What the offer is
"Doubt as to liability exists when there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment" (IRM 4.18.1.2.1, Jan. 10, 2022). "The taxpayer is not required to submit a financial statement for a DATL offer. Also, there is no application fee for a DATL offer."
An offer in compromise is a contract under IRC 7122 to settle a liability for less than the assessed amount. Taxpayers "must indicate the basis upon which they propose to compromise: Doubt as to Collectibility (DATC), Doubt as to Liability (DATL) and/or to promote Effective Tax Administration (ETA)," and "If the taxpayer submits a Form 656-L, the basis for compromise will be DATL only" (IRM 5.8.1.15.2, Sept. 2, 2025). The collectibility and effective-tax-administration offers are about ability to pay and require Form 433 financial statements, a fee and a deposit; the liability offer is about whether the tax is owed, and requires none of those. "No TIPRA payment or application fee is required with a DATL offer" (IRM 5.8.1.13, May 25, 2023; 5.8.1.12).
Jurisdiction follows the question. "In general, Collection has jurisdiction over DATC offers, and Examination has jurisdictional responsibility for the investigation and processing of DATL offers" (IRM 4.18.1.2, Jan. 10, 2022). A liability offer on a 1099 penalty is therefore examined by SB/SE Examination, the function that assesses the penalties in the first place, with its determination reviewed independently before any rejection and appealable to the Independent Office of Appeals.
When it fits a 1099 penalty
The ordinary routes come first and are usually better. A written response to the 972CG within 45 days, a Form 843 or letter asking for abatement of an assessed penalty, the 854C and the Appeals conference, and for a paid penalty the claim and the two-year suit period, are all described on the abatement and claim page. The liability offer fits the gaps between them: the abatement was denied and the 60-day Appeals window on the 854C was missed; the penalty was assessed without a 972CG the business ever saw and the CP215 is the first notice; the business cannot pay the penalty to buy a refund suit; or the dispute is factual and the business wants an examiner, not an Appeals officer reviewing a file, to look at the vendor records. The manual's own standard is modest: "Grounds for an OIC-DATL may exist when there is legitimate doubt from both the viewpoint of the taxpayer and the IRS" (IRM 4.18.1.2.1).
What it does not fit: a penalty already decided by a court; a penalty the business agrees is correct but cannot afford, which is a collectibility offer; and a dispute that is really about reasonable cause with no documentation, which fails the same way in every forum. A liability offer "should only include the tax years or periods for which the taxpayer disagreed with the liabilities. Liabilities for other tax periods should not be included in the offer" (IRM 5.8.1.9, Sept. 2, 2025).
Filing: Form 656-L and the statement
"For offers based solely on DATL, taxpayers do not need to submit collection information statements. However, the taxpayer must include a written statement explaining why the liability is incorrect and addressing the validity of the tax assessment(s) or a portion of the assessment(s)" (IRM 5.8.1.15, Sept. 2, 2025). The statement is the case; the form is the envelope.
Form 656-L goes to "the Centralized DATL processing unit located at the Brookhaven campus" (IRM 5.8.1.14.2, May 25, 2023); the form's instructions carry the address. The offer must name an amount: "The total amount of money offered must be indicated and must be more than zero" (IRM 5.8.1.15.3, Mar. 16, 2010), so an offer that the penalty is entirely wrong is an offer of a nominal sum, one dollar being the convention, with the statement explaining why nothing is owed. The amount "may not include money already paid, expected future refunds, funds attached by levy."
The written statement should do what a 972CG response does, aimed at an examiner: identify the returns and the penalty reference number, state why each penalty is wrong (the TIN matched IRS records at filing, the return was timely under IRC 7502 with the proof, the payee was exempt, the counts are wrong, the penalty is outside the statute), and attach the evidence: the solicitation log, TIN Matching results, filing acknowledgments, the W-9s. Where the argument is reasonable cause, include the written statement under penalties of perjury that the penalty manual requires, because the examiner applies the same IRM 20.1.7 standard. "An OIC-DATL may not be rejected solely because the IRS is unable to locate the taxpayer's return or return information" (IRM 4.18.1.2.1); bring your own copies.
What happens after filing
IRM 4.18.1.2, 4.18.1.2.2, 4.18.1.2.3, 4.18.1.4.3.3, 4.18.1.5.1 (2020 to 2025); IRM 5.8.1.14.2 (May 25, 2023).
"Unless collection of tax is in jeopardy, after an offer is accepted for processing the IRS cannot levy on the taxpayer's property while the offer is being considered, for 30 days after rejecting the offer, and for the period that the IRS Independent Office of Appeals considers a timely filed appeal" (IRM 4.18.1.2, Jan. 10, 2022). The collection statute is suspended for the same time.
Once the unit finds the offer processable, "The AOIC system uploads a transaction code (TC) 480 to IDRS and generates a 'Y' freeze" (IRM 4.18.1.2.3, Nov. 4, 2020), which the transcript page describes and which an assistor is told to leave alone. The case goes to an Examination OIC coordinator, who decides whether a field examination is warranted. Two statute rules run from here. "The filing of an OIC-DATL request extends an open statute for additional tax assessments in accord with the terms of the waiver provisions of Form 656-L" (IRM 4.18.1.2.2, June 10, 2025): if the assessment statute on the penalty is open, the examiner may look at the whole year and "issues resulting in additional tax and/or penalties may be considered"; if it has closed, other issues "may only be pursued to offset the amount of any allowable reduction" (IRM 4.18.1.4.2.2, 4.18.1.4.2.3). And the TIPRA clock: "Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer" (IRC 7122(f), quoted at IRM 4.18.1.2.2). A returned or withdrawn offer does not trigger the deemed acceptance.
Acceptance, withdrawal, rejection
Three endings. Acceptance compromises the penalty for the offered amount. Withdrawal is the examiner's negotiated middle: where the investigation shows part of the penalty is wrong, the taxpayer withdraws the offer "subject to the reduction of $(enter amount) in previously assessed tax and penalties, respectively, plus interest. By withdrawing my offer, I waive my appeal rights" (IRM 4.18.1.4.3.1, June 10, 2025), and the abatement posts. Rejection comes with the examiner's unagreed report and a rejection memorandum whose sample conclusion is "no legitimate doubt exists from the viewpoint of both the taxpayer and the IRS that the assessed liability is incorrect" (IRM 4.18.1.4.3.3, Nov. 4, 2020). Every rejection passes independent administrative review first, and then "The taxpayer has 30 calendar days, starting on the day after the date on the letter of rejection to file an appeal request" (IRM 4.18.1.5.1, Nov. 4, 2020). Appeals keeps the case even if it arrives undeveloped: "If Appeals receives a DATL case from Examination that is not fully developed, the case will not be returned. The hearing officer will make a decision based on available information" (IRM 4.18.1.5.2).
A liability offer can also be raised inside a Collection Due Process hearing, and Appeals has its own procedures for that (IRM 8.22.8.12); the CP504 page covers when a penalty can be contested in the hearing itself.
Trust fund recovery penalties go elsewhere
"Collection Division has jurisdiction over doubt as to liability offers involving the Trust Fund Recovery Penalty and Personal Liability for Excise Tax" (IRM 4.18.1.2.1), and "Offers based on DATL for TFRP or PLET should be sent to: Internal Revenue Service - COIC Unit, 1040 Waverly Avenue Stop 680, Holtsville, NY 11742" (IRM 5.8.1.14.2). A responsible person assessed the 100% penalty on a business's Form 945 balance who missed the 60-day Letter 1153 protest can dispute responsibility or willfulness this way; the TFRP guide covers the elements.
Questions people ask
Can we offer $0?
No; the amount "must be more than zero" (IRM 5.8.1.15.3). A nominal offer with a statement that nothing is owed is the standard form of a full dispute.
Does filing stop the levy?
Yes, once the offer is accepted for processing, and for 30 days after a rejection and during a timely appeal, unless collection is in jeopardy (IRM 4.18.1.2). Interest keeps accruing on whatever is finally owed.
We already paid part of the penalty. Can we include it?
The offer cannot count money already paid toward the offered amount (IRM 5.8.1.15.3), and a paid portion is pursued by refund claim instead. The offer covers the unpaid balance of the disputed periods only.
Will the examiner reopen other years?
Only where the assessment statute is open, and then "issues resulting in additional tax and/or penalties may be considered" (IRM 4.18.1.4.2.3). Where the statute has closed the examiner may only offset the reduction you are seeking. Check the statute page before filing.