Wednesday, June 4, 2008

Rejection of offer

If an offer is not acceptable, has been withdrawn, or the taxpayer dies during consideration, the offer is considered rejected once the IRS issues a written notice to the taxpayer or the taxpayer's representative informing the taxpayer of the reason(s) of rejection and the taxpayer's right to an appeal (Reg. §301.7122-1(f)). Offers based on Doubt as to Collectibility are most commonly rejected on the basis that more can be collected than was offered (Internal Revenue Manual, 09-01-2005.

IRS policy is to inform the taxpayer prior to the issuance of the rejection letter that an acceptance cannot be recommended. The computation of reasonable collection potential (RCP) is explained to the taxpayer, a copy of the financial analysis is provided, and the taxpayer is given an opportunity to submit any additional financial information.

In addition to concerns about the amount of the offer, an offer may also be rejected if the IRS determines that acceptance is not in the best interests of the government. This situation would require a review by an IRS territory manager or a similar review. Examples of situations that might result in rejection on this basis include: (1) an egregious history of past noncompliance indicating that the it would be unlikely the taxpayer would remain in compliance during the offer period; (2) a business taxpayer compromising employment taxes where the business apparently does not have the ability to fund the offer while at the same time paying current taxes and business expenses; (3) any offer involving deferred payment where financial analysis indicates the taxpayer cannot fund the offer; (4) situations in which the taxpayer is the primary responsible party on a related entity (corporation, partnership, etc.) that is not in compliance with its filing and paying requirements; or (5) the offer is from an ongoing business that appears to be insolvent, and it appears that the government's position would be better protected through a formal insolvency proceeding (the IRS would gain a greater share of assets in a bankruptcy filing) (Internal Revenue Manual, 09-01-2005.

The analysis of whether a particular offer qualifies as an acceptable offer may include evaluating factors such as:

(1) the potential economic hardship to the taxpayer brought about as a result of the IRS's collection of the entire tax liability; or

(2) whether acceptance of the offer would undermine compliance by taxpayers with the tax laws (Reg. §301.7122-1(b)(3)).

Public policy rejections. Offers in compromise may be also rejected because they are contrary to public policy. The Internal Revenue Manual states that a rejections of an offer in compromise upon public policy grounds should be extremely rare and limited to situations where the acceptance of the offer could be so negative as to diminish future voluntary compliance by the general public (Internal Revenue Manual, 09-01-2005. This could include:

(1) situations in which the taxpayer has openly encouraged others to refuse to comply with the tax laws; or

(2) situations in which there is a suspicion that the financial benefits of a criminal activity are concealed or the criminal activity is continuing.

However, offers in compromise will not be rejected on public policy grounds solely because:

(1) it would generate considerable public interest (some of it critical), or

(2) a taxpayer was criminally prosecuted for a tax or non-tax violation (Internal Revenue Manual, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

Administrative review of proposed rejections. The IRS is required under the IRS Restructuring and Reform Act of 1998 (P.L. 105-206) to establish procedures for independent administrative review of any rejection of an offer in compromise. The procedures provide that this review is to occur before the rejection is communicated to the taxpayer and is not to be conducted by front-line managers with direct supervisory authority over revenue officers working offer in compromise cases (Independent Administrative Reviewers) (Internal Revenue Manual, 09-01-200.

Rejection report. When an offer in compromise is not acceptable or has been withdrawn, Form 1271, Rejection or Withdrawal Memorandum, is prepared, along with a rejection or withdrawal letter to the taxpayer and a memorandum outlining the reasons for the rejection. The IRS will document the history regarding the decision, including the:

(1) amount of the reasonable collection potential (RCP);

(2) attempts to negotiate an alternate resolution;

(3) key issues in the disagreement. and

(4) discussion of any special circumstances (Internal Revenue Manual, 09-01-2005.

The amount tendered with the offer, including all installments paid, will be refunded without interest, unless the taxpayer has agreed that the amount tendered may be applied to the liability with respect to which the offer was submitted (Internal Revenue Manual, 09-01-2005.

Death of offeror. As with any other contract, the death of the offeror prior to the IRS's acceptance invalidates the offer, and the tax liability remains uncompromised. In such circumstances, the IRS will issue a rejection letter to the taxpayer's estate or surviving spouse. The estate or the surviving spouse, as appropriate, may then submit an offer in compromise, and the IRS will evaluate the offer in light of the amount that could be collected from the enforcement of liability for the tax against a beneficiary or transferee (Internal Revenue Manual, 09-01-2005.

Appeal of rejection. The taxpayer must be allowed to appeal any rejection of any proposed offer in compromise or installment agreement to the IRS Office of Appeals (Code Sec. 7122(e), as redesignated by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222)). The taxpayer may administratively appeal a rejection of an offer to the IRS Office of Appeals if, within the 30-day period commencing on the day following the date on the letter of rejection, the taxpayer requests an administrative review (Reg. §301.7122-1(f)(5)).

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