Section 7122: Special circumstances as basis of acceptance

In situations where doubt as to collectibility or doubt as to liability would not be grounds for acceptance of an offer, the IRS may accept the offer in order to promote effective tax administration if:


(1) collection of the full amount of the liability will create economic hardship under Reg. §301.6343-1; or



(2) regardless of the taxpayer's financial condition, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by the taxpayer; and



(3) compromise of the liability will not undermine compliance by taxpayers with the tax laws (Reg. §301.7122-1(b)(3)).


Factors that support (but are not conclusive of) a determination that acceptance of the offer would not undermine compliance by taxpayers with the tax laws include:


(1) the taxpayer does not have a history of noncompliance with the filing and payment requirements under the Code;



(2) the taxpayer has not taken deliberate actions to avoid payment of taxes; and



(3) the taxpayer has not encouraged others to refuse to comply with the tax laws (Reg. §301.7122-1(c)(3)(ii)).


In determining whether to accept or reject an offer to compromise, all facts and circumstances are considered, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the Secretary's policies and procedures (Reg. §301.7122-1(c)).

Examples of factors or special circumstances that might be considered by the IRS when evaluating whether economic hardship or special circumstances exist in a particular case may include, but are not limited to:


(1) advanced age;



(2) serious illness where recovery is unlikely; or



(3) any other factors that might impact the taxpayer's ability to pay the reasonable potential collection amount and still provide for the taxpayer's family.


Economic hardship. Factors that support a finding of economic hardship for purposes of Reg. §301.7122-1(c)(3)(i) may include factors such as:


(1) the taxpayer is incapable of earning a living due to a long-term illness, medical condition, or disability and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;



(2) the liquidation of the taxpayer's assets would render the taxpayer unable to meet basic living expenses; and



(3) the taxpayer cannot borrow against the equity in the taxpayer's assets and disposition or seizure of such assets would have sufficient negative consequences such that enforced collection is unlikely (Reg. §301.7122-1(c)(3)(i)).


Example (1):
Jamie Jones has submitted an offer in compromise but has sufficient assets to satisfy her outstanding tax liability. However, Jamie provides full-time care and assistance to Sue, her dependent child who suffers from a rare kidney disorder. It is expected that Jamie will need to use the equity in her assets to provide for the basic living expenses and medical care for her child. If Jamie has an overall compliance history that does not weigh against compromise, her offer will be accepted.


Example (2):
Marcia Munson is retired and her only income is from her pension. Marcia's only asset is an IRA and the funds are sufficient to satisfy the liability. However, liquidation of the IRA would leave Marcia without means to pay for her basic living expenses. If Marcia has an overall compliance history that does not weigh against compromise, her offer will be accepted.


Example (3):
Mortenson Marketing, Inc. suffered an embezzlement loss despite retaining outside auditors and adopting other precautions. Although Mike Mortenson, the president and CEO, signed employment tax returns and signed checks for payment of all employment tax liabilities, the embezzling employee was able to intercept the checks and divert the funds. At the time the embezzlement is discovered, Mike contacts the IRS and begins recovery efforts. However, Mike's recovery efforts fail miserably. Although the company has sufficient accounts receivable to satisfy the tax liability, the company would not be able to remain in business if the funds were seized. Further, while the company would continue to generate a profit if it remained in business, those profits would not be sufficient to pay the liability before the statute of limitations expired with respect to the liability. If the company's overall compliance history does not weigh against compromise, the company's offer will be accepted.


Exceptional circumstances. The following examples illustrate situations when offers may be accepted for exceptional circumstances:

Example (4):
In October, 2007, Mark Day developed a serious illness that resulted in almost continuous hospitalizations for a number of years. Mark's medical condition was such that he was not able to attend to his financial affairs or file his tax returns during his illness. Mark's health has now improved and he has promptly begun to attend to his tax affairs. Mark discovers that the IRS filed a substitute return for the 2007 tax year based on information returns it had received and assessed a tax deficiency. When Mark discovers the liability, the total tax bill is more than three times the original tax liability. If Mark's tax compliance history does not weigh against compromise, his offer will be accepted.