coordinating federal and Maryland state resolution

Maryland taxpayers frequently face both federal and state tax exposure simultaneously. The two resolution processes are independent, operate on different timelines, and involve different collection mechanisms. An attorney who handles both federal and Maryland state tax matters can develop a coordinated strategy that avoids the common pitfall of resolving one and triggering aggressive collection action on the other.

The IRS charges a $205 non-refundable application fee for most OIC submissions filed on Form 656. This fee is waived for taxpayers who qualify for the low-income certification, meaning their household income is at or below 250% of the federal poverty guidelines. There is no application fee for Doubt as to Liability offers submitted on Form 656-L. The application fee is separate from the initial payment required with the offer (20% for a lump sum cash offer, or the first proposed monthly payment for a periodic payment offer), which is also generally non-refundable.

Generally, IRS levy and seizure activity is suspended once an OIC is deemed processable and while it remains under consideration, and for 30 days after rejection. However, the IRS can still file or maintain a federal tax lien during this period to protect its secured interest in your assets. The Collection Statute Expiration Date (CSED) is tolled (paused) for the duration of the review plus 30 days, extending the IRS’s collection window. This toll is one reason why taxpayers should not view a pending OIC as an indefinite protection against collection without understanding what the IRS may do at the conclusion of the process.

You have 30 days from the date on the rejection letter to file a written request for appeal with the IRS Independent Office of Appeals. The appeal is conducted by an appeals officer who is independent from the original examiner, and it provides a genuine opportunity to present additional documentation, challenge the examiner’s RCP calculation, and argue for acceptance. If the appeal is also unsuccessful, you can re-examine other resolution options, including installment agreements, Currently Not Collectible status, or re-submission of a better-supported offer if your financial circumstances change. Working with a tax appeal attorney is strongly advisable when pursuing this step.

Yes. The Comptroller of Maryland has authority under Maryland Code, Tax-General Article § 13-606 to compromise state tax liabilities. Maryland’s program is entirely separate from the federal OIC process, uses different financial analysis criteria, and does not automatically follow IRS decisions. An accepted federal OIC does not resolve Maryland state tax debt. Maryland taxpayers with both federal and state tax debt should pursue a coordinated resolution strategy that addresses both, ideally with counsel who handles both systems.

No. The IRS will not consider an OIC from a taxpayer with outstanding unfiled federal tax returns. This is an absolute processability requirement, and the offer will be returned without consideration. If the issue is unfiled required returns, the IRS generally applies any initial payment to the tax debt and returns the application fee. Getting current on all required filings is the mandatory first step before any OIC submission. The same requirement applies to estimated tax payments for the current year and federal employment tax deposits for business owners.

An installment agreement is a structured payment plan that pays the full tax debt (plus continuing interest and penalties) over time. It does not reduce the amount owed; it only extends the time to pay. An Offer in Compromise is a formal settlement that, if accepted, permanently resolves the liability for less than the full amount owed. OICs require substantially more financial documentation and analysis than installment agreements, but for qualifying taxpayers the total payment can be dramatically lower. The right choice depends on your specific financial situation, the size of the debt, your asset base, and how the IRS’s RCP calculation applies to your facts.

IRS processing times for OICs typically range from several months to over a year, depending on the complexity of the submission, how quickly the taxpayer responds to IRS information requests, and current IRS workload. Incomplete or poorly documented submissions significantly extend the timeline. One important statutory protection: under IRC § 7122(f), if the IRS does not act on a timely submitted, processable OIC within two years of the date of receipt, the offer is deemed accepted by operation of law. This provision underscores the importance of submitting a complete and processable offer from the outset.

Currently Not Collectible (CNC) status is a temporary administrative designation the IRS uses when a taxpayer demonstrates that after accounting for allowable living expenses there is no remaining income or assets from which to collect. While in CNC, the IRS suspends levy and seizure activity. However, the tax debt remains in full, and interest and penalties continue to accrue throughout. The IRS also periodically reviews CNC accounts and will resume collection if the taxpayer’s financial situation improves. An OIC, by contrast, permanently settles the debt for a reduced amount once accepted and the terms fulfilled. CNC is sometimes a useful holding position while a taxpayer builds a more viable OIC case or waits for the CSED to approach.