An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax liability for less than the full amount owed, based on the taxpayer's ability to pay.
Three grounds for acceptance:
1. Doubt as to Collectibility (DATC): The IRS believes the taxpayer cannot pay the full liability within the collection statute (most common basis). The offer must be ≥ the taxpayer's "reasonable collection potential" (RCP = equity in assets + future income capacity). 2. Doubt as to Liability (DATL): There is genuine doubt that the assessed tax is correct. 3. Effective Tax Administration (ETA): Full collection would create an economic hardship or would be inequitable (even though the liability is correct and collectible).
Two payment options: - Lump-sum: Pay the offer amount in 5 or fewer installments within 5 months of acceptance; 20% non-refundable deposit required. - Periodic payment: Pay in 6–24 monthly installments; pay first installment with the offer application.
Application process: - File Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed) and Form 656. - Pay a $205 application fee (waived for low-income taxpayers).
What happens during processing: The collection statute of limitations is suspended while the OIC is pending + 30 days + any appeal period.
Not eligible: Taxpayers in an open bankruptcy proceeding cannot file an OIC.
> Exam tip: OIC is not for everyone — the IRS only accepts offers that equal or exceed the RCP (reasonable collection potential). The EA exam tests the three grounds for acceptance, the two payment methods, and the Form 656 application.