Saturday, December 20, 2008

Offer in Compromise Legislative History - General Explanation of 1998 Tax Legislation (Blue Book), JCS-6-98, November 24, 1998, 105th Congress


b. Offers-in-compromise (sec. 3462 of the Act and secs. 6331 and 7122 of the Code)

Present and Prior Law

The Code permits the IRS to compromise a taxpayer's tax liability. An offer-in-compromise is an offer by the taxpayer to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.

There are two bases on which an offer can be made: doubt as to liability for the amount owed and doubt as to ability to pay the amount owed.

A compromise agreement based on doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual provides guidelines for revenue officers to determine whether an offer-in-compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue officer is instructed to consider the taxpayer's assets and future and present income, the IRM advises that rejection of an offer solely based on narrow asset and income evaluations should be avoided.

Pursuant to the IRM, collection normally is withheld during the period an offer-in-compromise is pending, unless it is determined that the offer is a delaying tactic or collection is in jeopardy.

Reasons for Change

The Congress believed that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Congress believed that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Congress believed that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.Explanation of Provision

Rights of taxpayers entering into offers-in-compromise. --The Act requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offerin-compromise with adequate means to provide for basic living expenses. The IRS also is required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate under the circumstances, the taxpayer is not limited by the national or local allowances.

The Act prohibits the IRS from rejecting an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer. The Act provides that, in the case of an offer-in-compromise submitted solely on the basis of doubt as to liability, the IRS may not reject the offer merely because the IRS cannot locate the taxpayer's file. The Act prohibits the IRS from requesting a financial statement if the taxpayer makes an offer-in-compromise based solely on doubt as to liability.

Publication of taxpayer's rights with respect to offers-in-compromise. --The Act requires the IRS to publish guidance on the rights and obligations of taxpayers and the IRS relating to offers in compromise, including a compliant spouse's right to apply to reinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of the other spouse, providing all payments required under the compromise agreement are current.

Suspend collection by levy while offer-in-compromise or installment agreement is pending. --The Act prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in-compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, and (3) during any period in which an appeal of the rejection of an offer is being considered. Collection by levy is also prohibited while an installment agreement is pending, under similar rules. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection or return would be eligible for a continuous period of relief from collection by levy. This prohibition on collection by levy does not apply if the IRS determines that collection is in jeopardy or that the offer was submitted solely to delay collection. The Act provides that the statute of limitations on collection is tolled for the period during which collection by levy is barred.

Procedures for reviews of rejections of offers-in-compromise and installment agreements. --The Act requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The Act requires the IRS to allow the taxpayer to appeal any rejection of such offer or agreement to the IRS Office of Appeals. The IRS must notify taxpayers of their right to have an appeals officer review a rejected offer-in-compromise on the application form for an offer-in-compromise.

Guidelines to determine whether an offer-in-compromise should be accepted. --The Act authorizes the Secretary to prescribe guidelines for the IRS to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute. Accordingly, it is expected that the present regulations will be expanded so as to permit the IRS, in certain circumstances, to consider additional factors (i.e., factors other than doubt as to liability or collectibility) in determining whether to compromise the income tax liabilities of individual taxpayers. For example, it is anticipated that the IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer's income tax liability would promote effective tax administration. It is anticipated that, among other situations, the IRS may utilize this new authority to resolve longstanding cases by forgoing penalties and interest which have accumulated as a result of delay in determining the taxpayer's liability.

Effective Date

The provision is generally effective for offers-in-compromise and installment agreements submitted after the date of enactment (after July 22, 1998). The provision suspending levy is effective with respect to offers-in-compromise pending on or made after December 31, 1999.

Revenue Effect

The provision is estimated to reduce the Federal fiscal year budget receipts by $1 million in 1998, have no revenue effect in 1999, and to increase such receipts by $9 million in 2000 and by $4 million in each of the years 2001 through 2007.

c. Notice of deficiency to specify deadlines for filing Tax Court petition (sec. 3463 of the Act and sec. 6213 of the Code)

Prior Law

Taxpayers were required to file a petition with the Tax Court within 90 days after the deficiency notice is mailed (150 days if the person is outside the United States) (sec. 6213). If the petition was not filed within that time period, the Tax Court did not have jurisdiction to consider the petition.

Reasons for Change

The Congress believed that taxpayers should receive assistance in determining the time period within which they must file a petition in the Tax Court and that taxpayers should be able to rely on the computation of that period by the IRS.

Explanation of Provision

The Act requires the IRS to include on each deficiency notice the date determined by the IRS as the last day on which the taxpayer may file a petition with the Tax Court. The provision provides that a petition filed with the Tax Court by this date is treated as timely filed.

Effective Date

The provision is effective with respect to notices mailed after December 31, 1998.

Revenue Effect

The provision is estimated to have a negligible effect on Federal fiscal year budget receipts.

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