Offer in Compromise Investigations

Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 4. Investigation

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Exhibit 5.8.4-3 Offer in Compromise Recommendation Report

5.8.4.1 (09-01-2005)

Overview

This chapter provides:

Instructions for conducting the different types of offer investigations.

Definitions for considering each possible basis under which an offer may be filed.

How to work offers filed under multiple bases.

Directions for coordinating activities with other Service functions.


5.8.4.2 (09-01-2005)

Doubt as to Liability

After initial processing, offers based on Doubt as to Liability (DATL) of a Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET) are transferred to Area offices for assignment to Offer Specialists. All other Doubt as to Liability (DATL) offers should be forwarded with no initial processing, to Area Office Examination OIC Coordinators.

For offers based on Doubt as to Liability (DATL) of a Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET), the decision to accept or reject rests primarily on a reconsideration of whether or not the person assessed was responsible for and willfully failed to pay over the subject tax. Offers on assessments of this nature that were determined by Appeals or that received an Appeal hearing should be transferred to Appeals for consideration.

The taxpayer must offer a dollar amount. An offer for zero dollars on this basis, like any other, is not acceptable and is subject to perfection requirements.

The administrative file should be secured and reviewed to examine the supporting evidence that supported the assessment. New information, testimony or documents presented by the taxpayer should be considered. Refer to IRC 5.7, Trust Fund Compliance Handbook, for a discussion of the factors and evidence that support an assessment of a TFRP or PLET.

A Doubt as to Liability (DATL) offer should be resolved in one of the following ways:

If… Then…
No new information is available and the TFRP or PLET file supports the original assessment Reject the offer.
Another amount of liability is determined and the taxpayer agrees to the finding Prepare and submit the Form 3870, Request for Adjustment, to correct the assessment and secure a withdrawal of the offer or recommend acceptance of the offer for the correct amount.
Another amount of liability is determined and the taxpayer still does not agree Submit a Form 3870 to correct the assessment and recommend rejection of the offer.
The Administrative file does not support the assessment Abate the assessment in full and secure a withdrawal of the offer.


Note:
If new information is presented that raises doubt or the existing information supporting the assessment is weak, consider accepting an offer to avoid the hazards of litigation.


5.8.4.3 (09-01-2005)
Effective Tax Administration and Doubt as to Collectibility with Special Circumstances
Refer to IRM 5.8.11, Effective Tax Administration , for a full discussion on how to investigate and determine acceptability of offers submitted under Effective Tax Administration (ETA) or Doubt to Collectibility with Special Circumstance (DCSC).

Note:
Offers Investigators should review any comments in item 9 on the Form 656 to determine if special circumstances should be considered.


Effective Tax Administration (ETA) offers can be accepted only when:

There is no doubt the tax is owed and no doubt that the full amount owed can be collected from the taxpayer.

The taxpayer has a proven economic hardship or has presented facts that would support acceptance under the public policy/equity basis, and

Compromise would not undermine compliance with tax laws.


Doubt as to Collectibility with Special Circumstance (DCSC) offers can only be accepted when the taxpayer cannot fully pay the tax due, but has proven special circumstances that warrant acceptance for less than the amount of the calculated reasonable collection potential (RCP).

Factors establishing special circumstances under Doubt as to Collectibility (DATC) are the same as those considered under Effective Tax Administration (ETA). See IRM 5.8.11, Effective Tax Administration , for a list of those factors.

5.8.4.4 (09-01-2005)
Doubt as to Collectibility
Doubt as to Collectibility (DATC) offers may be worked either in the Centralized Offers in Compromise (COIC) site by Offer Examiners (OE) or in Area offices by Offer Specialists (OS). Cases assigned to Offer Examiners (OE) in COIC may be forwarded to Area offices for assignment to an Offer Specialist (OS) if complex issues requiring a field investigation are identified.

For Doubt as to Collectibility (DATC) offers, the decision to accept or reject usually rests on whether the amount offered reflects reasonable collection potential (RCP). The exception to this rule would be for offers not accepted based on public policy reasons. Reasonable collection potential (RCP) is defined as the amount that can be collected from all available means, including administrative and judicial collection remedies. Generally, the components of collectibility outlined in IRM 5.8.4.4.1 below, will be included in calculating total RCP. See IRM 5.8.5, Financial Analysis , for more detail on how to analyze the taxpayers financial condition to arrive at the value of each component. In determining the taxpayers future ability to pay, full consideration must be given to the taxpayers overall general situation including such factors as age, health, marital status, number and age of dependents, education or occupational training and work experience.

Offers should not be accepted where the tax can be paid in full as a lump sum or can be paid under current installment agreement guidelines, unless special circumstances are identified that warrant consideration of a lesser amount. Once the ability to make payments is established, the investigating employee must determine if a greater amount can be collected through current installment agreement guidelines than is being offered. If so, the offer should be recommended for rejection, unless special circumstances warrant acceptance.

5.8.4.4.1 (09-01-2005)
Components of Collectibility
The following four components of collectibility will ordinarily be included in calculating RCP for offer purposes:

Components Definition
Assets The amount collectible from the taxpayers net realizable equity in assets.
Future Income The amount collectible from the taxpayers expected future income after allowing for payment of necessary living expenses. (a) For cash offers, it is the amount collectible over the next 48 months (b) For short term deferred offers, it is the amount collectible over the next 60 months (c) For deferred payment offers, it is the amount that is collectible over the life of the collection statute
Amount Collectible from third parties The amount we could expect to collect from third parties through administrative or judicial action. For example, amounts collectible through assertion of a TFRP, a transferee assessment, nominee lien, or suit to set aside a fraudulent conveyance.
Assets and/or income that are available to the taxpayer but are beyond the reach of the government Assets that the lien will not attach, such as equity in assets located outside the country.


5.8.4.5 (09-01-2005)
Screen for Obvious Full Pay
Offer Examiners (OE) will verify the full pay worksheet as prepared by the Process Examiner (PE).

If the amounts shown by the taxpayer on the Collection Information Statement (CIS) reflect that the taxpayer can fully pay the tax due by either liquidation of assets or through an installment agreement, the offer should be rejected without substantiation or further analysis. The National Standard Expenses and Local Housing and Transportation expense standards should be applied for this analysis.

Review the case to ensure no special circumstances exist that would warrant consideration under Effective Tax Administration (ETA).

Taxpayers who have submitted an offer with a Collection Information Statement (CIS) that reflects an ability to fully pay the tax, absent special circumstances, will immediately be issued a rejection letter. In these cases, prepare the Form 1271, Rejection or Withdrawal Memorandum , and attach the Full Pay Worksheet in lieu of the Offer Recommendation Report and Asset/Equity and Income/Expense tables as instructed in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing.

5.8.4.6 (09-01-2005)
Actions Based on Reasonable Collection Potential
Once the reasonable collection potential (RCP) has been calculated, process the case as follows:

If… Then…
The Screen for Obvious Full Pay shows the taxpayer can full pay based on CIS (See IRM 5.8.4.5 above) The rejection letter should be issued. (See IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing)
The offer must be increased in order to be recommended for acceptance Issue Letter 3498 (SC/CG) or contact the taxpayer by telephone to amend the offer to the acceptable amount. If the taxpayer response does not change the case determination issue the rejection letter using the option to increase paragraph.
The analysis shows the taxpayer can fully pay the tax through liquidating assets and/or installment payments Issue Letter 3499 (SC/CG) or contact the taxpayer by telephone. If the taxpayer response does not change the case determination, issue the rejection letter using the full pay paragraph.
The offer amount equals or exceeds the RCP and the offer is otherwise acceptable The acceptance letter should be issued. (See IRM 5.8.8, Acceptance Processing)
Special circumstances are identified that warrant acceptance for less than the RCP Consider an ETA offer or DCSC. (See IRM 5.8.11, Effective Tax Administration)


5.8.4.7 (09-01-2005)
Initial Action, Follow-Up, and Closing Action Time Frames
Time frames have been set for completing certain tasks associated with an offer investigation. These time frames vary depending on who is assigned the case.

The timely completion of an offer investigation is an organizational priority. As such, unwarranted inactivity gaps are to be avoided. (See IRM 5.8.1.1.6, Timeliness of Offer Investigations, for definitions of timely case processing.)

5.8.4.7.1 (09-01-2005)
Initial Offer Actions
Within 15 calendar days of the date an offer is assigned to an Offer Examiner (OE) in Centralized Offer in Compromise (COIC) or within 30 calendar days of the date an offer is assigned to an Offer Specialist (OS), the assigned employee must complete the following actions:

Analyze the new receipt to determine if sufficient information is available to make an decision regarding the merits of the offer.

If additional information is needed from the taxpayer to reach a decision, issue an additional information request, as appropriate. Where necessary and appropriate, this request should also include verification of the taxpayers compliance with the current year's estimated tax (ES) payments.

To the extent that information is available, prepare an Asset/Equity Table (AET) and Income/Expense Table (IET), to make a preliminary projection of case resolution.

If no further information is needed, initiate appropriate follow-up actions to recommend the disposition of the offer.

The initial lien determination should be made and documented.


Note:
Prior to the issuance of offer cases to the field, COIC will have made all processability determinations and completed initial internal case building actions. In some cases, no additional information will be needed from the taxpayer to complete the investigations. In these situations, the next appropriate action(s) should be scheduled in a manner that ensures the timely resolution of the case.


In situations where the Field Offer Specialists (OS) are not co-located with the group manager, an additional five (5) days will be allowed from the assignment date to complete the initial case actions. This time accounts for the need to transship the case files to remote locations. Situations where this transit time routinely takes more than five (5) days to accomplish should be reported to the Area Offer in Compromise Coordinator to determine the cause for the delays.

Generally, the AOIC assignment date will be the assignment date of record.

Prior to the income and expense analysis of an individual offer where the taxpayer submitted a Form 656-A certification, the Offer Investigator will determine whether the taxpayers income and family unit size at the time the offer was submitted supported the decision not to pay the application fee. If the Offer Investigator concludes that the income for the family size exceeds the levels for which a Form 656-A certification was allowed (i.e., the taxpayer should have paid the application fee), offer processing should immediately cease. Return the offer using letter code "RET-AB " for failure to pay the application fee.

If additional information is required to make a decision, contact the taxpayer or Power of Attorney (POA) to request the additional supporting documents. If it is determined no information is necessary issue a decision letter.

The offer investigator may analyze the offer through correspondence, in person, which may include telephone contact, an office visit, or a field visit. Letters available on AOIC such as the combo letter or an additional information letter (L-2844) are appropriate to request additional information.

If the request for information is in writing the correspondence must include:

A list of the specific items/information needed,

A specific deadline for providing the information,

A statement indicating that the offer will be returned without further consideration if all the information is not provided,

The name, phone number, and employee number of the investigating employee,

A statement regarding enclosure of Publication 1 and 594,

Include Notice 1326, Offer in Compromise (OIC) Applicants ALERT Notice.

A statement indicating that a Notice of Federal Tax Lien (NFTL) will be filed if a decision has been made to file a lien.

A statement addressing any potential special circumstances (e.g. Effective Tax Administration or Doubt as to Collectiblity with Special Circumstance),

Rubber-stamp or otherwise enter on all outgoing envelopes containing requests for additional information "URGENT — TIME SENSITIVE" .


If the request for information is in person (e.g. by telephone, office, or field visit) the contact must include the following information:

Verify receipt of Pub. 1 and Pub. 594. If the first conversation is with the Power of Attorney (POA), verify that the taxpayer has received these publications. If the response from either the taxpayer or the POA is yes, ask if there are any questions and answer any questions they may have to ensure there is a clear understanding of their rights. If they have not been received, offer to either explain their rights before proceeding or re-mail the publications to the taxpayer and postpone conversation until they have been received and read.

Address and document any potential special circumstances (e.g. Effective Tax Administration or Doubt as to Collectibility with Special Circumstances) identified during the initial review of documents submitted with the offer.


Cases transferred from one office to another should have an AOIC transfer letter sent within 15 calendar days of the transfer advising the taxpayer of the location of the office where the case has been transferred and providing the taxpayer with a local contact telephone number. Since cases are often reassigned to a post of duty (POD) once received in the Area office drop point the receiving office will be responsible for sending the transfer letter. If the case cannot be assigned immediately, the taxpayer should be advised of the anticipated date of assignment to an Offer Specialist. A follow up letter should be sent to the taxpayer advising of any delay in assignment if the case is not assigned by the date specified in the original letter.

To eliminate the potential for mis-routed cases, the procedures outlined in IRM 3.13.62, Media Transport and Control, will be followed.

The originating office responsible for shipment of the offer files will follow-up within 30 days from the shipment date if the acknowledgment copy of the Form 3210, Document Transmittal, is not received.

If all the cases listed on the Form 3210 are not included in the shipment, the receiving office is responsible for notifying the originating office within 10 days of receipt of the Form 3210.

Any and all discrepancies will be resolved within 30 days.


5.8.4.7.2 (09-01-2005)
Follow-up Actions
In order to ensure timely case processing, all in-process offers must have follow-up dates scheduled for the next appropriate action.

Throughout the investigation, the scheduling of timely follow-up actions should be reasonable and appropriate, based on the facts of the case. In order to be considered timely, follow-up actions should be significant actions that can reasonably be expected to move the offer investigation toward resolution. Generally, follow-up actions should occur:

No later than 15 calendar days after a deadline for taxpayer action has passed without an adequate response.

No later than 15 calendar days of an established deadline that has resulted in the receipt of additional information.

Within 30 calendar days in situations where no contact has been established with the taxpayer or no deadline has been given.


Follow-up actions may include:

Recommending acceptance or rejection if the information received is sufficient to make a conclusion regarding the offer.

Recommending the case for closure when the taxpayer has clearly failed to provide the requested documents or information.

Personal contact when the taxpayer has made an attempt to comply with the requested documentation but the provided information is incomplete, or needs clarification.


5.8.4.7.3 (09-01-2005)
Case Recommendations and Closing Actions
Case Recommendations

Offer Examiners in Centralized Offer in Compromise (COIC) must submit all appropriate recommendation reports (i.e. Forms 1271/7249) within 10 calendar days from the date of the documented case decision.

Offer Specialists must submit all appropriate recommendation reports within 15 calendar days from the date of the documented case decision.

.

Closing Actions

Case must be submitted for closing actions (i.e. - dating/mailing of letters, closing on AOIC, ICS, etc.) within the defined 10 to 15 calendar days as described above.


5.8.4.8 (09-01-2005)
Documentation
Documentation must include but is not limited to:

The basis of the processability determination

Plans of action

Case actions

Requests for information/documentation

Receipt of requested information

Conversations with taxpayers or representatives

Results of internal information analysis

Special issues or circumstances

Financial analysis, if applicable

Case decisions


Note:
Do not repeat information already present on AOIC screens.


Documentation should include evaluation of the income, allowable expenses, asset values, and encumbrances. It should support and define differences and/or verification of the assets/expenses, including reasons for disallowance of income and/or expenses.

COIC employees will use AOIC to document case actions. Field compliance employees will use Integrated Collection System (ICS) to document actions. If ICS is used to record documentation, a closing summary history must be placed on AOIC prior to closing the case, indicating the basis for the closure and that the complete history is available on ICS.

Documentation should be recorded the day the action occurs or as soon as practical thereafter.

5.8.4.9 (09-01-2005)
Notice of Federal Tax Lien Filing
It is the responsibility of the employee to safeguard the government's interest and taxpayer rights. Employees must exercise judgment in deciding whether or not a Notice of Federal Tax Lien (NFTL) should be filed. See IRM 5.12, Federal Tax Liens, for further discussion on the NFTL.

A NFTL filing determination must be made and documented on all assigned cases as part of the initial offer actions defined in IRM 5.8.4.7.1(1) above.

Example:
Your initial case analysis reveals that the taxpayer has an interest in real property and no indication that a Notice of Federal Tax Lien is filed. Or, your initial case analysis indicates that there are no Notice of Federal Tax Liens filed and the taxpayer threatens to file bankruptcy if we do not accept the offer. You should immediately file the lien to safeguard the government's interest.


The initial review of any case must include an analysis of whether a NFTL has been correctly filed on all tax modules owing, is filed in the correct jurisdiction, and whether or not any filed liens should be re-filed. If analysis indicates a lien was erroneously allowed to self-release, appropriate action must be taken to correct the problem.

A NFTL will generally be filed whenever the unpaid balance of assessments exceeds $5,000 and an offer is recommended for rejection or a deferred payment offer is accepted. Circumstances warranting non-filing in the above situations should be clearly documented in the case histories.

In the event a NFTL is filed and the taxpayer exercises Collection Due Process (CDP) rights, it is not necessary to delay processing of the offer to wait for the outcome of the hearing. However, communication with Appeals is essential to expedite processing of the offer.
In those cases where an offer is being investigated and the taxpayer files a request for a CDP during the investigation, the case then becomes the jurisdiction of Appeals. If a determination to accept the offer has been made, the Offer Investigator should contact Appeals to recommend the taxpayer withdraw the CDP request. If a determination to reject the offer has been made, the offer file should be forwarded to the Appeals Officer handling the CDP hearing before sending any rejection letters.

If… Then…
No lien has been filed and a decision is made to not file a lien until the conclusion of the investigation The case file should be documented when a lien determination was made and it should also include the basis for the decision to withhold filing. An additional determination will be required at the conclusion of the investigation. Generally, a lien will be filed if the offer is:
accepted as a deferred payment offer,

rejected

returned

Caution: Remember that an attempt must be made to contact the TP by phone, in person, or by letter to advise of the filing before requesting the lien. AOIC combo and rejection letters satisfy the notification requirement.
A determination is made to file a lien immediately Ensure that an attempt to notify the TP of the proposed filing (by phone, letter, or in person) has been made and documented before requesting the lien be filed. Provide the required appeal rights per IRM 5.12, Federal Tax Liens, if the taxpayer objects to the filing. If the lien is filed and a CDP request is received process it immediately following guidelines in IRM 5.1.9, Collection Appeal Rights.
Liens were previously filed but in an incorrect jurisdiction Determine whether to file a NFTL in the correct jurisdiction or withhold filing until the conclusion of the investigation. Follow instructions above based on your decision. If the decision is made to withhold the filing until the conclusion of the investigation, an additional determination must be made at that time.
Liens were filed but have expired Follow instructions in IRM 5.12, Federal Tax Liens.
Liens were filed and are currently in the refiled period Ensure that liens are correctly refiled in all required jurisdictions.
An offer where the unpaid balance of assessment is $5,000 or more and is being rejected or accepted with deferred payment terms A lien will normally be filed on these cases. Circumstances warranting non-filing must be documented in case history.


5.8.4.10 (09-01-2005)
Combination Offers
Taxpayers may submit an offer based on Doubt as to Collectibility (DATC), Doubt as to Liability (DATL), Effective Tax Administration (ETA) or any combination of the three. During the offer investigation consider all bases submitted, providing the taxpayer complies with the requests for information needed as each basis is considered.

The offer will be accepted under only one basis. It is the Service’s responsibility to determine the correct basis for acceptance.

If the taxpayer submits the offer under both Doubt as to Collectibility (DATC) and Doubt as to Liability (DATL) or Effective Tax Administration (ETA), the Collection function will determine DATC first. Collection will retain control of the account on AOIC while coordinating with the Examination function on any combination offer. See the chart below for processing instructions.

For offers submitted based on both Doubt as to Collectibility (DATC) and Doubt as to Liability (DATL):

If… Then…
A decision is made to accept based on DATC Upon recommendation of acceptance on the DATC component of a "combination offer" , the Offer Investigator should review and discuss with the taxpayer the option to agree with the current recommendation of acceptance of the DATC offer or opt to pursue the DATL offer. If the taxpayer chooses not to pursue the DATL offer, recommend acceptance of the DATC offer using normal procedures. Do not send any information to Examination. It is not necessary to amend the offer to remove the reference to DATL.
Reasonable collection potential (RCP) cannot be determined because the taxpayer failed to provide the requested information, or the taxpayer no longer meets processability criteria Return the offer using normal procedures. Do not send any information to Examination.
Taxpayer chooses to withdraw the DATL basis only Secure an amended Form 656 removing the DATL basis. Do not send any information to Examination and consider under DATC.
Taxpayer chooses to withdraw the DATC basis Secure an amended Form 656 eliminating the DATC basis. Close the AOIC record as a withdrawal. Annotate the AOIC history indicating the offer is being forwarded to Examination and why. Note: Monitor the case until the TC 482 posts after closing the AOIC record. Then, coordinate with Examination to ensure that the TC 480 jurisdiction code 2 (Exam) and Status 71 are input.
A decision is made to reject the offer based on the DATC basis Prepare the Form 1271, Rejection or Withdrawal Memorandum, per IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, and send to the Independent Administrative Reviewer (IAR). Once approved by the IAR: (1) Send the letter to the TP explaining the reasons for rejection based on DATC, using the following statement: "We have concluded our evaluation of your offer based on Doubt as to Collectibility and are now forwarding it to the following office for consideration of the Doubt as to Liability issue." (2) Assign the AOIC record to 7000 (field) and 6500 (COIC), and (3) Forward the entire case file to Examination with a cover memo requesting an expedite evaluation of the DATL issue and advise us of the outcome so the AOIC record can be closed or transferred to Appeals if the TP appeals the decision to reject the DATC basis.


For offers submitted based on Doubt as to Collectibility (DATC), Doubt as to Liability (DATL), and Effective Tax Administration (ETA):

If… Then…
A determination is made to accept under ETA - hardship provisions, but DATL must be determined first Send the offer, any pertinent information and a memo to Examination requesting an expedite investigation of the DATL issue. If Examination responds stating there is no DATL issue, accept as an ETA. If Examination states there is DATL issue: (1) Send the AOIC transfer letter to the TP advising where the case was transferred. In the open paragraph inform the taxpayer that Examination has concluded there is DATL issue so ETA cannot be considered. (2) Assign the case to 7500, and (3) Advise Examination to notify Collection when the case is completed so the AOIC record can be closed.
A determination is made to reject under ETA but accept under Doubt as to Collectibility with Special Circumstances (DCSC) Accept under that basis. It is not necessary to amend the offer to remove the other bases. Nothing should be forwarded to Examination.
Reasonable collection potential (RCP) can not be determined because the taxpayer failed to provide the required information, or the taxpayer no longer meets processability criteria Return the offer using normal procedures. Do not send any information to Examination.
A determination is made that the offer should be rejected based on DATC but the ETA offer is submitted based on public policy/equity issue(s) requiring Examination consideration. Prepare Form 1271 per IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, and send to the Independent Administrative Reviewer (IAR).
Once approved by the IAR: (1) Send a letter to the TP explaining the reasons for rejection based on DATC, using the following statement: "We have concluded our evaluation of your offer based on Doubt as to Collectibility and are now forwarding it to the following office for consideration of the public policy/equity issue." (2) COIC should assign the AOIC record to "6500 " (COIC) and Offer Specialists should assign it to "7000 " , and(3) Forward the entire case file to Examination with a cover memo asking them to expedite evaluation and advise Collection of the outcome so the AOIC record can be closed or assigned to Appeals if the TP appeals the decision.


If a combo offer is forwarded to Examination and they conclude that a different amount of liability is due, generally an adjustment to the account will be made rather than acceptance of the offer. If Examination requests a release of the offer freeze to allow the adjustment, the TC 483 should be manually input to IDRS to temporarily release the –Y freeze. This will allow the adjustment to post to the account(s). TC 480 should be re-input to reconsider Doubt as to Collectibility (DATC) or Effective Tax Administration (ETA) issues as applicable following the adjustment of the account(s).

If Examination accepts, rejects, or secures a withdrawal on a combo offer that is still open on AOIC and assigned to "6500" (COIC) or "7000" (field OS), sufficient information should be secured to close the record on AOIC. If the offer is to be accepted, release the AOIC record to the appropriate end processing center. Coordination with Examination is required to ensure the accepted case file is simultaneously mailed to the same center. The AOIC history should be annotated indicating the basis for the closure.

Offices must print an inventory listing of accounts assigned to "6500" (COIC) or "7000" (field Offer Specialist) and reconcile it each quarter with Examination to ensure all cases are still open and assigned. Appropriate actions should be taken to resolve mismatches.

5.8.4.11 (09-01-2005)
Responsibility of Offer Specialist and Field Revenue Officers
Offer investigators are responsible for working only offer aspects of an investigation. During the offer process employees may discover collection issues that require traditional Revenue Officer (RO) investigation. Generally, if these issues are initially identified by an Offer Examiner (OE) in COIC, the case will be forwarded to a field Offer Specialist (OS), where the issues will be confirmed and if appropriate, action taken to refer the case to a traditional RO. Some of the issues that may be identified and the way they should be processed are:


Issue Procedure
Transferee, Nominee or Alter Ego When these issues arise during an offer investigation, Offer Specialist (OS) should establish a valuation for the involved asset or income stream. The OS should include the value in computing the reasonable collection potential (RCP) but not actually complete the administrative actions required to establish the liability or secure a lien against the third party. If the value of the involved asset or income stream will be obtained through an accepted offer, that fact should be clearly documented and any transferee, nominee or alter ego remedy not pursued through administrative or judicial action.
If the offer is rejected or moving toward rejection and time is of the essence due to the dissipation/transfer of assets or statute expiration, a Form 2209, Courtesy Investigation, or Other Investigation (OI) should be initiated to request the assignment of a RO to complete the required action to establish the transferee, nominee or alter ego liability or lien.
Levy or seizure related actions If during the course of an offer investigation an Offer Investigator determines that immediate levy or seizure action may be needed, the case will be referred to the Collection field function. The offer investigator will initiate an OI request to an RO group outlining the actions needed and providing any additional information that would assist the RO. Upon notification that a jeopardy levy has been approved the Offer Investigator will follow the procedures to close the offer outlined in IRM 5.8.3.19, Offers Submitted Solely to Delay Collection, if both the field and offer manager concur that the offer was filed to hinder or delay collection.
Suit recommendations Offer Specialists (OS) should consider the value of any recovery that may be made through a suit when determining reasonable collection potential (RCP). If the anticipated recovery amount is obtained through an accepted offer this fact should be clearly documented and the suit recommendation not pursued. If the offer is rejected or moving toward rejection and time is of the essence due to the statute expiration for filing suit, an OI should be initiated to request the assignment of a RO to complete the suit recommendation.
Continuing action on In Business Trust Fund (IBTF) cases Due to the potential for the pyramiding of liabilities and dissipation of assets in IBTF cases, the Offer Specialist will initiate an OI on rejected or returned offers involving ongoing businesses with employment tax liabilities. Because rejected, returned and withdrawn offers do not systemically revert to Status 26 (field assignment), the OI serves as an open assignment until the case is systemically assigned to Status 24 (queue), at which time the collection group manager can assign the case to an RO and close the OI. This process will generally take about 30 days.
Trust Fund Recovery Penalty (TFRP) and Personal Liability for Excise Tax (PLET) cases It is the responsibility of the traditional RO to complete the investigation and make a determination regarding personal responsibility in these cases. Follow the provisions in IRM 5.7.4, Investigation and Recommendation of TFRP. The process of completing the TFRP or PLET can be ongoing while the offer is pending, but before the determination is finalized. The LEM 5.4, non-assertion criteria, does not apply when an offer is under consideration. The TFRP investigation must be completed, because the reasonable collection potential (RCP) for the corporate offer must include not only what can be collected from the corporation, but any amounts that could reasonably be expected to collect from responsible officers on a TFRP assessment. For this reason, a hardship "non-assertion" recommendation against a responsible person should not be proposed if there is any reasonable collection potential (RCP) for that person based on current offer guidelines.
TFRP investigations should be completed through the point of assessment (i.e. through delivery of Letter(s) 1153 (DO) and consideration of any timely protests). See IRM 5.8.4.13 below for instructions on processing these investigations in conjunction with open offers.
Note:
OIs referred per these instructions should be considered high risk cases, i.e. risk code 100, and processed accordingly.



Note:
In the above situations , except in the case of TFRP or PLET investigations, an OI will be initiated only after the OIC manager and RO manager have discussed the issue and agree that the situation warrants the issuance of the OI.


5.8.4.12 (09-01-2005)
Coordination with Other Functions
Coordination with other functions is sometimes required during offer investigations. The most common coordination occurs between Collection and Examination or Collection and Appeals offices.

5.8.4.12.1 (09-01-2005)
Cases Pending in Examination
During initial analysis of an offer, IDRS should be checked to verify there are no actions for any periods either included or not included on the offer; such as, open audits, underreporter cases, TEFRA proceedings, or amended returns pending but not yet assessed. Pending examination cases may be identified by:

TC 922 without a CP 2000 process code or TC 290/291

TC 976 or 977 without a subsequent tax increase or decrease

-L Freeze and/or an AMDIS record

Partnership Investor Control File (PIFC) code on AMDIS of 5 indicating an investor with at least one open TEFRA key case linkage


If any potential adjustments are identified the assigned Examination or AUR function or employee should be contacted to determine the status of the audit and informed that an offer based on DATC has been received. The decision on how to proceed with the offer should be based on the status of the potential adjustment.

For example:

If… Then…
The TP was involved in abusive tax avoidance transactions (ATAT), appears to have substantial unreported income (UIDIF), or there is another reasonable explanation given by the assigned Examination employee as to why the audit should continue The TP should be advised that the offer investigation cannot proceed until the Exam issues have been resolved. Solicit a withdrawal explaining that it is in the TPs best interest due to CSED suspension. If the TP refuses to withdraw, consider returning the offer using the AOIC reason "Other investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted" .
The audit is routine and the assigned Exam employee has agreed to close the tax year(s) with no change Proceed with the offer investigation.
The audit is routine, but nearly concluded, and Examination wishes to conclude and assess the tax. Proceed with the offer investigation. Talk to the TP and the Revenue Agent (RA) to coordinate securing an agreement to the deficiency to expedite assessment. Include the tax year in the acceptance, but do not issue the acceptance letter until the tax is assessed.
The return has been selected for examination or Automated Under Reporter (AUR) consideration, but not yet assigned. Contact the controlling Examination or AUR function to advise that we are proceeding with the offer investigation.
The Partnership Investor File Control (PIFC) code on AMDIS is a 5, indicating at least one open TEFRA key case linkage exists Advise the TP that we cannot consider an offer until all TEFRA partnership issues have been resolved. Attempt to secure a withdrawal. If the taxpayer refuses to withdraw, consider returning the offer using the AOIC Return Letter paragraph "Other investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted."
The Partnership Investor File Control (PIFTD) code on AMDIS is a 7, the TEFRA case is closed Verify with the assigned Examination employee that the assessment was made and include the additional liability(s) in the offer.


Within 7 to 14 calendar days prior to accepting an offer, the Integrated Data Retrieval System (IDRS) should be rechecked to ensure that there are no new audit issues pending.

5.8.4.12.2 (09-01-2005)
Innocent Spouse Claims
When one spouse files an innocent spouse claim and the other spouse submits an offer, the assigned Examination employee should be contacted prior to proceeding to ensure there are no additional reasons to delay the offer investigation until the innocent spouse claim is resolved.

If a taxpayer files a Doubt as to Collectibility (DATC) offer but raises an innocent spouse issue during the investigation, the issue should be discussed with the taxpayer. If appropriate, the offer should be withdrawn and an innocent spouse claim should be forwarded to Examination.

If IDRS indicates that the taxpayer has an open innocent spouse claim, or if a Doubt as to Collectibility (DATC) offer and innocent spouse claim are filed simultaneously the taxpayer should be requested to withdraw the offer unless the Examination function advises that the claim will be closed immediately with no change. If Examination indicates that the claim appears valid and the taxpayer will not withdraw the offer it should be suspended pending disposition of the innocent spouse claim.

5.8.4.12.3 (09-01-2005)
Cases Pending or Decided in Appeals
During a Collection Due Process (CDP) or Equivalent Hearing (EH) assigned to Appeals, an offer may be submitted by the taxpayer. Taxpayers also occasionally submit a Doubt as to Collectibility (DATC) offer during an appeal of a proposed audit deficiency. Appeals retains jurisdiction of both these types of offers, but may send an Appeals Referral Investigation (ARI) to Collection.
An Appeals Referral Investigation (ARI) requesting Collection Information Statement (CIS) verification of a complex nature should be assigned to field revenue officers (RO). The results of the investigation will be reported via memorandum to Appeals and Appeals will conclude the investigation.
Requests for any expeditious treatment of an ARI will be decided on a case by case basis through a discussion between the two functional managers.

Offers based on Doubt as to Liability (DATL) on Trust Fund Recovery Penalty (TFRP) or Personal Liability Excise Tax (PLET) assessments must be reviewed upon receipt to ensure that the case is not pending or was not already heard in Appeals. If a DATL assessment had previously been determined in Appeals or is found to be currently assigned to an Appeals office, the offer should be removed from AOIC and transferred to Appeals. Coordination should be made with Appeals to ensure that the TC 480 (and if applicable Command Code STAUP to Status 71) is re-input with the proper Appeals jurisdiction code, since removing the offer from AOIC will reverse the TC 480.
If an offer based on Doubt as to Collectibility (DATC) only is received and there is an open case pending in Appeals, contact Appeals to determine who will have jurisdiction of the offer.

5.8.4.12.4 (09-01-2005)
Open Criminal Investigations
Open criminal investigations can be identified on IDRS by an unreversed transaction code (TC) 914 or (TC) 916. When these transaction codes are discovered contact must be made with the assigned Special Agent and procedures in IRM 5.1.5 followed. It may be necessary for the group or unit managers to discuss with the Criminal Investigation division (CID) manager to determine the next appropriate action. A decision will need to be made on the appropriate actions to take (including disposition of any application fee or deposit) and what may or may not be discussed with the taxpayer.

Once a taxpayer has been advised of the open criminal investigation, if the assigned Special Agent has no objection, the taxpayer may be asked to withdraw the offer until the criminal matter is resolved. If the taxpayer declines to withdraw the offer a joint decision should be made whether it should be closed as a return or held open until the investigation is closed.

5.8.4.12.5 (09-01-2005)
Offer Submitted Solely to Delay Collection
When it is determined that an offer is submitted "solely to delay" collection, the offer should be returned to the taxpayer without further consideration. The term "solely to delay" collection means an offer was submitted for the sole purpose of avoiding or delaying collection activity. A determination that an offer is submitted solely for the purpose of delaying collection should be apparent to an impartial observer. See IRM 5.8.3.19, Offers Submitted Solely to Delay Collection , for a complete discussion of this topic and procedures to follow when a case meeting this criteria is identified.

5.8.4.13 (09-01-2005)
Procedures for Certain Types of Taxpayers and Liabilities
Certain types of taxpayers and/or liabilities require unique considerations. The instructions described below should be followed when considering cases of this nature.

5.8.4.13.1 (09-01-2005)
Trust Fund Liabilities From Operating Businesses
When an offer is accepted to compromise trust fund tax owed by an operating business, the taxpayer is relieved of a significant operating expense. The effect is to grant the delinquent taxpayer an economic advantage over competitors who are in tax compliance. Recovery of the unpaid trust fund tax amount is a significant issue when considering an offer from a business taxpayer. In the interest of "fairness to all taxpayers" the Service must be cautious to avoid providing financial advantages to those taxpayers through the forgiveness of employment tax debt, as this may be detrimental to competitors who are remaining in compliance with their tax obligations. The following procedures apply to all In Business Trust Fund (IBTF) taxpayers, including sole proprietorships, partnerships, as well as corporations.

These taxpayers must meet the compliance requirements of IRM 5.8.3.4.1(1)(a), Determining Processability, and must remain in compliance while the offer is being considered. An untimely Federal Tax Deposit (FTD) during investigation will result in a return of the offer.

If financial analysis reveals that the taxpayer cannot pay operating expenses and remain current with taxes (i.e. the business is operating at a loss), all business assets should be valued rather than just valuing the income stream. Close review should be conducted as well to see whether the offer meets the criteria for return as one "solely to delay collection."

Business tax returns (Schedule C, Form 1120, and Form 1065), the taxpayers balance sheet, income statements, and the Form 433-B, Collection Information Statement for Business, need to be carefully analyzed to arrive at the correct reasonable collection potential (RCP). The following issues should be carefully reviewed and/or considered:


1) Depreciation — Do not allow depreciation. Instead allow necessary actual monthly obligations paid to secured creditors on depreciable assets (i.e. autos, equipment or real estate loans).


2) Accounts Receivable — Accounts receivable that are current (i.e. generally less than 90 days past due) generally should not be discounted at Quick Sale Value (QSV). Value all accounts receivable at 100% of the balance due, unless the taxpayer can substantiate the account has been delinquent over 90 days. If the account is determined to be delinquent, it may be discounted up to a maximum of 50%. However, supporting documentation is required to substantiate accounts the taxpayer claims are delinquent over 90 days; such as a request for the taxpayer to provide an aging report. If the account is over 90 days and the taxpayer fails to provide substantiation, it will be valued at 100%.

Note:
A delinquent account is defined as an uncollectible account that has been delinquent for more than 90 days. A collectible account is defined as one that may be considered to be past due, but is still an active client.



3) Personal Expenses Paid by the Business — Financial statements must be reviewed to ensure expenses such as car payments, insurance, utilities, etc. are not claimed on both the Form 433-A and the Form 433-B.


4) Compensation to Corporate Officers — Wages and/or other compensation paid to corporate officers in excess of applicable expenses allowable per National and Local standards should generally not be allowed as business expenses.


5) Stock Holder Distributions and Repayment of Loans to Officers — These expenses are discretionary in nature. Distributions of this nature made after the incurrence of the employment tax delinquency should be factored into the reasonable collection potential (RCP) analysis as dissipated assets. Loans to officers should be considered an account receivable and valued according to their collectibility.


6) Potential Recovery of "Priority Taxes" — Trust fund tax plus associated interest is classified as a "priority tax" in the U.S. Bankruptcy code. As such this tax must be paid in full, in a Chapter 11 or 13 payment schedule. If it is probable that the taxpayer will file a Chapter 11 or 13 if the offer is returned or rejected, then an offer should not be considered for less than what would be recovered through the bankruptcy proceeding.


7) Field Visits to Evaluate Business Assets — A field call should be made to validate the existence and value of business assets and inventory for all offers involving operating businesses and that will be recommended for acceptance. The offer specialist should make the call, if practical, or initiate an Other Investigation (OI) to request that a call be made by another revenue officer (RO) if the taxpayer operates in a remote location.

Note:
OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.




5.8.4.13.2 (09-01-2005)
Corporate Trust Fund Liabilities
If an offer to compromise trust fund tax is being considered for a corporation that is still in business all the issues outlined in IRM 5.8.4.13.1 above should be considered. In addition, the Trust Fund Recovery Penalty (TFRP) must be addressed.

It is the Service's policy that the amount offered to compromise a corporate employment tax liability must include, in addition to what can be collected from the corporation an amount equal to what can be collected from all responsible persons, up to the amount of the TFRP (plus interest, if the penalty has been assessed). However, if the Service enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person pursuant to Section 6672 of the Internal Revenue Code.

During initial analysis of an offer received from a corporation involving unpaid trust fund tax the Offer Specialist must determine the Assessment Statute Expiration Date (ASED) of each period and take immediate steps to protect it if expiration is imminent.

The following actions should be taken based on the facts of the case:

If… Then the RO will… Then the Offer Specialist will…
The TFRP has been completed and the assessment processed prior to the time the corporate offer is filed Document this fact on ICS and Form 657 submitted with the offer. Obtain a copy of the Form 4183 and the CIS for each responsible person and proceed with offer investigation.
The TFRP has not been completed at the time the corporate offer is submitted, but the RO is continuing to complete the TFRP investigation and plans to request assessment Continue holding the balance due accounts in Status 26 until the Form 4183 is approved, Letter 1153 (DO) issued, and the assessment requested. Request Status 71 on the Corporate liability at the time the TFRP assessment is processed. Send copies of the signed Form 4183 and CIS on the responsible officers to the Offer Specialist when secured. Obtain a copy of Form 4183 and the CIS for each responsible person and proceed with the investigation. Coordinate with the field RO and if information needed to make a TFRP determination is not received in a reasonable amount of time, return the offer based on failure to provide the requested information.
The TFRP has been completed but not assessed at the time the corporate offer is submitted and the RO recommends withholding assessment of the penalty until the offer investigation is completed Complete the investigation through issuance of Letter 1153 (DO) and process any appeals received. Establish an OI to maintain control of the TFRP case. Send copies of the Form 4183 and CIS for each responsible person to the Offer Specialist. Secure a Form 2750 from each responsible person extending the ASED to ensure there are at least 2 years remaining on the statute from the date the offer was submitted. Obtain a copy of the Form 4183 and CIS for each responsible person from the field RO and proceed with the investigation. Coordinate with the field RO and if a CIS and/or information is needed to make the TFRP determination is not received in a reasonable amount of time, return the offer for failure to provide requested information.
Trust fund tax is due, the corporate account is not assigned to an RO and the TFRP has not been investigated, or was investigated and was not asserted because the potential assessment was below LEM-V criteria or was potentially uncollectibility from responsible officer. Complete the TFRP investigation, using an OI (coded 100). Follow the chart above based on a decision of whether to assess TFRP or not. OI should be completed within 90 days. Contact a field group to ensure an OI is assigned to an RO to conduct the investigation. Follow the chart above based on the decision of the RO. Coordinate with the RO and if information is needed to make a TFRP determination and it is not received in a reasonable amount of time, return the offer based on failure to provide requested information.
The ASED has expired without any TFRP assessment Annotate the expiration in the case history and continue processing the offer determining only the corporation’s RCP. Prepare an expired statute notification and submit to your manager for processing.


If a decision is made to accept the corporate offer and the TFRP is not assessed, as a condition of acceptance of the offer, Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, and Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, must be secured from each responsible person. The ASED should be extended to a date 2 years beyond the anticipated completion date of all terms and conditions of the offer, the applicable compliance provisions, and any related collateral agreements. The complete TFRP administrative file, including the signed Forms 2751 and 2750 should be sent with the accepted offer file to the appropriate Monitoring OIC (MOIC) unit once the offer is accepted. Should the offer default, that unit will be responsible for returning the TFRP Administrative file to the appropriate area office for assessment.

Caution:
Ensure the responsible persons are advised of IRC Section 6501(c) (4)(B) rights to (1) refuse to extend the statute, (2) limit the extension to particular issues, or (3) limit the extension to a particular period of time.
If the person refuses to extend the statute, a decision must be made to either (1) accept the offer without protecting the Service's ability to later assess the penalty, (2) assess the penalty, or (3) reject the offer.




When a cash offer is accepted from a corporation and has been paid in full all employees assigned related TFRP accounts should be notified and asked to initiate the Form 3870, Request for Adjustment, only if the amount offered will full pay the TFRP liability. If the accounts are not currently in active collection status the Offer Specialist (OS) should initiate the adjustment requests. The Form 3870 should request that the TFRP module(s) be brought to a "zero" balance. If any payment or refund offset has been made on the TFRP the Form 3870 should also include the statement "Do not refund any credits on the module" .

When a deferred payment offer is accepted from a corporation the Form 3870, Request for Adjustment, for each related TFRP should be prepared as in (6) above, but should be attached to the accepted file when it is forwarded to the Monitoring OIC (MOIC) unit. A note should be attached asking that the Form 3870 be processed when the offer amount has been paid in full, only if the amount offered will full pay the TFRP liability. Employees assigned TFRP accounts should be notified of the acceptance and should assign all account(s) to IDRS t-sign code "8500" .

In the situation where the amount offered by a corporation combined with the payments already made on related TFRP assessments exceeds the total employment tax liability of the corporation for the same tax periods:

Request the responsible person(s) sign irrevocable requests to transfer their payments on the TFRP accounts to the related corporation liability.

Complete and process Form 3870 to accomplish the credit transfer.

Secure full payment of the balance due from the corporation.

Secure a withdrawal of the offer.



Note:
The above situation should be rare. If the combined payments made on the related TFRP assessments exceed the total employment tax liability of the corporation, then the accounting transactions completed by the campus should have posted the related payments to all accounts.


5.8.4.13.3 (09-01-2005)
Excise Tax Liabilities
When the Personal Liability Excise Tax (PLET) is assessed at the time we accept an offer from the business, we may still collect from the responsible person any amount not paid by the business. Therefore, do not request abatement of the PLET just because the business's liability has been compromised.

While investigating an offer to compromise excise tax subject to PLET, also:

Determine if the PLET has been assessed.

Follow locally established guidelines if no PLET investigation has been completed. Actual assessment of the PLET may be held in abeyance pending the outcome of the offer investigation.

Verify ASEDs and protect them if expiration is imminent.

Secure a Collection Information Statement (CIS) from each responsible person.




Caution:
The assessment waiver on the Form 656 does not extend the statute of limitations for assessing the PLET against a responsible person.


If the taxpayer should default an accepted offer, an opportunity to assert the PLET will be available at that time. For this reason, when an offer is accepted from a business based in part on our ability to collect the excise tax from responsible persons no PLET will be assessed:

As a condition of acceptance secure the Form 9490, Waiver Extending Statutory Period for Assessment of Personal Liability for Excise Tax, from each responsible person.

Extend the assessment statute 2 years beyond the anticipated completion date of all terms and conditions of the offer; including the applicable compliance provision and any related collateral agreements.

Caution:
Insure the responsible person is advised of IRC Section 6501(c)(4)(B) rights to: (1) refuse to extend the statute, (2) limit the extension to particular issues, (3) limit the extension to a particular period of time. If the person refuses to extend the statute a decision must be made to either: (1) accept the offer without protecting the Service’s ability to later assess the penalty, (2) assess the penalty and include the additional liability in the offer, or (3) reject the offer.


Forward the Form 9490, Waiver Extending Statutory Period for Assessment of Personal Liability for Excise Tax, to Compliance Services with the accepted offer file. Should the offer default, this file will be returned to the Compliance Area office for processing and assessment of the PLET.

Note:
The Form 9490 is not required for any responsible person who makes a designated payment of the excise tax or when a non-assertion decision has been made because the excise tax could not be collected from that person.



5.8.4.13.4 (09-01-2005)
Partnership Liabilities
Partnership employment tax liabilities are not "joint and several" as are joint income tax assessments. The Service's ability to collect from the partners is based on state law.

When a partnership liability is compromised for any individual general partner our ability to collect from all other general partners may be affected. Therefore, the amount offered to compromise a partnership tax liability must include what we can collect from the partnership plus what can be collected from each of the general partners. No offer should be accepted to compromise only one partner’s individual liability for the partnership debt.

When investigating partnership offers a Collection Information Statement (CIS) should be secured from the partnership and from all general partners. The reasonable collection potential (RCP) for the partnership must equal what could be collected from the partnership plus what could be collected from all general partners. Generally, an offer based on Doubt as to Collectibility (DATC) from a partnership will not be accepted when the RCP of one or more of the general partners cannot be determined. When it is not possible to secure a CIS from one or more of the general partners, because they cannot be located or they refuse to cooperate or join in the offer, the offer may still be accepted if the investigation is able to establish that there is no collection potential from the non-participating partners.

5.8.4.13.5 (09-01-2005)
Child Support Obligations
While the Service is charged with collecting certain child support obligations, we do not have the authority to compromise them. These accounts are identified on the Non-Master-File with a Masterfile Transaction (MFT) code of 59.

If a taxpayer proposes a compromise that includes a child support liability, Service employees should request that the offer be amended to remove the child support obligation. If the offer is acceptable it can be compromised without including the child support debt. If the taxpayer refuses to remove the child support liability the offer should be rejected using the public policy reason and the open paragraph stating that "We do not have authority to compromise child support obligations" .

5.8.4.14 (09-01-2005)
Concluding the Offer Investigation
Once the reasonable collection potential (RCP) has been calculated, immediate action should be taken to bring the case to closure. See IRM 5.8.4.7.3 above for time frames within which closing actions must be taken.


Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 6. Collateral Agreements

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5.8.6 Collateral Agreements
5.8.6.1 Overview
5.8.6.2 Co-obligor Agreements
5.8.6.3 Other Collateral Agreements
5.8.6.4 Multiple Agreements
5.8.6.5 Waiver of Refunds
Exhibit 5.8.6-1 Co-obligor Agreement Common Law States Pattern Letter P–229 (Rev. 6-90)
Exhibit 5.8.6-2 Co-obligor Agreement Other States Pattern Letter P–230 (Rev. 6-90)
Exhibit 5.8.6-3 Collateral Agreement – Modification of Waiver Provisions of Compromise Agreement
Exhibit 5.8.6-4 Form 2261-C, Collateral Agreement Waiver of Net Operating Losses, Capital Losses and Unused Investment Credits
5.8.6.1 (09-01-2005)
Overview
A collateral agreement enables the government to collect funds in addition to the amount actually secured by the offer or to add additional terms not included in the standard Form 656 agreement, thereby recouping part or all of the difference between the amount of the offer or additional terms of the offer and the liability compromised.

5.8.6.2 (09-01-2005)
Co-obligor Agreements
When a compromise is accepted from one party to a joint liability, the other party is not released from their several liability. Secure a co-obligor agreement from the taxpayer submitting the offer to clarify the effect of the compromise on the obligations of the other parties.

Note:
Trust Fund Recovery Penalty (TFRP) assessments are not joint liability assessments and do not require a co-obligor agreement.


If… Then…
The taxpayer lives in a state where acceptance of an offer in compromise from one party to a joint assessment also releases the other party Secure the common law co-obligor agreement. See Exhibit 5.8.6-1.
The taxpayer lives in a state where the right is expressly reserved to proceed against the other taxpayer who is not a party to the compromise Secure the non-common law co-obligor agreement. See Exhibit 5.8.6-2.
The taxpayer lives in a state where acceptance of an offer in compromise from one party to a joint assessment also releases the other party up to the amount of their proportionate share of the liability There is no co-obligor agreement available for this case. An acceptable offer should include the reasonable collection potential (RCP) of all the obligors. When it is impossible to investigate all the obligors, there is a risk that the full collection potential will not be collected. Such an offer must meet the criteria for acceptance on the basis of Doubt as to Collectibility with Special Circumstances (DCSC) or Effective Tax Administration (ETA).
Both parties have submitted separate offers which are recommended for acceptance If appropriate, the parties may submit a joint offer to eliminate the need for co-obligor agreements. Otherwise, secure a co-obligor agreement from each taxpayer.


A co-obligor agreement is not warranted in the following instances:

In a proportionate liability state, when the offer amount is equal to or exceeds the not compromising taxpayers proportionate liability.

No possibility exists for collecting from the other obligors.

Under state law, no specific reservation of collection rights is required to protect the ability to collect from co-obligors.


5.8.6.3 (09-01-2005)
Other Collateral Agreements
Other collateral agreements may be appropriate in certain circumstances. Because all other collateral agreements must be monitored for compliance, they should only be secured when a significant recovery is anticipated. Securing a collateral agreement should be the exception and not the rule.

Do not use a collateral agreement to accept an offer amount less than the taxpayers financial condition indicates.

In lieu of a collateral agreement, the taxpayer may increase the amount of the offer equivalent to what the government could reasonably expect to recover from the collateral agreement.

A collateral agreement may be appropriate in the following situations:

If the taxpayer… Then consider securing a…
Anticipates a substantial increase in future income Future income collateral agreement.
Is compromising the income tax liability of a defunct professional corporation Future income collateral agreement from the professional to collect from future individual income.
Has real or personal property that is being depreciated Collateral agreement to reduce the basis of the asset.
Has net operating losses or capital losses arising from prior years available for deduction in future years A collateral agreement to waive the loss.
Is seeking to compromise a Trust Fund Recovery Penalty (TFRP) and qualifies to take a capital loss benefit from the defunct corporation on the Form 1040 A collateral agreement from the individual taxpayer to waive the capital loss.


5.8.6.3.1 (09-01-2005)
Future Income
It is appropriate to consider future collateral agreements for both individuals and corporations when the investigation reveals that a substantial increase in the taxpayers future income is expected.

The use of a future income collateral agreement may be an option when attempting to determine a taxpayers future income for reasonable collection potential (RCP) purposes. When investigating an offer where the taxpayers past income does not provide an accurate analysis for what may be earned in the future then the use of a future income collateral agreement may be a better option.

Example:
1) The taxpayer is an engineer, but is currently employed as a salesman earning less than half of his prior salary due to difficulty he has had in obtaining a job in the engineering field at the present time, or
2) The taxpayer is a student and is expected to graduate soon and begin earning a significant annual income.


The period of time a future income collateral agreement should cover will be determined by the circumstances identified in the offer investigation based on the taxpayers financial situation. Generally the period of time the agreement covers should coincide with the future compliance provision.

Example:

•If the offer terms are for cash payment (paid within 90 days of acceptance) the future income collateral agreement should generally run for a five year period,
•If the offer terms are based on deferred payments calculated through the collection statute periods, the future income collateral should generally run through the last full year before the statutory period for collection expires.
•The offer file should document the basis for the time frame used for each collateral agreement.


Use the Form 2261, Collateral Agreement — Future Income (Individual), for individual taxpayers or the Form 2261–A, Collateral Agreement — Future Income (Corporation) for corporate taxpayers. The beginning year is defined as the year following acceptance of the offer. The ending year is defined as the last year for which the collateral agreement will remain in effect. The beginning dollar amount is negotiable but generally should be the amount determined necessary to meet living expenses during the term of the offer. In determining the beginning dollar amount the expected rate of inflation during the term of the agreement should be considered, as well as any additional expenses such as those for an expected additional child or a replacement auto.

Offers with future income collateral agreements must be approved by a second level manager. The Territory manager for the field and Department manager for COIC will indicate approval by signing the Form 7249, Offer Acceptance Report, and the acceptance letter. The Form 2261 may be signed by the authorized official in Delegation Order 42.

Do not secure a future income collateral agreement:

To collect future income that should be included in the offer amount.

Merely on unfounded speculation about an increase in income.

To cover statistically improbable events, such as lottery winnings.

To attempt collection from a potential inheritance.

Example:
Do not secure a future income collateral agreement when the investigation reveals that the taxpayer is the only child of wealthy parents, and the surviving parent is well advanced in years and in poor health.



Future income collateral agreements must be monitored annually for the life of the agreement. The cost of monitoring and the difficulty in tracing income structured through other entities should be considered when deciding whether such an agreement is warranted.

5.8.6.3.2 (09-01-2005)
Adjusted Basis of Specific Assets
The initial basis of an asset is equal to the cost of acquiring it. Adjustments to the basis are made each year for the cost of improvements and accumulated depreciation. When an asset is sold, the basis is used to determine the amount of capital gain to be taxed.

A collateral agreement may be used to reduce the basis after accumulated depreciation, or book value, of a specific asset to a lesser amount or zero. This will have two effects. It will limit or eliminate the amount of deprecation deduction allowed in future years and it will cause a higher capital gain tax to be paid if the asset is later sold for an amount more than the adjusted basis.

Use the Form 2261–B, Collateral Agreement — Adjusted Basis of Specific Assets. The beginning year is defined as the year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Specifically describe each asset. Set the amount of the basis at the reduced or zero value.

Adjusted basis collateral agreements must be monitored annually until the asset is ultimately disposed of all value. Consider the cost to monitor the agreement and the difficulty in tracing the sale or exchange of the property when deciding whether such an agreement is warranted.

5.8.6.3.3 (09-01-2005)
Waiver of Losses
Use the Form 2261–C, Collateral Agreement —Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits. The beginning year is defined as the next year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Waive net operating losses and capital losses arising from all years prior to and including the last filed tax return.

Do not prohibit the deduction of losses that arise in years after the offer is accepted.

The waiver of investment credits is obsolete.

Waiver of losses collateral agreements must be monitored annually until all the losses are extinguished, potentially for decades. Consider the cost to monitor the agreement and potential for recovery of future tax liabilities when deciding whether such an agreement is warranted.

A waiver of losses collateral agreement may be secured to partially waive a loss, if the facts of the case support this determination.

5.8.6.3.3.1 (09-01-2005)
Net Operating Loss
Net Operating Loss (NOL) may be incurred when expenses exceed the income of a business.

The taxpayer must be able to prove the amount of the loss.

Generally, losses may be carried back no more than two years and forward no more than twenty years or until all the loss is offset against taxable income.

If the taxpayer only wishes to carry the loss forward, the taxpayer must elect to do so no a timely field return for the year of the loss, or if the original return is filed timely but no election is made on an amended return by the close of the period 6 months after the due date of the return excluding extensions.


When the taxpayer has claimed a Net Operating Loss (NOL), determine and verify the exact origin and amount of the loss. If a taxpayer has been associated with more than one business there may be multiple losses.

When… Then…
Calculating the remainder of the NOL The loss can be located on the "other income" line or the "business loss" line on the Form 1040 and should be labeled as Net Operating Loss.
1. Determine the original loss amount claimed on the tax return.
2. Subtract any carry backs.
3. Subtract the amounts claimed on subsequent tax returns from the year the NOL was established.


5.8.6.3.3.2 (09-01-2005)
Capital Loss
Capital Loss is one in which the taxpayer experiences a loss associated with such investments as land, stock, paid in capital, or loans from shareholders. This loss is:

Found on a Schedule D.

Only offset against income or capital gain in the year in which it is incurred and the remainder carried forward at a limit of $3,000 per year against other income or;

Offset against a capital gain in total

Example:
A taxpayer has a $100,000 loss and a $40,000 gain. The taxpayer may offset $40,000 against the gain and an additional $3,000 loss against other income leaving a $57,000 loss that may be carried forward in future years.


Individuals may deduct $3,000 each year until the loss is extinguished with no limit on the number of years. Corporations are generally limited to 3 preceding and 5 succeeding taxable years.


When the taxpayer claims a capital loss, determine and verify the exact origin and amount of the loss.

If… Then…
The loss is derived from personal investment The investment can be either loans to the corporation or the individual's capital investment in the corporation.•Verify loans through copies of checks or general journal entries that establish the loan and track repayment.•Verify capital investment through canceled checks or other documents which support the amount of the original loan.
Determining the remaining amount of the loss once you have determined the origin Trace the loss forward through the tax return copy or RTVUE.


5.8.6.3.3.3 (09-01-2005)
Passive Loss
Passive Activity Loss is one that involves the conduct of any trade or business in which the taxpayer does not materially participate. This loss should not be confused with net operating loss.

Any rental activity is a passive activity even if the taxpayer does materially participate.

Losses from a passive activity generally cannot be deducted from other types of income (e.g., wages, interest, or dividends).

The amount of the taxpayers allowable loss is subject to the "at-risk" rules. Generally losses are limited to the amount of the taxpayers cash contribution, adjusted basis of other property which contributes to the activity, and amounts borrowed for use in the activity if the taxpayer has personal liability for the borrowed amounts.

Note:
Refer to the current Master Tax Guide for additional information.



Because passive losses are not deducted from earned income, waiving them may have little or no effect. One option is to reduce the basis of the property to zero so that the taxpayer cannot carry the loss over to the tax year in which the property is sold and receive benefit of the loss against a capital gain at that time.

5.8.6.4 (09-01-2005)
Multiple Agreements
When related taxpayers submit more than one offer to compromise different tax liabilities secure only one collateral agreement. Describe on the collateral agreement all the offers to which it relates.

When more than one type of collateral agreement is secured for the same offer, the terms of all the agreements may be incorporated into one Form 2261, Collateral Agreements – Future Income (Individuals) or Form 2261–A, Collateral Agreements – Future Income Corporation. The appropriate language may be found on the Form 2261–B, Collateral Agreement – Adjusted Basis of Specific Assets, or Form 2261–C, Collateral Agreement – Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits.

Type of Agreement… Statement…
Adjusted Basis of Assets "For the purpose of computing income taxes of the taxpayer for all years beginning after ___, the basis for certain assets, under existing law for computing depreciation and the gain or loss upon sale, exchange or other disposition shall be as follows:
Name of asset _____
Dollar amount ______
That in no event shall the basis set forth above be in excess of the basis that would otherwise be allowable for tax purposes, except for this agreement."
Waiver of Net Operating Loss "For the purpose of computing income taxes of the taxpayer for all years beginning after ___, Any net operating losses sustained for the years before __shall not be claimed as net operating loss deductions under the provisions of Section 1212 of the Internal Revenue Code."
Waiver of Capital Losses "For the purpose of computing income taxes of the taxpayer for all years beginning after ___, Any net capital losses sustained for the years before __shall not be claimed as carryovers or carrybacks under the provisions of Section 172 of the Internal Revenue Code."


If there is insufficient space on the form to insert all the necessary paragraphs simply type the paragraph numbers followed by "See Attached" and fasten a separate sheet containing the added provisions.

5.8.6.5 (09-01-2005)
Waiver of Refunds
Form 656 contains a term which waives refunds and overpayments for all tax years through the year the offer in compromise is accepted. This waiver is a standard term, which cannot be altered.

When accepting an offer based on doubt as to liability (DATL) or under the basis of Effective Tax Administration (ETA) based on public policy/equity considerations, the waiver of refunds is not applicable.

In order to remove the waiver of refund provision for these type of offers, both the taxpayer and the investigating employee must sign an agreement and include it with the accepted offer in compromise. See Exhibit 5.8.6-3.

Exhibit 5.8.6-1 (09-01-2005)
Co-obligor Agreement Common Law States Pattern Letter P–229 (Rev. 6-90)
Collateral Agreement—Taxpayer Involved in Joint Assessment
(For Use in States Where Common Law Rule Applies)

To: Commissioner of Internal Revenue:
 I submitted an offer dated (date) in the amount of $(amount) to compromise unpaid (Kind of tax) tax, plus statutory additions, for the tax period(s) (date(s)).
 The purpose of this letter is to amend that offer by adding the following provisions:
 The (a) liability, which is the subject of this proposed agreement, is the joint and individual responsibility of myself and my co-obligor(s). I agree to pay the United States $(amount). The United States agrees, in turn, not to:
  (1) sue the undersigned for the difference between the amount of the offer in compromise and the amount of the Iiability, or
  (2) collect the difference from assets of the undersigned by levy or any other means.
If this proposal is accepted, it does not mean that the liability or any part of the liability is settled for myself or the co-obligor(s). The United States still reserves all its rights to collect the liability from the co-obligors.

________________
Taxpayer's Signature

________________
Date

Exhibit 5.8.6-2 (09-01-2005)
Co-obligor Agreement Other States Pattern Letter P–230 (Rev. 6-90)
Collateral Agreement — Taxpayer Involved in Joint Assessment
(For Use in States Where Statutes Expressly Reserve Right to Proceed Against Co-obligor)

To: Commissioner of Internal Revenue

 I submitted an offer dated (date) in the amount of $(amount), to compromise unpaid (kind of tax) tax, plus statutory additions, for the tax periods (dates).
 The purpose of this letter is to amend and clarify that offer by adding the following provision:
 Although the liability sought to be compromised is the joint and individual liability of myself and my co-obligors, I am submitting this offer to compromise my individual liability only. If this offer is accepted, it does not release or discharge my co-obligor(s) from liability. The United States still reserves all rights of collection against co-obligors.

________________
Taxpayer's Signature

________________
Date

Exhibit 5.8.6-3 (09-01-2005)
Collateral Agreement – Modification of Waiver Provisions of Compromise Agreement

Collateral Agreement — Modification of Waiver Provisions of Compromise Agreement
(For Use when offer is being accepted under Detriment to Voluntary Compliance only)

To: Commissioner of Internal Revenue

 I submitted an offer dated (date) in the amount of $(amount), to compromise unpaid (kind of tax) tax, plus statutory additions, for the tax periods (dates).
 The purpose of this letter is to modify that offer by stating that Items 8(g) and (h) of the agreement, Form 656, governing refunds and overpayments, will not apply to this offer. Acceptance of this offer will in no way alter my rights to refunds of overpayment or my ability to designate an overpayment to estimated tax payments for the following year:

________________
Taxpayer's Signature
________________
Date