Offer in Compromise - Practitioner Guide and Cover Letter

OFFER IN COMPROMISE (OIC)

Practitioner Guide, Cover Letter, and Submission Checklist

United States - Internal Revenue Service

Pursuant to IRC § 7122 and IRS Form 656

IMPORTANT: This template is a practitioner aid for preparing and organizing an Offer in Compromise submission to the IRS. It does NOT replace the official IRS forms (Form 656, Form 433-A(OIC), Form 433-B(OIC), or Form 656-L), which must be completed and submitted as required. Always verify that you are using the most current version of IRS forms and that all fees and payment requirements are current.

TABLE OF CONTENTS

1. Overview and Basis for Offer
2. Taxpayer Information
3. Eligibility Pre-Screening
4. OIC Basis Selection and Analysis
5. Reasonable Collection Potential (RCP) Calculation
6. Offer Amount Determination
7. Payment Options
8. Submission Packet Checklist
9. Financial Documentation Checklist
10. Narrative Statement (ETA or DATL)
11. Cover Letter Template
12. Exhibit Index
13. Post-Submission Procedures
14. Practitioner Notes and Strategy

1. OVERVIEW AND BASIS FOR OFFER

A. Statutory Authority

1.1. IRC § 7122 authorizes the IRS to compromise any civil or criminal case arising under the internal revenue laws prior to referral to the Department of Justice for prosecution or defense.

1.2. The IRS may accept an OIC based on one of three grounds:

☐ Doubt as to Collectibility (DATC): The taxpayer's assets and income are insufficient to pay the full tax liability. This is the most common basis for an OIC.

☐ Doubt as to Liability (DATL): There is a genuine dispute that the assessed tax liability is correct. (Uses Form 656-L; no application fee or initial payment required.)

☐ Effective Tax Administration (ETA): The taxpayer can pay the full amount, but collection would create an economic hardship or would be unfair and inequitable. Requires exceptional circumstances.

B. Key Regulatory References

• 26 C.F.R. § 301.7122-1: Detailed OIC regulations
• IRM 5.8: Internal Revenue Manual, Offer in Compromise procedures
• IRM 5.8.1: Overview of OIC process
• IRM 5.8.4: Doubt as to Collectibility
• IRM 5.8.5: Doubt as to Liability
• IRM 5.8.11: Effective Tax Administration

2. TAXPAYER INFORMATION

Representative Information

3. ELIGIBILITY PRE-SCREENING

Before submitting an OIC, verify the following eligibility requirements (all must be met):

A. Filing Compliance

☐ All required federal tax returns have been filed (including delinquent returns)
☐ Returns filed for tax years: [________________________________]
☐ Any unfiled returns have been prepared and will be submitted with or before the OIC

B. Estimated Tax / Withholding Compliance

☐ Current-year estimated tax payments are being made (if required)
☐ Current-year federal income tax withholding is adequate
☐ Employment tax deposits are current (if applicable to business)

C. Bankruptcy Status

☐ Taxpayer is NOT currently in an open bankruptcy proceeding
☐ If previously in bankruptcy, case was closed/dismissed on: [__/__/____]

D. IRS Pre-Qualifier Tool

☐ The IRS OIC Pre-Qualifier Tool (available at irs.gov) has been used to perform a preliminary assessment
☐ Results: ☐ Likely eligible ☐ May be eligible ☐ Unlikely to be accepted

E. Low-Income Certification (Fee/Payment Waiver)

☐ Taxpayer qualifies as a low-income taxpayer (income at or below 250% of the federal poverty level)
☐ If qualified, the $205 application fee and initial payment are waived
☐ Low-Income Certification completed on Form 656, Section 1

4. OIC BASIS SELECTION AND ANALYSIS

A. Doubt as to Collectibility (DATC)

4.1. When to use: The taxpayer cannot pay the full tax liability from current income and assets within the remaining time on the Collection Statute Expiration Date (CSED).

4.2. Analysis framework:

• Calculate Reasonable Collection Potential (RCP) - see Section 5
• Compare RCP to total tax liability
• If RCP is less than total liability, DATC may be appropriate
• The offer amount must equal or exceed the RCP

4.3. Key factors:
☐ Monthly disposable income (income minus allowable expenses)
☐ Net equity in assets (fair market value minus encumbrances, with quick-sale discount)
☐ Remaining months on CSED
☐ Future income potential

B. Doubt as to Liability (DATL)

4.4. When to use: There is a legitimate dispute about whether the assessed tax is correct. Examples include:

• Mathematical or clerical errors in the assessment
• Incorrect application of the tax law
• Errors in audit findings
• Missing documentation that was available but not considered
• Other legal or factual basis for challenging the assessment

4.5. Requirements:
☐ Use Form 656-L (separate from standard Form 656)
☐ No application fee required
☐ No initial payment required
☐ Must include a detailed written statement explaining why the liability is disputed
☐ Must include supporting documentation and legal authority

C. Effective Tax Administration (ETA)

4.6. When to use: The taxpayer CAN pay the full amount, but collection would:
☐ Create an economic hardship (taxpayer unable to meet basic living expenses), OR
☐ Be unfair and inequitable given exceptional circumstances (e.g., disability, serious illness, or other compelling factors demonstrating that collection is not in the interest of effective tax administration)

4.7. Requirements:
☐ Must demonstrate exceptional circumstances
☐ Supported by medical records, disability documentation, or other objective evidence
☐ Must explain why collection of the full amount is unfair

5. REASONABLE COLLECTION POTENTIAL (RCP) CALCULATION

A. RCP Formula

RCP = Net Equity in Assets + Future Income

Where:

• Net Equity in Assets = (Fair Market Value of Assets x Quick-Sale Value Percentage) - Encumbrances
• Future Income = (Monthly Disposable Income) x (Number of Months)
• Lump sum payment: Future Income = Monthly Disposable Income x 12 months
• Periodic payment: Future Income = Monthly Disposable Income x 24 months (or remaining CSED months, whichever is less)

B. Asset Valuation Worksheet

C. Monthly Income and Expense Analysis

D. RCP Summary

6. OFFER AMOUNT DETERMINATION

6.1. The offer amount must equal or exceed the calculated RCP.

6.2. Proposed Offer Amount: $[________________________________]

6.3. Justification: The proposed offer amount ☐ equals / ☐ exceeds the RCP because: [________________________________]

6.4. ☐ The offer includes a "cushion" above the RCP to improve the likelihood of acceptance: $[________________________________]

7. PAYMENT OPTIONS

A. Lump Sum Cash Offer (IRC § 7122(c)(1)(A))

☐ Selected

7.1. The taxpayer elects a lump sum cash offer, which requires:

• Initial payment: 20% of the offer amount = $[________________________________], submitted with Form 656
• Balance: Remaining 80% = $[________________________________], payable within 5 months of acceptance
• ☐ Initial payment enclosed with submission

B. Short-Term Periodic Payment Offer

☐ Selected

7.2. The taxpayer elects a periodic payment offer (paid within 24 months of acceptance):

• Initial payment: First proposed installment = $[________________________________], submitted with Form 656
• Monthly payments: $[________________________________] per month
• Payments continue during IRS consideration (must make payments as proposed while OIC is pending)
• Total paid over 24 months: $[________________________________]

C. Deferred Periodic Payment Offer

☐ Selected

7.3. The taxpayer elects a deferred periodic payment offer (paid over the remaining CSED):

• Payment schedule: [________________________________]
• Payments continue during consideration

8. SUBMISSION PACKET CHECKLIST

Organize the OIC submission packet in the following order:

☐ 1. Cover Letter (see Section 11 below)
☐ 2. Form 656 (Offer in Compromise) - signed and dated
☐ 3. Form 656-L (if DATL basis) - signed and dated
☐ 4. Form 433-A(OIC) (Collection Information Statement for Individuals) - completed and signed
☐ 5. Form 433-B(OIC) (Collection Information Statement for Businesses) - if applicable
☐ 6. Application Fee: $205 (check or money order payable to "United States Treasury")
☐ Fee waived (low-income certification)
☐ 7. Initial Payment:
☐ Lump sum: 20% = $[________________________________]
☐ Periodic: First installment = $[________________________________]
☐ Payment waived (low-income certification)
☐ 8. Form 2848 (Power of Attorney) - if represented
☐ 9. Financial Documentation (see Section 9)
☐ 10. Narrative Statement (if ETA or DATL basis) (see Section 10)
☐ 11. Supporting Exhibits and Index (see Section 12)

9. FINANCIAL DOCUMENTATION CHECKLIST

Attach the following documents to support the Form 433-A(OIC) and/or 433-B(OIC):

Income Documentation

☐ Most recent 3 months of pay stubs (all employment)
☐ Most recent federal tax return with all schedules and W-2s/1099s
☐ Self-employment: Most recent 6 months of profit and loss statements
☐ Social Security benefit statements
☐ Pension/retirement income statements
☐ Rental income documentation
☐ Any other income documentation

Bank and Financial Accounts

☐ Bank statements for ALL accounts (last 3 months) - checking, savings, money market
☐ Investment/brokerage account statements (last 3 months)
☐ Retirement account statements (401(k), IRA, etc.)
☐ Life insurance policies with cash surrender values

Real Property

☐ Most recent property tax assessment or appraisal for each property
☐ Mortgage statements (current balance, monthly payment)
☐ HELOC statements (if applicable)
☐ Comparable sales data or Zillow/Redfin estimates (as supporting evidence)

Vehicles

☐ Vehicle titles or registration
☐ Loan/lease statements
☐ Kelley Blue Book or NADA valuation printouts

Monthly Expenses

☐ Rent/mortgage payment verification
☐ Utility bills (last 3 months)
☐ Health insurance premium documentation
☐ Out-of-pocket medical expense documentation
☐ Court-ordered payment documentation (child support, alimony)
☐ Child/dependent care expense documentation

Business Documentation (if applicable)

☐ Business financial statements (balance sheet, P&L) for last 12 months
☐ Business bank statements (last 3 months)
☐ Accounts receivable and payable aging reports
☐ Inventory records
☐ Business asset valuations
☐ Equipment and vehicle information

10. NARRATIVE STATEMENT

A. Effective Tax Administration (ETA) Narrative

☐ Use this section if the OIC is based on ETA.

Exceptional Circumstances:
[________________________________]
[________________________________]
[________________________________]

Evidence of Hardship:
☐ Medical records documenting: [________________________________]
☐ Disability documentation: [________________________________]
☐ Dependent care obligations: [________________________________]
☐ Other exceptional circumstances: [________________________________]

Why Full Collection Is Inequitable:
[________________________________]
[________________________________]

B. Doubt as to Liability (DATL) Narrative

☐ Use this section if the OIC is based on DATL.

Summary of Disputed Assessment:
[________________________________]
[________________________________]

Legal Authority Supporting Taxpayer's Position:
☐ IRC Section(s): [________________________________]
☐ Treasury Regulation(s): [________________________________]
☐ Revenue Ruling(s)/Procedure(s): [________________________________]
☐ Case law: [________________________________]

Prior Attempts to Resolve:
[________________________________]

Supporting Documentation:
[________________________________]

11. COVER LETTER TEMPLATE

[LAW FIRM / REPRESENTATIVE LETTERHEAD]

[________________________________]
[Address]
[City, State, ZIP]
[Telephone]
[Email]

[__/__/____]

Internal Revenue Service
[________________________________]
[OIC Unit Address - verify current address at irs.gov]

Re: Offer in Compromise
Taxpayer: [________________________________]
SSN/EIN: [________________________________]
Tax Period(s): [________________________________]
Basis: ☐ Doubt as to Collectibility ☐ Doubt as to Liability ☐ Effective Tax Administration

To Whom It May Concern:

On behalf of [________________________________] ("Taxpayer"), enclosed please find a complete Offer in Compromise submission, organized as follows:

1. Form 656 (Offer in Compromise), signed and dated
2. Form 433-A(OIC) (Collection Information Statement for Individuals)
3. ☐ Form 433-B(OIC) (Collection Information Statement for Business) [if applicable]
4. Application fee of $205 ☐ enclosed / ☐ waived (low-income certification)
5. Initial payment of $[________________________________] ☐ enclosed / ☐ waived
6. Supporting financial documentation (see Exhibit Index)
7. ☐ Narrative statement [if ETA or DATL]
8. Form 2848 (Power of Attorney)

Summary of Offer:

The Taxpayer offers to compromise the tax liability of $[________________________________] for the total sum of $[________________________________], on the basis of [________________________________]. The offer amount reflects the Taxpayer's Reasonable Collection Potential based on current income, assets, and allowable expenses as documented in the enclosed financial statements.

Payment Terms:

☐ Lump Sum: Initial payment of $[________________________________] (20%) enclosed. Balance of $[________________________________] payable within 5 months of acceptance.

☐ Periodic Payment: Initial payment of $[________________________________] enclosed. Monthly payments of $[________________________________] for [____] months. Payments will continue during consideration of the offer.

☐ The Taxpayer qualifies for low-income certification; application fee and initial payment are waived.

Please contact the undersigned with any questions or requests for additional information.

Respectfully submitted,

_____________________________________________
[Representative Name]
[Title]
[CAF Number]
[Firm]
[Address]
[Telephone] | [Email]

Enclosures: As described above and in Exhibit Index

12. EXHIBIT INDEX

13. POST-SUBMISSION PROCEDURES

A. During IRS Processing

13.1. Compliance requirement: The taxpayer must remain in full compliance with all filing and payment obligations while the OIC is pending. Failure to comply may result in return of the offer.

13.2. CSED tolling: The 10-year Collection Statute Expiration Date (IRC § 6502) is tolled (suspended) during the period the OIC is pending, plus 30 days after rejection or withdrawal.

13.3. Levy protection: The IRS generally will not levy the taxpayer's property while an OIC is pending (IRC § 6331(k)).

13.4. Processing time: OIC processing typically takes 6-12 months, though complex cases may take longer.

13.5. Periodic payments: If a periodic payment offer is selected, continue making proposed monthly payments while the OIC is pending.

B. If the OIC Is Accepted

13.6. Pay any remaining balance according to the accepted terms.

13.7. The taxpayer must remain in compliance with all tax filing and payment obligations for five (5) years following acceptance (or until the offered amount is paid in full, whichever is longer). Failure to comply during this period may result in default, reinstatement of the full original liability (less amounts paid), and resumption of collection activities.

13.8. Any federal tax refund due within the calendar year the OIC is accepted will be applied to the tax debt (not refunded to the taxpayer).

C. If the OIC Is Rejected

13.9. The taxpayer has 30 days from the date of the rejection letter to request Appeals review by filing a written protest.

13.10. During the 30-day period and during Appeals consideration, the CSED remains tolled and levy protection continues.

13.11. If Appeals upholds the rejection, the taxpayer may resubmit a new OIC or explore other resolution options (installment agreement, CNC status, etc.).

14. PRACTITIONER NOTES AND STRATEGY

OIC Strategy Considerations

14.1. CSED awareness: Calculate the remaining CSED for each tax period. If the CSED will expire soon, the IRS may be more willing to accept a lower offer. Conversely, be aware that submitting an OIC tolls the CSED.

14.2. Allowable living expenses: The IRS uses national and local standard amounts for food, clothing, housing, transportation, and other expenses. Exceeding these standards requires justification. See IRM 5.8.5.22 and the IRS Allowable Living Expense tables.

14.3. Asset dissipation: If the taxpayer recently sold or transferred assets, the IRS may include the dissipated asset value in the RCP. Prepare to explain any asset transfers.

14.4. Income averaging: The IRS may average income over recent periods rather than using a single month. Provide documentation showing income trends.

14.5. Special circumstances: Document any special circumstances that support a lower RCP (medical conditions, age, education level, employment prospects).

14.6. Multiple liabilities: If the taxpayer has liabilities across multiple tax periods, all periods should be included in a single OIC.

14.7. Trust fund penalties: IRC § 6672 trust fund recovery penalties (TFRP) are assessed against responsible persons individually. An OIC for the business entity does not compromise the individual's TFRP liability.

14.8. Spouses: Joint filers may submit a joint OIC or individual OICs. Strategy depends on whether both spouses are liable and their individual financial situations. Consider Innocent Spouse relief (IRC § 6015) as an alternative.

SOURCES AND REFERENCES

1. IRC § 7122 - Authority to compromise tax liabilities
2. IRC § 7122(c) - OIC guidelines, standards, and procedures
3. IRC § 7122(d) - Allowable living expenses in OIC evaluation
4. IRC § 6159 - Installment agreement authority
5. IRC § 6331(k) - Levy restrictions during OIC pendency
6. IRC § 6502 - Collection statute expiration date (10 years)
7. IRC § 6672 - Trust fund recovery penalty
8. IRC § 6015 - Innocent spouse relief
9. IRC § 7803(e) - IRS Independent Office of Appeals
10. 26 C.F.R. § 301.7122-1 - OIC regulations
11. IRS Form 656 - Offer in Compromise (individual)
12. IRS Form 656-L - Offer in Compromise (Doubt as to Liability)
13. IRS Form 433-A(OIC) - Collection Information Statement for Individuals
14. IRS Form 433-B(OIC) - Collection Information Statement for Businesses
15. IRS Form 2848 - Power of Attorney and Declaration of Representative
16. IRM 5.8 - Internal Revenue Manual: Offer in Compromise
17. IRM 5.8.1 - OIC overview and processing
18. IRM 5.8.4 - Doubt as to Collectibility
19. IRM 5.8.5 - Financial analysis and RCP calculation
20. IRM 5.8.11 - Effective Tax Administration
21. Rev. Proc. 2003-71 - OIC submission procedures
22. IRS Publication 594 - The IRS Collection Process
23. IRS Publication 1 - Your Rights as a Taxpayer
24. IRS OIC Pre-Qualifier Tool - https://irs.treasury.gov/oic_pre_qualifier/
25. United States v. Dalm, 494 U.S. 596 (1990) - Compromise authority principles

This template is provided for informational and educational purposes only. It does not constitute legal or tax advice. Federal tax law, IRS procedures, forms, fees, and requirements change frequently. Always verify current requirements at irs.gov and consult with a qualified tax professional before submitting an Offer in Compromise. Use of this template does not create an attorney-client, accountant-client, or representative-client relationship.