§301.7122-1., Compromises - Effective Tax Administration
In general
(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.
(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.
(b) Grounds for compromise
(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.
(2) Doubt as to collectibility. --Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.
(3) Promote effective tax administration
(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.
(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.
(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.
(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, 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.
(2) Doubt as to collectibility
(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.
(ii) Nonliable spouses
(A) In general. --Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.
(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration
(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --
(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --
(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and
(C) Taxpayer has encouraged others to refuse to comply with the tax laws.
(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:
Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.
Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.
(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:
Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.
(d) Procedures for submission and consideration of offers
(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.
(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.
(e) Acceptance of an offer to compromise a tax liability
(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.
(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.
(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.
(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.
(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --
(i) False information or documents are supplied in conjunction with the offer;
(ii) The ability to pay or the assets of the taxpayer are concealed; or
(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --
(i) The amount of tax assessed;
(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and
(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise
(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.
(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.
(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.
(4) Offers based upon doubt as to liability. --Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.
(5) Appeal of rejection of an offer to compromise
(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.
(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.
(g) Effect of offer to compromise on collection activity
(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.
(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.
(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.
(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.
(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.
(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.
(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.
(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).
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.
FINAL-REG, 2008FED ¶41,111, §301.7122-1., Compromises
Caution: Reg. §301.7122-1 does not reflect recent law changes. For details, see ¶41,111.01.
Compromises
In general
(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.
(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.
(b) Grounds for compromise
(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.
(2) Doubt as to collectibility. --Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability.
(3) Promote effective tax administration
(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.
(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.
(iii) No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.
(c) Special rules for evaluating offers to compromise
(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise will be based upon consideration of all the facts and circumstances, 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.
(2) Doubt as to collectibility
(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, guidelines published by the Secretary on national and local living expense standards will be taken into account.
(ii) Nonliable spouses
(A) In general. --Where a taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.
(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration
(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --
(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --
(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and
(C) Taxpayer has encouraged others to refuse to comply with the tax laws.
(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:
Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.
Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.
(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:
Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.
Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.
(d) Procedures for submission and consideration of offers
(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.
(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.
(e) Acceptance of an offer to compromise a tax liability
(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.
(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.
(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.
(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.
(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --
(i) False information or documents are supplied in conjunction with the offer;
(ii) The ability to pay or the assets of the taxpayer are concealed; or
(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --
(i) The amount of tax assessed;
(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and
(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise
(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.
(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.
(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.
(4) Offers based upon doubt as to liability. --Offers submitted on the basis of doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability.
(5) Appeal of rejection of an offer to compromise
(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (Appeals) if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the Secretary.
(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.
(g) Effect of offer to compromise on collection activity
(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.
(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending.
(3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.
(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.
(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.
(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.
(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.
(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited
(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).
301.6343-1(b)(4) Economic hardship
(i) General rule . --The levy is creating an economic hardship due to the financial condition of an individual taxpayer. This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
(ii) Information from taxpayer . --In determining a reasonable amount for basic living expenses the director will consider any information provided by the taxpayer including --
(A) The taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;
(B) The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer's production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);
(C) The cost of living in the geographic area in which the taxpayer resides;
(D) The amount of property exempt from levy which is available to pay the taxpayer's expenses;
(E) Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster; and
(F) Any other factor that the taxpayer claims bears on economic hardship and brings to the attention of the director.
(iii) Good faith requirement . --In addition, in order to obtain a release of a levy under this subparagraph, the taxpayer must act in good faith. Examples of failure to act in good faith include, but are not limited to, falsifying financial information, inflating actual expenses or costs, or failing to make full disclosure of assets.
Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 11. Effective Tax Administration
________________________________________
5.8.11 Effective Tax Administration
• 5.8.11.1 Overview
• 5.8.11.2 Legal Basis for Effective Tax Administration Offer
• 5.8.11.3 Initial Processing of Effective Tax Administration Offers
• 5.8.11.4 Evaluation of Offers
• 5.8.11.5 Documentation and Verification
• 5.8.11.6 Final Processing
• Exhibit 5.8.11-1 Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet
5.8.11.1 (09-01-2005)
Overview
1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:
• Hardship,
• Public policy, and
• Equity
Treasury Regulation § 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.
2. The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:
• Believe the laws are fair and equitable, and
• Gain confidence that the laws will be applied to everyone in the same manner.
The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:
• The tax is legally owed, and
• The taxpayer has the ability to pay it in full.
3. If a taxpayer submits an Effective Tax Administration (ETA) offer, first investigate the offer for:
• Doubt as to Liability (DATL), and/or
• Doubt as to Collectibility (DATC).
An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC).
The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA).
4. Economic hardship standard of § 301.6343-1 specifically applies only to individuals.
5.8.11.2 (09-01-2005)
Legal Basis for Effective Tax Administration Offer
1. Compared to Doubt as to Collectibility (DATC)
In a Doubt as to Collectibility (DATC) offer, the tax liability equals or exceeds the taxpayers reasonable collection potential (RCP) which is:
• Net equity, plus
• Future income
In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayers reasonable collection potential (RCP). The taxes owed can be collected in full either:
• In a lump sum, or
• Through an installment agreement (IA)
A Doubt as to Collectibility (DATC) offer does not convert to an Effective Tax Administration (ETA) offer if the Offer Investigator and the taxpayer cannot agree on an acceptable offer amount.
2. Compared to Doubt as to Collectibility with Special Circumstances (DCSC)
Taxpayers may qualify for an Effective Tax Administration (ETA) offer when their reasonable collection potential (RCP) is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.
Example:
The taxpayer owes $20,000. The reasonable collection potential (RCP) is $25,000. The taxpayer could have an offer accepted for less than the total liability of $20,000 under the Effective Tax Administration (ETA) provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.
Taxpayers could have an offer accepted under Doubt as to Collectibility with Special Circumstance (DCSC) when their reasonable collection potential (RCP) is less than their liability, but there are economic hardship or public policy/equity factors that would justify accepting the offer for an amount less than the reasonable collection potential (RCP).
Example:
The taxpayer owes $20,000. However his reasonable collection potential (RCP) is $15,000. The offer does not meet the legal basis for an Effective Tax Administration (ETA) because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under Doubt as to Collectibility with Special Circumstance (DCSC) provisions.
3. Compared to Doubt as to Liability
An offer can be considered under Effective Tax Administration (ETA) provisions only when there are no doubt to liability issues.
4. In reaching these determinations:
If… Then…
The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for Effective Tax Administration (ETA) consideration. The offer is considered based on the Doubt as to Liability (DATL) issue.
The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an Effective Tax Administration (ETA) offer. The offer is considered based on Doubt as to Collectibility (DATC).
However, hardship or public policy/equity may be present in the case to allow consideration under Doubt as to Collectibility with Special Circumstances (DCSC).
The Service determines the taxpayer is not eligible for compromise based on Doubt as to Liability (DATL) or Doubt as to Collectibility (DATC) and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for Effective Tax Administration (ETA) consideration.
5. Before we can consider a compromise based on economic hardship or public policy/equity considerations, three factors must exist:
A. A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.
B. The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.
C. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.
5.8.11.2.1 (09-01-2005)
Economic Hardship
1. When a taxpayers liability can be collected in full but collection would create an economic hardship, an Effective Tax Administration (ETA) offer based on economic hardship can be considered.
2. The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.
Note:
Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.
3. The taxpayers financial information and special circumstances must be examined to determine if they qualify for an Effective Tax Administration (ETA) offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.
4. The taxpayers income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers family. Some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards. Deviation from these standards is permissible if and when the taxpayer is able to justify expenses that exceed these limits.
5. In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:
• The taxpayers age and employment status,
• Number, age, and health of the taxpayers dependents,
• Cost of living in the area the taxpayer resides, and
• Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.
Note:
This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.
6. Factors that support an economic hardship determination may include:
1. The taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.
2. The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.
3. The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.
Note:
These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.
7. Compromise under the Effective Tax Administration (ETA) economic hardship provision is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws. Factors supporting a determination that compromise would undermine compliance include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
There may be other situations where compromise would be undermined.
8. The following examples illustrate the types of cases that may be compromised under the economic hardship standard.
Example:
The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.
Example:
The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.
Example:
The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.
9. The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.
Example:
The taxpayer submitted an Effective Tax Administration (ETA) offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.
10. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and use personal funds for basic living expenses. The taxpayer owes $100,000 and has a reasonable collection potential of $150,000. An offer was submitted for $35,000. Through the investigation, it is determined that collecting more than $50,000 would cause an economic hardship for the taxpayer since it would hinder the ability to meet reasonable living expenses, including ongoing medical expenses. The taxpayer is advised to raise the offer to $50,000 since it is an amount the Service can collect without creating an economic hardship.
11. The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.2 (09-01-2005)
Public Policy or Equity Grounds
1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.
2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.
3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayers belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.
Example:
The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).
Example:
In 1983, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. Immediately upon investing, the taxpayer claimed investment tax credits that significantly reduced or eliminated the tax liabilities for the years 1981 through 1983. In 1984, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). After issuance of the Final Partnership Administrative Adjustment (FPAA), but prior to any proceedings in Tax Court, the IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS's determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership's activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. Neither the operation of the TEFRA rules nor the TMP's actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph (b)(4)(i)(B) of this section. Compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of TEFRA. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of paragraph (b)(4)(i)(A) of this section.
Note:
In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statute based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.
4. Section 6404(e) grants the Service the discretion to abate interest attributable to certain errors and delays by the Service. It would not promote Effective Tax Administration (ETA) to compromise a liability based solely on an assertion of delay by the Service if that delay would not support relief from interest under section 6404(e).
5. Compromise may promote Effective Tax Administration (ETA) where the taxpayer was incapacitated and thus unable to comply with the tax laws.
Example:
In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The medical condition was such that during this period, the taxpayer was unable to manage any of their financial affairs. The taxpayer has not filed tax returns since that time. The taxpayers health has now improved and has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 1986 tax year based on information documents received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayers overall compliance history does not weigh against compromise.
Note:
In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 1986 tax year and adjust the taxpayers account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had there been an ability to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.
6. It would not promote Effective Tax Administration (ETA) to compromise with the taxpayer in (5), above, if the investigation revealed that the taxpayer was able to attend to matters other than those due in 1986 during the time of the illness. For example, assume the taxpayer discussed, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote Effective Tax Administration (ETA), and could serve to undermine compliance by other taxpayers.
7. Compromise may promote Effective Tax Administration (ETA) where the taxpayers liability was caused by reasonable reliance on a statement issued by the Service that caused the taxpayer to incur a tax liability that would not otherwise have been incurred.
Example:
The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds by answering the E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds timely. The taxpayer retained a copy of the IRS E-mail for his records. The taxpayers overall compliance history does not weigh against compromise.
Note:
Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the service not made an error.
8. Compromise may also promote Effective Tax Administration (ETA) where a taxpayers liability was directly caused by the Service and through no fault of the taxpayer.
Example:
The taxpayer is a closely-held corporation. The IRS audited the taxpayers tax returns for 1996, 1997, and 1998 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.
Note:
That the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.
9. In contrast, compromise would not be authorized based on mistakes by the Service that did not cause the tax liability. For example, providing an incorrect statement of the balance due does not authorized the compromise of additional interest that may have later accrued. However, any relief from interest attributable to errors or delays by the Service should be granted under the standards set forth in section 6404(e). Compromise that would undermine those standards would not promote Effective Tax Administration (ETA). Similarly, relief from penalties attributable to errors by the Service should be granted pursuant to the standards for relief set forth in section 6404(e) and the IRM.
10. The Service will not compromise on public policy or equity grounds based solelyon the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:
• Representative,
• Partner,
• Agent, or
• employee
Note:
The actions of a third party may be part of a fact pattern that, viewed as a whole, presents compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayers situation must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.
11. Compromise on public policy or equity grounds promotes Effective Tax Administration (ETA) only where it does not undermine compliance by other taxpayers. In general, compromise would undermine compliance where other taxpayers viewing the compromise may conclude that the taxpayer benefited from a failure to comply with the tax laws (i.e. the result of the compromise places the taxpayer in a position better than they would occupy had they timely and fully met their obligations). Such cases present the danger that other taxpayers may consider it beneficial to take the chance of not complying with the tax laws or litigating an issue they would otherwise concede or settle, and relying on compromise at some later date as a safety net. Factors supporting a determination that compromise would undermine include, but are not limited to:
• The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.
• The taxpayer has taken deliberate actions to avoid the payment of taxes.
• The taxpayer has encouraged others to refuse to comply with the tax laws.
Note:
Additional factors such as the cause of the delinquency, length of non-compliance, and efforts to resolve non-compliance should also be considered. Generally a review of the last 3–5 years of compliance should be completed.
12. Once it has been determined that a case raises compelling public policy or equity considerations justifying compromise, the Service must still determine whether the amount offered by the taxpayer should be accepted to resolve the case. An acceptable offer amount should be based on a determination of what is fair and equitable under the circumstances. When public policy or equity considerations are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.
5.8.11.2.3 (09-01-2005)
Compromise Would Not Undermine Compliance With Tax Laws
1. No compromise to promote Effective Tax Administration (ETA) may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. See IRM 5.8.11.2.1(7), 5.8.11.2.1(9) and 5.8.11.2.2(11) above, for additional information.
5.8.11.3 (09-01-2005)
Initial Processing of Effective Tax Administration Offers
1. Offers submitted on the grounds of Effective Tax Administration (ETA) will be worked either by the COIC units or field specialists.
2. Taxpayers seeking a compromise under Effective Tax Administration (ETA) will submit the Form 656, Offer in Compromise, selecting ETA in Item 6, along with the Collection Information Statement (CIS) (Form 433-A and/or Form 433-B). Taxpayers must complete the Form 656, Item 9 and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An additional attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since Effective Tax Administration (ETA) criteria can not be considered until all other bases have been addressed.
3. Like all other offers, the Service will only consider an Effective Tax Administration (ETA) offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A; filed all required tax returns; submitted the Form 656, Form 433-A and/or Form 433-B on the latest revision of the forms; and are not a debtor in a bankruptcy proceeding). In-business taxpayers must have timely filed and timely deposited their quarterly federal taxes for the 2 preceding quarters and paid all federal tax deposits during the quarter in which the offer was filed.
Note:
Follow IRM 5.8.3, Processability Determination, for initial processing of offers.
4. Elements necessary to perfect an offer also apply to Effective Tax Administration (ETA) offers. The requirement to submit complete financial statements for ETA offers is the same as for Doubt as to Collectibility (DATC) offers.
Note:
Follow IRM 5.8.3.11, Types of Perfection, for procedures on perfecting offers.
5. Effective Tax Administration (ETA) offers are initially added to AOIC as Doubt as to Collectibility (DATC) offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a Doubt as to Collectibility (DATC), the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.7 below for a full discussion of requirements to update AOIC prior to final processing of ETA and Doubt as to Collectibility with Special Circumstances (DCSC) offers.
5.8.11.4 (09-01-2005)
Evaluation of Offers
1. Effective Tax Administration (ETA) offers cannot be considered if the taxpayer qualifies for Doubt as to Collectibility (DATC) or Doubt as to Liability (DATL).
Note:
Follow IRM 5.8.4, Evaluation of Offers, for Doubt as to Collectibility (DATC) issues and determining reasonable collection potential (RCP).
2. If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC). The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for Effective Tax Administration (ETA) consideration. The offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC).
3. If the taxpayer submits an offer based on Doubt as to Collectibility (DATC) but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of Effective Tax Administration (ETA). The employee that investigates the offer is required to address any potential special circumstances during first contact with the taxpayer or the taxpayers representative. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the offer case history. This requirement does not apply where the only taxpayer contact is through correspondence.
4. If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.
5.8.11.4.1 (09-01-2005)
Public Policy/Equity Issues
1. Offers submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.
2. In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been set up in Austin, Texas to work these offers.
3. Only after consideration has been given to all other potential bases for acceptance (e.g. Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), Doubt as to Collectibility with Special Circumstance (DCSC), and/or Effective Tax Administration (ETA) based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.
4. After all other potential bases have been considered, complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.
5. The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.
6. If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.
7. If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Austin.
• The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.
• The file should be sent by overnight mail on Form 3210 to the Austin group.
• At the time of mailing, the case should be transferred on AOIC to Area 10.
• A history item should be added to AOIC to show the case is being sent to Austin, Area 10.
• The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.
Note:
The Offer Examiner or Offer Specialist may also seek guidance from the Austin group on a Doubt as to Collectibility with Special Circumstances (DCSC) offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.
5.8.11.4.2 (09-01-2005)
Financial Statement Analysis
1. Offers submitted under Effective Tax Administration (ETA) require the same full financial analysis as Doubt as to Collectibility (DATC) offers in order to determine reasonable collection potential (RCP) and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.
2. Once reasonable collection potential (RCP) is completed a determination can be made as to whether the offer qualifies for consideration under Effective Tax Administration (ETA) or Doubt as to Collectibility (DATC).
3. If the taxpayers assets and future income exceed the tax liability, the taxpayers offer can be considered under the Effective Tax Administration (ETA) basis.
5.8.11.4.3 (09-01-2005)
Determining an Acceptable Offer Amount
1. An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
Example:
The taxpayer has a $100,000 liability and a reasonable collection potential (RCP) of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.
2. In offers based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances.
3. Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, in some locations the availability of funding options such as reverse mortgages, assigning deeds of trust, etc. may allow the taxpayer to tap into available equity without creating economic hardship. These options should be taken into consideration in determining an acceptable offer amount for an Effective Tax Administration (ETA) offer based on economic hardship.
5.8.11.5 (09-01-2005)
Documentation and Verification
1. To verify the taxpayers special circumstances and support a basis of Effective Tax Administration (ETA):
A. Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.
B. When special circumstances are found to exist, the amount offered will be less than reasonable collection potential (RCP). For Effective Tax Administration (ETA), reasonable collection potential (RCP) is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.
5.8.11.6 (09-01-2005)
Final Processing
1. Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.
2. The following is a guide to these determinations:
If… And… Then…
The offer was submitted under Effective Tax Administration (ETA) An economic hardship has been determined to exist, but the reasonable collection potential (RCP) is less than the liability balance due 1. Update the AOIC offer screen to indicate a "C" under the offer type.
2. Generate all closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Doubt as to Collectibility (DCSC) An economic hardship has been determined to exist, and the reasonable collection potential (RCP) is greater than the liability balance due 1. Update AOIC offer screen to indicate "A" under offer type.
2. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The offer is being recommended for acceptance under Doubt as to Collectibility (DATC) with the offer exceeding the reasonable collection potential (RCP) 1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for Doubt as to Collectibility (DATC).
Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances.
The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under Doubt as to Collectibility (DATC). Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.
The offer was submitted under Effective Tax Administration (ETA) with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the reasonable collection potential (RCP) is less than the liability and the offer cannot be recommended for acceptance under Doubt as to Collectibility with Special Circumstances (DCSC). 1. Update AOIC offer screen to indicate a "C" under special circumstances.
2. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
The offer was submitted under Effective Tax Administration (ETA) with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the reasonable collection potential (RCP) exceeds the liability 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Effective Tax Administration (ETA) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) exceeds the tax liability. However, the offer cannot be recommended for acceptance. 1. Update AOIC offer screen to indicate "A" under offer type.
3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
The offer was submitted under Doubt as to Collectibility with Special Circumstances (DCSC) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
5.8.11.6.1 (09-01-2005)
Rejection/Return/Withdrawal Processing
1. The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.
2. IRM 5.8.12, Independent Administrative Review, provides instructions for independent administrative review of rejected offers.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 1271 and the closing letter.
5.8.11.6.2 (09-01-2005)
Acceptance Processing
1. The procedures in IRM 5.8.8, Acceptance Processing , should be followed when processing accepted Effective Tax Administration (ETA) offers.
2. Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.
3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority to accept offers based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 7249, Offer Acceptance Report, and the acceptance letter.
8.23.3.8 (10-16-2007)
Effective Tax Administration Offers
1. If it's determined that there is no basis to accept an offer under doubt as to collectibility (DATC) or doubt as to liability (DATL), the offer may still be accepted if it's determined that doing so:
A. would promote effective tax administration, and
B. would not undermine other taxpayers' compliance with the tax laws.
2. IRM 5.8.11 , Offer in Compromise, Effective Tax Administration, contains information about Effective Tax Administration (ETA) offers and doubt as to collectibility offers where the taxpayer presents "special circumstances" (DATC-SC) as a basis to accept the offer, and the procedures for evaluating such offers.
3. Under ETA, the taxpayer does not dispute being financially capable of paying the liability in full. To accept an ETA offer, the taxpayer must establish that:
• Paying the full tax liability would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay in full. These "public policy" or "equity" offers are sometime referred to as "non-hardship" ETA offers.
4. Under DATC-SC, the taxpayer does not have the ability to pay in full, but does not dispute being financially capable of paying more than the amount being offered. To accept a DATC-SC offer, the taxpayer must establish that:
• Paying the full RCP amount would cause an undue economic hardship (see below), or
• Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay the full RCP amount
5. ETA and DATC-SC offers require a more subjective evaluation. Although IRM 5.8.11 is comprehensive, it's simply not practical to try to draft guidance that encompasses every event or situation.
6. ETA and DATC-SC offers based upon economic hardship are not uncommon. The definition of an undue economic hardship for ETA and DATC-SC offer purposes is found in Treasury Regulation 301.6343-1. Often a taxpayer presents circumstances reflecting one or more of the factors outlined in IRM 5.8.11.2.1 , or closely resembling many aspects of an example cited in the IRM or Treasury Regulation 301.7122-1, but the case for ETA or DATC-SC acceptance falls apart when actual dollars are factored in. A decision in an ETA or DATC-SC hardship offer requires a three-tiered approach:
0. Does the taxpayer present exceptional circumstances meriting ETA or DATC-SC consideration?
1. Would payment of more than the offered amount cause the taxpayer to be unable to meet future necessary living expenses?
2. Would acceptance of the offer undermine other taxpayers' compliance with the tax laws?
An acceptable offer requires affirmative answers to questions 1 and 2, and a negative answer to question 3.
7. Offers based upon public policy or equity considerations are rarer.
. Any disposition of an ETA or DATC-SC offer based in whole or in part on public policy or equity considerations requires review and approval by the Director, Field Operations (DFO). Coordination at the DFO level allows Appeals to support Service efforts through consistency.
Note:
When a case is forwarded for DFO approval, a copy of the Appeals Case Memorandum and Form 5402 should also be e-mailed to the Tax Policy and Procedures OIC Analyst.
8. See Delegation Order 5-1, which is available on the Appeals web site at Appeals OIC Home Page, for the required levels of approval for accepting or rejecting ETA and DATC-SC offers.
9. IRM 5.8 does not contain separate ETA offer procedures for when filing a NFTL is generally required. See IRM 8.23.3.3.2 for information regarding lien filing criteria and procedures if the offer is going to be accepted
No comments:
Post a Comment