This section provides an introduction to offers in compromise received in Examination and initial processing procedures.

Form 656, Offer in Compromise (OIC), is a taxpayer's proposal to the Government for settlement of a liability for an amount less than previously determined and assessed. An offer, having been filed, will be acted upon by recommendation for acceptance, rejection, or it may be withdrawn by the taxpayer or the taxpayer's duly authorized agent.

An accepted offer in compromise is a legally binding agreement between the Service and the taxpayer, and is enforceable by either party. Contract law principles apply to compromise agreements. The compromise of a tax liability can rest upon doubt as to collectibility, doubt as to liability, doubt as to liability and collectibility, or promotion of effective tax administration. In general, Collection has jurisdiction over Doubt as to Collectibility offers, and Examination has jurisdictional responsibility for the investigation and processing of offers based on doubt as to liability. In certain circumstances, the Office of Appeals will have jurisdiction of offers. (See Sections 7.4 and 7.4.1 of this Handbook regarding Appeals jurisdiction).

Offers that do not meet the doubt as to liability or doubt as to collectibility criteria may be compromised under the criteria for the promotion of effective tax administration. Jurisdiction of these offers rests with Collection; however, some may be forwarded to Examination for consideration.

The Service Center has the authority to consider penalty offers based upon doubt as to liability. Area Office action or investigation is not necessary unless the offer is based on doubt as to collectibility or there are unusual circumstances or complex questions involved. Penalties that are not subject to reasonable cause determination are not subject to compromise based on doubt as to liability. Penalty liabilities alone may not be compromised unless there is substantial doubt as to liability and therefore must be processed in the same manner as a tax offer.

Offer in compromise cases may be forwarded from Service/Customer Service Center Classification or transferred from Collection to Examination for further investigation. Examination will make a determination whether the offer merits further consideration.

Upon receipt of offers in compromise in Exam, the OIC Coordinator (generally located within Technical Support) will insure input of transaction code 480, jurisdiction code 2. In some cases, STAUP 71 should also be input and is necessary to suspend collection activity (offer merits consideration and there is no reason to believe that collection of the tax liability is in jeopardy). Form 2515, Record of Offer In Compromise, should be completed and used for monitoring offer cases received in Exam.

Offer receipts will fall into 3 categories: processable, non-processable, and offers that must be perfected. Processable offers are those where Form 656 is properly prepared and required documents are attached. Non-processable offers are those which may be returned immediately [5 below] or those that are not perfected within 14 days [4 below]. Offers that must be perfected are those where items are omitted from Form 656 and contact must be made with the taxpayer to obtain the information needed to make the offer processable.

The Service should work with taxpayers to provide an opportunity to perfect defects or errors in the offers. A 14-day additional information letter may be used for this purpose, and may be issued a maximum of two times. See Exhibits 4.18.1–1 and 4.18.1–2 for examples of letters which may be used for this purpose. Offers that are not perfected by the taxpayer within 14 days of request should be returned to the taxpayer as non-processable; this time frame may be extended if warranted.

The OIC coordinator will analyze the offer to determine if it is non-processable or may be returned without further investigation. Offers that are not processable (per IRM Handbook 5.8, Section 3) will be returned to the taxpayer within 14 days. Offers may be returned immediately if: the offer is frivolous, groundless, or has been submitted for the purpose of delaying collection (i.e. not raising a valid collectibility or liability issue, repetitive resubmission of offers which have already been rejected). Appropriate managerial approval must be obtained before an offer can be returned on these grounds.

If the offer is based solely on doubt as to liability and the liability has been finally determined by the Tax Court, other courts, or by the Commissioner's Final Closing Agreement, there is no doubt as to liability and the offer should be rejected.

Bankruptcy or noncompliance in filing other required returns should not be used as a basis for returning or rejecting a doubt as to liability offer in compromise request. This is distinguished from doubt as to collectibility offers which may be returned for such purposes. (

Doubt as to liability offers may be considered on a tax period by period basis. If the taxpayer is submitting separate doubt as to liability offers for more than 1 period, they are not required to be considered simultaneously but may be, particularly if the same issue applies in each tax period.

Pattern Letter 2842 (P) may be used for returning offers. [See Exhibit 4.18.1–3.]

If it is evident that Appeals determined the liability, the offer should be forwarded directly to Appeals for consideration.

The Service does not have the authority to accept an offer in compromise in the following cases under jurisdiction of the Department of Justice:

When an offer is received in an area office and the taxpayer is not located within the receiving area, the offer will generally be forwarded to the area office where the taxpayer resides.

Doubt as to liability offers submitted without any consideration (zero dollar amount offered) should not be considered processable as an offer in compromise. The taxpayer should be advised to amend the offer to reflect what the taxpayer believes to be the correct liability. If the taxpayer does not amend or withdraw the offer, the request may be considered as an audit reconsideration or informal claim, but may not be considered as an offer in compromise.

Offers that are deemed processable and not returned, are generally sent to the field (revenue agents & tax compliance officers) for further consideration. Pattern Letter 2843(P) may be used to notify the taxpayer of receipt and processability of the offer. [See Exhibit 4.18.1–4.] Examinations of offers in compromise based on doubt as to liability (and/or effective tax administration) will generally be conducted by tax compliance officers, revenue agents, or specialists in the tax areas involved. It is not required that offers always be sent to the field, particularly when the determination may readily be made by the OIC coordinator. However, as with all offers, an Independent Administrative Review (IAR) is required for proposed rejections.

Offers in Compromise, Form 656, are not controlled on AIMS (although the subject to return generally should be). Transmittal Form 3210 should always be used for transmitting Form 656 between functions, offices, and groups.

Because OICs are priority cases, the OIC coordinator should effectively monitor OIC cases assigned to the field and in process. Monthly status updates should be obtained on offers in process over 6 months.