IRC 7122: Offer in Compromise Statutory Framework

1. What IRC 7122 Authorizes

IRC 7122(a) grants the Secretary of the Treasury the authority to compromise any civil or criminal case arising under the internal revenue laws prior to its referral to the Department of Justice. The offer in compromise (OIC) program is the primary vehicle through which that authority is exercised in civil collection matters.

The statutory authority in IRC 7122 is broad, but it is exercised through Treasury Regulation 301.7122-1, which defines the three grounds on which an OIC may be accepted, the application procedures, the mandatory payment requirements, the taxpayer eligibility conditions, and the post-acceptance compliance requirements. Understanding the statutory framework is essential because the procedural guides (Form 656-B, Form 433-A (OIC)) give instructions for completing the application, but the statute and regulations determine whether the IRS has legal authority to accept a given offer and whether a rejection can be challenged.

This guide addresses the statutory and regulatory framework. The companion procedural guide covers the Form 656 filing process, Reasonable Collection Potential (RCP) calculations using IRS national and local standards, and the administrative handling of a pending offer.

2. Ground 1: Doubt as to Collectibility (DATC)

The majority of accepted OICs are submitted on DATC grounds. Under Treasury Regulation 301.7122-1(b)(1)(ii), doubt as to collectibility exists when the taxpayer is unable to pay the full amount of the tax liability, either in a lump sum or through an installment agreement, within the remainder of the statutory collection period. The collection period is generally ten years from the date of assessment under IRC 6502, though it may be extended by tolling events (such as pending OIC, bankruptcy, installment agreement, and others).

The core of a DATC offer is the Reasonable Collection Potential (RCP) calculation:

• Asset component: The quick-sale value of all assets (real property, vehicles, financial accounts, business assets, retirement accounts reduced by an equity factor for early distribution penalties and taxes) minus secured debt against those assets.
• Income component: Monthly disposable income (gross income minus IRS-allowable living expenses under national and local standards) multiplied by the applicable collection period (12 months for a lump-sum offer; 24 months for a periodic payment offer, reflecting that installment payments create a longer repayment period). Verify current multipliers and IRS allowable expense standards at IRS.gov.

The IRS will generally not accept a DATC offer below the calculated RCP. An offer at or above the RCP is presumptively acceptable; an offer below the RCP requires the taxpayer to identify specific assets or income items that the IRS overstated in its RCP calculation, or to raise equitable grounds that justify a deviation.

3. Ground 2: Doubt as to Liability (DATL)

Under Treasury Regulation 301.7122-1(b)(1)(i), doubt as to liability exists when there is genuine uncertainty whether the tax liability is correct. A successful DATL offer does not require the taxpayer to demonstrate inability to pay -- the offer resolves the existence or amount of the liability itself, not merely the collection path.

Circumstances that support a DATL offer include:

• The statutory assessment period under IRC 6501 had expired before the IRS made the assessment, meaning the tax was assessed outside the applicable limitations period.
• An audit adjustment was made based on a factual error that can be documented (for example, the IRS disallowed a business expense because it misclassified an item or overlooked documentation that was not provided during the examination).
• The legal basis for the assessment is genuinely in dispute and has not been finally resolved, and the taxpayer has a good-faith legal argument that the liability is not owed.
• A math error or computational mistake inflated the assessment, and the IRS's error can be demonstrated with documentation.

A DATL offer is NOT appropriate as a mechanism to relitigate issues that were raised (or could have been raised) and resolved through the examination and appeals process. The IRS will require the taxpayer to explain why the liability is doubtful and to provide supporting documentation. If the IRS determines that the underlying liability was correctly assessed and that no genuine doubt exists, it will reject the offer on DATL grounds and may still evaluate it as a DATC offer if the Form 433-A (OIC) financial information supports DATC analysis.

4. Ground 3: Effective Tax Administration (ETA)

Under Treasury Regulation 301.7122-1(b)(1)(iii), the ETA ground applies when collection of the full liability would be detrimental to voluntary compliance or would be against equity and good conscience based on the facts and circumstances. Unlike DATC, ETA contemplates that the taxpayer HAS the ability to pay the full liability but exceptional circumstances make collection inequitable.

Treasury Regulation 301.7122-1(b)(3) identifies three categories of ETA cases:

1. Undermining future voluntary compliance: Collection would create economic hardship so severe that it would undermine the taxpayer's ability to comply with tax obligations in the future -- for example, forcing the taxpayer into bankruptcy, destroying a viable business, or creating conditions that make future noncompliance more likely than not.
2. Exceptional circumstances: The taxpayer has experienced severe or unusual circumstances that make collection inequitable, such as a serious illness that was the direct cause of the noncompliance, a catastrophic event (natural disaster, loss of a family member who managed finances), or other circumstances that a reasonable person would find compelling.
3. Public policy and equity: Collection would be fundamentally unfair or contrary to the public interest based on the facts of the case, even if the taxpayer can technically pay. This is a residual category and is rarely invoked successfully.

An ETA offer must still include a financial disclosure (Form 433-A (OIC)) to allow the IRS to evaluate whether the taxpayer could otherwise pay. The IRS evaluates ETA offers holistically and may accept an offer below the RCP if the ETA rationale is compelling. IRS Policy Statement 5-100 and internal revenue manual guidance (IRM 5.8.11) provide additional criteria for ETA evaluation; verify current IRM guidance at IRS.gov.

5. The Non-Refundable Payment Requirements (IRC 7122(c))

IRC 7122(c) creates two payment categories based on the number of proposed installments:

• Lump-sum offer: Any offer payable in 5 or fewer installments. Requires 20% of the total offer amount submitted with Form 656.
• Periodic payment offer: Any offer payable in 6 or more installments (over a period not to exceed 24 months from the date the offer is submitted). Requires the first proposed monthly installment submitted with Form 656. Each subsequent installment must be paid while the offer is pending (typically while the IRS processes and evaluates the offer).

For a periodic payment offer, the ongoing installment obligation means that months of evaluation time translate into additional payments that reduce the tax balance. If the offer is rejected after 12 months of IRS evaluation, the taxpayer will have made 13 installment payments (one at submission, 12 during evaluation), all of which are credited to the liability but are non-refundable.

Low-income taxpayers who qualify under the IRS's income threshold may be exempt from the initial payment requirement. Verify current thresholds and the application process for fee waivers in the Form 656-B instructions and at IRS.gov.

6. The 24-Month Deemed Acceptance Rule (IRC 7122(d))

The 24-month deemed acceptance rule under IRC 7122(d) is a powerful statutory protection for taxpayers whose OIC has been pending for an extended period. If the IRS fails to act on the offer within 24 months, the offer is deemed accepted by law and becomes binding. The IRS is then required to accept the offered amount as full satisfaction of the liability and to release any liens.

Key mechanics of the 24-month rule:

• Start date: The 24-month period begins on the date the IRS receives the processable offer (the date it is submitted with all required items, including the required initial payment). An offer returned as non-processable does not start the 24-month clock.
• Tolling: The 24-month period is tolled during any period in which a Tax Court proceeding is pending. Additional tolling events may apply; verify with current IRS guidance and IRM 5.8.7 at IRS.gov.
• IRS practice: In practice, the IRS rarely allows an OIC to reach the 24-month mark without acting on it. The deemed acceptance rule is most relevant as a deadline-management tool and as a basis to demand IRS action on a stalled offer.
• Withdrawal: A taxpayer may withdraw a pending OIC at any time before acceptance. Withdrawal terminates the offer and stops the 24-month clock. The initial non-refundable payment is not returned on withdrawal.

7. Threshold Eligibility Requirements

Before submitting an OIC, a taxpayer must meet the threshold eligibility requirements in Treasury Regulation 301.7122-1(e)(2). The most important conditions are:

• All required returns filed: The taxpayer must have filed all required federal tax returns (individual, business, employment tax, information returns) for all years, including delinquent returns. The IRS will return the offer as non-processable if unfiled returns are identified during processing.
• Estimated tax payments current: For taxpayers with estimated tax obligations (self-employed individuals, partnerships, and others), estimated tax payments for the current year must be current at the time of submission and during IRS evaluation of the offer.
• No open bankruptcy: A taxpayer who is in an active bankruptcy proceeding under Title 11 is ineligible to submit an OIC. The OIC program requires that the IRS be able to create a binding settlement, which the automatic stay in bankruptcy prevents. Verify that no bankruptcy petition has been filed before submitting an offer.
• Form 656 and 433-A (OIC) completed and signed: Both forms must be fully completed, signed under penalty of perjury, and accompanied by the required documentation and initial payment.

Collateral Agreements

Under Treasury Regulation 301.7122-1(c)(3), the IRS may condition acceptance of an OIC on the taxpayer's execution of a collateral agreement. The most common is an agreement to pay a percentage of future income above a defined threshold for a specified period (typically 5 years). A collateral agreement is separately negotiated; the terms depend on the taxpayer's income profile and the grounds of the offer. Practitioners should review any collateral agreement terms carefully before the client signs, because violation of a collateral agreement may result in the IRS reinstating the original tax liability.

Post-Acceptance Compliance

An accepted OIC requires the taxpayer to remain in full tax compliance for the 5-year period following acceptance (filing all returns on time and paying all taxes due). Failure to comply during this period may allow the IRS to default the OIC and reinstate the original liability, less any amounts paid under the offer. The 5-year compliance period is a condition of the acceptance agreement, not a separate statute; verify current terms in Form 656 and the OIC acceptance letter.

8. Raising OIC as a Collection Alternative in CDP Hearings

The CDP framework under IRC 6330 requires the IRS Appeals officer to consider collection alternatives -- including installment agreements, OICs, currently not collectible status, and lien withdrawals -- as part of the CDP hearing. An OIC raised in a CDP hearing is evaluated under the same three-ground framework (DATC, DATL, ETA) as a Form 656 offer, but the Appeals officer does not calculate the RCP in the same way the Collection function would on a formal OIC submission.

Raising a DATL position in connection with a CDP hearing has special significance: it preserves the taxpayer's right to Tax Court review of the underlying liability (to the extent the liability was not previously determined in a court proceeding or admitted in a prior CDP hearing). A taxpayer who accepts the underlying liability in a CDP hearing without raising DATL -- or who fails to raise DATL within the CDP hearing -- generally cannot raise the underlying liability as an issue in Tax Court review of the CDP determination. This is a distinct and important reason to analyze the DATL ground even when DATC is the primary OIC strategy.

9. OBBBA: No Direct Amendments to IRC 7122

The One Big Beautiful Bill Act (OBBBA, Pub. L. 119-21, enacted July 4, 2026) did not amend IRC 7122 or the offer in compromise statutory framework. The three grounds, the non-refundable payment requirements, the 24-month deemed acceptance rule, and the Treasury Regulation 301.7122-1 framework remain unchanged from their pre-OBBBA form.

Practitioners should monitor IRS.gov and the Internal Revenue Bulletin for any OBBBA-related guidance that may affect OIC processing procedures, allowable expense standards, or RCP calculation methodologies. The IRS periodically updates national and local standard expense amounts, and those updates affect every DATC offer regardless of whether any statutory amendment has been made.

10. Strategic Considerations and Common Pitfalls

Ground Selection Is Not Optional

Form 656 requires the taxpayer to identify the ground(s) for the offer. A taxpayer who checks the wrong box does not merely make an administrative error -- the choice of ground determines the legal framework the IRS applies during evaluation and may affect the taxpayer's rights if the offer is rejected. A taxpayer who submits under DATL and loses may be in a worse position to re-submit under DATC (because the IRS now has a complete financial profile). Assess all three grounds at the outset of every OIC engagement and choose the primary ground deliberately.

The Statutory Tolling vs. Voluntary Withdrawal Decision

A practitioner who has submitted an OIC and is now considering filing a Tax Court petition for the same client faces a direct conflict: the Tax Court petition tolls the 24-month clock, potentially significantly extending the time before deemed acceptance. In cases where the OIC is strong and close to the 24-month mark, voluntary withdrawal of the OIC before filing the Tax Court petition may be preferable to indefinitely tolling the deemed acceptance period.

The Anti-Staleness Problem

An OIC pending for many months may become stale if the taxpayer's financial condition has materially changed (either improved or deteriorated). A significant improvement in the taxpayer's RCP after submission gives the IRS grounds to reject an offer that would otherwise be accepted. Practitioners with clients whose financial condition improved during OIC pendency should assess whether to amend the offer or to withdraw and re-submit before the IRS conducts its final evaluation.

Lien Implications of OIC Submission

Submission of an OIC does not release a filed federal tax lien. However, an accepted OIC requires the IRS to release any federal tax liens within 30 days of the date the taxpayer fully complies with the terms of the accepted offer. During the pendency of the OIC, the IRS is generally prohibited from levying -- but not from maintaining existing liens -- unless the taxpayer terminates the OIC or the OIC is rejected.

11. Claims and Positions Taken in This Guide

Frequently Asked Questions