An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.

The Secretary of the Treasury is granted broad authority to compromise tax liabilities in IRC Section 7122.

The Commissioner of Internal Revenue, in temporary and proposed regulations 26 CFR Section 301.7122–1T approved by the secretary, is authorized to compromise a liability on any one of three grounds; doubt as to collectibility, doubt as to liability, or to promote effective tax administration.

Delegation Order No. 11 in IRM 1.2 redelegates the commissioner's authority to compromise.

In Policy Statement P–5–100, the commissioner instructs that an offer in compromise will be accepted when it is unlikely the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to reporting a case currently not collectible.

Offers will not be accepted if the liability can be paid in full under installment agreement guidelines. If, however, special circumstances exist such that collection in full would create an economic hardship or be detrimental to voluntary compliance the offer may be accepted on the basis of effective tax administration. Other factors, such as the legitimate threat of bankruptcy may result in an offer being accepted.

A compromise is effective for the entire assessed liability for taxes, penalties and interest for the years or periods covered by the offer. All questions of tax liability for the years or periods covered by the agreement are conclusively settled. Neither the taxpayer nor the government can reopen a compromised tax year or period unless there was falsification of information or documents, concealment of ability to pay and/or assets, or a mutual mistake of a material fact which would be sufficient to set aside or reform a contract.

Taxpayers may submit, and we will consider, an offer to compromise taxes due on tax returns which have been filed but have not yet been assessed. However, before the offer can be accepted, the taxes must be assessed.

A compromise will not be accepted on any tax liability which has become unenforceable by reason of lapse of time.

If a taxpayer desires to make a voluntary payment on a liability for which the statutory period for collection has expired, they should provide a signed statement that they have been advised collection of the tax is barred. Attach the statement to the payment posting document and process the payment through normal remittance processing procedures. Do not treat these payments as offer payments.

IRC Section 6305 charges the Secretary of the Treasury to assess and collect certain child support obligations on behalf of the Secretary of Health and Human Services. These liabilities are identified on the non-master file with a master file tax code of 59.

The Secretary of the Treasury is not authorized to compromise these liabilities. However, the individual may seek a legal, equitable or administrative action in a state court or before a state agency to determine the correct liability or to recover an amount collected under this section.

Each separate tax period and type of tax must be indicated on Form 656. For Trust Fund Recovery Penalty (TFRP) assessments only the last quarterly period, as indicated by the assessment, needs to be shown. If an offer is accepted that includes TFRP assessments, the acceptance file must include information that identifies the BMF periods that are included in the TFRP assessment.

A taxpayer may submit an offer that does not include all outstanding liabilities. Prior to accepting the offer Form 656 must be amended to include all outstanding tax liabilities.

An offer submitted under Doubt as to Liability should be accepted for only the tax periods that are in doubt.

Taxpayers must indicate one or more bases upon which they propose to compromise; doubt as to collectibility, doubt as to liability or to promote effective tax administration.

The total amount of money offered must be indicated. The amount offered may not include money already paid, expected future refunds , or funds attached by levy.

Taxpayers are expected to pay the entire amount offered in as short a time as possible.

The amounts and due dates of payments must be specifically described.

Taxpayers must agree to all the standard conditions of the contract as they are printed on the form.

Offers accepted under Doubt as to Liability or Effective Tax Administration based on Detriment to Voluntary Compliance are not subject to the waiver of refund condition. See Section 11 discussing Detriment to Voluntary Compliance offers.

Taxpayers may use the designated space on Form 656 to explain why they are submitting the offer or they may attach a separate statement.

If special circumstances exist, the taxpayer must explain their situation.

Each taxpayer who is a party to an offer should personally sign the Form 656 and collection information statements. When unusual circumstances prevent a taxpayer from doing so, an authorized power of attorney may sign for the taxpayer. Include in the case file a copy of the properly executed Form 2848, Power of Attorney and Declaration of Representative or CFINQ print as verification of the representative's authority.

In the case of joint offers in compromise, all parties, or their designated representative as indicated in paragraph (1), must sign Form 656 to ensure the provisions of the contract bind all parties.

In the case of a taxpayer corporation, the corporate name should be entered on the first signature line and the signature, name and title of the authorized officer on the second line.

An offer submitted by the fiduciary of an estate of a deceased taxpayer will be binding on the taxpayer's estate to the extent that it would be binding on a taxpayer who submits an offer on their own behalf. Include in the case file a copy of the fiduciary's appointment document.

If an offer is submitted on behalf of a deceased taxpayer, when there is no estate or fiduciary, the individual who signs the offer must have authority. This authority can be designated by a will appointing that individual as the executor or by written authorization from the probate court.