Overview
An Offer in Compromise (OIC) on the grounds of doubt as to liability is an IRS process for taxpayers who contend the assessed tax, penalties, or interest are incorrect. Unlike an OIC based on doubt as to collectibility (which is about inability to pay) or an Effective Tax Administration (ETA) offer (which is about fairness or hardship), doubt as to liability focuses strictly on whether the tax liability exists or was computed properly.
Why this matters
If you can prove the IRS’s assessment is wrong, an OIC based on doubt as to liability can eliminate all or part of the assessed liability without the need to show financial hardship. Because the IRS is cautious about accepting such offers, applicants must provide strong, well-documented proof and follow the IRS procedures closely.
Which form do I use?
Use Form 656‑L, Offer in Compromise (Doubt as to Liability), when the reason for the offer is that you do not owe the tax the IRS assessed. Do not submit a standard Form 656 (used for doubt as to collectibility or ETA) for a pure liability dispute. For practical guidance on forms and process, see FinHelp’s Form 656‑L explanation.
- Form 656‑L (FinHelp): https://finhelp.io/glossary/form-656-l-offer-in-compromise-doubt-as-to-liability/
- General OIC guidance (FinHelp): https://finhelp.io/glossary/offer-in-compromise-oic/
What the IRS expects: evidence, not opinion
The IRS will not accept an OIC based solely on a taxpayer’s belief. You must submit objective documentation that undermines the assessment. Typical types of evidence include:
- Corrected information returns (e.g., W‑2, 1099 corrected by the issuer) and employer statements.
- Amended tax returns (Form 1040‑X) and supporting schedules demonstrating calculation errors.
- Bank statements, canceled checks, contracts, invoices or receipts proving the correct amounts of income or deductions.
- Law enforcement reports or identity‑theft affidavits (Form 14039) when a return was filed fraudulently in your name.
- Legal documents or rulings that negate the asserted liability (for example, court decisions or IRS Chief Counsel advice relevant to your situation).
Common scenarios where doubt as to liability applies
- Erroneous information returns: An employer or payer filed an incorrect W‑2/1099 that resulted in an IRS assessment. If you have a corrected form and corroborating pay records, the IRS may accept the OIC as the correct remedy.
- Identity theft or fraudulent filings: If someone used your Social Security number to file, or filed returns in your name, supporting police reports and IRS identity‑theft documentation can substantiate doubt as to liability.
- Calculation or assessment errors: If the IRS used faulty data (e.g., misapplied credits, duplicated income, or mathematical mistakes in an IRS notice), detailed documentation and corrected returns are necessary.
- Statute of limitations concerns: Occasionally, taxpayers can show collection or assessment is time‑barred; provide dates and IRS records proving the period has expired.
Step‑by‑step: how to prepare a doubt as to liability OIC
1) Confirm the assessment: Get a current IRS account transcript and review the notice that assessed the tax. Knowing exactly what the IRS claims will focus your evidence.
2) Choose the right form: Use Form 656‑L for liability disputes. Include a clear, concise written statement explaining the legal and factual basis for doubt. Attach all supporting documents.
3) Organize evidence chronologically and by issue: Label documents, highlight the parts that contradict the IRS assessment, and include a table or index so reviewers can follow your argument quickly.
4) Consider an amended return where appropriate: If there are mathematical or reporting errors on your return, file Form 1040‑X with appropriate schedules and proof.
5) Retain copies and document communications: Keep every letter, phone log, and proof of mailing. If the IRS requests additional records, respond promptly.
6) Consult a qualified tax pro: CPAs, tax attorneys, or Enrolled Agents with OIC experience can help build stronger cases and avoid procedural missteps.
Timing and procedural rules
- Processing time: OIC reviews — especially liability offers — can take many months. The IRS must carefully review documents and may ask for more evidence.
- Collection during review: In many cases, the IRS will suspend most collection actions while an OIC is being considered. However, certain actions, such as filing or maintaining a Notice of Federal Tax Lien, may continue. Confirm current collection‑status rules on the IRS site.
- Pending litigation or tax court petitions: If you have a timely filed petition with the U.S. Tax Court disputing the assessment, the IRS generally will not consider a Form 656‑L until the court matter is resolved. Check IRS instructions and consult counsel if litigation is active.
What to expect after you file
- Acceptance: If the IRS accepts the offer, you’ll get a written notice with terms. If your offer resolves the liability entirely, the IRS will close the account accordingly.
- Rejection: If rejected, the IRS will explain why and outline appeal rights. Typically, you have 30 days to appeal the rejection (often to the IRS Office of Appeals) or to pursue other remedies such as tax court (depending on facts and timing).
- Reconsideration or reapply: If you obtain new evidence, you can request reconsideration. FinHelp’s guide on how to reapply or modify an existing OIC can help with that process: https://finhelp.io/glossary/how-to-reapply-or-modify-an-existing-offer-in-compromise/
Common mistakes to avoid
- Submitting a weak or unorganized packet of documents. The IRS reviewers are looking for clear proof; make it easy for them to see why the assessment is wrong.
- Using the wrong form. A liability dispute filed on Form 656 instead of Form 656‑L can delay review or lead to rejection. See FinHelp’s instructions for Form 656 for comparisons: https://finhelp.io/glossary/form-656-offer-in-compromise/
- Ignoring deadlines for appeals or failing to respond to IRS requests for more information.
- Confusing inability‑to‑pay issues with doubt as to liability — choose the right OIC basis for your facts. See FinHelp’s article on doubt as to collectibility for clarification: https://finhelp.io/glossary/offer-in-compromise-doubt-as-to-collectibility/
Practical tips
- Start by ordering a tax account transcript from IRS.gov so you know the official assessment details. (IRS OIC overview: https://www.irs.gov/payments/offer-in-compromise)
- Create a short cover letter that summarizes your legal theory and the strongest documents supporting it — that helps reviewers see the main point before digging into exhibits.
- If identity theft is involved, get an IRS Identity Protection PIN and file Form 14039 when instructed. Provide police reports and other third‑party records.
- Keep expectations realistic: liability OICs can succeed, but you must meet the burden of proof.
Interlinks (useful FinHelp pages)
- Form 656‑L — Offer in Compromise (Doubt as to Liability): https://finhelp.io/glossary/form-656-l-offer-in-compromise-doubt-as-to-liability/
- Qualifying for an Offer in Compromise: https://finhelp.io/glossary/qualifying-for-an-offer-in-compromise/
- Offer in Compromise process: https://finhelp.io/glossary/offer-in-compromise-process/
- Offer in Compromise application fee (current rules and waivers): https://finhelp.io/glossary/offer-in-compromise-application-fee/
Authoritative source
- IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise (review current forms and fee guidance on this IRS page before filing).
Bottom line
An OIC based on doubt as to liability is a formal claim that the tax assessment itself is wrong. Success depends on submitting the correct form (usually Form 656‑L), assembling clear, third‑party documentary evidence, and following IRS procedures and deadlines. When in doubt, consult a tax professional experienced with OICs to evaluate whether this is the right path for your situation.