May 11, 2026 – The IRS can reduce taxes, interest, and penalties (civil or criminal) through an offer-in-compromise (i.e., an “OIC”). An OIC is an offer by a taxpayer to settle unpaid tax accounts for less than the full amount due. The IRS’s authority to compromise a tax liability comes from section 7122 of the Internal Revenue Code. The IRS can compromise a tax liability for three reasons: (1) if there is a doubt as to liability, (2) if there is a doubt as to collectability, or (3) if doing so promotes effective tax administration (“ETA”).
The ETA provision was added as a third basis for relief in response to comments by Congress when enacting the Internal Revenue Service Restructuring and Reform Act of 1998. The Conference Report to that law explains that the IRS’s OIC guidelines should be expanded for equity and effective tax administration, stating that the IRS should:
consider additional factors (i.e., factors other than doubt as to liability or collectability) in determining whether to compromise the income tax of individual taxpayers. For example, the conferees anticipate that the IRS will take into account factors such as equity, hardship, and public policy, where a compromise of an individual taxpayer’s income tax liability would promote effective tax administration. The conferees anticipate that, among other situations, the IRS may utilize this new authority to resolve longstanding cases by foregoing penalties and interest which have accumulated as a result of delay in determining the taxpayer’s liability. The conferees believe that the ability to make payments of tax liability by installment enhances taxpayer compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the conferees believe that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.
In 2002, the Department of the Treasury issued final regulations containing updated OIC guidelines, which includes relief for ETA. The ETA provision can apply either if (1) collection of the liability would create an economic hardship, or (2) compelling public policy or equity considerations provide a sufficient basis for compromising the liability. The ETA OIC, however, cannot undermine compliance with the tax laws.
This second prong for public policy and equity can apply regardless of a taxpayer’s financial circumstances, even if a similarly situated taxpayer may have paid his liability in full. Before granting an ETA OIC based on equity and public policy, the IRS must conclude that collecting the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. This second prong may be satisfied with unique facts showing “delay on the part of the IRS or by actions of third parties” and that “the misdeeds of third parties that may have contributed to a tax liability may be taken into account when determining whether to accept a compromise based on doubt as to collectability or on a finding that collection would cause an economic hardship.”
The regulations contain two examples of when the public policy and equity ETA OIC might apply. In the first example, a taxpayer developed a serious illness that required frequently hospitalizations over several years, during which he was unable to manage his financial affairs and did not file tax returns. When his condition stabilized, he realized the IRS prepared a substitute for return based on information returns and assessed a tax deficiency, penalties, and interest, making the bill more than three times the original tax liability and his tax history was overall complaint.
In the second example, a taxpayer asked the IRS over email for the duration to re-deposit funds from a tax-deferred individual retirement account to a new financial institution. The email response back was that he had 90 days (instead of 60). In reliance on that advice, the taxpayer re-deposited the funds in 63 days. The IRS imposed taxes, a penalty, and interest penalty because his rollover was late. The taxpayer was otherwise tax complaint.
In 2023, Rutgers Professor Sandy Freund shared practitioners’ experiences where taxpayers have been granted an ETA OIC based on public policy and equitable considerations. In one example, a severely disabled combat veteran of Desert Storm offered to pay $12,000 to compromise his debt. The IRS initially denied the request because he received a lump-sum, retroactive award from the Veterans Administration to compensate him for mental health injuries from combat and his tax debt. The taxpayer saw the tax debt as the government’s disregard for the horrors he perpetrated in war at the behest of the government. The IRS’s refusal to compromise that debt gave him suicidal ideations, which his physician confirmed. The taxpayer’s original ETA OIC request was denied but the denial was reversed after a successful appeal to the IRS Independent Office of Appeals.
In a second example, a taxpayer was defrauded into withdrawing a large sum of money from a retirement account and lost it all. The IRS granted the ETA OIC, concluding that the crime arose from the acts of a third party.
As reported in the 2025 National Taxpayer Advocate Annual Report by Erin Collins, in fiscal year 2025, only 15.6% of offers in compromise were accepted. An ETA OIC is a small fraction of that number (estimated to be around 4% (with the public policy and equity prong even smaller). An ETA OIC based on public policy and equity is extremely rare and requires compelling, verifiable, and unique facts that would not undermine compliance with the tax laws. It also adds to the duration of time that a taxpayer is waiting for resolution of his tax issue.
When evaluating whether to submit an OIC for any reason, consult part 5 of the Internal Revenue Manual (5.8.11.2, 5.8.11.3.2, and 5.8.11.5.1, in particular). If seeking assistance from others, taxpayers should be wary of “OIC mills,” which the IRS identified on the “dirty dozen” list as aggressive and misleading providers that overpromise results and charge high fees to taxpayers who do not qualify.
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If you need help resolving a tax dispute with the IRS, please reach out to our team at K Tyson Law. Note that this summary does not establish an attorney-client relationship and should not be construed as applying to a particular tax situation.
Written by Kim Tyson.