Tuesday, September 30, 2008

SectJack E. and Ruth I. Christians v. Commissioner.

Dkt. No. 21555-07 , TC Memo. 2008-220, September 29, 2008.



[Code Secs. 6663 and 7201]Penalties, civil: Fraud penalty: Collateral estoppel. --
A married couple was collaterally estopped from contesting their liability for the civil fraud penalty after they were convicted of willfully attempting to evade taxes under Code Sec. 7201. The couple admitted that they did not report the gain from the sale of their property on their Form 1040 but that they reported the gain on Form 1041 for one of the two trusts they created prior to the sale of the property. They asserted that their individual tax return did not contain a false statement when read in conjunction with the trust's return, thus, claiming that they should not be held liable for the civil fraud penalty. However, their conviction under Code Sec. 7201 conclusively established fraud in the subsequent civil tax fraud proceeding through the doctrine of collateral estoppel. Further, since a charitable contribution deduction was not addressed in the criminal proceeding, they were not estopped from raising that issue, which would be resolved at trial. Thus, the extent of the couple's liability will be determined after the issue relating to the claimed charitable deduction is resolved.





MEMORANDUM OPINION

JACOBS, Judge:1 This matter is before the Court on respondent's motion for summary judgment filed pursuant to Rule 121. Petitioners filed a response opposing respondent's motion. The issues presented are: (1) Whether petitioners, each of whom was indicted and subsequently convicted under section 7201 for

willfully attempting to evade and defeat a large part of the income tax due * * * for the calendar year 1995, by filing and causing to be filed * * * a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, wherein approximately TWO MILLION NINE HUNDRED FORTY SIX THOUSAND FIFTY dollars ($2,946,050) of income was excluded from the return causing an underpayment of approximately EIGHT HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY FOUR Dollars ($824,894)in taxes,

are collaterally estopped from contesting their liability for the civil fraud penalty under section 6663 for the same taxable year; and (2) whether petitioners are entitled to a $25,600 charitable contribution deduction for taxable year 1995.

All section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.


Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The parties stipulated that any appeal in this case will lie to the Court of Appeals for the Sixth Circuit.

The Court of Appeals for the Sixth Circuit, in United States v. Christians, 105 Fed. Appx. 748 (6th Cir. 2004), affirmed petitioners' convictions under section 7201. The Court of Appeals identified the relevant facts to be as follows.

In 1995, Meijer, Inc., a large retailer, entered into negotiations with the Christians [petitioners herein] for the purchase of their Michigan home and an accompanying 20-acre tract of land. On the day before Meijer made its final offer of approximately $3.1 million, the Christians created Cornerstone Management Trust, naming themselves as trustees, and deeded their property to the trust for $10. The Christians accepted Meijer's $3.1 million offer.

A few days before the closing on the land sale, the Christians created Ottawa Trust, again naming themselves as trustees. After receiving a check written to the Cornerstone Management Trust for $3,072,699.94, the Christians deposited the funds in Ottawa Trust's account. In the months following the sale, the Christians moved most of the money to Barclays Bank in the Cayman Islands, ultimately sending over $3 million there.

On April 15, 1996, the Christians filed their individual IRS Form 1040, which omitted any reference to the real-property sale or to the gain realized from it.2 The Christians also filed an IRS Form 1041 for Cornerstone Management Trust. This return disclosed the property sale, calculated the tax due at over $1.1 million, and was signed by Jack Christians. Instead of paying the tax, however, Jack Christians attached a disclaimer, which read in part: "The assessment and payment of income taxes is voluntary with no distraint.... The above named taxpayer(s) respectfully disclaim any liability and decline to volunteer concerning assessment and payment of any [tax]." The disclaimer closed by suggesting that if the taxpayer "shows the tax to be zero," then the IRS has the obligation of assessing any tax deficiency.

The IRS audited the Christians, who refused to cooperate, even after Agent Rogowski of the IRS's Criminal Investigation Division became involved. After a court enforced an administrative summons for their records, the Christians produced documentation regarding the real property sale and the trusts. The documents revealed that the Christians maintained control of the two trusts and, as a result, retained control over the transfer of their real property and the proceeds from the sale.

After meeting with Agent Rogowski and after receiving an accountant's advice that the proceeds of the sale belonged on their individual tax return, the Christians filed an amended 1995 return using an IRS Form 1040X on July 17, 1997. The return listed the tax due at approximately $1.1 million,3 stated that the "admitted tax liability is zero," then added a tax disclaimer nearly identical to the one attached to Cornerstone Management Trust's earlier return.

On February 27, 2002, a grand jury indicted the Christians on a single count of willfully attempting to evade the payment of income tax due from the sale of their property "by filing ... a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040" in violation of 26 U.S.C. § 7201. The jury returned a guilty verdict against both defendants. The court sentenced them each to 27-month prison sentences. [Id. at 749-750; joint appendix refs. omitted.]

On their 1995 return petitioners claimed a $25,600 charitable contribution deduction consisting of $600 in cash and $25,000 of other property. Attached to the return was a Form 8283, Noncash Charitable Contributions, which described the donated property as a house in good condition with a fair market value of $25,000 and identified the donee as the Evangelistic Center of Grand Rapids, Michigan. A letter of thanks and a receipt for $25,000, both signed by Pastor Harry Dunn of the Evangelistic Center, were attached to the return. In their amended 1995 return, filed July 17, 1997, in addition to increasing the amount of their adjusted gross income to include the gain from the sale of property to Meijer, Inc., petitioners claimed an additional $120,025 charitable contribution deduction.

Respondent issued a notice of deficiency on June 29, 2007. Respondent determined that petitioners' income should be increased by $2,948,000 to reflect the sale of property to Meijer, Inc., and disallowed the $25,600 charitable contribution deduction claimed in the original return. The resulting tax, according to respondent, is $845,049, leaving a deficiency of $835,580 after taking into account the amount of tax ($9,469) shown on the original return. Respondent acknowledges that petitioners made a payment of $824,894 on January 24, 2003, which will be applied to the deficiency amount. Respondent also determined that petitioners are liable for the section 6663 civil fraud penalty in the amount of $626,685.

Petitioners admit that the gain from the sale of property to Meijer, Inc., is includable in their income for 1995 and generated tax. They assert, however, that their tax liability was not understated but rather was reported by means of two returns --a Form 1040, U.S. Individual Income Tax Return, and a Form 1041, U.S. Income Tax Return for Estates and Trusts, filed by Cornerstone Management Trust.

Petitioners concede in their response opposing respondent's motion that "the law is not generally in their favor", but they maintain "they should be allowed to contest the fraud penalty on the basis of the facts which establish that no fraudulent tax returns were filed but rather the Petitioners refused to pay the original amounts due, and moved their assets out of the jurisdiction of the United States to frustrate collection efforts by the IRS."

In summarizing their position, petitioners state:

This is clearly a willful refusal to pay, tax protest type case not a fraudulent attempt to evade liability. Although convicted of violating IRC § 7201, it is clear that Petitioners were engaged in conduct to attempt to validate their incorrect positions that no taxes were due and owing at that time.

This should not result in collateral preclusion by fraud. It was not necessary under § 7201 for the jury to find a fraudulent filing to sustain or support the conviction. Therefore, the facts should be viewed as admitted by Respondent, thus precluding summary judgment on the issue.

Petitioners also assert that they are entitled to contest respondent's disallowance of their $25,600 claimed charitable contribution. Finally, petitioners claim that their $824,894 payment of January 24, 2003, extinguished their tax liability.


Discussion

As a preliminary matter, we note that summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of proving that no genuine issue of material fact exists, and the Court will view any factual material and inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A partial summary adjudication may be made even if it does not dispose of all the issues in the case. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Rule 121(d) provides that where the moving party properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such party's pleading," but must set forth specific facts, by affidavits or otherwise, "showing that there is a genuine issue for trial."

We now turn to the first of the two issues; namely, whether petitioners' convictions for income tax evasion under section 7201 collaterally estop them from litigating the issue of their liability for the civil fraud penalty under section 6663.

In Montana v. United States, 440 U.S. 147, 153-154 (1979), the Supreme Court provided guidance on the application of the doctrine of collateral estoppel as follows: "Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation."

The two Code sections involved herein are section 6663 and section 7201. Section 6663 provides:

SEC. 6663. IMPOSITION OF FRAUD PENALTY.

(a) Imposition of Penalty. --If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

(b) Determination of Portion Attributable to Fraud. --If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

(c) Special Rule for Joint Returns. --In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

An "underpayment" for purposes of section 6663 is defined in section 6664(a), in relevant part, as the amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer on his return.

The record shows, and petitioners admit, that they filed a 1995 individual tax return on which they did not report the gain from the sale of their property to Meijer, Inc., or the tax imposed on the gain. However, petitioners assert that their tax liability was not understated but rather was reported by means of two returns --a Form 1040 and a Form 1041 filed by Cornerstone Management Trust. Petitioners made this same assertion in appealing their convictions under section 7201. The Court of Appeals for the Sixth Circuit rejected this argument, stating:

Nor may the Christians sidestep this conclusion [that they willfully evaded their taxes] by pointing out that their 1995 individual tax return did not contain a false statement when read in conjunction with Cornerstone Management Trust's IRS Form 1041, which did disclose the tax owed and proceeded to disclaim any liability for it. The Government prosecuted the Christians for income tax evasion with respect to their individual tax return, not the return of Cornerstone Management Trust. And their individual return neither acknowledged nor paid the tax due. No doubt, a jury could have concluded that the acknowledgment of the sale and the tax due on the Cornerstone Management Trust form undermined a finding that the Christians acted willfully and committed an affirmative act of evasion. But in view of the Christians' prior tax-filing experiences, their sudden decision no longer to use an accountant, their creation of the sham trusts and offshore accounts and their non-cooperative conduct once the Government inquired about the sale, the Christians cannot tenably argue that the jury was compelled to reach such a conclusion on the basis of the Cornerstone tax filing. [United States v. Christians, 105 Fed. Appx. at 752].

We are mindful that petitioners, in their amended return, admitted an underpayment of tax for 1995. See Badaracco v. Commissioner, 464 U.S. 386, 399 (1984).4 Therefore, there is no doubt that there was an "underpayment of tax required to be shown on a return" with respect to petitioners' 1995 return as required by section 6663.

Section 7201 provides:

SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Petitioners were convicted of violating section 7201. We have repeatedly held that "A conviction for an attempt to evade or defeat tax pursuant to section 7201, either upon a guilty plea or upon a jury verdict, conclusively establishes fraud in a subsequent civil tax fraud proceeding through the application of the doctrine of collateral estoppel." Marretta v. Commissioner, T.C. Memo. 2004-128 (citing DiLeo v. Commissioner, 96 T.C. 858, 885 (1991), affd. 959 F.2d 16 (2d Cir. 1992) and Frey v. Commissioner, T.C. Memo. 1998-226), affd. 168 Fed. Appx. 528 (3d Cir. 2006); see also Montalbano v. Commissioner, T.C. Memo. 2007-349 ("It is well established that a final criminal judgment for tax evasion under section 7201 collaterally estops relitigation of the issue of fraudulent intent in a subsequent proceeding over the civil fraud penalty."); Uscinski v. Commissioner, T.C. Memo. 2006-200 ("Because the elements of criminal tax evasion and civil tax fraud are identical, petitioner's prior conviction under section 7201 conclusively establishes the elements necessary for finding fraud under section 6663."); Wilson v. Commissioner, T.C. Memo. 2002-234 ("We hold that the doctrine of collateral estoppel bars * * * [the taxpayer convicted under section 7201] from relitigating in the instant case the matters litigated in * * * [the taxpayer's] criminal tax proceeding, i.e., whether * * * [the taxpayer] underpaid his tax for each of the taxable years * * * and whether his underpayment of such tax for each such year was due to fraud."). Our holding in this regard has been affirmed by the Court of Appeals for the Sixth Circuit. Shah v. Commissioner, 208 F.3d 215 (6th Cir. 2000), affg. without published opinion T.C. Memo. 1999-71; Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir. 1983), and cases cited thereat, affg. T.C. Memo. 1981-1.5

As recounted supra, petitioners were indicted and convicted for willfully attempting to evade the payment of income tax due from the sale of their property by filing a false and fraudulent joint tax return for 1995 in violation of section 7201. As the Court of Appeals noted, the petitioners' filing of a false Form 1040 constituted the affirmative act of evasion under section 7201 charged in the indictment. United States v. Christians, 105 Fed. Appx. at 753. Therefore, contrary to petitioners' claim, the issue of whether they filed a false and fraudulent return for 1995 was in fact "actually and necessarily determined by a court of competent jurisdiction", Montana v. United States, 440 U.S. at 153. Thus, petitioners are estopped from relitigating that issue in this proceeding.

On the record presented, we find that there is no genuine issue of material fact with respect to the section 6663 penalty insofar as it relates to petitioners' 1995 underpayment attributable to petitioners' failure to report the gain from the sale of their property to Meijer, Inc., in their 1995 return. We thus hold that a decision may, and should, be entered against petitioners on that issue as a matter of law. Accordingly, we sustain respondent's determination to impose a penalty under section 6663 with respect to the portion of petitioners' 1995 underpayment attributable to the omitted gain from the sale.

We now turn to that portion of petitioners' 1995 underpayment which is attributable to petitioners' $25,600 claimed charitable contribution deduction. Petitioners' entitlement to the charitable contribution deduction was not addressed in the criminal proceeding which resulted in their convictions under section 7201, and petitioners dispute respondent's disallowance of the charitable contribution deduction. Summary judgment with respect to this matter is not appropriate. A trial with respect to this issue should proceed.

A determination of the extent to which petitioners have paid their outstanding tax liability must await the resolution of the issue relating to the claimed charitable contribution deduction.

To reflect the foregoing,

An order granting in part and denying in part respondent's motion for summary judgment will be issued.

1 This case was assigned to Judge Julian I. Jacobs for disposition of respondent's motion for summary judgment by order of the Chief Judge on Aug. 12, 2008.

2 The return showed a total tax of $9,469.

3 The amended return increased petitioners' adjusted gross income by $2,948,000, with the explanation "Ottawa Revocable Living Trust Not Included in Original Filing of Form 1040", and showed $1,118,112 as the correct amount of total tax.

4 Petitioners do not appear to argue that their amended return, filed after they were notified that the IRS's Criminal Investigation Division had become involved, remedied the fraudulent underpayment with respect to their original return. Indeed, as the Supreme Court noted in Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), "once a fraudulent return has been filed, the case remains one 'of a false or fraudulent return,' regardless of the taxpayer's later revised conduct, for purposes of criminal prosecution and civil fraud liability" and "a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure".

5 Petitioners, in their opposition to respondent's motion for summary judgment, rely on the dissenting opinion in Gray v. Commissioner, 708 F.2d 243, 247 (6th Cir. 1983) Merritt, J., dissenting, affg. T.C. Memo. 1981-1. The taxpayer in Gray, who entered a guilty plea to income tax evasion under sec. 7201, claimed that he did not understand that his guilty plea would have collateral consequences in subsequent civil proceedings. The dissent objected to application of collateral estoppel under those circumstances. Even were we to recognize a difference between a guilty plea and a jury verdict for purposes of application of collateral estoppel in these circumstances, which we do not, see Marretta v. Commissioner, T.C. Memo. 2004-128, affd. 168 Fed. Appx. 528 (3d Cir. 2006), petitioners' convictions were the result of a jury verdict of income tax evasion under sec. 7201 rather than the result of guilty pleas to those charges. In any event, apart from our own precedent, we would be constrained by the majority position in Gray v. Commissioner, supra, to apply the doctrine of collateral estoppel to the case at bar. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Conviction estops denial of fraud. --Fraud Penalty: Criminal Fraud: Conviction estops denial of fraud

An individual who pleaded guilty to a charge of criminal tax evasion for one tax year in return for a dismissal of charges for other years was collaterally estopped from denying that he had underpaid his taxes and that the underpayment was due to fraud. The criminal conviction established that part of the underpayment for the tax year at issue was attributable to fraud. Collateral estoppel applied regardless of whether the conviction arose from a trial on the merits or a plea of guilty.

J.C. Stepien, 71 TCM 1688, Dec. 51,108(M), TC Memo. 1996-6.

Conviction of fraud estops taxpayer from denying applicability of fraud penalty.

J.W. Amos, CA-4, 66-1 USTC ¶9130, 360 F2d 358.

J.H. Moore, CA-4, 66-1 USTC ¶9399, 360 F2d 353.

H.M. Plunkett, CA-7, 72-2 USTC ¶9541, 465 F2d 299.

A.H. Fontneau, CA-1, 81-2 USTC ¶9557, 654 F2d 8.

G. Weber, Sr., 69 TCM 2216, Dec. 50,541(M), TC Memo. 1995-125., TC Memo. 1998-226.

D.T. Madge, 80 TCM 804, Dec. 54,144(M), TC Memo. 2000-370. Aff'd, per curiam, on another issue, CA-8 (unpublished opinion), 2001-2 USTC ¶50,761.

S.M. Zamzam, 80 TCM 808, Dec. 54,145(M), TC Memo. 2000-371. Aff'd, per curiam, CA-4 (unpublished opinion), 2002-1 USTC ¶50,180.

L.J. Moore, 81 TCM 1442, Dec. 54,291(M), TC Memo. 2001-77.

R.P. Console, 82 TCM 479, Dec. 54,471(M), TC Memo. 2001-232. Aff'd, CA-3 (unpublished opinion) 2003-2 USTC ¶50,593.

Y. Yang-Wu, 83 TCM 1363, Dec. 54,681(M), TC Memo. 2002-68.

M.C. Wilson, 84 TCM 321, Dec. 54,876(M), TC Memo. 2002-234.

S.C. Carter, 86 TCM 229,Dec. 55,258(M), TC Memo. 2003-235.

H.J. Uscinski, 92 TCM 285, Dec. 56,626(M), TC Memo. 2006-200.

In cases that probably will no longer be followed, it was held that criminal conviction does not estop taxpayer from denying fraud penalty.

S.L. Anderson, DC, 66-1 USTC ¶9441, 245 FSupp 177.

M.J. Safra, 30 TC 1026, Dec. 23,126 (Nonacq.).

R.F. Smith, 31 TC 1, Dec. 23,197 (Acq.).

H.L. Blackwell, 20 TCM 599, Dec. 24,816(M), TC Memo. 1961-124.

W.F. Slater Est., 21 TCM 1355, Dec. 25,733(M), TC Memo. 1962-256.

A prior criminal conviction for fraudulent failure to file income tax returns and to pay the taxes due estops the taxpayer from seeking a refund of the civil penalties assessed for the same fraudulent action. This is true even in the case of a fraudulent joint return where one party to the return was not prosecuted and is a party to the refund suit merely because he signed the joint return.

Lefkowitz, 64-2 USTC ¶9623, 334 F2d 262. Cert. denied, 379 US 962.

O.K. Armstrong, CtCls, 66-1 USTC ¶9119, 354 F2d 274.

An individual who had pleaded guilty to charges of tax evasion for one of the three years in dispute was estopped from denying that he had filed fraudulent returns. The fact that he faced numerous personal and legal problems at the time was not a sufficiently special circumstance to waive collateral estoppel.

J.G. Paschal, CA-3 (unpublished opinion), 96-1 USTC ¶50,013.

A self-employed manufacturer's representative was not collaterally estopped by his Code Sec. 7203 criminal conviction from denying that his failure to file returns was willful. The IRS had not raised the affirmative defense of collateral estoppel with respect to the addition to tax for fraud. The taxpayer's suspicious actions concerning bank deposits and accounts were not sufficient individually to prove fraud but provided support for the IRS's determination of fraud.

P.E. Niedringhaus, 99 TC 202, Dec. 48,411.

A corporation was not collaterally estopped by a stockholder's conviction for filing and causing it to file false and fraudulent returns. It was not a party to the criminal proceeding and did not participate in his defense.

C.B.C. Supermarkets, Inc., 54 TC 882, Dec. 30,081 (Nonacq.).

American Lithofold Corp., 55 TC 904, Dec. 30,681.

Although the taxpayer, a traffic court clerk, was estopped from denying participation in a bribery scheme because of conclusions of law entered by a Federal district court, he was not collaterally estopped by the findings of the court as to the specific amounts of money he received. However, based on reasonable inferences drawn from the circumstances of the case, and in light of the taxpayer's credible testimony, the Tax Court concluded that he lacked the specific intent to avoid the payment of tax.

R.C. Cipparone, 49 TCM 1492, Dec. 42,090(M), TC Memo. 1985-234.

An IRS agent who was convicted of conspiracy to bribe was not collaterally estopped from denying that he received bribes. The jury had not been required to find that the agent actually received bribe payments in the amounts that the IRS included in his income.

W. Kale, 71 TCM 2854, Dec. 51,311(M), TC Memo. 1996-197.

An individual who pleaded guilty to charges of criminal fraud was collaterally estopped from contesting the IRS's determination that he was liable for the fraud penalty. The individual's allegation that his guilty plea was coerced and involuntary did not constitute an exceptional circumstance. An appellate court that affirmed his conviction was not persuaded by his arguments, and the U.S. Supreme Court denied review. As a result, the criminal conviction was final.

J.R. Taylor, 73 TCM 2028, Dec. 51,887(M), TC Memo. 1997-82.

An individual who was convicted of criminal tax evasion was collaterally estopped from denying that he had underpaid his taxes for the years at issue and that part of those underpayments were due to fraud. The IRS was not required to prove the exact amounts of the underpayments or the taxes owed as an element of the criminal proceeding; consequently, the individual was not precluded from contesting the amounts of the deficiencies. No exception to the application of collateral estoppel was warranted by the individual's alleged ineffective assistance of counsel at the criminal trial.

H. Wapnick, 73 TCM 2317, Dec. 51,941(M), TC Memo. 1997-133.

A medical practice was liable for the additions to tax for fraud for the tax years in issue. The conviction of the doctor for criminal fraud for one tax year collaterally estopped it from denying civil fraud in a subsequent suit.

Richard A. Cole, M.D., Inc., 76 TCM 1055, Dec. 53,004(M), TC Memo. 1998-452.

The fraud penalty was imposed on a former state senator whose conviction for criminal tax evasion collaterally estopped him from denying that he had fraudulently underpaid his taxes. The elements for criminal and civil tax fraud were virtually identical, the criminal and civil proceedings involved the same parties, and it was immaterial that his conviction resulted from a guilty plea, rather than a trial. Also, the record did not support his claim that language in his plea agreement barred the government from asserting collateral estoppel or imposing penalties and interest.

J.L. Boettner, Jr., 76 TCM 622, Dec. 52,905(M), TC Memo. 1998-359.

An individual who voluntarily pleaded guilty to the charge of violating Code Sec. 7201 and was convicted of income tax evasion by a federal district court was collaterally estopped from denying in his Tax Court proceeding that some part of his tax underpayment was due to fraud. A clarification to his plea agreement indicating that the tax issues were not resolved did not prevent the application of collateral estoppel, because the district court subsequently entered judgment against the taxpayer for tax evasion.

J.S. Fagan, 82 TCM 443, Dec. 54,457(M), TC Memo. 2001-222.

When a petition is filed with the Board, it is its duty to review the administrative action of the Commissioner in determining a deficiency and penalties (here fraud and failure to file). It is not relieved of this duty by the fact that, in a criminal proceeding, the taxpayer was sentenced to pay and did pay the amount determined as the tax by the court.

Epstein, 34 BTA 925, Dec. 9461.

Fraud penalties were imposed against an attorney who admitted to having understated taxable income from his law practice by overstating business expenses. He was collaterally estopped from challenging the IRS's determination of a fraud penalty for one tax year because he had pleaded guilty to tax evasion charges.

D.R.. Cooley, 86 TCM 1025, Dec. 55,558(M), TC Memo. 2004-49.

A taxpayer was liable for penalties for fraud, under Code Sec. 6663, based on admissions he had made while pleading guilty in a criminal case and on his conviction in that case. The taxpayer was estopped from challenging the IRS's determination that he had taxable income and that he had filed a false tax return with the intent to evade income tax for that year. The taxpayer's guilty plea and conviction for attempting to evade or defeat the tax, under Code Sec. 7201, conclusively established fraud in the subsequent civil tax fraud proceeding.

J. Marretta, 87 TCM 1371, Dec. 55,649(M), TC Memo. 2004-128.

Because the elements of criminal tax evasion and civil tax fraud are identical, an attorney's prior conviction under Code Sec. 7201 conclusively established the elements necessary for finding fraud under Code Sec. 6663. His prior conviction collaterally estopped him from denying in the civil tax proceeding: (1) that his failure to report funds received from a former client resulted in an underpayment in his income tax; and (2) that at least part of the underpayment was due to fraud within the meaning of Code Sec. 6663. However, the IRS failed to carry its initial burden to show that there was no triable issue of fact with respect to the precise amount of the attorney's unreported income for the year at issue.

The sole owner of an S corporation who pled guilty to criminal tax evasion for failure to report in excess of $650,000 of corporate income was liable for the civil fraud penalty and was collaterally estopped from denying fraud. He argued that he suffered from diminished mental capacity based on the fact that in his criminal proceeding the government stipulated, and the sentencing court found, diminished capacity resulting from his bipolar disorder but that diminished capacity did not serve as a basis for waiving collateral estoppel.

C. Montalbano, 94 TCM 499, Dec. 57,183(M), TC Memo. 2007-349.


Failure to report income. --Willful Failure to File Return, Supply Information, or Pay Tax: Failure to report income

Taxpayer was a close friend of prominent political figures, and by virtue of his public offices was able to grant them favors in the way of contracts for materials and machinery in the construction of public works. The evidence sustains his conviction for failure to report the sums he received.

Murray, CA-8, 41-1 USTC ¶9247, 117 F2d 40.

Barrow, CA-5, 49-1 USTC ¶9112, 171 F2d 286.

Tax evasion conviction was upheld for failure to include in income a fee for arranging a mortgage loan.

B. Cohen, CA-5, 66-2 USTC ¶9560, 363 F2d 321.

Conviction of taxpayer who failed to report as taxable income the amounts extorted from another was upheld.

Rutkin, 52-1 USTC ¶9260, 343 US 130.

[Note: See also Rutkin at ¶41,318.20. --CCH.]

But a conviction for embezzling done before Rutkin was decided when Wilcox, 46-1 USTC ¶9188, was in effect (holding that embezzled funds are not taxable) was reversed since a willful attempt to evade could not be established so long as the law contained the gloss put upon it by Wilcox.

E.C. James, SCt, 61-1 USTC ¶9449, 81 SCt 1052.

Since funds which the taxpayer failed to report in his income tax returns were embezzled funds, and the embezzlement occurred before Wilcox was overruled, the taxpayer could not be prosecuted for willful evasion of income tax for his failure to include the funds in his tax returns.

M. Pitoscia, DC, 65-1 USTC ¶9281, 238 FSupp 135.

Conviction for failure to report certain funds which taxpayer acquired through his employment before James, was sustained, since the taking of the fund was not technically an embezzlement under local law.

R.C. Jannsen, CA-7, 65-1 USTC ¶9142, 339 F2d 941.

Failure to report funds embezzled 3 days before James was decided was willful evasion of income tax for the year 1961.

H.B. Nordstrom, CA-8, 66-1 USTC ¶9437, 360 F2d 734. Cert. denied, 385 US 826.

A taxpayer who acquired property and money by fraud and deceit, obtained such funds unlawfully in the first instance; therefore the Wilcox doctrine was inapplicable and the taxpayer could be found guilty of filing fraudulent returns as a result of his failure to include these amounts in gross income.


Conviction for tax evasion was reversed and a new trial was ordered, to find out if unreported income was embezzled funds or income from some other source, following James, above.

D.D. Beck, CA-9, 62-1 USTC ¶9227, 298 F2d 622.

To the contrary, where reliance on the James decision was first presented on appeal.

B.C. Wallace, CA-4, 62-1 USTC ¶9330, 300 F2d 525. Cert. denied, 370 US 923.

Dismissal of indictment for tax evasion before determining whether or not defendant had an interest in part of a fund allegedly embezzled was premature.

O.P. Colamatteo, CA-7, 63-1 USTC ¶9206, 312 F2d 154.

Proof that taxpayers deliberately omitted to report side payments received in connection with over-ceiling sales of whiskey and that after investigation had begun each taxpayer filed an amended return disclosing a part of the income previously omitted was sufficient.

Rosenblum, CA-7, 49-1 USTC ¶9314, 176 F2d 321. Cert. denied, 338 US 893.

Conviction for failure to report suppliers' cash discounts as income was sustained. Since the case was built on the correct amount of the discount receipts, the government was not required to prove the correct amount of the purchases, even though such discounts are normally reflected as reductions of purchases.

A.L. Wainwright, CA-10, 69-2 USTC ¶9503, 413 F2d 796. Cert. denied, 396 US 1009.

Circumstantial evidence supported the District Court's determination that the taxpayer made no agreement to repay unreported income from trade-outs in which businesses exchanged merchandise for newspaper advertising.

H.B. Brown, Jr., CA-10, 71-2 USTC ¶9557, 446 F2d 1119.

Taxpayer's conviction for failing to report long-term capital gain by using false basis was sustained.

R.R. Krilich, CA-7, 72-2 USTC ¶9767, 470 F2d 341. Cert. denied, 411 US 938.

Taxpayer's tax evasion conviction for fraudulently understating income was affirmed on appeal.


Taxpayer's conviction of willfully and knowingly attempting to evade and defeat federal income taxes for two years by omitting from gross income money received as salary was upheld. The court held that the taxpayer knew that money received from a partnership was income and that he deliberately omitted such sums from his returns. Such payments could not be construed as a return of equity since the taxpayer, as a limited partner, had not made any capital contributions and was not responsible for any partnership losses.

T.M. Fahey, CA-2, 75-1 USTC ¶9102, 510 F2d 302.

Taxpayer's conviction for willfully attempting to evade taxes by concealing his Irish Sweepstakes winnings of approximately $130,000 in a foreign bank account was affirmed on appeal.

F.L. McNulty, CA-9, 76-1 USTC ¶9215, 528 F2d 1223. Cert. denied, 425 US 972.

Although an individual correctly and timely reported the amount of tax due, his concealment of assets alone was a sufficient act to support a conviction for tax evasion. Congress did not intend that Code Sec. 7206(4) be the sole remedy for concealment of assets or be interpreted to limit the scope of Code Sec. 7201.

F.L. Hook, CA-6, 86-1 USTC ¶9179, 781 F2d 1166.

It was not shown that a payment received from a corporation for which the taxpayers were selling products, which payment was the only income they failed to report, was a discount or rebate rather than a bonus payment.

M.L. Schutterle, CA-8, 78-2 USTC ¶9773, 586 F2d 1201.

No error was committed when the defendant was found guilty of tax evasion for the years 1975 and 1976. Although the defendant had formal legal control over all of certain unreported funds prior to 1976, that did not preclude a conviction for 1976 because there had been an issue of facts as to when he felt free to use the funds. The funds in his bank account did not result in reportable income until he had "practical control" over the funds.

D. Dixon, CA-11, 83-1 USTC ¶9213.

Where the government in a tax evasion prosecution established that a resident alien received unreported income and that his nondisclosure resulted in a tax deficiency, the resident alien did not negate the deficiency by claiming a foreign tax credit when there had been no firmly established taxable amount owed the Dominican Republic and determined by it before the discovery of the federal tax deficiency.

J.M.A. Cruz, CA-11, 83-1 USTC ¶9216, 698 F2d 1148. Cert. denied, 104 SCt 391.

The conviction of an engineering president for failure to report income on his individual income tax returns was upheld. The firm's general business practices included depositing in the corporation's account payments received for engineering services rendered to its clients. For the tax years at issue, a number of the clients' checks were either cashed by the president or deposited in his personal checking account.

T.P. Meyer, CA-8, 87-1 USTC ¶9132, 808 F2d 1304.

A personal injury lawyer who concealed and attempted to conceal the nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record was properly convicted by a jury on three counts of willful attempt to evade and defeat the payment of his personal income tax.

E.J. Conley, CA-7, 87-2 USTC ¶9469, 826 F2d 551.

The conviction of an individual for tax evasion was upheld. The taxpayer forged documents charging personal expenses to her family corporation, failed to report interest income on 10 money market accounts and deposited large amounts of cash that were not attributable to any known source into her bank accounts.

R.R. Walker, CA-8, 90-1 USTC ¶50,084, 896 F2d 295.

An individual's conviction for tax evasion was upheld. The government properly determined that the individual had unreported income under the cash expenditures and bank deposits method of reconstructing income. The individual's cash on hand at the beginning of each year was established with reasonable certainty based on the individual's personal records and safety deposit box access records.

C.T. Conaway, CA-5, 94-1 USTC ¶50,009, 11 F3d 40.

The evidence was sufficient to sustain an individual's conviction for willful failure to file tax returns and tax evasion. He could not claim that his taxes were not deficient by treating fees received from an insurance adjusting company as a nontaxable settlement award for personal injuries. The company stated that no settlement was ever agreed upon, and, even if one had been reached, the damages would have flowed from a breach of contract.

W.J. Benson, CA-7, 95-2 USTC ¶50,540, 67 F3d 641.

There was sufficient evidence for a jury to find that the majority shareholder, president, and director of a corporation was guilty of tax evasion based on his exercise of control over a liquidating dividend that was due another shareholder. The money was not used for the alleged purpose of providing a contingency fund to protect former officers and directors from claims arising out of the liquidation but, instead, was for the taxpayer's benefit.

R.P. Mueller, CA-11, 96-1 USTC ¶50,190.

Insufficient evidence was presented to support married taxpayers' convictions for tax evasion where the government failed to prove the required existence of a tax deficiency. Under the "no earnings and profits, no income" rule established in P.F. DiZenzo, CA-2, 65-2 USTC ¶9518, amounts that the couple diverted from their wholly owned corporation could not be taxable to them personally as a constructive dividend, where the company had no earnings or profits. Instead, the diverted funds constituted a nontaxable reduction of the couple's shareholder loan account.

J. D'Agostino, CA-2, 98-1 USTC ¶50,380, 145 F3d 69.

The taxpayer's contention that the bonus and interest payments were motivated solely by tax concerns and that they did not constitute taxable income and, thus, could not result in a tax deficiency, was rejected.

M.Y. Khalaf, CA-9 (unpublished opinion), 2002-1 USTC ¶50,297, aff'g an unreported District Court decision.

A federal district court properly determined the amounts embezzled by an individual from his employers. The individual produced no evidence in support of his claim that he embezzled less than the amounts alleged by the victim, and he failed to refute the reliability of the victim's allegations.

D.J. Peterson, CA-10, 2003-1 USTC ¶50,168.

An individual's conviction for filing false tax returns was not set aside because the evidence supported the jury's finding beyond a reasonable doubt that the individual's tax returns contained false information as to material matters in that he did not report income he should have reported. The evidence also showed that the individual exerted control over funds he obtained from his business trust but did not report those funds as income on his personal returns or otherwise properly account for the funds.

M.E. Diesel, DC Kan., 2006-2 USTC ¶50,398.

Two individuals who operated a printing and copying business were properly convicted for willful tax evasion. They concealed business assets using a secret bank account that was not known to their accountant and used the funds in that account for personal expenses. They also handled affairs in cash to avoid making records and repeatedly failed to report large amounts of income.

L.K. Spurlock, CA-5 (unpublished opinion), 2007-1 USTC ¶50,384, aff'g an unreported DC Texas decision.

An individual's conviction and sentence for tax evasion and failure to account for and pay over withholding taxes was proper. The government presented evidence that the individual was the hidden owner of a partnership, he diverted the partnership's funds for personal purposes without reporting the income, and misused taxes withheld from the partnership's employees. Further, contrary to the individual's arguments, an assessment is not necessary to prove tax evasion.

P. Lombardo, CA-3 (unpublished opinion), 2008-1 USTC ¶50,381, aff'g an unreported DC Pa. decision.
ion 7201 tax fraud also permits section 6663 penalty

Thursday, September 25, 2008

Section 7206 fraud - filing false statements

It is very important to seek the immediate attention of a tax attorney when a return preparer is being investigated by the IRS Criminal Tax Division. The very best time to defend actions taken is before the IRS. It is far more difficult to fashion a defense at the time the case is being considered by the Department of Justice.


Section 7206 fraud by return preparers apply when the preparer willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document.

There was a conviction in the case just published. The tax preparer was sentenced following his conviction for aiding in the preparation and filing of false tax returns. In determining the base offense level under the sentencing guidelines, the tax loss was properly calculated based on the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return.

The district court was not required to reduce the government's tax loss from the fraud by any unclaimed worthless investment capital loss deductions to which the preparer's taxpayer clients were legitimately entitled. The investors' offsetting capital losses were unrelated to the tax fraud committed by the preparer, and the losses that he had his clients fraudulently claim were ordinary business losses that were neither related to nor in lieu of the worthless investment losses. Additionally, the unclaimed capital losses were tax benefits available to the investor-taxpayers, not to the tax preparer. Consequently, the tax preparer's fraud did not result in any offsetting tax benefit to the government.
Affirming an unreported DC Mo. decision.



United States of America, Plaintiff-Appellee v. Leon Travis Blevins, Defendant-Appellant.

U.S. Court of Appeals, 8th Circuit; 07-3298, September 16, 2008.Affirming an unreported DC Mo. decision.

[ Code Sec. 7206]

Tax crimes: Aiding in preparation and filing of false returns: Conviction and sentence: Sentencing Guidelines: Tax loss calculation. --


LOKEN, Chief Judge: Tax preparer Leon Travis Blevins prepared and filed twenty federal income tax returns for seven taxpayers that falsely claimed Schedule C business losses, Schedule E rental losses, and Form 4797 losses from the sale of business property for the 1999-2002 tax years. At least six of the taxpayers were investors in a foundering business run by Blevins that bought and sold home mortgages and engaged in other real estate activities. Some returns falsely claimed the business's ordinary losses as if they were incurred by the investor-taxpayers. Other claimed losses were wholly fictitious. Blevins pleaded guilty to twenty counts of aiding in the preparation and filing of false tax returns in violation of 26 U.S.C. § 7206(2). He appeals his twenty-one month sentence, arguing that the district court 1 erred in determining tax loss under U.S.S.G. § 2T1.1 because the court failed to take into account the tax effect of investment losses to which his taxpayer clients were entitled. The court released Blevins on his personal recognizance pending resolution of the appeal. Reviewing the district court's interpretation of the Sentencing Guidelines de novo, we affirm. See United States v. Vickers, 528 F.3d 1116, 1120 (8th Cir. 2008) (standard of review).

For sentencing purposes, the Guidelines provide that the base offense level for the offense of filing fraudulent tax returns is the tax loss level from § 2T4.1, or six if there is no tax loss. U.S.S.G. § 2T1.1(a). Tax loss is "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)." § 2T1.1(c)(1). Notes (A)-(C) to § 2T1.1(c)(1) provide that tax loss equals 28% of the underreported income and improperly claimed deductions (34% if the taxpayer is a corporation), plus 100% of any falsely claimed tax credits, "unless a more accurate determination of the tax loss can be made."

At sentencing, the government argued that the tax loss attributable to Blevins's offense conduct was $100,029, the aggregate amount of underpaid income tax determined by an IRS examination of each fraudulent return. 2 This level of loss produced a base offense level of sixteen, see U.S.S.G. § 2T4.1(F), and an advisory guidelines range of 21-27 months in prison. Blevins countered with a letter report from his tax and business valuation expert. Using investment data from the fraud investigation, the expert opined that each taxpayer's investment in Blevins's failed business was "a total loss" and that these losses "appear to be capital losses." Based on the assumption that each investor would use these losses to offset $3,000 of ordinary income each year until the losses were exhausted, the expert calculated that the investors were entitled to capital loss deductions totaling $32,177, "resulting in a net tax loss to the government of $68,074." 3 This lower level of tax loss would produce a base offense level of fourteen, see § 2T4.1(E), resulting in an advisory guidelines sentencing range of 15-21 months in prison.

Relying on the expert's calculations and on the Second Circuit's decision in United States v. Gordon, 291 F.3d 181, 187 (2d Cir. 2002), cert. denied, 537 U.S. 1114 (2003), Blevins argued to the district court, as he does on appeal, that the determination of tax loss under § 2T1.1(c)(1) must take into account the legitimate, unclaimed capital loss deductions to which his taxpayer clients are entitled on account of their worthless investments. The government disagreed, urging the court instead to follow decisions in other circuits concluding that the definition of tax loss in § 2T1.1(c)(1) --"total amount of loss that was the object of the offense" --does not allow a sentencing court to take into account "other unrelated mistakes on the return such as unclaimed deductions." United States v. Chavin, 316 F.3d 666, 677 (7th Cir. 2002); accord United States v. Delfino, 510 F.3d 468, 472-73 (4th Cir. 2007), petition for cert. filed, 76 U.S.L.W. 3569 (Apr. 7, 2008); United States v. Phelps, 478 F.3d 680, 681-82 (5th Cir. 2007), cert. denied, 128 S. Ct. 436 (2007); United States v. Spencer, 178 F.3d 1365, 1368-69 (10th Cir. 1999). The district court agreed with the government.

On appeal, the parties again frame the issue as turning on a conflict between other circuits on the broad question of whether a taxpayer's "unclaimed" deductions or losses may ever be taken into account in determining tax loss for purposes of § 2T1.1(c)(1). The apparent conflict developed after § 2T1.1 was amended in 1993. The prior version defined "tax loss" as "the greater of (1) the total amount of tax that the taxpayer evaded or attempted to evade or (2) 28% of the amount by which the greater of gross income and taxable income was understated;" a comment explained that alternative (2) "should make irrelevant the issue of whether the taxpayer was entitled to offsetting adjustments that he failed to claim." U.S.S.G. § 2T1.1 & cmt. n.4 (1992). The 1993 amendment deleted this comment, leading the Second Circuit to suggest in dicta that § 2T1.1 no longer precluded using legitimate unclaimed deductions to offset a tax loss. United States v. Martinez-Rios, 143 F.3d 662, 670-71 (2d Cir. 1998). The Seventh Circuit disagreed, concluding that the comment was deleted "because the new tax-loss definition specifically excludes consideration of unclaimed deductions on its face by defining tax loss as the 'object of the offense.'" Chavin, 316 F.3d at 678. Three other circuits have agreed with the Seventh.

In Gordon, defendant was convicted of tax evasion for failing to report income he received from a company he controlled. On appeal, he argued that the district court erred in refusing to reduce the tax loss resulting from this unreported income by the tax benefit the company would have received if it had treated the payments as a deductible salary expense. Adopting the reasoning of Martinez-Rios, the Second Circuit agreed in principle but concluded that the error was harmless because Gordon failed to prove that the company would have treated the income he received as a salary expense, as opposed to non-deductible dividends. 291 F.3d at 187.

The theory argued but not proved in Gordon presents the strongest case for allowing unclaimed tax benefits to reduce the government's tax loss because the unclaimed deduction in that case was a tax consequence of the fraud. Taking this type of offsetting tax benefit into account at least arguably comports with the plain language of § 2T1.1(c)(1) --"the loss that would have resulted had the offense been successfully completed." On the other hand, the defendant's failure to claim the offsetting tax benefit in Gordon by taking a corporate salary expense deduction for payments he intended not to report as income helped conceal the fraud. No doubt reflecting this aspect of the issue, the four circuits that have rejected the Second Circuit's reasoning explicitly refuse to interpret § 2T1.1(c)(1) "as giving taxpayers a second opportunity to claim deductions after having been convicted of tax fraud." Spencer, 178 F.3d at 1368, quoted in Chavin, 316 F.3d at 679, in Phelps, 478 F.3d at 682, and in Delfino, 510 F.3d at 473.

In this case, we need not decide whether an unclaimed tax benefit may ever offset tax loss determined by aggregating the offense conduct of underreported income, improper deductions, and false tax credits. First, Gordon is clearly distinguishable. Here, the investors' offsetting capital losses that Blevins is claiming are unrelated to the tax fraud he committed. The Schedule C and Schedule E losses that Blevins had his clients fraudulently claim were ordinary business losses. Such losses presuppose an on-going business, however distressed, not a failed business that has become a worthless investment. Thus, the fraudulently claimed losses were neither related to nor in lieu of worthless investment losses. Indeed, the worthless investment losses were tax benefits that the investors could claim whether or not the fraud was perpetrated. Taking into account unclaimed tax benefits wholly unrelated to the offense of conviction is contrary to the plain meaning of the definition of tax loss in § 2T1.1(c)(1), "the total amount of loss that was the object of the offense ( i.e., the loss that would have resulted had the offense been successfully completed)."

Second, the unclaimed capital losses in this case are tax benefits available to the investor-taxpayers, not to Blevins. So far as this record reveals, those capital losses have not been claimed and remain potentially available to the taxpayers in the future (if they have not already been claimed). Thus, Blevins's fraud did not result in any offsetting tax benefit to the government. Indeed, should the investors properly claim and be entitled to worthless investment capital losses on future returns (or amended past returns), the government will incur a loss of tax revenue in addition to the loss that was the object of Blevins's offense. In these circumstances, the district court properly declined to reduce the government's tax loss from the fraud by the taxpayers' allegedly unclaimed capital loss deductions.

The judgment of the district court is affirmed.

1 The HONORABLE RICHARD E. DORR, United States District Judge for the Western District of Missouri.

2 Application of the 28% default rule in the notes to § 2T1.1(c)(1) would have produced a tax loss of $164,326. However, the IRS calculated its losses based on the investor-taxpayers' marginal tax rates, which were less than 28%. The government proposed the lower figure as reflecting a "more accurate determination," as the notes to § 2T1.1(c)(1) envision.

3 The expert's letter report relied on assumptions not supported by the record. First, the expert opined that capital loss treatment of the taxpayers' worthless investments "is consistent with IRC Section 165." But the record contains no evidence that the investments would qualify as "worthless securities" as defined in 26 U.S.C. § 165(g)(2). Then, having assumed the investments are worthless and qualify for capital loss deductions, she assumed that each investor-taxpayer would offset his or her loss against $3,000 of ordinary income in each tax year to which any unused portion of the losses could be carried forward under 26 U.S.C. § 1212(b). But an investor must apply such losses to any capital gains before offsetting up to $3,000 in ordinary income. See 26 U.S.C. § 1211(b). Nothing in the record supports the expert's assumption that the investors would have no capital gains in the tax years in question. Like the district court, we need not consider these failures of proof.

United States of America, Appellant v. Talmus R. Taylor, Defendant-Appellee.

U.S. Court of Appeals, 1st Circuit; 06-2216, July 9, 2008.

On remand from the SCt, 2008-2 USTC ¶50,432, Remanding an unreported DC Mass. decision..

[ Code Sec. 7206]


A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.


Michael J. Sullivan, United States Attorney, John A. Capin, Paul G. Levenson, Assistant United States Attorneys, for appellant. Bruce T. Macdonald, for defendant-appellee.

Before: Lynch, Chief Judge, and Newman and Torruella, Circuit Judges.

Before Lynch, Chief Judge, Newman and Torruella, Circuit Judges. *


ON REMAND FROM THE SUPREME COURT OF THE UNITED STATES


TORRUELLA, Circuit Judge: Talmus Taylor was sentenced to one year in a halfway house, five years of probation, and a $10,000 fine, for aiding and assisting in the preparation of false tax returns, in violation of 26 U.S.C. §7206(2). Following an appeal by the Government, we vacated the sentence as substantively unreasonable and remanded to the district court. See United States v. Taylor [ 2007-2 USTC ¶50,653], 499 F.3d 94 (1st Cir. 2007), vacated, 128 S.Ct. 878 (2008). The case returns to us on remand from the Supreme Court for further consideration in light of Gall v. United States, 128 S.Ct. 586 (2007).

The Court's decision in Gall, combined with its decisions in Kimbrough v. United States, 128 S.Ct. 558 (2007), and Rita v. United States, 127 S.Ct. 2456 (2007), makes clear that in the post- Booker world, district judges are empowered with considerable discretion in sentencing, as long as the sentence is generally reasonable and the court has followed the proper procedures. In accordance with these decisions, our recent opinions have elaborated on the broad scope of this discretion. See, e.g., United States v. Martin, 520 F.3d 87 (1st Cir. 2008); see also United States v. Rodríguez, 527 F.3d 221 (1st Cir. 2008); United States v. Politano, 522 F.3d 69 (1st Cir. 2008). Recently, in another sentencing case vacated by Gall, we noted this expanded discretion and concluded that the fairest course of action was to provide the district court the opportunity to reconsider its sentence in view of the Supreme Court's elucidation of sentencing procedures, as well as some of the concerns we had expressed in the prior opinion. See United States v. Tom, No. 07-1074, 2008 WL 1886608 (1st Cir. Apr. 30, 2008) (unpublished). We think that course appropriate under the circumstances here as well.

In so doing, we first reiterate some of the important sentencing principles underscored in all of these recent decisions. As clearly outlined in Gall, we review a district court's sentence under a deferential abuse of discretion standard, which involves both a procedural and a substantive inquiry. See Gall, 128 S.Ct. at 597; see also Politano, 522 F.3d at 72. This deference arises from the advantages inherent in the district court's position: "a superior coign of vantage, greater familiarity with the individual case, the opportunity to see and hear the principals and the testimony at first hand, and the cumulative experience garnered through the sheer number of district court sentencing proceedings that take place day by day." Martin, 520 F.3d at 92. Indeed, once the district court has followed the proper procedures, our review of substantive reasonableness is highly discretionary. See id. ("[R]eversal will result if - and only if - the sentencing court's ultimate determination falls outside the expansive boundaries of that universe [of reasonableness].").

Yet, along with this increased discretion to fashion an appropriate sentence goes an accompanying "need for an increased degree of justification commensurate with an increased degree of variance." Martin, 520 F.3d at 91. To be clear, there is no strict formula for determining the bounds of an appropriate sentence, but there is "a certain `sliding scale' effect [that] lurks in the penumbra of modern federal sentencing law; the guidelines are the starting point for the fashioning of an individualized sentence, so a major deviation from them must `be supported by a more significant justification than a minor one.' " Id. (quoting Gall, 128 S.Ct. at 597).

In our prior review of the sentence in this case, we expressed concern that the district court had failed to take all of the 18 U.S.C. §3553(a) factors into account in fashioning the defendant's entirely non-jail sentence for such a serious crime. Our conclusion was not based on any requirement that the justification be "proportional" to the deviation or that the result comply with a mathematic formula defining the outer bounds of reasonableness. Rather, it was that in our view, the court's explanations had failed to justify the overall result.

As in Tom, a ruling on the sentence based on the present record would not fully actualize Gall's effect in "shed[ding] considerable light on the scope and extent of a district court's discretion under the now-advisory federal sentencing guidelines." Martin, 520 F.3d at 88. Given the intervening cases which have further elucidated the district court's discretion in sentencing (as well as underscored the importance of the district court's justifications for that sentence), we think it best to remand to the district court for reconsideration with the benefit of all of these developments, as well as the concerns we expressed in our prior opinion.

So ordered.

* Of the Federal Circuit, sitting by designation.
Sentence. --Fraud and False Statements: Sentence

The Court upheld the taxpayer's conviction for wilfully and knowingly subscribing to joint returns which he did not believe to be true and correct as to every material matter. The taxpayer was not deprived of his constitutional rights by the District Court's denial of his motion to reduce the sentence to merely a fine and not a jail sentence. The sentence was within the maximum penalties provided for violations of Code Sec. 7206(1).

J. Brown, CA-7, 70-2 USTC ¶9521, 428 F2d 1191. Cert. denied, 400 US 941.

There was no error in the refusal of the district court to disclose the contents of a pre-sentence report to the taxpayer's attorney, where there was no constitutional necessity for disclosure and the report contained no adverse information.

J.C. Knupp, CA-4, 71-2 USTC ¶9637, 448 F2d 412.

The trial judge did not abuse his discretion in sentencing the taxpayer to jail for one year for aiding in the preparation of a false return merely because others convicted of similar offenses in the same district were not incarcerated.

W.M. Metcalf, CA-4, 76-1 USTC ¶9192.

The court held that the sentencing judge improperly conditioned taxpayer's probation for willfully and knowingly filing a false income tax return on the condition that he resign as a member of the bar. The court held that this special condition denied him due process by depriving him of his license to practice law without notice or an appropriate hearing.

V.M. Pastore, CA-2, 76-2 USTC ¶9513, 537 F2d 675.

An accountant's conviction for violating Code Sec. 7206(2), which prohibits willfully aiding or assisting in the preparation of a false or fraudulent tax return, constituted a conviction of a criminal offense under the revenue laws of the United States for which he was validly disbarred from practice before the IRS.

P.C. Washburn, DC, 76-1 USTC ¶9323, 409 FSupp 3.

The defendants were not sentenced unduly severely because of their failure to cooperate with the government. The trial judge did not state that leniency would be conditioned upon cooperation, nor was the trial judge required to explain each sentence imposed.

R.S. Bacheler, CA-3, 79-2 USTC ¶9695, 611 F2d 443.

Because 18 U.S.C. §3651 limits to six months the permissible period of actual confinement when a part of a sentence is suspended upon probation, a suspended sentence that involved thirteen months of incarceration was invalid.

M.H. Cohen, CA-4, 80-1 USTC ¶9288, 617 F2d 56.

The sentence of a taxpayer who was convicted of tax fraud was vacated and remanded for resentencing because no record was available to show why his sentence was increased at a second trial.

F.F. Solomon, Jr., CA-9, 87-2 USTC ¶9482, 825 F2d 1292.

The trial court did not abuse its discretion by considering all of the evidence for sentencing purposes, including conduct of which the taxpayers had been acquitted at trial.

C.W. Lawrence, Jr., CA-7, 91-2 USTC ¶50,522.

A federal district court properly determined the sentence of an individual who was convicted of preparing fraudulent tax returns. The trial record supported enhancement of the base offense level under the U.S. Sentencing Guidelines due to the amount of the tax loss, and no evidentiary hearing was necessary.

M.G. Marshall, CA-8, 96-2 USTC ¶50,678, 92 F3d 758.

A tax protestor convicted of various tax crimes under Code Secs. 7206 and 7212 was appropriately sentenced under the United States Sentencing Guidelines. Instead of the usual tax protestor tactic of ignoring tax administration, the defendant filed income tax forms seeking a refund, setting forth huge and obviously fictitious sums of money as his earnings. Although the IRS never considered making the claimed refunds, and the returns harassed and impeded IRS employees, there was no tax evasion, tax loss or false tax credits involved. Thus, the government did not suffer the actual loss required to impose a longer sentence.

M. Krause, DC N.Y., 92-1 USTC ¶50,193, 786 FSupp 1151.

A defendant's conviction for conspiracy to defraud the IRS was upheld because there was no reversible error. The government was permitted to seek enhancement of the defendant's sentence because it proved his intent to accomplish illegal transactions that would cause a tax loss to the government, even though the tax loss would not occur in the year of the transactions.

R.M. Hirschfeld, CA-4, 93-1 USTC ¶50,098.

An individual's conviction and sentence for filing false tax returns were upheld based on sufficient evidence of underreported income. A transaction in which amounts were loaned from a business account of the individual's S corporation to his friend, the loan repayment was deposited into the individual's personal account, and the loan was deducted as a business expense, along with the resulting tax loss to the government, were properly treated as relevant conduct in sentencing the individual under the U.S. Sentencing Guidelines.

T.G. Georges, CA-8, 98-1 USTC ¶50,477.

An individual convicted of aiding and abetting a tax fraud was properly denied a withdrawal of his guilty plea and a continuance to seek assistance of a lawyer at his sentencing. Furthermore, he was correctly adjudged to serve an enhanced sentence in light of the evidence and given his behavior during the proceedings.

R.J. Jagim, CA-8, 93-1 USTC ¶50,093, 978 F2d 1032.

An office manager's conviction for filing a fraudulent return was upheld. However, the trial court erred in imposing a sentence of three years' supervised release because a conviction under Code Sec. 7206(1) is a Class E offense, not a Class D felony. Therefore, a sentence of a one year's supervised release was imposed.

E.A. Pratt Stokes, CA-5, 93-2 USTC ¶50,545, 998 F2d 279.

An unlicensed professional sports agent, who was convicted of aiding in the preparation of false income tax returns and sentenced to a prison term, several years of supervision, and a fine, unsuccessfully appealed his prison sentence, but prevailed in obtaining a reduced period of supervised release. The trial court properly followed the sentencing guidelines for organized tax fraud from which one derives a substantial part of one's income and the guidelines applicable to those in the business of preparing or assisting in the preparation of false returns. However, the trial court improperly classified the nature of the agent's felony.

A.Q. Welch, CA-5, 94-2 USTC ¶50,358.

An individual's sentence following conviction for filing false tax returns was upheld where there was no clear error in the trial court's determination.

J. Swanson, III, CA-4 (unpublished opinion), 97-1 USTC ¶50,398, aff'g, per curiam, an unreported District Court decision.

The trial court erred in failing to determine whether state (California) law prohibited payments for unsolicited client referrals in calculating the base offense level for a former attorney's tax fraud conviction based on his deduction of referral payments. The trial court erroneously used the entire amount that the taxpayer deducted to compute the tax loss for sentencing purposes without considering whether it constituted illegal payments for which deductions were disallowed under Code Sec. 162(c)(2). Since state law did not prohibit payments for unsolicited referrals, the taxpayer was entitled to deduct such payments as business expenses. As a result, payments for unsolicited referrals should not have been included for purposes of computing the tax loss.

R.M. Standard, CA-9, 2000-1 USTC ¶50,319.

The sentence imposed on a taxpayer who was convicted of filing a false return was properly enhanced by the trial court in light of his use of sophisticated means to conceal his offense, his abuse of a position of trust, and his actions in obstructing or impeding the administration of justice during his case.

J.D. Tindall, CA-8 (unpublished opinion), 2000-2 USTC ¶50,585, aff'g an unreported District Court decision.

An individual's conviction for aiding another to file a fraudulent tax return and subsequent sentencing were upheld. The sentence requested by the government was reasonable under the sentencing guidelines given the number of violations and the amount of tax involved. The court was also within its discretion to enhance the sentence because of taxpayer's attempts to intimidate government witnesses before trial.

C. Bruno, CA-2 (unpublished opinion), 2001-1 USTC ¶50,112, aff'g an unreported District Court decision.

A taxpayer who pled guilty to 12 counts of aiding and assisting in the preparation of false tax returns was properly sentenced to a period of 41 months of imprisonment, which was longer than the three-year maximum sentence authorized by statute for each count. The district court had the discretion to run consecutively the sentences for separate counts. However, the court could not sentence him to 41 months for each of his 12 convictions because 41 months exceeded the statutory maximum for any single count.

J. Darden, CA-9 (unpublished opinion), 2002-1 USTC ¶50,291, vac'g and rem'g an unreported District Court decision.

Sentencing guidelines imposed with respect to an individual convicted of tax evasion permitted the inclusion of conditions that the taxpayer refrain from consuming alcohol and participate in community service activities. Those conditions were reasonably related to the goals of probation and rehabilitation. Further, amounts previously remitted by the taxpayer were not deducted from the current taxes owing because those funds were paid in connection with a fraudulent offer-in-compromise that was entered into after the crimes were committed.

F.F. Paul, CA-6 (unpublished opinion), 2003-1 USTC ¶50,222, aff'g, per curiam, an unreported District Court decision.

Sentences imposed were upheld.

K.P. Kontny, CA-7, 2001-1 USTC ¶50,197. Cert. denied, 5/14/2001.

K.L. Utecht, CA-7, 2001-1 USTC ¶50,311.

M. Wick, CA-9 (unpublished opinion), 2002-1 USTC ¶50,456, aff'g an unreported District Court decision.

W.N. Jackson, CA-2 (unpublished opinion), 2003-1 USTC ¶50,478, 65 FedAppx 754, aff'g an unreported District Court decision.

The sentence imposed on an individual convicted of aiding and assisting in the preparation of false federal income tax returns was affirmed. The individual failed to demonstrate that the court's consideration of the relevant sentencing factors was deficient or that the sentence imposed was unreasonable.

A. Jones, CA-6 (unpublished opinion), 2007-1 USTC ¶50,340, 218 FedAppx 488, aff'g an unreported DC Mich. decision.

A federal district court erred in imposing four consecutive one-year terms of supervised release on an individual who pleaded guilty to tax fraud and agreed to make restitution to the IRS. The federal sentencing guidelines require multiple terms of supervised release to run concurrently.

M.J. Spangler, CA-11 (unpublished opinion), 2007-1USTC ¶50,400, 224 FedAppx 890, aff'g in part, vac'g and rem'g in part an unreported DC Fla. decision.

A federal district court did not miscalculate the tax loss when sentencing an individual convicted for filing a false income tax return and assisting others in the preparation of false returns. The calculation was based on the fraudulent tax returns and the testimony of two IRS agents and the taxpayers for whom the individual had prepared false returns.

J.H. Bell, CA-7 (unpublished opinion), 2007-1 USTC ¶50,407, 226 FedAppx 596, aff'g an unreported DC Ill. decision.

A four-level leadership enhancement to the sentence imposed on a tax return preparer who was convicted for aiding and assisting in the preparation of false federal income tax returns was proper. The individual organized a tax fraud scheme that involved a number of taxpayers and caused a large tax loss.

R.E. Reiss, CA-8 (unpublished opinion), 2007-2 USTC ¶50,532, 230 FedAppx, aff'g, per curiam, an unreported DC Minn. decision.

A lawyer and former federal prosecutor's sentence for tax fraud was substantially and procedurally reasonable. Although the individual failed to report as income bribes he received from city vendors while the mayor of Atlanta, the trial court imposed the minimum sentence recommended by the sentencing guidelines. The court followed Booker to calculate the sentence; first establishing the base level of the offense by estimating the government's tax loss and then enhancing the base level for use of sophisticated means of concealment and obstruction of justice. The individual failed to show that his public service was so extraordinary as to justify a downward departure from the sentencing guidelines. The sentence was not excessive because it was less than the maximum allowed by Code Sec. 7206.

W.C. Campbell, CA-11, 2007-2 USTC ¶50,609, 491 F3d 1306.

A federal district court's adoption of the government's tax loss calculation when sentencing an individual convicted for willfully filing false tax returns was reasonable. The court reasonably concluded that, even though he had not reported all of his sales income, the individual had claimed all of his deductible expenses.

V. Roudakov, CA-3 (unpublished opinion), 2007-2 USTC ¶50,700, 239 FedAppx 776, aff'g an unreported DC Pa., decision.

An individual's conviction and sentence for aiding and abetting the filing of fraudulent tax returns was upheld. The trial court properly considered the pre-sentence report, the amount of loss, the severity of the crime, the necessity for deterrence and the defendant's statement, and the sentence imposed was 18 months less than the minimum in the applicable sentencing guidelines range. Therefore, the sentence imposed was reasonable.

C. Contreras, CA-2 (unpublished opinion), 2007-2USTC ¶50,712, 247 FedAppx 293, aff'g an unreported DC N.Y. decision.

The sentence imposed on a certified public accountant for aiding and advising the filing of a false income tax return was reasonable. The trial court properly imposed a sentence of a one year's supervised release, as recommended by the sentencing guidelines, since he was convicted of a Class E felony and also sentenced to more than one year imprisonment. Further, the trial court had a reasoned basis for imposing the sentence.

L.P. Bridges, CA-9 (unpublished opinion), 2007-2 USTC ¶50,779, aff'g, an unreported DC Wash., decision.

A tax return preparer's sentence for aiding in the preparation of a false tax return was upheld. The trial court did not err in calculating the tax loss attributable to his conduct, and the court was entitled to consider uncharged and acquitted conduct in determining the return preparer's sentence when such conduct was proven by a preponderance of the evidence.

A.T. Fokkoun-Ngassa, CA-4 (unpublished opinion), 2007-2 USTC ¶50,794, aff'g, per curiam, an unreported DC Va., decision.

The sentence imposed on an individual for filing false, fictitious and fraudulent income tax returns was reasonable. The district court did not abuse its discretion when it denied a downward departure or variance of the sentence based on exceptional family circumstances because it found that the individual's criminal history and utilization of family members in the commission of his offense constituted as factors weighing against a variance. Moreover, the court considered the properly calculated guidelines range before imposing the sentence and did not treat the sentencing guidelines as mandatory.

V.T. Carter, CA-6, 2008-1 USTC ¶50,124, 510 F3d 593.

The winner of a reality television show failed to establish that he was improperly convicted and sentenced for filing false tax returns. The sentence imposed, which was at the higher end of the sentencing guidelines range, was not unreasonable. The court was entitled to accept the testimony of the government's witness as providing a more accurate determination of the tax loss than would be determined using the sentencing guidelines. A perjury enhancement was also properly applied after the court noted that he lied on the witness stand.

R. Hatch, CA-1, 2008-1 USTC ¶50,166.

Sentence imposed on a tax preparer for willfully preparing false or fraudulent income tax returns was reasonable and within the Sentencing Guidelines range. The court did not err in applying a sentencing enhancement for obstruction of justice or in calculating the tax loss based on IRS interviews with the individual's customers.

G.D. Goosby, CA-6, 2008-1 USTC ¶50,331.

An individual who pleaded guilty to two counts of filing false income tax returns was properly sentenced to the statutory maximum of three years imprisonment on each count, to be served concurrently. The court could have imposed the sentences consecutively, its comment comparing the individual's tax offense to drug trafficking crimes was not illegal or improper and the court acted within its discretion by allowing and considering testimony regarding the basis of a pending state charge to address the history and character of the individual.

B. Tockes, CA-7, 2008-2 USTC ¶50,411.

An individual could not appeal the sentence imposed on him following his conviction for conspiracy and aiding and assisting in the preparation of false tax returns. The individual had entered a guilty plea and waived his right to appeal.

D. Shields, CA-9 (unpublished opinion), 2008-2 USTC ¶50,425, aff'g an unreported DC Calif. decision.

The U.S. Supreme Court has summarily vacated and remanded a Court of Appeals ruling that a sentence of probation and time in a halfway house imposed on a part-time income tax preparer for aiding and assisting in the preparation of false tax returns was unreasonable. The Court requested the Appeals court reconsider its ruling in light of Gall v. United States, 128 S. Ct. 586 (2007).

T.R. Taylor, SCt, 2008-2 USTC ¶50,432, vac'g and rem'g, CA-1, 2007-2 USTC ¶50,653.

A sentence of probation and time in a halfway house imposed on an individual for aiding and assisting in the preparation of false tax returns was remanded for reconsideration. The sentencing court was directed to provide justifications for its sentence in light of the scope and extent of the sentencing court's discretion under the federal sentencing guidelines.

T.R. Taylor, CA-1, 2008-2 USTC ¶50,436, on rem'd from SCt, 2008-2 USTC ¶50,432.

The sentence imposed on an individual for tax preparer fraud was vacated and remanded a second time for resentencing because the government did not prove the amount of the tax loss by a preponderance of the evidence and did not consider family circumstances as a mitigating circumstance. The court prejudged the amount of tax loss without giving due consideration to the individual's challenges to the amount of tax loss and whether the individual was responsible for the loss, thereby undermining the fairness of the sentencing hearing. Further, the district court did not consider whether the individual's incarceration would impose an extraordinary hardship on his family, thereby constituting a mitigating factor that would justify imposing a below-guidelines sentence.

J.P. Schroeder, CA-7, 2008-2 USTC ¶50,477.


SEC. 7206. FRAUD AND FALSE STATEMENTS.
Any person who --

7206(1) DECLARATION UNDER PENALTIES OF PERJURY. --Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or

7206(2) AID OR ASSISTANCE. --Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or

7206(3) FRAUDULENT BONDS, PERMITS, AND ENTRIES. --Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the internal revenue laws, or by any regulation made in pursuance thereof, or procures the same to be falsely or fraudulently executed or advises, aids in, or connives at such execution thereof; or

7206(4) REMOVAL OR CONCEALMENT WITH INTENT TO DEFRAUD. --Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by section 6331, with intent to evade or defeat the assessment or collection of any tax imposed by this title; or

7206(5) COMPROMISES AND CLOSING AGREEMENTS. --In connection with any compromise under section 7122, or offer of such compromise, or in connection with any closing agreement under section 7121, or offer to enter into any such agreement, willfully --

7206(5)(A) CONCEALMENT OF PROPERTY. --Conceals from any officer or employee of the United States any property belonging to the estate of a taxpayer or other person liable in respect of the tax, or

7206(5)(B) WITHHOLDING, FALSIFYING, AND DESTROYING RECORDS. --Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax;

shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation) or imprisoned not more than 3 years, or both, together with the costs of prosecution.

------------------


For more information about tax return preparer fraud or taxpayer fraud, contact ab@irstaxattorney.com 888 712-7690 ex 106
Labels: section 7206 tax preparer fraud




www.irstaxattorney.com 888-712-7690

Wednesday, September 24, 2008

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Synopsis - trust fund recovery penalty (100% penalty)

An employer is required to withhold federal income taxes, Federal Insurance Contributions Act (FICA) taxes and Railroad Retirement Act (RRA) taxes from employees and to pay over those amounts to the IRS (Code Sec. 3402 and Code Sec. 3501). These taxes withheld from the employee are referred to as trust fund taxes. In addition, the employer is required to pay FICA taxes equivalent to the amount withheld from the employee and to pay Federal Unemployment Tax Act (FUTA) taxes on the employee's wages (Code Sec. 3111 and Code Sec. 3301). Such amounts are generally referred to as the employer's share of employment taxes or non-trust fund taxes.

When the person responsible for collection and payment of such taxes willfully fails to pay over withheld trust fund taxes, a penalty equal to the amount of the delinquent trust fund taxes is assessed (Code Sec. 6672(a)). The trust fund recovery penalty (also known as the 100 percent penalty) only applies to the failure to collect, account for and pay over third-party taxes. It, therefore, does not apply to taxes that are directly paid, such as the employer's share of employment taxes, or to delinquency penalties or interest owed on the delinquent trust fund taxes (Reg. §301.6672-1). The trust fund recovery penalty is generally intended to encourage the prompt payment of the affected taxes and to insure ultimate collection of the taxes from a secondary source.

The penalty may be assessed against the employer, but is most often levied on at least one "responsible person," an individual within the organization who had sufficient authority to pay over the withheld taxes (Code Sec. 6672(a)). See ¶39,780.02 for a discussion of "responsible person."

In typical situations, a struggling business that has fallen behind in its bills pays other creditors before the IRS to assure a continued supply of needed goods and services. Individuals responsible for paying the business's bills may hope that by the time the IRS catches up, the business will have turned around and will have sufficient funds available to satisfy employment taxes and other liabilities. Alternatively, such persons may hope that if the business goes bankrupt, the employment tax debt will be discharged. These individuals often fail to realize that, not only do the business's liabilities gain a measure of priority in bankruptcy (11 U.S.C. §507 and 11 U.S.C. §724(b)), but the persons responsible for paying other business creditors in preference to the IRS may be personally liable for 100 percent of the unpaid trust fund taxes. Furthermore, this personal liability is neither dischargeable in bankruptcy, nor deductible as a business expense or bad debt (see ¶39,780.53). However, a responsible person who pays the penalty has a right of contribution against other responsible persons

Tuesday, September 23, 2008

Part 8. Appeals
Chapter 23. Offers in Compromise

Section 1. Offer in Compromise Overview
________________________________________
8.23.1 Offer in Compromise Overview
• 8.23.1.1 General
• 8.23.1.2 Suspension of Levy While Offer is Pending
• 8.23.1.3 Conference and Settlement Practices
• 8.23.1.4 Requirements for Compromise
8.23.1.1 (10-16-2007)
General
1. This IRM provides instructions for Appeals personnel for offer in compromise cases. The procedures in IRM 8.23 are intended to be consistent with the procedures in IRM 5.8, Offer in Compromise, IRM 5.15, Financial Analysis, as well as with other sections of IRM Part 8 - Appeals. Section 509 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) significantly impacted the offer in compromise program. Appeals' responsibilities under TIPRA differ between Collection Due Process (CDP) and non-CDP offers, so separate sections are written for each.
2. IRM 5.8 contains the primary policies and procedures for both Collection and Appeals for processing, evaluating and making determinations on offers. IRM 8.6.1, Conferencing and Issue Resolution, and IRM 8.6.4, Conference and Settlement Practices, contain general conference and settlement practice procedures applicable to all Appeals work streams.
3. An offer in compromise (OIC) is an agreement between a taxpayer and the government that settles a tax liability in exchange for payment of less than the full amount owed. IRM 5.8.1 contains a general overview of the OIC program, including:
• Authority
• Policy
• Objectives
• Bases for Compromise
• Payment terms
• Fees and required initial payments
4. Appeals has jurisdiction to make decisions on OIC cases in the following circumstances:
A. Offers appealed after being rejected by Collection.
B. Offers based wholly or in part on doubt as to liability (DATL) after being rejected by Exam, or if the liability was previously determined by Appeals.
C. Offers submitted directly to Appeals as an alternative to the proposed collection in a CDP or equivalent hearing (EH) case.
D. Offers being evaluated by Collection when a Notice of Federal Tax Lien (NFTL) is filed and the taxpayer requests a CDP or EH hearing.
Note:
Appeals will not accept jurisdiction over an OIC if we do not have the authority to determine the type of tax that is being compromised, e.g. Alcohol, Tobacco and Firearm (ATF) taxes.
Note:
Appeals has no authority to compromise a liability if the Department of Justice (DOJ) can settle the case. This is identified by a Transaction Code (TC) 550 with definer code "04." Also, a TC 520 with a Closing Code (cc) 80 indicates a judgment was obtained and a TC 520 cc 70 indicates litigation is pending. See IRM 5.8.1, Offer in Compromise Overview, Tax Cases Controlled by Department of Justice.
5. Per Q-A 6 in Section 3 of Rev. Proc. 2000-43, OIC cases are subject to ex parte provisions. The third party contact waiver provision found in paragraph (n) in Section V of Form 656 pertains to non-IRS contacts only and is not a waiver of prohibited ex parte communications between Appeals and either the Collection or Examination functions.
6. While following the general OIC procedures found in IRM 5.8, Appeals exercises independent judgment concerning the disputed valuations and business decisions made by Collection. Appeals also makes independent determinations regarding offers based upon DATL, which are evaluated in the same manner as in a proposed deficiency case.
8.23.1.2 (10-16-2007)
Suspension of Levy While Offer is Pending
1. IRC 6331(k) provides that no levy may be made
• during the period that the offer is pending,
• for an additional 30 days after the offer is rejected, and
• during the time any appeal is pending.
2. Treasury Regulation 301.7122-1(d)(2) states that an offer becomes pending once it's accepted for processing. This is the date the Service official signs the Form 656, Offer in Compromise.
3. Treasury Regulation 301.7122-1(f)(1) provides that an offer in compromise has not been rejected until IRS issues a written notice to the taxpayer or his representative advising of:
• The rejection
• The reason(s) for rejection
• The right to an appeal
4. Treasury Regulation 301.7122(1)(f)(5) further provides that a taxpayer may administratively appeal the rejection of an offer to the IRS Office of 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.
5. IRC 6331(i)(5)provides that the period of limitations to collect the tax under IRC 6502 shall be suspended for the period during which levy is prohibited. See also Treasury Regulation 301.7122-1(i)(1).
Note:
The suspension of the CSED was repealed by the Community Renewal Tax Relief Act effective December 21, 2000. The Job Creation and Workers Assistance Act re-established the suspension of the CSED effective March 9, 2002. Appeals and Settlement Officers working cases involving older liabilities with multiple prior OICs must be aware of the proper CSED date. IRM 5.8.10and IRM 8.21contain detailed information on CSED issues involving OICs.
8.23.1.3 (10-16-2007)
Conference and Settlement Practices
1. As previously indicated, IRM 5.8 contains the primary policies and procedures for processing, evaluating and making determinations on offers. Appeals does not have the authority to disregard established policies or procedures. However, the Appeals process in an OIC case is not merely an extension of the Small Business Self Employed (SBSE) Collection process. The role and mission of Appeals is different than that of SBSE Collection . Appeals personnel must employ Appeals' standard conference and settlement practices for all work streams, including OICs.
2. IRM 8.6.1, Conferencing and Issue Resolution, and IRM 8.6.4, Conference and Settlement Practices, contain general guidance on Appeals conference and settlement practices. Because a taxpayer may not (generally) seek judicial review of Appeals' decision to sustain Collection's rejection of an offer, not all of 8.6.1 and 8.6.4 relate to OICs. Some relevant portions of those sections are:
A. Conduct conferences in an open atmosphere that fosters cooperation in the resolution of disputes. Above all, it is of utmost importance to be a good listener.
B. The judicial attitude is one which reasonably appraises the facts, law, and litigating prospects; uses sound judgment and ability to see both sides of a question; and is objective and impartial. Any approach which contemplates a maximum possible result in favor of the Government or a deficiency in every case is incompatible with a judicial attitude and the Appeals mission.
C. Do not take advantage of a taxpayer's lack of technical knowledge. The Appeals Officer or Settlement Officer will assist the pro se taxpayer in every way possible. In the absence of an agreement, explain the taxpayer's further appeal rights.
8.23.1.4 (10-16-2007)
Requirements for Compromise
1. This section contains only the most basic compromise requirement details plus some information that's unique to Appeals. Appeals personnel working offers must be familiar with the revised guidelines in IRM 5.8 , which contain numerous post-TIPRA changes. To avoid duplication of procedures, the bulk of what you need to know in terms of OIC processability, perfecting and payment requirements is found in IRM 5.8.2, Offer in Compromise, Offer Receipts, and IRM 5.8.3, Offer in Compromise, Processability.
2. Except as indicated below, an offer must be filed on the current revision of Form 656 to be accepted. The Form 656 instruction booklet provides specific details for completing the offer.
Note:
Collection will process an offer even if the Form 656 does not list all outstanding tax debts. However, an amended Form 656 listing all known tax debts must be secured prior to accepting the offer.
3. If you are working an OIC case where the original offer was mailed before July 16, 2006, the offer may be accepted using the July 2004 revision of Form 656. This is a pre-TIPRA offer. If an amendment is needed on a pre-TIPRA offer, you may use the July 2004 revision of Form 656 as the taxpayer is not required to make a TIPRA payment with the amended offer.
4. A Form 656-L, Offer in Compromise (Doubt as to Liability), is used for an offer based upon doubt as to liability where the assessment at issue is other than a Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET) liability. There is no DATL option on the February 2007 revision of Form 656 because Notice 2006-68 provides that taxpayers submitting offers based only on DATL are not required to make TIPRA payments with the offers.
5. Each separate tax period and type of tax must be listed on the Form 656. If an offer involving a Trust Fund Recovery Penalty (TFRP) assessment is accepted, the case file must include information identifying the Business Master File (BMF) periods comprising the TFRP assessment(s). A TFRP assessed prior to August of 2000 reflects only the last quarterly period that was the subject of the TFRP. In August of 2000, IRS began assessing TFRPs for each respective quarter. Verification on the Integrated Data Retrieval System (IDRS) is required to determine how the assessment was completed.
6. IRC 7122(b) requires an opinion from the Office of Chief Counsel on all offers recommended for acceptance in which the unpaid liability (including tax, penalties and interest) is $50,000 or more. Counsel's review of a proposed acceptance has two separate and distinct components:
A. Certification that the legal requirements for compromise were met.
B. Review of the proposed compromise for consistent application of the Service's acceptance policies.
Note:
Further details concerning Counsel's review and statutorily required opinion are in IRM 8.23.4.2.2, Counsel Review of Acceptance Recommendations.
8.23.1.4.1 (10-16-2007)
Application Fees, Offer Terms, Payments and Deposits
1. On May 17, 2006, TIPRA was signed into law by the president. Offers received on or after July 16, 2006 must include the applicable fee and an additional partial payment under TIPRA. The offer terms and associated initial partial payment requirements are:
A. Lump Sum Cash Offer: Payable in five or fewer installments from notice of acceptance. The Form 656 must be accompanied by either payment of 20% of the amount of the proposed offer or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment.
B. Short-term Periodic Payment Offer: Payable in six or more installments within two years (24 months) from the IRS received date. The Form 656 must be accompanied by either the first proposed installment or a signed Form 656-A. Additional installments must be paid in accordance with the taxpayer's proposed terms while the offer is being considered unless the offer is based upon DATL or the taxpayer meets the low-income exclusion via an approved Form 656-A. See paragraph (4) below for information on the low-income exclusion.
Note:
If an amended offer is secured, the 24-month period begins the date the amended offer is received.
Note:
If the offer is either based upon DATL or the taxpayer qualifies for the Form 656-A waiver and the offer is accepted, the 24-month time frame for paying the accepted offer amount starts on the date of the written notice of acceptance.
C. Deferred Periodic Payment Offer: Payable in six or more installments over 25 or more months from the IRS received date, but within the time remaining on the statutory period for collection. The Form 656 must be accompanied by either the first proposed installment or a signed Form 656-A. Additional installments must be paid in accordance with the taxpayer's proposed terms while the offer is being considered unless the offer is based upon DATL or the taxpayer meets the low-income exclusion via an approved Form 656-A. See paragraph (4) below for information on the low-income exclusion.
Note:
If the offer is accepted and is either based upon DATL or the taxpayer qualified for the Form 656-A waiver, the taxpayer must begin making periodic payments in accordance with the terms of the accepted offer after Appeals issues the written notice of acceptance.
2. Note:
3. TIPRA does not require the taxpayer to make periodic payments on either a regular basis or in equal amounts, although the revised Form 656 is set up for the taxpayer to make such a proposal. The amounts and due dates of payments must be specified.
4. The IRS now requires that installment agreements in effect prior to receipt of an OIC remain in effect while an offer is being considered only with regard to Lump Sum Cash offers. Installment agreement payments are not required for Periodic Payment offers because the taxpayer is required to make proposed installment payments pursuant to TIPRA while the offer is under consideration.
5. IRC 7122 provides that the Secretary may issue regulations waiving any partial payments required with the submission of the offer. The only available waivers per Notice 2006–68 are for offers based upon doubt as to liability and offers received from low-income taxpayers. Such taxpayers are not required to pay the $150 processing fee, initial payment, or periodic installment payments.
6. The IRS OIC Monthly Low Income Guidelines found in the Form 656 information booklet were increased to 250% of the most current Health & Human Services poverty guideline, so an increased percentage of taxpayers will be exempt from the application fee and TIPRA payment requirements. A taxpayer seeking a low-income exemption must submit a Form 656-A with the offer. The low-income exemption applies only to individuals.
7. IRM 5.8.3 and Collection's July 26, 2007 Replacement TIPRA Interim Guidance contain detailed information concerning OIC payment terms, processability issues and initial payment requirements for offers.
8.23.1.4.1.1 (10-16-2007)
Processing OIC Payments
1. Appeals can process all "pre-acceptance" TIPRA payments using a Form 3244, Payment Posting Voucher, except for the payment that's due with the original Form 656. The processing fee and initial payment are part of the overall processability determination so they must be forwarded to the appropriate Centralized Offer in Compromise (COIC) site. Subsequent periodic installment payments made prior to acceptance of the offer may be processed by Appeals as follows:
A. Apply designated payments for tax debts other than employment or excise taxes per the written designation using Designated Payment Code (DPC) 35.
B. Apply undesignated payments for tax debts other than employment or excise taxes to the liability with the earliest CSED using DPC 35.
C. Apply designated payments received with an amended Form 656 for tax debts other than employment or excise taxes per the written designation using DPC 34.
D. Apply undesignated payments received with an amended Form 656 for tax debts other than employment or excise taxes to the liability with the earliest CSED using DPC 34.
E. Apply payments designated to trust fund taxes for employment or excise tax (trust fund) debts per the written designation using DPC 02.
F. Apply undesignated payments for employment or excise tax debts to all unpaid Forms 1120 and 940 liabilities and then to other non-trust fund liabilities beginning with the liability with the earliest CSED using DPC 35.
Note:
This is different than the standard TFRP payment application procedures outlined in IRM 5.7.4.3, Trust Fund Compliance - Investigation and Recommendation of the Trust Fund Recovery Penalty, Calculating the TFRP, because offer payments are applied in the best interest of the government, unless otherwise designated.
G. Apply payments designated to trust fund taxes that are received with an amended Form 656 per the written designation using DPC 02.
H. Apply undesignated payments for employment or excise tax debts that are received with an amended Form 656 to all unpaid non-trust fund liabilities beginning with the liability with the earliest CSED using DPC 34.
2. Per IRC 7122(c)(2)(A) and Notice 2006-68, taxpayers are entitled to designate all payments required under TIPRA while the offer is under consideration. The designation must be made in writing at the time the payment is made. Absent a written designation, the payments will be applied in the best interest of the government. Once the taxpayer designates application of a payment, it cannot be changed at a later date.
Note:
The OIC application fee cannot be designated and will be applied to the taxpayer's liability in the best interest of the government.
3. Once the offer is accepted, the taxpayer no longer has the right to designate subsequent offer payments. All post-acceptance payments must be processed by the Monitoring Offer in Compromise (MOIC) unit.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 2. Receipt and Control of Non-CDP Offers
________________________________________
8.23.2 Receipt and Control of Non-CDP Offers
• 8.23.2.1 Receipt
• 8.23.2.2 Assignment of OIC Case
• 8.23.2.3 Initial Case Review
• 8.23.2.4 When Taxpayer Does Not Remain in Compliance
8.23.2.1 (10-16-2007)
Receipt
1. This section provides guidance for the receipt and control of non-CDP offers in compromise. There are a number of TIPRA issues impacting CDP offers that do not affect non-CDP offers, so a separate section containing procedures for CDP offers is in IRM 8.23.5, Collection Due Process OIC Procedures.
2. Field Collection, Field Examination and the Centralized Offer in Compromise (COIC) sites forward taxpayer appeals of rejected offers. The campus Appeals offices in Brookhaven and Memphis work the bulk of the cases coming out of the COIC sites. Cases worked by field compliance offices, the most complex COIC offers, and cases where the taxpayer wants to meet with Appeals in person are generally assigned to the Appeals office that covers the taxpayer's location. Appeals Management will occasionally assign or re-assign cases to other areas as part of effectively managing inventory levels.
3. The Appeals Team Manager or their designee will generally issue the Uniform Acknowledgement Letter 4141 to the taxpayer within 30 days from the date of receipt by Appeals. Enclose Publication 4227, Overview of Appeals Process, and Publication 4167, Appeals-Introduction to Alternative Dispute Resolution. The purpose of this acknowledgement letter is to:
• Advise the taxpayer of receipt of the case in Appeals
• Explain what the taxpayer can expect during the Appeals process, including their right to meet with an Appeals Officer or Settlement Officer (AO/SO) in person
• Provide the contact person's name and telephone number
Note:
Appeals campus sites in Brookhaven and Memphis should not enclose Publication 4167 with the Letter 4141 because OICs considered at an Appeals campus site are not eligible for alternative dispute resolution processes.
4. See IRM 8.23.6, OIC Processing and Closing Procedures, for initial case receipt guidance for Appeals Processing Section (APS) personnel.
8.23.2.2 (10-16-2007)
Assignment of OIC Case
1. As previously indicated, Appeals receives rejected OIC cases from a variety of sources. Assignments should be based upon case complexity and the experience level of the employee. Appeals must also strive to accommodate a taxpayer's reasonable request for an in-person conference. Taxpayers should make clear their desire for an in-person hearing before substantive negotiations begin. If the complexity of a certain case extends beyond the technical skills available in a particular location, the case should be re-assigned.
2. OICs rejected by a COIC site using "Obvious Full Pay" criteria will generally require less technical expertise. See IRM 8.23.3.9, Centralized Offer in Compromise and "Obvious Full Pay" Offers, for guidance on working these types of cases.
3. OICs rejected by a COIC site but not based upon "Obvious Full Pay" criteria can generally be resolved through written or telephone contact. The Settlement Officer working these cases must be knowledgeable with this IRM text as well as with IRM 5.8, Offer in Compromise, IRM 5.15, Financial Analysis, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, and Collection's July 26, 2007 Replacement TIPRA Interim Guidance .
4. OICs rejected by Collection Field OIC groups are generally more complex and require more detailed financial analysis skills, familiarity with asset valuation techniques, and sound negotiation and communication skills. Appeals and Settlement Officers working these more complex cases must be well versed in the aforementioned IRM sections and have an in-depth understanding of
• the impact and priority of the federal tax lien,
• the impact of state and local statutes on asset ownership, valuation and equities,
• enforced collection actions such as levy and administrative seizure and sale,
• judicial actions such as a suit to foreclose a federal tax lien or reduce a tax claim to a judgment, and
• Trust Fund Recovery Penalty (TFRP) issues.
5. OICs filed on the basis of Effective Tax Administration (ETA) or Doubt as to Collectibility with Special Circumstances (DCSC) require a level of experience commensurate with the facts of the case as described above.
8.23.2.2.1 (10-16-2007)
Transfer of OIC Cases
1. If Appeals cannot resolve a case easily and it requires a face-to-face discussion, the case may be transferred to the Appeals office nearest to the taxpayer. To reduce the length of time a case is in Appeals, it's important to initiate the transfer of appropriate cases as quickly in the overall Appeals process as practical.
2. Situations occur where a taxpayer will request to have a case transferred to the Appeals office closest to the taxpayer after engaging in substantive negotiations with Appeals. This often occurs when the taxpayer believes an adverse decision is likely or imminent. It's important to point out to the taxpayer in both the acknowledgement letter and initial substantive contact letter or during the initial telephone contact that he/she may ask meet with someone from Appeals in person, but that the decision to do so should be made before meaningful negotiations begin and must be made well in advance of an imminent decision. Appeals will not transfer a case simply because the taxpayer disagrees with its determination.
3. Prior to transferring a case, conduct a preliminary review to avoid unnecessary delays. If the review shows that the taxpayer is not in compliance with filing or payment requirements or the entire liability is clearly collectible and the taxpayer presents no special circumstances, the offer may be rejected without transfer.
4. If acceptance of the offer is possible and the Appeals office with the case cannot resolve it easily, transfer the case to the Appeals office nearest to the taxpayer.
5. Upon completion of Appeals' action, return the entire case file to Appeals Processing Section.
8.23.2.3 (10-16-2007)
Initial Case Review
1. This section provides procedures for preliminary case review to make sure the offer is ready for Appeals' consideration. If the offer was sent to Appeals prematurely, it must be returned to the referring office. Follow the procedures in IRM 8.23.3 after determining the case is ready for Appeals' consideration.
Note:
Premature referrals should be returned to the originating Compliance office within 45 days of Appeals' receipt of the case.
2. Appeals must screen new OIC receipts to make sure the appeal was timely. As indicated in IRM 8.23.1.2(4), a taxpayer has 30 calendar days from the date of the rejection letter to request an administrative Appeals hearing.
3. IRC 7502 and IRC 7503 apply to OIC appeals.
A. Per IRC 7502, if the appeal is mailed within 30 calendar days after the date of Compliance's rejection letter, it is a timely appeal. It must be postmarked or mailed via certified or registered mail so that the mailing date can be proven. If the postmark is made by a non-U.S. Postal Service system such as a private postage meter stamp or a non-USPS carrier such as UPS or FedEx, Treasury Regulation 301.7502-1(b) provides that such postmark must be legible and dated on or before the due date and the appeal must be received not later than the time when a letter sent by the same class of mail would ordinarily have been received if it were sent from the same point of origin by the U.S. Post Office on the last day for timely mailing the appeal.
B. Per IRC 7503, if the 30th day falls on a Saturday, Sunday, or legal holiday, a request for appeal is considered timely if mailed on the next business day.
Note:
IRC 7508and 7508A postpone certain time-sensitive acts when a person is serving in the armed forces in a combat zone, or there is a Presidentially declared disaster. Rev. Proc. 2005-27, 2005-20-IRB 1050 includes the 30-day period for appealing a rejection of an OIC as an act that may be postponed.
4. If the appealed offer is based upon both Doubt as to Collectibility and Doubt as to Liability (a combination offer), the offer must be evaluated and rejected by both functions. If either Collection or Exam has not yet made a determination on the combination offer, it must be returned as a premature referral.
5. If the case involves unpaid trust fund tax, the assessment statute expiration date(s) (ASED) is not suspended by the offer in compromise. Collection should have taken the necessary steps to protect the ASED(s) prior to sending the case to Appeals. See IRM 5.8.4.13.2 and IRM 5.8.4.13.3. If an ASED was not properly protected by Collection per IRM 5.8.4.13.2 or 5.8.4.13.3 and will expire within 12 months of the Appeals received date, the case should be returned as a premature referral.
6. Collection often receives additional information as part of the taxpayer's appeal or protest letter. Before sending the case to Appeals, the originating Collection office should review the additional information and document such information's impact, if any, on its determination of reasonable collection potential (RCP). If Collection did not review the information received with the appeal, the offer may be returned to Collection so that the information may be considered. The determination to return the case to Collection to fully address issues raised by the taxpayer in the protest letter should be made within 45 days of Appeals' receipt of the case. If Collection still believes the offer should be rejected after considering the new information, the offer will be returned to Appeals along with documentation of Collection's findings and Appeals will continue to process the appeal.
7. Initial case review may also show that Collection failed to comply with significant IRM requirements or that substantial additional information is necessary. Unlike the other premature referral issues detailed in this section, the decision to return a case as a premature referral in either of these instances is subjective and Collection may not necessarily agree with Appeals' decision. The feedback transmittal must clearly identify the IRM requirement that Collection failed to follow and/or the case development action needed.
8. There are other issues that should be screened out before proceeding with case evaluation. These are rare, but if found, the case should be returned to Collection as a premature referral:
• Taxpayer paid in full before direct or written contact was initiated by Appeals
• Taxpayer submitted a claim for relief from joint and several liability (innocent spouse claim) as the requesting spouse and the claim was filed before the offer was rejected and the claim is still open. IRM 5.8.4.12.2 states that Collection should have suspended the offer pending disposition of the claim. If the claim was filed before the offer was rejected and is still open, the case may be returned to Collection as a premature referral.
Note:
See IRM 8.23.3.3.1.1 if a claim for relief from joint and several liability was filed after the offer was rejected and the taxpayer is either the requesting or the non-requesting spouse.
• Taxpayer filed bankruptcy before the offer was rejected. Collection should have returned the offer without appeal rights per IRM 5.8.10.2.1. Return the offer to Collection as a premature referral.
Note:
The only premature referral issues identified above that cause jurisdictional problems for Appeals are if the taxpayer did not appeal timely or if the taxpayer filed bankruptcy before the offer was rejected. In those instances, Appeals has no jurisdictional basis to consider the offer. As a courtesy, if either of these issues are identified after 45 days has lapsed since the date Appeals received the case, either the AO/SO or the ATM should contact the Collection manager and explain why the case will be returned as a premature referral before sending it back. The other premature referral issues listed above do not cause jurisdictional problems for Appeals, so the cases should not be sent back as premature referrals if more than 45 days has lapsed since the date Appeals received the case.
9. If it's determined that the case is ready for Appeals' consideration, send Letter 4141 if one was not previously sent and document such in the case activity record.
8.23.2.3.1 (10-16-2007)
Liability Previously Determined by Appeals
1. When an OIC is based upon doubt as to liability and the liability was previously determined by Appeals, the offer will be assigned directly to Appeals for consideration. Appeals is responsible for:
• Assembling the information and documents necessary to evaluate the offer
• Determining the merits of the offer
• Reaching a conclusion
• Preparing the closing documents
2. The taxpayer must offer some amount of consideration. An offer of $0.00 is an abatement request and not an offer. The offer would generally be the amount of the expected corrected liability, penalties and interest. The taxpayer is not required to pay an OIC application fee or make any sort of TIPRA payment if the sole basis of the offer is doubt as to liability.
3. The Appeals Officer should negotiate a settlement in the same manner as in a proposed deficiency case.
A. If an agreement is reached, the Appeals Officer will request that the taxpayer withdraw the offer and then process the necessary adjustment by completing Form 3870, Request for Adjustment.
B. If the prior case disposition involved a Form 870-ADagreement, approval by either the Appeals Director of Field Operations or Appeals Director of Technical Services is required for re-opening. (See Policy Statement P-8-3 (formerly P-8-50), which is also IRM 1.2.17.1.3.)
C. If an agreement is not reached or the taxpayer will not withdraw the offer, the Appeals Officer will act upon the offer based upon the settlement negotiations and recommend acceptance or rejection of the offer, as appropriate.
4. Process the offer in accordance with IRM 8.23.6, OIC Processing and Closing Procedures.
8.23.2.4 (10-16-2007)
When Taxpayer Does Not Remain in Compliance
1. One of the stated goals of the OIC program per Policy Statement P-5-100 (which is found in IRM 1.2.14.1.17) is that acceptance of an offer will create for the taxpayer an expectation of a fresh start toward compliance with all future filing and payment requirements. As additional consideration for an accepted offer based upon doubt as to collectibility, the taxpayer is required to timely file all federal returns and timely pay all tax when due for a period of five years after acceptance or until the offer amount is paid in full, whichever is longer. (See Section V of Form 656.) The prospect of this "fresh start" is eliminated when a taxpayer ceases being compliant with filing and/or payment requirements while the offer is being considered.
2. If a taxpayer whose rejected offer is being considered by Appeals fails to timely file all required federal tax returns or pay current taxes, including required estimated tax payments and federal tax deposits, Appeals will contact the taxpayer and attempt to verify and remedy the problem.
3. The noncompliant taxpayer must promptly resolve the issue(s) of noncompliance. Give the taxpayer a short time frame (no more than 21 days) to remedy the issue(s). It's critical in these instances for Appeals to provide the taxpayer with clear and specific instructions as to exactly what is required of the taxpayer, when such is due, and the consequence of Appeals sustaining rejection of the offer if the compliance issue is not promptly resolved. To enable Appeals to continue with consideration of the taxpayer's appeal, the noncompliant taxpayer must do all of the following:
A. File all past-due returns or provide sufficient documentation to support a claim of having no filing requirement
B. Pay all tax, penalties and interest due on any return that was filed after the offer was processed and not included by Collection as part of the offer. This includes the past due returns identified in a) above
C. Make all required estimated tax payments or federal tax deposits by the established deadline or provide sufficient documentation to support claim of having no estimated tax requirement
4. IRM 5.8.7provides instructions to Collection on when to return an offer based upon a taxpayer's noncompliance. Appeals cannot "return" an offer that's already been rejected by Collection, but the same criteria in IRM 5.8.7 may be used by Appeals as a basis to sustain Collection's rejection of the taxpayer's offer.
Note:
It is no longer a requirement for an In-Business Trust Fund (IBTF) taxpayer to be compliant with the prior two quarterly tax returns, or to have made timely deposits prior to submitting the offer. However, it is necessary for the IBTF taxpayer to be current with the quarter that the offer was submitted and remain in compliance with all filing and deposit requirements during the offer evaluation and appeal processes. Per IRM 5.8.4.13.1, an untimely tax deposit during the investigation will result in a return of the offer. To be consistent with Collection's procedures, an untimely tax deposit during the investigation will result in Appeals sustaining rejection of the offer.

Part 8. Appeals
Chapter 23. Offers in Compromise
Section 3. Evaluation of Offers in Compromise
________________________________________
8.23.3 Evaluation of Offers in Compromise
• 8.23.3.1 Consideration of Doubt as to Collectibility Offers
• 8.23.3.2 Rejected Offers
• 8.23.3.3 Appeals OIC Evaluation Procedures
• 8.23.3.4 Amended Offers
• 8.23.3.5 Collateral Agreements
• 8.23.3.6 Offer from an Operating Business
• 8.23.3.7 Offers for Other Liabilities
• 8.23.3.8 Effective Tax Administration Offers
• 8.23.3.9 Centralized Offer in Compromise and "Obvious Full Pay" Offers
• 8.23.3.10 Consideration of Doubt as to Liability Offers
• 8.23.3.11 Consideration of Combination Offers
• 8.23.3.12 Alternative Resolutions for Offers
• 8.23.3.13 Actions on Defaults Offers
• 8.23.3.14 Mediation and Arbitration
8.23.3.1 (10-16-2007)
Consideration of Doubt as to Collectibility Offers
1. The purpose of this section is to provide Appeals personnel with the procedures necessary to properly evaluate a taxpayer's appeal of a rejected offer in compromise (OIC). Appeals does not have its own set of rules or procedures for determining reasonable collection potential (RCP) in an OIC case. For this reason, this section does not reiterate what's already in IRM 5.8, Offers in Compromise. Rather, it discusses some of the more basic elements of the OIC evaluation process and provides guidance unique to Appeals' role in the OIC process.
2. Collection, under the Commissioner, Small Business/Self Employed, is responsible for processing and analyzing a taxpayer's offer, negotiating with the taxpayer, making an RCP determination and communicating the final determination to the taxpayer. Collection's IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, and Collection's July 26, 2007 Replacement TIPRA Interim Guidance contain OIC guidance concerning:
• Components of collectibility
• Procedures for evaluating specific types of taxpayers and tax debts, including trust fund, excise, partnership, and child support liabilities
• Financial analysis, including determining equity in assets and a taxpayer's future ability to make payments
• Issues involving the dissipation of assets
• Financial information documentation and verification requirements
• Payment terms
3. If it's determined that the taxpayer cannot pay in full, there is a legal basis for compromise under IRC 7122based on doubt as to collectibility. If the taxpayer has the ability to pay in full, there may still be a legal basis for compromise if it's further determined that such compromise would promote effective tax administration. See IRM 8.23.3.8 for guidance on Effective Tax Administration (ETA) offers.
Note:
An offer based upon doubt as to collectibility with "special circumstances" will be evaluated using the same criteria as an ETA offer.
4. Policy Statement P-5-100 ( IRM 1.2.14.1.17) states, in part:
The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.
5. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.
6. IRC 7122(d)(2)requires IRS to publish schedules of national and local allowances designed to ensure that taxpayers seeking to compromise their tax debts have an adequate means to provide for basic living expenses. This code section further requires that IRS (including Appeals) "shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph A [of that IRC section] is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses."
A. A taxpayer must be able to substantiate that limiting him/her to the national or local standard allowance(s) would not provide for his or her basic living expenses.
B. Allowances in excess of national or local standards must be documented in the Appeals Case Memorandum.
7. If the taxpayer disagrees with the rejection of an offer by Collection, they can request Appeals consideration and review of Collection's determination. The appeal must be in writing. A Form 13711, Request for Appeal of Offer in Compromise, will generally be used but is not required.
8. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.
8.23.3.1.1 (10-16-2007)
The Tax Increase Prevention and Reconciliation Act of 2005
1. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was enacted May 17, 2006 and became effective July 16, 2006. TIPRA brought about major changes to the OIC program, most of which do not affect non-CDP offers in Appeals. Notice 2006-68, Downpayments for Offers in Compromise, provides guidance on TIPRA issues until the regulations are updated.
2. Offers mailed prior to July 16, 2006 are not affected by TIPRA. Amended offers for these cases may be secured using the July 2004 revision of Form 656 and taxpayers are not required to remit TIPRA payments with any subsequent amended offer.
3. IRS began using a Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The new Form 656 (Rev. 02-2007) does not include doubt as to liability as an option because Notice 2006-68 provides that taxpayers submitting offers based only on doubt as to liability are not required to make TIPRA payments with the offers.
4. IRM 8.23.1.4.1contains TIPRA information concerning:
• Changes in OIC payment terms
• Installment agreement in effect prior to receipt of the OIC
• Taxpayer's right to designate offer payments
• Appeals procedures for processing TIPRA payments
8.23.3.1.1.1 (10-16-2007)
General Changes Resulting from TIPRA
1. As a result of TIPRA, IRS changed the rules for determining the processability of post-TIPRA offers. Now, an offer will be deemed non-processable only if one or more of the following criteria are present:
A. Taxpayer in Bankruptcy: An offer will not be considered during an open bankruptcy proceeding.
B. Taxpayer did not submit the application fee with the offer: An application fee of $150 or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), must accompany the Form 656. The Form 656-A applies to individual taxpayers only. No application fee or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
C. Taxpayer did not submit the required initial payment with the offer: See IRM 8.23.1.4.1 for initial payment requirements. No initial payment or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
Note:
Collection has procedures for handling cases where the determination that a taxpayer qualified for the Form 656-A waiver was later found to be erroneous. Appeals will not get involved in addressing erroneous Form 656-A qualification issues on a non-CDP offer. The issue before Appeals on a non-CDP offer is the overall acceptability of the offer itself ( See IRM 8.23.3.3.). Collection had ample opportunity to make the proper Form 656-A qualification determination before the case was referred to Appeals and such a matter would be considered a "new issue" in that it doesn't pertain to the overall acceptability of the offer.
2. The IRS will no longer automatically return an offer as not processable if IMF and BMF taxpayers are not in filing compliance or if BMF taxpayers seeking to compromise employment tax debts are not compliant with FTDs prior to submitting the offer. An offer will be returned without appeal rights if the taxpayer does not come into filing compliance within the time the IRS provides after the offer is processed. See section 5.8.3.13 of the Collection's July 26, 2007 Replacement TIPRA Interim Guidance. The new criteria are reflected on the revised processability Letters 3820 and 3821 that are available on APGolf.
3. Taxpayers are encouraged (but not required) to send separate checks for the application fee and 20% initial payment or initial periodic installment payment. The reason for this is the 20% initial payment and initial periodic installment payment are not refunded if IRS determines that the offer is not processable, but the application fee may be refunded. Page 12 of the February 2007 Form 656 instruction booklet set out the various OIC application fee and initial TIPRA payment scenarios.
4. The TIPRA requirement for a taxpayer to make periodic installment payments while a Periodic Payment offer is being considered ends when Collection rejects the offer. Taxpayers are not required to continue making periodic installment payments while a rejected offer is being considered by Appeals unless Appeals secures an amended offer. See IRM 8.23.3.1.1.2. for additional TIPRA guidance on amended offers secured by Appeals.
5. During the course of an offer investigation, if a tax period is fully satisfied by a TIPRA payment(s) that includes the initial payment submitted with the offer and subsequent periodic installment payments, the period must remain part of the offer and must be listed on any subsequent amended Form 656. Even though the tax debt is fully paid, the payment or payments used to satisfy the tax debt are still part of the overall offer amount, so all satisfied periods must remain part of the offer.
6. Similarly, if a taxpayer’s total liability exceeded $50,000 and TIPRA payments made during the course of an OIC investigation cause the total to fall below $50,000 at the time the case is submitted for approval, the offer still requires an opinion from Counsel. If a non-TIPRA payment such as a refund offset is applied to the taxpayer’s account, you need to see if the non-TIPRA payment or payments alone was sufficient to cause the total liability to fall below $50,000. If so, then no Counsel opinion is needed.
7. The 24-month mandatory acceptance period provided for in IRC 7122(f) ends when Collection rejects or returns the offer, or the offer is withdrawn. The non-CDP offer will not be deemed accepted if Appeals doesn't render a decision on the appealed offer within 24 months after the date the offer was submitted. Appeals' responsibilities are considerably different with a CDP offer. See IRM 8.23.5, Collection Due Process OIC Procedures.
8.23.3.1.1.2 (10-16-2007)
OIC Payments and Amended TIPRA Offers
1. IRC 7122(c)(2)allows a taxpayer to designate all payments required under TIPRA while the offer is under consideration. The designation must be made in writing at the time the payment is made. Absent an express designation the payments will be applied in the best interest of the government. The taxpayer loses the right to designate offer payments after the offer is accepted.
2. If an amended offer is secured by Appeals, the taxpayer is given credit toward the amount of the amended offer for all OIC payments made prior to receipt of such amended offer. The taxpayer may be required to remit an additional offer payment(s) with the amended offer depending on the amount and payment terms of such amended offer relative to the amount and payment terms of the original offer. The following table reflects various amended offer scenarios and the associated TIPRA payment requirements:
If ... And ... Then ...
Original was a Lump Sum Cash offer Amended offer is Lump Sum Cash with greater proposed offer amount Taxpayer must pay with the amended offer 20% of the revised amount minus the partial payment made with the original offer
Original was a Periodic Payment offer Amended offer is Lump Sum Taxpayer must pay with the amended offer 20% of the revised amount minus the total amount of the periodic installment payments already paid toward the original Periodic Payment offer
Original was a Periodic Payment offer Amended offer is Periodic Payment with a greater proposed offer amount and/or different proposed installment amounts or schedule Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installment payments that come due during the evaluation of the amended offer
Original was a Lump Sum Cash offer Revised offer is Periodic Payment with greater proposed offer amount Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installments payments that come due during the evaluation of the amended offer
3. IRM 8.23.1.4.1.1 provides guidance for Appeals in how to process OIC payments.
4. Amended offers secured by Appeals must be signed and dated by the Appeals Officer or Settlement Officer as of the date of receipt. Retain the original (initial) Form 656 and include it as part of the offer file along with the original copy of the amended Form 656.
5. Taxpayers who do not meet the exemption requirement must include a partial payment with the amended offer. If an amended offer is received without the required partial payment, contact the taxpayer and explain the TIPRA requirement. Collection treats cases where a taxpayer fails to make partial payments on an amended offer as a "processable return," so follow the procedures in IRM 8.23.2.4 concerning other similar processable return-type issues that surface while the offer is pending in Appeals.
8.23.3.2 (10-16-2007)
Rejected Offers
1. When evaluating offers (other than "Obvious Full Pay" offers - See IRM 8.23.3.9), Collection generally sends a pre-decision letter to the taxpayer telling them why they are proposing to reject the offer. This letter provides the taxpayer with the rationale and financial analysis for Collection’s preliminary conclusion and an opportunity to supply additional information or, if applicable, to amend the offer to reflect the RCP determined by Collection.
A. Collection is responsible for reviewing any information provided by the taxpayer before the offer is rejected and any new information provided by the taxpayer as part of the appeal of the rejection. Collection should address each disputed item in their narrative or case history.
2. If the offer must be rejected, copies of Collection's Income/Expense (IET) and Asset/Equity (AET) Tables will be attached to the rejection letter.
3. As a result of the pre-decision letter and IET and AET information provided with the rejection letter, a taxpayer should be fully aware of why the offer was rejected. The Form 13711, Request for Appeal of Offer in Compromise, though not mandatory, directs the taxpayer to provide in the appeal:
• the disagreed item,
• reason(s) for the disagreement, and
• supporting documentation, as appropriate
Appeals can then try to narrow the focus of consideration to the specific issues for which the offer was rejected.
8.23.3.3 (10-16-2007)
Appeals OIC Evaluation Procedures
1. Appeals must exercise independent judgment concerning the RCP determination made by Collection and the issues disputed by the taxpayer on appeal. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.
Note:
Having found a basis to reject the offer, Collection may cease its evaluation and simply reject the offer. As such, they may not have addressed all the issues necessary for acceptance of a doubt as to collectibility or Effective Tax Administration (ETA) offer. If Appeals agrees with arguments made by the taxpayer, Appeals may need to address the issues not addressed by Collection before accepting the offer.
2. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.
3. RCP issues that were previously addressed during the investigation by Collection should not generally be re-examined unless there is convincing evidence that such reinvestigation is necessary. Appeals will generally consider only the items disputed in the taxpayer's appeal, provided the case referred from Collection is fully and adequately developed. However, the overall acceptability of the taxpayer's offer remains the primary issue before Appeals, so if Collection has overlooked or underdeveloped an important issue that will affect whether the offer is accepted or rejected, then the issue must be properly developed and/or addressed. Counsel's opinion is statutorily required for acceptance of a significant number of appealed offers (See IRM 8.23.4.2.2) and Appeals must present an acceptance recommendation that adequately addresses all aspects of the taxpayer's RCP.
4. If Collection neglected to address or did not fully develop an issue that significantly affects the taxpayer's overall RCP determination and the Appeals employee cannot quickly resolve the issue, the offer should be returned to Collection so that the information can be considered and the issue fully developed and addressed. If Collection continues to believe that the offer should be rejected after considering and addressing the issue, the offer will be returned to Appeals with Collection's views and Appeals will continue to process the appeal.
5. The financial information in the case file should generally be less than 12 months old. If the financial information becomes older than 12 months, contact the taxpayer to update the necessary information. Updated financial information and/or a new Form 433-A and/or Form 433-B is not necessary unless the taxpayer's financial situation has significantly changed. Appeals also needs to be aware of situations where the financial information became outdated because of delays by Collection (or Appeals) and through no fault of the taxpayer. Pen and ink changes to the existing Form 433-A/B are sufficient for cases where the taxpayer's financial situation has not changed significantly. IRM 5.8.5.2.2 contains additional guidance for cases with old or outdated information.
6. A taxpayer who had a Periodic Payment offer rejected by Collection is not required to continue making the periodic installment payments while the case is being considered in Appeals. See IRM 8.23.3.1.1.1. The TIPRA requirement to make periodic installment payments ended when Collection rejected the offer. However, if Appeals secures an amended Periodic Payment offer, then the taxpayer must once again start making the periodic installment payments proposed in the amended offer. See IRM 8.23.3.1.1.2. for a table with guidance on TIPRA payment requirements for amended offers.
7. Document all significant case actions on the case activity record in a timely, accurate and complete manner.
8.23.3.3.1 (10-16-2007)
Preliminary Evaluation Procedures
1. IRM 8.23.2.3 provides initial case review procedures for making sure the case is ready for Appeals' consideration. This section contains preliminary evaluation procedures for cases that were not prematurely referred by Collection.
2. Appeals should not "re-work" an offer that was rejected by Collection. Unless there are obvious issues needing additional development and consideration, Appeals should generally restrict the in-depth review to the issues the taxpayer is protesting. If the analysis in other areas appears to be reasonable and the taxpayer is not disagreeing with all items, limit your consideration to the items of protest.
3. Determine whether and how much additional financial documentation and/or verification is needed. See IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis. In most instances, the required verification and substantiation can be completed in-house without a field investigation. If the case is complex and requires field investigation or verification, then send an Appeals Referral Investigation (ARI) to a Field Revenue Officer group. See IRM 8.23.5.6 and IRM 8.22 for more details about ARIs.
4. Appeals will:
A. Review the offer, the rejection narrative and tables prepared by Collection. The review should be documented in the ACDS Case Activity Record.
B. Verify that the taxpayer is compliant in filing all returns, paying balances due, making estimated payments and, if applicable, federal tax deposits on any related business entities for which the offer taxpayer is responsible (such as a sole proprietorship, single-member LLC, or closely held corporation). See also IRM 8.23.2.4.
C. Review the taxpayer’s Form 13711 or other written appeal.
D. Conduct the conference; explain the offer process and how an acceptable amount is computed. Explain how the financial data presented supports an acceptance or rejection of an amended offer. If the taxpayer objects to other issues, or contends that additional documentation will change the RCP determination, set a short but reasonable deadline for the taxpayer to provide all of that information. Explain that failure to provide that information will result in sustention of Collection’s rejection.
E. Follow up in a timely manner and review any information submitted as soon as possible. Timeliness of case actions is an important component in making the Appeals determination without needing to ask the taxpayer to update previously supplied financial information. Unwarranted inactivity gaps should be avoided.
5. Within 30 days of case assignment (as opposed to case receipt - see IRM 8.23.2.1), Appeals will send out an initial substantive contact letter which:
• Explains the Appeals process, including the taxpayer's rights concerning meeting with Appeals in-person. Be sure to further explain that if the taxpayer prefers a face-to-face hearing, he or she should contact the AO/SO as soon as possible and certainly before meaningful negotiations begin. See also IRM 8.23.2.2.1.
• Identifies the disputed issues
• Asks the taxpayer to provide any other information that he or she wants Appeals to consider
• Identifies any supplemental information or verification needed to properly evaluate the offer and lists a clear date when such information is due ( See IRM 8.23.3.3.1.2for addition guidance on requesting supplemental information.)
• Sets clear expectations and a specific date for providing any requested supplemental information. Generally, this date should be within the next 30 days and before any scheduled conference date
• Schedules the conference or requests the taxpayer to contact Appeals by a specific date
• Advises the taxpayer of the consequences of either not providing requested information by the established due date or failing to participate in the conference
Note:
Avoid sending blanket requests for supplemental information or documentation that either may not actually be needed in the analysis or that may have been previously provided.
6. If initial substantive contact is made by telephone, be sure to cover all of the above and document the case activity record accordingly.
8.23.3.3.1.1 (10-16-2007)
Coordination with Other Functions
1. The AO/SO needs to be alert to issues that may prevent Appeals from making a final determination on an appealed offer. Issues such as an open claim for relief from joint and several liability (also known as an innocent spouse claim) or an open criminal investigation require coordination with other functions before proceeding with considering the appealed offer.
Caution:
Carefully review Rev. Proc. 2000-43 before any contact with another function. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.
2. For procedures concerning an open Examination matter, follow IRM 5.8.4.12.1.
3. IRM 5.8.4.12.2 contains information regarding a claim for relief from joint and several liability. The following table reflects Appeals procedures for the various scenarios that may occur where a claim for relief from joint and several liability was filed after the offer was rejected by Collection (see IRM 8.23.2.3 for details regarding such claims filed before the offer was rejected):
If ... And ... Then ...
The spouse whose appealed offer is being considered is not the spouse who filed the innocent spouse claim The innocent spouse claim is still open Contact the Service employee at the Cincinnati Centralized Innocent Spouse Operations Unit (CCISO) considering the innocent spouse claim to make sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer until the claim is resolved
The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim The innocent spouse claim is still open Ask the taxpayer to withdraw the offer unless CCISO indicates that the claim will be closed immediately with no change
The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim CCISO indicates that the innocent spouse claim has merit and the taxpayer won't withdraw the appealed offer Suspend consideration of the appealed offer pending disposition of the innocent spouse claim
4. Caution:
5. Contacting CCISO is considered an administrative or ministerial contact for ex parte purposes provided such contact is limited to simply making sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer or checking on the status of the requesting spouse's claim when the requesting spouse's offer is in Appeals. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.
6. For procedures concerning an open criminal investigation, follow IRM 5.8.4.12.4. The AO/SO must exercise caution and good judgment before contacting someone from Criminal Investigation (CI). Discuss the issue with your ATM and Counsel before initiating contact with CI.
8.23.3.3.1.2 (10-16-2007)
Requesting Supplemental Information
1. Collection may not address or fully develop all of the issues in a case after finding a reasonable basis to reject the offer. Taxpayers and their representatives are often more willing to amend their offers during the Appeals process because they realize Appeals is their last chance. Although Appeals must avoid sending blanket requests and strive to keep supplemental information requests to a minimum, the AO/SO must have the latitude to secure the information believed necessary to properly determine RCP in order to maintain the integrity of the OIC program and our voluntary system of taxation as a whole. It generally takes considerably more effort for both the taxpayer and Appeals to work through, document and resolve all issues while working an offer to eventual acceptance than it does for Appeals to arrive at a decision to reject the offer. Because relevant issues in the offer case file may not always be fully developed, supplemental information is often necessary to:
• Properly evaluate the offer
• Verify information per the requirements of IRM 5.8.5
• Prepare the case file for supervisory and Counsel approvals
2. When supplemental information is needed, it's important for Appeals to clearly communicate to the taxpayer:
A. Exactly what information is needed
B. That such information is necessary to properly evaluate the offer
C. Exactly when the information must be to Appeals
D. That Appeals must sustain Collection's rejection of the offer (unless the conference has not yet been held) if all of the requested information is not provided in a timely manner
3. Set a reasonable deadline for the taxpayer to provide the requested information or documentation. The general rule is 30 days, but the amount of time to give the taxpayer to respond will depend on the amount and type of information requested.
Example:
If the taxpayer raised a number of issues in the appeal and a significant amount of supplemental information is needed to adequately analyze such issues, the full 30-day response period is probably appropriate. This is especially true if some of the requested information must come from a third party such as a written statement from a lender, insurance company, physician, etc.
Example:
If the taxpayer is asked to provide only a few supplemental information items that are generally readily available such as bank statements, wage/earning statements, utility bills, etc., a shorter period of time to respond is appropriate.
4. If the supplemental information request is made prior to the hearing, allow a sufficient amount of time between the date by which the taxpayer is to provide the information and the conference date, so you have time to review the information before the hearing. If the supplemental information request is made the hearing and the taxpayer does not provide complete information for all of the requested items by the established due date, the case may be closed by sustaining Collection's rejection of the offer. Document the case activity record as to exactly what was received and when it was received. Follow the procedures in IRM 8.23.4, Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP).
5. IRM 8.23.2.4 contains separate guidance for situations when the taxpayer does not remain in compliance while the offer is being considered by Appeals.
8.23.3.3.2 (10-16-2007)
Financial Analysis and RCP Determination
1. As previously indicated, IRM 5.8 is the primary authority for evaluating offers in compromise. Appeals does not have its own set of rules or guidelines for evaluating an offer. IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, contain comprehensive instructions for analyzing a taxpayer's financial situation and for determining RCP.
2. Depending on the complexity of the issue, a certain amount of documentation may be required to verify the accuracy of the financial information being relied upon to determine RCP. Most of the verification items should be in the administrative file that was received from Collection. Substantiation of issues not fully developed by Collection and/or supplemental information received while the case is in Appeals may require additional verification. IRM 5.8.5.2.1 and IRM 5.8.5.2.2 contain details as to the information needing verification and required level of such verification. Verification efforts and results should be documented in the case activity record.
A. The Property Appraisal and Liquidation Specialists (PALS) web site at PALS Home Page contains links to a number of property valuation resources.
3. Most of the required verification can be obtained from either the taxpayer or internal sources. Occasionally, however, issues may require the assistance of a field investigator. IRM 8.23.5.6 and IRM 8.22 contain procedures for sending an Appeals Referral Investigation (ARI) to a Field Revenue Officer group and the ex parte considerations for the ARI process.
4. The numerical factors used to determine the present value of the taxpayer's future ability to pay were changed to accommodate changes brought about by TIPRA. The following table reflects the present value factors to be used when determining the present value of the taxpayer's future ability to pay:
Payment Type Payment Terms Number of Months Future Income Required
Lump Sum Cash Five installments within five months of acceptance 48
Lump Sum Cash Five installments paid in more than five months but less than 24 months of acceptance 60
Lumps Sum Cash Five installments paid in more than 24 months of acceptance Number of months remaining on the collection statute
Short-term Periodic Payment Paid within six to 24 months 60
Long-term Periodic Payment Paid within the time remaining on the collection statute Number of months remaining on the collection statute
5. Note:
6. Use the number of months actually remaining on the CSED for Lump Sum Cash and Short-term Periodic Payment offers when there are less than 48 or 60 months remaining. See IRM 5.8.5 for details on how to properly compute the CSED.
7. A key requirement for accepted offers with a liability of over $100,000 is the need to review a full credit report. This requirement only applies to offers recommended for acceptance. If warranted, Appeals can secure a credit report on any case over $100,000 although this should not be routine.
8. If it becomes apparent that Appeals must sustain Collection's rejection of the offer, contact the taxpayer and advise him/her of the decision and the reason(s) why the offer cannot be accepted. Provide a copy of the financial analysis reflecting Appeals' determination of RCP (generally IET and/or AET) and allow the taxpayer a reasonable opportunity to provide feedback or amend the offer to the revised RCP amount and then follow the instructions in the following table:
If ... Then ...
The taxpayer provides feedback causing a substantive change in the RCP determination Continue to try to negotiate an appropriate settlement
The taxpayer provides feedback that causes no appreciable change to the RCP determination or is unwilling/unable to amend the offer to the necessary amount, if applicable Contact the taxpayer, explain any legal or administrative remedies and advise that Appeals must sustain rejection of the offer. Follow the procedures in paragraph (10) of this section before proceeding with closing out the case
The taxpayer contacts Appeals and indicates an inability to amend the offer to the necessary amount, or if amending the offer doesn't apply because RCP exceeds the liability and there is no basis for ETA consideration Advise the taxpayer that Appeals must sustain rejection of the offer and follow the procedures in Paragraph (10) of this section before proceeding with closing out the case
The taxpayer and Appeals agree to an alternative resolution such as an installment agreement or having the account placed in currently-not collectible status Consider having the taxpayer withdraw the offer and proceed with closing out the case. See IRM 8.23.4 for instructions for closing out the OIC case. If the agreed upon alternative resolution is an installment agreement, prepare the Form 433-D, Installment Agreement.
The taxpayer and Appeals agree to an alternative resolution and the taxpayer won't withdraw the offer Proceed with processing the applicable alternative resolution as part of closing out the case by sustaining rejection of the offer
The taxpayer doesn't respond Proceed with closing out the case by sustaining rejection of the offer
9. Note:
10. Providing the taxpayer with a copy of Appeals' financial analysis is not necessary if there are no substantive changes to the analysis that was completed by Collection. The taxpayer has already had an opportunity to provide relevant feedback to Collection's RCP analysis.
11. IRM 5.8.4.9 calls for the filing of a Notice of Federal Tax Lien (NFTL) in certain instances even though the offer is accepted. The following table reflects the general NFTL filing criteria for accepted offers when the unpaid balance of assessments exceeds $5,000:
If ... Then ...
Lump sum cash offer with five or fewer installments paid in five months or less No NFTL is necessary
Lump sum cash offer with five or fewer installments paid in six months or more A NFTL will generally be filed
Short-term periodic payment offer A NFTL will generally be filed
Deferred periodic payment offer A NFTL will generally be filed
12. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL.
13. The circumstances and reasons for not filing a NFTL in the above situations must be clearly documented in the case activity record.
14. Appeals will sustain Examination's rejection of a Doubt as to Liability offer when the tax is believed to be correct as assessed.
15. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances with a Doubt as to Collectibility offer, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
16. See IRM 8.23.3.12 for details on alternative resolutions for a non-CDP offer.
8.23.3.3.2.1 (10-16-2007)
Bankruptcy Considerations
1. The Service will not consider an offer while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides legal remedies and procedures to resolve the government's claim. If the taxpayer files bankruptcy while the case is being considered by Appeals, the offer must be closed as Appeals sustaining Collection's rejection of the offer. In this instance, the offer has already been rejected (by Collection) and Appeals no longer has a basis to overturn Collection's decision. Follow the procedures in IRM 8.23.4 for closing the offer.
2. If the taxpayer threatens to file bankruptcy if the offer is not accepted, consider whether the tax liability can be discharged and follow the guidance in IRM 5.8.5.5 and IRM 5.8.10.2.2. Make a general analysis of collectibility if the taxpayer files bankruptcy and the liabilities that would be discharged and attempt to negotiate an agreeable settlement, as appropriate. Keep in mind when making this analysis that it's generally advantageous for the taxpayer to avoid bankruptcy.
Note:
Procedures involving ex parte communications must be followed when discussing case information with Insolvency Unit personnel. Clearly document the case activity record concerning exactly what information was requested from Insolvency, why such information was requested, and the results of the contact. See Rev. Proc. 2000-43 for additional guidance.
3. If the taxpayer files bankruptcy after the offer is accepted, follow the procedures in IRM 5.8.10, Offer in Compromise Special Case Processing. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.
4. If the taxpayer files an offer as part of a CDP or EH case and subsequently files bankruptcy, return the offer to the taxpayer. The cover letter should simply indicate that Appeals cannot consider the offer while the taxpayer is in bankruptcy. The underlying CDP or EH case, however, must remain open. See IRM 8.22 for CDP and EH case procedures.
5. See IRM 8.7.6.3, Appeals Bankruptcy Cases, Offer in Compromise Cases, for additional information on bankruptcy issues.
8.23.3.3.2.2 (10-16-2007)
Dissipation of Assets
1. Dissipation of assets is a frequent issue of dispute in an appealed offer in compromise. If a determination is made that a taxpayer dissipated an asset(s) and such asset is no longer available to pay the tax liability, a secondary determination must be as to whether including the value of the dissipated asset as part of RCP is justified.
2. Including the value of the dissipated asset as part of the RCP determination is not automatic. Such inclusion must be clearly justified in the case file and documented in the case activity record. If the taxpayer can show that all or a portion of the asset was used to provide for necessary living expenses, the applicable portion of the asset should not be included in the RCP calculation. The taxpayer must be able to provide a reasonable accounting of the dissipated asset.
3. If the investigation clearly reveals that the asset was dissipated with a disregard of the outstanding tax debt, the value of the asset should generally be considered for inclusion in the RCP calculation. As indicated, however, an exception may be appropriate to the extent of the amount that the taxpayer can establish was used to fund necessary living expenses.
Caution:
Avoid "double counting" if a decision is made to include a dissipated asset as part of RCP and all or part of the dissipated asset was used to improve the value of another asset that is also being included as part of RCP.
Example:
A taxpayer secured a second mortgage of $60,000 on her residence after accruing a tax liability and before IRS filed a NFTL. She provided documentation to show that she used $40,000 of the loan proceeds to put an addition on to her home and make other necessary repairs and improvements. She paid unsecured credit card debts with the remaining $20,000. With the improvements, the residence is now valued at $300,000. She has a first mortgage with a balance of $100,000, so net realizable equity in the residence is now $80,000 ($300,000 x 0.80 = $240,000 - $100,000 (first mortgage) - $60,000 (second mortgage) = $80,000). If the full $60,000 is going to be treated as a dissipated asset, a concurrent determination must be made as to the increase in value to the residence that is attributable to the amount of the second mortgage (dissipated asset) that went toward improving or increasing its value. To include both the full $60,000 second mortgage loan and the full $80,000 net realizable equity in the residence in the RCP calculation would cause a "double counting" of a portion of the $40,000 that went toward improving and thus increasing the value of the residence. The AO/SO will have to use judgment in deciding how much the residence increased in value because of the $40,000 in improvements.
4. IRM 5.8.5.4 contains the primary guidance for dissipated asset issues.
8.23.3.4 (10-16-2007)
Amended Offers
1. Because TIPRA allows the taxpayer to propose not just the amount of the offer, but also the terms of payment, consideration must be given to such terms before deciding to recommend acceptance of the offer. Appeals must now evaluate and negotiate not just an acceptable offer amount, but also agreeable payment terms. Appeals is not required to accept the taxpayer's offer simply because it otherwise meets or exceeds RCP. If the taxpayer's proposed payment terms cause the offer itself to be unacceptable, the terms must be sufficiently renegotiated. If the taxpayer is not willing to propose acceptable terms, the offer may be denied as not being in the best interest of the government.
Example:
The taxpayer owes $65,000 and there are 50 months remaining on the CSED. RCP is $24,000. The taxpayer has proposed a Deferred Periodic Payment offer of $24,000 with 49 monthly payments of $100 and a final payment in the 50th month of $19,100. The terms of this offer are not acceptable and must be renegotiated before approval. The CSED is no longer suspended after the offer is accepted and the risk of the taxpayer paying only a small portion of the offered amount is high given the structure of the proposed payment terms. If the taxpayer cannot/will not make the final payment, the CSED will expire before the Monitoring Offer in Compromise unit (MOIC) is able to properly respond.
2. If an amended offer is secured by Appeals, the AO/SO must sign the Form 656 as the "Authorized Internal Revenue Official" .
If ... Then ...
The original Form 656 was received on or before July 21, 2006 You may use the July 2004 revision of Form 656 for the amended offer because the taxpayer is not required to make a TIPRA payment
The original Form 656 was received on or after July 22, 2006 Use the February 2007 revision of Form 656 for the amended offer because the taxpayer must make an additional required TIPRA payment
3. See IRM 8.23.3.1.1.2 to determine the required TIPRA payment if the taxpayer is amending a TIPRA offer.
4. If the amended offer is a Periodic Payment TIPRA offer, the taxpayer must once again start making the proposed periodic installment payments. Appeals is responsible to make sure the taxpayer makes the proposed periodic installment payments while the case is pending in Appeals. The offer may be considered withdrawn under IRC 7122(c)(1)(B)(ii) if the taxpayer fails to make all proposed periodic installment payments. See IRM 8.23.5.3.1 for Appeals mandatory withdrawal procedures.
Note:
If a tax period that was part of the original offer is subsequently paid in full via TIPRA payments, the period must still be listed on all amended offer. Even though the tax period is fully paid, the funds used to satisfy it are part of the overall offer amount, so the tax period must remain on the Form 656. If a tax period is paid in full via a non-TIPRA payment, such as a refund offset, there is no need to list such period on the amended Form 656.
8.23.3.5 (10-16-2007)
Collateral Agreements
1. Follow IRM 5.8.6 with regard to collateral agreements. In addition to the terms specifically stated in the offer, collateral agreements enable the government to either collect funds or restrict a taxpayer's ability to claim future losses or credits. Do not use them to allow the taxpayer to submit an offer for a lower amount than the collection potential of the case dictates. You can also use a collateral agreement to clarify an offer, as in the case of a co-obligor agreement. Usage of collateral agreements should not be routine. Secure them only when you expect significant recovery or the taxpayer has identifiable future losses or credits. It may be appropriate to secure a collateral agreement when a significant increase in income is expected. It would be inappropriate to secure a collateral agreement simply to guard against an unexpected windfall such as a lottery.
2. Use standard collateral agreements whenever possible to aid in the monitoring of the agreements. The standard agreements are listed below:
A. Form 2261, Collateral Agreement-Future Income-Individual, and Form 2261-A, Collateral Agreement-Future Income-Corporation
B. Form 2261-B, Collateral Agreement-Adjusted Basis of Specific Assets
C. Form 2261-C, Collateral Agreement-Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits
D. Co-Obligor Agreements, IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2
Caution:
These forms need to be modified to delete reference to the Collection statutes.
3. The collateral agreement is signed by the authorized official in Delegation Order 5-1, which is available on the Appeals website at Appeals OIC Home Page.
8.23.3.5.1 (10-16-2007)
Co-obligor Agreement
1. When a compromise is accepted from one party to a jointly owed tax liability, the other party is not released from their several liability. Secure a co-obligor agreement from the taxpayer submitting the offer to clarify the effect of the compromise on the obligations of the other parties.
2. IRM 5.8.6.2 contains details as to the type of co-obligor agreements needed for based on various state laws. Co-obligor agreements are available in IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2.
3. Co-obligor agreements will not be solicited from individuals seeking to compromise Trust Fund Recovery Penalty assessments. The Trust Fund Recovery Penalty is not treated as a joint obligation.
8.23.3.6 (10-16-2007)
Offer from an Operating Business
1. When an offer is accepted to compromise trust fund tax owed by an operating business, the taxpayer is relieved of a significant operating expense. The effect is to grant the delinquent taxpayer an economic advantage over competitors who are in tax compliance. Recovery of the unpaid trust fund tax amount is a significant issue when considering an offer from a business taxpayer. In the interest of "fairness to all taxpayers" the Service must be cautious to avoid providing financial advantages to those taxpayers through the forgiveness of employment tax debt, as this may be detrimental to competitors who are remaining in compliance with their tax obligations. Procedures in IRM 5.8.4.13 must be followed when considering an appealed offer from all In-business Trust Fund (IBTF) taxpayers, including sole proprietorships, partnerships, LLCs and corporations.
2. If an offer to compromise trust fund tax is being considered for a corporation that is still in business, all of the issues outlined in IRM 5.8.4.13 should be addressed and the ASED(s) for the Trust Fund Recovery Penalty (TFRP) properly protected. IRM 8.23.2.3 provides guidance on returning the case to Collection as a premature referral if the ASED(s) were not adequately protected by Collection when the case was received in Appeals. It is the responsibility of the AO/SO to follow IRM 5.8.4.13 and properly protect the ASED(s) if the offer is being accepted by Appeals. See IRM 8.23.3.6.1..
8.23.3.6.1 (10-16-2007)
Corporate Trust Fund Offer Procedures
1. It is no longer a requirement for an In-business Trust Fund (IBTF) taxpayer to be compliant with the prior two quarterly tax returns, or to have made timely deposits prior to submitting the offer. However, it is necessary for the IBTF taxpayer to be current with the quarter that the offer was submitted and remain in compliance with all filing and deposit requirements during the offer evaluation and appeal processes. However, per IRM 5.8.4.13.1, an untimely tax deposit during the investigation will result in a return of the offer. To be consistent with Collection's procedures, an untimely tax deposit during the investigation will result in Appeals sustaining rejection of the offer.
2. If the Service enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person pursuant to Section 6672 of the Internal Revenue Code. See IRM 5.8.4.13.2, Corporate Trust Fund Liabilities, IRM 5.8.3.4, Processability and IRM 5.8.7.6, Rejection.
3. Per IRM 5.8.4.13.2, it is the Service’s policy that the amount offered to compromise a corporate employment tax liability must include, in addition to what can be collected from the corporation, an amount equal to what can be collected from all responsible persons, up to the amount of the TFRP (plus interest, if the penalty has been assessed). If the offer is accepted, post-acceptance payments will be applied first to non-trust fund components of the corporation's tax liability (see IRM 5.19.7.3 , Application of OIC Payments on Corporate OICs). The Service will pursue collection of the TFRP (unless the trust fund portion has been full paid) assessed against the responsible persons.
Note:
Offer payments (other than properly designated pre-acceptance payments made under TIPRA in conjunction with the offer) are applied in the best interest of the government. The corporate taxpayer does not have the right to designate any offer payment made after the offer is formally accepted. By signing the Form 656 , the taxpayer agreed that IRS will apply payments made after acceptance in the best interest of the government. See Paragraph (a) of Section V of the February 2007 revision of Form 656.
4. The value of the business as a going concern should also be evaluated. See IRM 5.8.5.3.14 .
5. Follow the procedures in IRM 5.8.4.13.2 for situations where the amount offered by the corporation combined with the payments already made on related assessed TFRP assessments exceed the total employment tax liability of the corporation for the same tax periods.
6. Carefully review IRM 5.8.4.13.2 and secure the necessary Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, before proceeding with accepting the corporate trust fund offer.
8.23.3.7 (10-16-2007)
Offers for Other Liabilities
1. IRM 5.8.4.13 contains additional guidance for offers involving:
A. Excise tax liabilities,
B. Partnership liabilities, and
C. Child support obligations
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.
8.23.3.9 (10-16-2007)
Centralized Offer in Compromise and "Obvious Full Pay" Offers
1. All new offers are either received in or forwarded to the Centralized Offer in Compromise (COIC) sites for initial processing. Once the COIC unit has loaded the offer onto the Automated Offer in Compromise (AOIC) system and determined the offer to be processable, a decision is made as where the case will be assigned. Collection's field offer groups work the more complex cases.
2. Some taxpayers look to compromise their tax debts yet their application ( Form 433-A, Form 433-B) reflects an ability to pay the account in full. COIC will reject such offers unless the taxpayer presents special circumstances warranting consideration under ETA. COIC will not contact the taxpayer to clarify any information or submit any further documentation if it's apparent to COIC that the account can be paid in full based upon the financial information provided by the taxpayer. The formal rejection letter will be the first response the taxpayer receives from COIC.
3. If the taxpayer submits new information with his or her appeal, COIC is required to consider such information before sending the case to Appeals. If Collection did not consider the information and such information could result in a different determination, the offer may be returned to COIC as a premature referral so that the information can be considered. If COIC still believes the offer should be rejected after considering the information, they will return the offer to Appeals with their response and Appeals will process the appeal.
8.23.3.9.1 (10-16-2007)
Appeals Procedures for "Obvious Full Pay" Offers
1. Standard Appeals conference and settlement practices require Appeals to afford taxpayers whose offers were rejected by Collection as "obvious full pay" cases the same opportunities for discussion and negotiation as with any other Appeals case. There may very well be settlement opportunities available in these cases because Collection's "obvious full pay" procedures:
• Assume the taxpayer knew what he/she was doing when completing the Form 433-A/B
• Do not adjust any asset values or apply necessary national or local expenses standards
• Call for rejection of the offer without any contact with the taxpayer
However, depending on the circumstances, there may also be little to discuss and no opportunity for settlement absent information from the taxpayer indicating a basis for compromise.
2. In order to meet the basic mission of Appeals and adhere to standard conference and settlement practices (see IRM 8.23.1.3), Appeals should take the following actions in a case referred by COIC to Appeals as an"obvious full pay" case:
A. Send a letter to the taxpayer which explains both the Appeals and OIC processes. Enclose Publication 4227, Overview of the Appeals Process. The letter should clearly explain to the taxpayer that the offer was rejected by Collection because the financial information that the taxpayer provided in the Form 433-A/B reflected an ability to pay in full. Enclose a copy of Collection's Full Pay Worksheet and offer the taxpayer the opportunity to either provide feedback to dispute Collection's findings or pay in full. If the taxpayer qualifies under either a guaranteed or streamlined installment agreement, offer him/her the opportunity to discuss such an alternative resolution. See IRM 5.14.5 for guaranteed and streamlined IA criteria.
B. Give the taxpayer a reasonable period of time to respond, with a specific response date provided in the letter.
C. Set a follow-up date allowing for mail time beyond the response date provided in the letter.
D. Follow the procedures in the following table based upon the taxpayer's response or lack of response.
If ... Then ...
The taxpayer does not respond by the response due date Sustain Collection's rejection of the offer by preparing the following closing documents:
• Closing letter
• Generate a Customized Form 5402, Appeals Case Transmittal and Case Memorandum, from APGolf and attach a copy of Collection's Full Pay Worksheet. (The Form 5402 will be used in lieu of an ACM, so be sure to document the basis of your decision in the Brief Remarks section of the Form.)
• A copy of the Form 1271 completed by Collection
The taxpayer responds to Appeals with new information not previously considered by Collection Review the information and determine whether it could make the offer acceptable
Appeals determines the new information could make the offer acceptable and is able to sufficiently address and develop all issues on its own Continue working with the taxpayer in accordance with standard Appeals OIC procedures
The new information requires significant evaluation or development to determine whether it could make the offer acceptable Consider returning the offer to Collection to address the new information
The offer is sent back to Collection to consider the new information and they determine that the offer should still be rejected. Collection will return the offer to Appeals for us to resume working with the taxpayer in accordance with standard Appeals OIC procedures
The new information makes the offer acceptable Verify the information in accordance with IRM 5.8.5 and follow the procedures in IRM 8.23.4.2 to close the case as an acceptance
The taxpayer responds with new information that will not make the offer acceptable Provide the taxpayer with your revised Income/Expense (IET) and Asset/Equity (AET) Tables. Set a reasonable deadline for the taxpayer to respond with feedback to your findings. Be sure to advise the taxpayer that Appeals must sustain rejection of the offer if the taxpayer:
H. neglects to respond by the established date,
I. does not provide information that will impact the IET and AET determinations, or
J. does not amend the offer to the RCP amount reflected on the revised IET and AET, if applicable
The taxpayer:
• neglects to provide feedback to the revised IET and AET,
• responds with additional information that does not make the offer acceptable, or
• if applicable, neglects to submit an amended offer along with the appropriate TIPRA payment
. Close out the offer by sustaining Collection's rejection of the offer as noted above
3. Document all significant case actions on the case activity record in a timely, accurate and complete manner.
8.23.3.10 (10-16-2007)
Consideration of Doubt as to Liability Offers
1. Appeals considers offers based in whole or in part on doubt as to liability (DATL) where
• the offer was rejected by Exam, or
• the liability to be compromised was determined by Appeals
2. IRM 4.18 , Exam Offer in Compromise, contains administrative procedures for working DATL offers.
3. Appeals should make an independent determination regarding the offer, which should be evaluated in the same manner as in a proposed deficiency case. Consider the facts and law as well as the hazards to litigation in determining the degree of doubt as to the liability. IRC 7122(d)(3) provides that a DATL offer may not be rejected solely because the Service cannot locate the taxpayer’s return or return information. The Service is also prohibited from requesting a financial statement if an offer is based solely on doubt as to liability.
Note:
If the DATL offer case came to Appeals after being rejected by Exam, the case file should be fully developed and documented. The case may be returned as a premature referral if the case is materially undeveloped and Appeals is not able to adequately address the issue(s) in dispute.
Note:
If the DATL offer case came to Appeals because the liability at issue was previously determined by Appeals, then Appeals has exclusive jurisdiction over the case and Exam is not responsible for either developing the case or securing the closed administrative case file before forwarding the case to Appeals.
4. The following table reflects general decision and case closing guidelines.
If ... Then ...
It's determined that the actual liability is less than or equal to the amount offered The balance of the assessment in excess of the proper liability amount should be abated.
A. If the proper adjustments have or will be made, ask the taxpayer to withdraw the offer.
B. If the taxpayer does withdraw the offer, it should be rejected.
It's determined that the actual liability is greater than the amount offered but less than the amount assessed The excess balance of the assessment should be abated.
C. Inform the taxpayer of the amount of the re-determined liability and advise him/her to pay the correct amount.
D. Ask the taxpayer to withdraw the offer
E. If the taxpayer does not withdraw the offer, it should be rejected.
If it is determined that there is doubt as to liability based upon hazards of litigation The case should be closed by accepting the offer. The acceptable amount depends on the degree of doubt based upon the hazards relative to the amount assessed.
It's determined that there is no doubt as to the liability Close the case by sustaining Exam's rejection of the offer.
5. Bankruptcy filing or non-compliance in filing other required federal tax returns does not preclude Appeals from considering an appealed DATL offer.
8.23.3.10.1 (10-16-2007)
TEFRA Liability Offers
1. Upon receipt of an offer in compromise case, secure an AMDIS or AMDISA print.
A. If there is a Partnership Investor Control File (PIFC) Code 5, there is at least one open TEFRA key case linkage. The taxpayer should have been advised by the investigating officer or function that an offer cannot be considered until all TEFRA partnership (or TEFRA S corporation) issues have been resolved. See IRM 5.8.4.12.1. Attempt to secure a withdrawal. If the taxpayer refuses to withdraw the offer, it should be returned to the investigating officer as a premature referral.
B. If there is a PICF Code 7, there is at least one closed TEFRA key case linkage. Verify that any assessment as a result of the TEFRA key case was made and that the additional liability is included in the offer.
2. In general, DATL and non-hardship ETA liability offers pertaining to an assessment resulting from a TEFRA proceeding should not be considered. TEFRA assessments are generally final determinations.
3. Appeals employees considering acceptance of either a DATL or non-hardship ETA liability offer that pertains to an assessment resulting from a TEFRA proceeding must discuss the issue with the Appeals Technical Guidance Coordinator for TEFRA who will coordinate a response with the Appeals Program Analyst responsible for the Offer program.
4. Similar to an offer based on doubt as to collectibility, consideration can be given to individual circumstances supporting acceptance of an ETA offer based on economic hardship where the liability includes an assessment resulting from a TEFRA proceeding. See IRM 8.23.3.8 for ETA offer guidance.
8.23.3.10.2 (10-16-2007)
Offers Involving TFRP and PLET Liabilities
1. IRM 8.25 has instructions for working Trust Fund Recovery Penalty (TFRP) cases in Appeals. IRM 5.8.4.2 contains instructions for working doubt as to liability offers involving Trust Fund Recovery Penalty (TFRP) and Personal Liability for Excise Tax assessments. Per IRM 5.8.4.2, resolution of an agreed case can be achieved by:
• Preparing and submitting a Form 3870, Request for Adjustment, to correct the assessment and securing a withdrawal of the offer from the taxpayer, or
• Recommending acceptance of the offer for the correct amount
2. Acceptance of a doubt as to liability offer sufficiently concludes the TFRP or PLET matter for the taxpayer. There are no five-year compliance or refund offset provisions on a doubt as to liability offer.
3. Collection cannot settle a TFRP or PLET case based upon hazard of litigation considerations, so IRM 5.8.4.2 doesn't address this type of such settlement. For this reason, simply recommending acceptance of the doubt as to liability offer is generally a simpler approach when settling a TFRP or PLET matter based on hazards.
8.23.3.11 (10-16-2007)
Consideration of Combination Offers
1. Combination offers based upon both doubt as to collectibility (DATC) and doubt as to liability (DATL) must be fully considered by both the Collection and Examination functions prior to being transmitted to Appeals. See IRM 5.8.4.10 and IRM 4.18.4. A combination offer case will be returned to the referring Collection function as a premature referral if both functions have not yet completed their respective reviews. If both functions have completed their reviews and continue to believe that the offer should be rejected, Collection will return the offer to Appeals with each function's recommendation and Appeals will continue to process the appeal.
2. The DATC aspect of the offer should be reviewed first. Collectibility determinations generally take less time and if the matter can be resolved as a DATC offer, then it saves Appeals time and resources. If a Settlement Officer determines that there is no basis to accept the DATC offer, the DATL aspect of the offer should be reviewed by an Appeals Officer. The Settlement Officer, however, can generally make the DATL determination on the following:
• TFRP liabilities
• Liabilities consisting exclusively of basic late filing, late payment, or late deposit penalties
• Certain civil penalties assessed under IRC 6721 for failure to file correct information returns, such as failure to file Form W-2 and Form W-3
3. Appeals should see fewer combination offers than in years past. IRS began using a separate Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The February 2007 revision of Form 656 , Offer in Compromise, no longer lists DATL as an option because taxpayers are not required to pay an OIC application fee or an up-front TIPRA payment when the sole basis for the offer is DATL.
4. Combination offers may arrive in Appeals after a prolonged period in Collection and/or Exam. See IRM 8.23.3.3 and IRM 5.8.5.2.2 if the financial information is outdated. Appeals should avoid sending these financial statements back to Collection to be reworked whenever possible.
8.23.3.12 (10-16-2007)
Alternative Resolutions for Offers
1. Taxpayers will occasionally express an interest in alternative resolutions when it's apparent that an offer is not a viable option. If the AO/SO determines that an alternative resolution such as an installment agreement (IA) or having the account placed in currently not collectible (CNC) status is appropriate, Appeals may initiate the alternative resolution using its general authority.
2. Refer to:
• IRM 5.14, Installment Agreements
• IRM 5.15, Financial Analysis
• IRM 5.16, Currently Not Collectible
• IRM 8.1, Appeals Program
3. If the taxpayer wants to enter into an IA and Appeals agrees that such is an appropriate resolution, follow the procedures in IRM 5.14. . Similarly, follow procedures in IRM 5.16 to determine the propriety of placing the account in CNC status.
Reminder:
IA and CNC criteria are different than that for an OIC.
Note:
Just because the taxpayer can pay in full via installment payments doesn't mean Appeals should automatically attempt to set up an IA. If the taxpayer has equity in assets, IRM 5.14.1.5 requires the taxpayer to either fully or partially pay using the equity in assets before an IA can be recommended for acceptance. If the offer is withdrawn or must be rejected and the AO/SO is not comfortable setting up an IA because of equity in assets or other such issues, Appeals should simply proceed with closing the OIC case and referring the matter back to Collection.
Note:
Appeals must rely of the Multi-functional Installment Agreement Authority (see IRM 5.14.6) for non-CDP offers. The Multi-functional Installment Agreement is for cases with an aggregate unpaid balance of assessments of less than $100,000 and is limited to individual taxpayers, out-of-business sole proprietors, and corporations owing income tax only. ATMs should negotiate appropriate local procedures with area Collection management for securing the necessary approvals on installment agreements that don't fit under the multi-functional authority.
4. Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
5. IRS increased its IA user fees on January 1, 2007. Individual taxpayers meeting a low-income standard may apply to have the user fee reduced, but must do so within 30 days after the Letter 238, is issued. When generating the Letter 238 from APGolf, be sure to use the optional paragraph with details about Form 13844, Application for Reduced User Fee for Installment Agreements, and include a blank form as an attachment. If the financial information secured while the offer was being considered indicates the taxpayer may be eligible for a reduced IA user fee, discuss the reduced fee process with him/her when negotiating the actual IA payment terms.
6. Appeals is also responsible for making a lien filing determination as part of the alternative resolution. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL if a NFTL is generally required must be clearly documented in the case activity record.
7. The Appeals Processing Section will input/process the applicable alternative resolution. Be sure to prominently indicate the alternative resolution on the Form 5402 so it's clearly visible to the Appeals technician handling the back-end processing. See IRM 8.23.4 for specific non-CDP OIC case closing procedures.
8.23.3.13 (10-16-2007)
Actions on Defaults Offers
1. A taxpayer must agree to the terms set forth in the Form 656, and the compromised amount remains a tax liability until the taxpayer meets all the terms and conditions of the offer. See Paragraph (i) of Section V of Form 656.
2. Taxpayers entering into either a DATC or ETA offer must agree to comply with all filing and paying obligations under the Internal Revenue Code for a period of 5 years after the offer is accepted. See Paragraph (d) of Section V of Form 656.
3. If a taxpayer fails to meet any of the terms of the offer, the Service has the right to terminate the offer, reinstate the compromised liability, and pursue collection action against the taxpayer. The default provisions apply only to the party failing to comply if the liabilities are jointly owed and the offer was jointly submitted. See Paragraph (d) of Section V of Form 656.
4. If an offer was originally accepted by Appeals, Monitoring Offer in Compromise (MOIC) will refer the case to the appropriate Appeals office for review and, if necessary, issuance of the default letter. See IRM 5.8.9.3, Possible Actions on Accepted Offers, Potential Default Cases.
5. The referral from Collection is usually on Form 2209, Courtesy Investigation. The case will be opened as an offer on ACDS in order to place time on a specific case. APS should note it as a pending defaulted offer in compromise.
6. If the offer in default was accepted as part of a CDP hearing, the taxpayer may be entitled to a retained jurisdiction hearing before Appeals. See IRM 8.22 concerning retained jurisdiction. These defaults will be worked like offers accepted by Appeals upon review of rejected offers. Do not establish a retained jurisdiction case on ACDS. It should be noted on ACDS as a defaulted offer and not a new offer.
7. The Service may accept a compromise of a compromise. There is no standard form for such a proposal. It should be submitted in letter format and addressed to the Commissioner of the Internal Revenue. IRM Exhibit 5.8.9-1 should be used for this purpose. If Appeals initially accepted the offer, Appeals will consider the taxpayer's compromise of a compromise proposal. Exhibits 5.8.9-2 and 5.8.9-3 should be used to notify the taxpayer of either acceptance or rejection of the compromise of a compromise proposal. See IRM 5.8.9.4 for procedures.
8. For information on CDP Hearings on terminated OICs refer to IRM 8.22.
8.23.3.14 (10-16-2007)
Mediation and Arbitration
1. Post-Appeals mediation takes place while the offer is under Appeals' jurisdiction, which means the written request for mediation must be made before the case is closed by Appeals. Post-Appeals mediation procedures are found in Rev. Proc. 2002-44. Arbitration procedures are found in Rev. Proc. 2006-44. Appeals is presently addressing both post-Appeals mediation and arbitration requests on a case-by case basis. If an AO/SO receives a written request for post-Appeals mediation, contact the OIC Program Analyst for Appeals Tax Policy and Procedure.
2. Fast Track Mediation takes place while the offer is still under either Collection's or Examination's jurisdiction. The goal of Fast Track Mediation (FTM) is to help taxpayers resolve disputes arising in Examination and Collection source work without having to send the case to Appeals.
3. Currently, mediation is not available for any offers worked in the Centralized Offer in Compromise sites. While FTM will be considered in all other cases, the decision to mediate a particular case remains discretionary for both the Service and the taxpayer.
4. FTM will be considered only after an offer specialist has fully developed the case facts and made a reasonable attempt to negotiate an acceptable offer. If the case meets the criteria for FTM described below, the offer specialist will inform the taxpayer of the option to mediate, provide a copy of Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and answer any questions. Taxpayers who express an interest in mediating must first request a conference with the Compliance group manager.
5. When the taxpayer’s request for FTM is granted, the offer specialist will complete Form 13369, Agreement to Mediate, and also provide a summary of the issues. Even though mediation may result in the specialist’s recommendation to accept, the actual decision to accept is still subject to counsel review and approval of the official with delegated authority according to the category of the offer.
6. The case will remain in the jurisdiction of Compliance. The case will not be reassigned to Appeals on the Automated Offer in Compromise (AOIC) program. Because it may not always be feasible to have a face-to-face conference, it may be necessary to hold the mediation process via conference call.
7. It is not appropriate to mediate in the following situations:
A. When the taxpayer has the ability to pay in full, based on the financial data submitted by the taxpayer with the offer,
B. When the taxpayer declines to increase the amount offered and does not indicate disagreement with the values, figures, or methodology used to arrive at the increased amount,
C. When the issue is explicitly covered by procedural guidance; i.e., unsecured debt, college expenses, or non-qualifying charitable contributions,
D. When the proposed rejection is based on public policy.
8. Examples of matters that generally are appropriate for mediation are the following:
A. The value of an ongoing business’ good will,
B. Artwork with collector or sentimental value,
C. Value of any assets, including real estate,
D. Projections of future income based on calculations other than current income,
E. Whether assets are held as nominee or transferee of a taxpayer,
F. Taxpayer’s proportion of interest in jointly held assets,
G. Calculation of ability to pay from future income when expenses are shared with a nonliable person.
9. For additional information on this topic, see Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and the Appeals Alternative Dispute Resolution web site.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 4. Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP)
________________________________________
8.23.4 Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP)
• 8.23.4.1 AO/SO Procedures for Closing Non-CDP Offers
• 8.23.4.2 Accepted Offers
• 8.23.4.3 Sustaining Offer Rejection
• 8.23.4.4 Withdrawn Offers
• 8.23.4.5 Potential Default Offers
8.23.4.1 (10-16-2007)
AO/SO Procedures for Closing Non-CDP Offers
1. When Appeals makes a decision on an offer in compromise (OIC) case, the basis of that decision must be adequately documented. The Appeals Officer or Settlement Officer (AO/SO) must also prepare the appropriate closing documents in order to obtain the necessary approvals and meet statutory requirements. This section provides procedures for the AO/SO to close out an accepted, rejected, or withdrawn non-CDP Offer in Compromise (OIC). Back-end closing procedures for the Appeals Processing Section (APS) are found in IRM 8.23.6 , OIC Processing and Closing Procedures.
2. The Appeals Case Memorandum (ACM) contains the detailed basis for the AO/SO's recommendation. The approving official relies significantly on the information detailed in the ACM. Also, just as Appeals owes a taxpayer an explanation as to why the offer was not acceptable, Appeals owes Collection an explanation as to why their decision to reject the offer was overturned. The ACM may include a brief or long narrative depending on the complexity of the case. The ACM:
A. Should include all information having a bearing on the overall decision in the case.
B. Should not include confidential comments. Relevant facts of a confidential nature are rare, but if they exist and are pertinent to the case, include them in a supplemental report.
3. The customized Form 5402, Appeals Case Transmittal and Case Memorandum, contains essential taxpayer identification information, resolution reason codes, case closing codes and case routing information.
Note:
It's important to generate the Form 5402 directly from APGolf as opposed to using a templated version. The Appeals Centralized Database System (ACDS) captures the case's Resolution Reason and Closing Codes when the Form 5402 is generated on APGolf. Appeals provides this information back to Collection and works with them on efforts to improve the overall OIC process based upon the data collected.
4. APGolf also has the appropriate letters that notify the taxpayer of Appeals' decision in the case.
8.23.4.2 (10-16-2007)
Accepted Offers
1. An OIC accepted under doubt as to collectibility (DATC) or Effective Tax Administration (ETA) must include all unpaid tax liabilities for which the taxpayer is liable. Appeals may consider an offer that incudes an unassessed liability, but the liability must be assessed before the offer can be accepted.
2. A compromise is effective for the entire assessed liability for tax, penalties, and interest for the years or periods covered by the offer. An accepted OIC conclusively settles all tax debts listed on the Form 656 . Neither the taxpayer nor the government can re-open a compromise tax year or period unless there was a:
• Falsification of information or documents
• Mutual mistake of a material fact that would be sufficient to set aside or reform a contract
• Concealment of assets and/or ability to pay
See IRM 5.8.9 , Offer in Compromise, Possible Actions on Accepted Offers, for more information.
3. Before preparing the closing documents, check the Integrated Data Retrieval System (IDRS) to make sure there are no other pending liabilities that are not included on the Form 656. A subsequent liability could cause IRS to default the offer. Matters that will later require the time and attention of the AO/SO and other IRS personnel can be avoided by checking for and resolving possible pending liability issues before closing out the case. The following are some ways to look for possible pending liabilities:
• Check IDRS Command Code (CC) AMDIS
• Check IDRS CC UNLCER to see if there are any Trust Fund Recovery Penalties not listed on the Form 656
• Look for Transaction Codes (TCs) 420, 922, 976 or 977 to see if there is an amended return or any examination or underreporter activity
If an open audit is found, follow the instructions in IRM 5.8.8.3 and IRM 5.8.4.12.1 .
Caution:
Review ex parte procedures in Rev. Proc. 2000-43 before contacting a Compliance function.
4. If the offer includes Trust Fund Recovery Penalties (TFRPs), make sure all TFRP assessments are listed on the Form 656 . Generally, TFRPs assessed before August 2000 combined all unpaid corporate tax periods and were assessed using the latest quarterly period. TFRP assessments after August 2000 are made for each quarterly period. The Form 7249 and Form 656 must match by reflecting each assessed TFRP period.
5. Order a MFTRA-X transcript as close to the acceptance date as possible without delaying acceptance. Sanitize the transcript to redact the taxpayer's identification number (both the primary and secondary SSNs if it's a joint offer) and all other tax information that should not be disclosed to the public. IRM 5.8.8.3 contains a detailed listing of the information that must be redacted.
6. An amended Form 656 secured by Appeals must be signed by the AO/SO as the "Authorized Internal Revenue Service Official" (Section VIII of Form 656).
8.23.4.2.1 (10-16-2007)
Accepted Offer Closing Documents and AO/SO Procedures
1. The ACM for an accepted offer should contain the following:
A. The amount of the original offer and a description of the payment terms
B. The amended offer amount, if applicable, and a description of its payment terms
Note:
Provide a complete explanation if the amount of the amended offer that's being recommended for acceptance is less than the amount of the original offer.
C. The type of tax and periods (if the report covers individual and joint liabilities, clearly describe them in separate paragraphs)
Note:
If a tax period that was part of the original offer is subsequently paid in full via TIPRA payments, the period must still be listed on any amended offer. Even though the tax period is fully paid, the funds used to satisfy it are part of the overall offer amount, so the tax period must remain on the Form 656 . If a tax period is paid in full via a non-TIPRA payment, such as a refund offset, there is no need to list such period on the amended Form 656.
D. The cause of the tax problem and status of current compliance, including estimated tax payments or federal tax deposits
E. Collection's reason for rejecting the offer
F. The issues raised by the taxpayer
G. An analysis of the taxpayer's financial condition including any documentation upon which the AO/SO's position is based (e.g. type, location or condition of assets, or the taxpayer's age, health, education or future income prospects)
H. A comparison of the financial figures claimed by the taxpayer, the amounts allowed by Collection, and the amounts allowed by Appeals. Sample RCP Comparison Tables are available at the Appeals web site.. If the taxpayer simply amends the offer to the RCP amount determined by Collection and the AO/SO agrees that this is the proper amount, there is no need for the financial figure comparison. Simply attach a copy of Collection's financial analysis tables to the ACM.
Reminder:
It's important for Appeals to document a clear and concise explanation of the factors considered in accepting the offer. This may include information that was not previously provided to Collection, or a different interpretation of the facts of the case or the policies procedures outlined in the IRM.
I. The source of the offer funds
J. The total amount of TIPRA payments already applied to the offer
K. An affirmative statement that the offer being recommended for acceptance reasonably reflects collection potential or that special circumstances exist that otherwise justify compromise.
L. An explanation of the special circumstances justifying acceptance under Doubt as to Collectibility with special circumstances (DATC-SC) or Effective Tax Administration (ETA) and why payment of more than the offered amount would either cause the taxpayer to be unable to meet necessary living expenses or would undermine public confidence that the tax laws are being administered in a fair and equitable manner
Reminder:
DATC-SC and ETA acceptance recommendations also require an affirmative statement indicating acceptance of the offer would not undermine other taxpayers' compliance with the tax laws.
M. If the offer being accepted involves a federal employee, document whether public policy implications exist based on the sensitivity of the employee's position or area of responsibility
Note:
An offer involving an IRS employee requires Area Director approval.
2. When recommending acceptance of two or more related offers based upon a single financial analysis, only one ACM is necessary. To ensure proper processing of the related offers, create separate files/folders marked "1 of 2," and "2 of 2." It's not necessary to duplicate information pertaining to both taxpayers, but the separate files/folders should contain the documents listed below in paragraph (3), except for only one consolidated ACM.
3. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
A. If the offer is being accepted based upon public policy or equity considerations (ETA or DATC-SC), approval from the Director of Field Operations is required and copies of the ACM and Form 5402 must be e-mailed to the OIC program analyst for Appeals Tax Policy and Procedure.
B. It is not necessary to e-mail copies of the ACM or Form 5402 to Appeals Tax Policy and Procedure if the ETA or DATC-SC offer is based upon economic hardship.
4. When accepting a non-CDP offer, prepare and assemble the following:
A. Form 7249 , Offer Acceptance Report,
B. Sanitized MFTRA-X transcripts for each tax debt listed on the Form 656
C. Customized Form 5402 generated from APGolf
D. ACM
E. Letter 673 to notify the taxpayer of the accepted offer
F. Form 656 or amended Form 656
G. Collateral agreement, if applicable
Note:
Enclose a copy of the Form 656 and any collateral agreements with the taxpayer's (and POA's) copy of the Letter 673
5. See IRM 8.23.6, OIC Processing and Closing Procedures, for APS OIC case closing procedures.
8.23.4.2.2 (10-16-2007)
Counsel Review of Acceptance Recommendations
1. IRC 7122(b) requires an opinion from Counsel if the liability, including tax, penalties and interest, is $50,000 or more. Counsel's review of a proposed acceptance has two separate and distinct components:
A. Certification that the legal requirements for compromise were met.
B. If the legal requirements for compromise were met, then Counsel reviews the proposed acceptance for consistent application of the Service’s policies regarding whether the proposed compromise amount is acceptable. Review of the proposed compromise for consistent application of the Service's acceptance policies.
2. Counsel's signature on the Form 7249 indicates that the legal requirements for compromise were met. If Counsel does not sign the Form 7249, the legal issues must be resolved before the case can be closed as an accepted offer.
3. Per CCDM 33.3.2, Chief Counsel Directives Manual - Legal Advice, Other Legal Advice, Offers in Compromise, a finding by Counsel that a proposed acceptance is not in keeping with Service policy is not a justification for withholding an opinion if all of the legal requirements for compromise have been met. If Counsel signs the Form 7249 but disagrees with the amount of the offer, they will communicate their disagreement in a separate memorandum.
4. Counsel's signature on Form 7249 is required for compromise, but their concurrence with the decision to accept the offer is not. However, the approving official for Appeals must review and carefully consider any opinion from Counsel prior to accepting the offer. If Counsel raised substantive policy concerns, it's appropriate to document the case activity record indicating the approving official carefully considered the issues before accepting the offer. See IRM 5.8.8.5.
8.23.4.3 (10-16-2007)
Sustaining Offer Rejection
1. When the facts of the case do not support acceptance, the taxpayer should be informed that Appeals must sustain rejection of the offer. See IRM 8.23.3.3.2 for additional information.
2. Appeals will sustain Collection's rejection of a Doubt as to Collectibility offer when Appeals determines that the taxpayer can pay more than the offered amount.
3. Appeals will sustain Examination's rejection of a Doubt as to Liability offer when Appeals determines that the tax is correct as assessed.
4. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record.
5. See IRM 8.23.3.12 for details concerning alternative resolutions in a non-CDP offer case.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844 , Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
6. APS can process alternative resolutions as part of closing out the OIC case. Remember, APS isn't necessarily looking for IA or CNC information when closing out an OIC case, so be sure to prominently indicate the alternative resolution on the Form 5402 so it is noticeable. A Form 53 is not needed to have the account placed in CNC status. Simply request input of the proper TC 530 CC 24-32 in the "Remarks" section of the Form 5402.
7. Appeals is responsible to make a lien filing determination as part of the alternative resolution. If a Notice of Federal Tax Lien (NFTL) will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL must be clearly documented in the case activity record if such filing is generally required.
8. If a deposit was received with the offer, the deposit will be returned unless the taxpayer provides written authorization to apply it to the tax debt. Use a Form 3040 , Authorization to Apply Offer in Compromise Deposit to Liability, for this purpose. The deposit is credited as of the date it was received by the Service.
Note:
If the offer at issue is a TIPRA offer, the 20% initial payment for a Lump Sum Cash offer and the proposed periodic installment payments for either a Short-term Periodic Payment offer or a Deferred Periodic Payment offer are not deposits and will not be refunded. Also, if the taxpayer pays more than 20% with the submission of a Lump Sum Cash offer, the excess amount is considered a payment of tax and will be applied in the government's best interest, unless otherwise designated. The same applies to periodic installments in excess of the proposed amounts.
8.23.4.3.1 (10-16-2007)
Closing Documents and AO/SO Procedures for Sustaining Offer Rejection
1. The ACM for a case in which Appeals is sustaining the rejection of the offer should contain the following:
A. Sufficient information to support the decision, including a complete financial analysis.
Note:
If the decision is simply to sustain Collection's RCP determination, the Offer Examiner's financial analysis tables (Income/Expense Table (IET), Asset/Equity Table (AET) or Full Pay Worksheet) are sufficient.
B. Any counter proposals either offered to or received from the taxpayer.
C. Information as to the disposition of any offer deposits.
Note:
The Customized Form 5402 may be used in place of an ACM if there is sufficient room to reflect the above.
D. Information as to alternative resolution proposals considered by Appeals and/or recommended for approval.
2. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
A. If rejection of the offer is being sustained based upon public policy or equity considerations, approval from the Director of Field Operations is required and copies of the ACM and Form 5402 must be e-mailed to the OIC program analyst for Appeals Tax Policy and Procedure.
B. It is not necessary to e-mail copies of the ACM or Form 5402 to Appeals Tax Policy and Procedure if rejection is being sustained on an ETA or DATC-SC offer based upon economic hardship.
3. When recommending Appeals sustain rejection of the non-CDP offer, prepare and assemble the following:
A. Customized Form 5402 generated from APGolf
B. ACM
C. An undated Letter 238 to notify the taxpayer that Appeals sustained rejection of the offer
D. Form 3040 or other written authorization, as applicable
E. Form 433-D , Installment Agreement, and a Form 13844 , Application for Reduced User Fee for Installment Agreement, if applicable
F. Form 1271 , Rejection and Withdrawal Memorandum, unless the Form 1271 that was prepared by Collection is still in the file.
4. Once all of the above documents are complete and assembled, update the ACDS case status to AC/FR and submit the case file to the ATM for approval.
8.23.4.4 (10-16-2007)
Withdrawn Offers
1. IRM 5.8.7.4 contains details for withdrawn offers. There are now two kinds of withdrawals:
A. Voluntary withdrawal, and
B. Mandatory withdrawal
2. A taxpayer may voluntarily withdraw an offer at any time after its submitted, including the time the case is in Appeals. A voluntary withdrawal may be made verbally, by fax, or in writing. Written withdrawals are encouraged. Letter 3504 (SC/SG), Offer in Compromise Withdrawal, and Letter 3504-A (SC/SG), Offer in Compromise Withdrawal - Joint, may be used for withdrawal purposes. The letters must be modified with respect to the taxpayer waiver appeal rights. However, if a taxpayer or authorized representative provides a clear oral statement requesting withdrawal of the offer, the offer may be closed as withdrawn. Be sure to adequately document the case activity record as to the taxpayer's or representative's withdrawal request.
3. If the taxpayer mails a written withdrawal via certified mail or hand-delivers the withdrawal, the offer is considered withdrawn as of the date the withdrawal is received. Date stamp the withdrawal document with the received date, as that is the date the statutory period to collect the tax starts running.
4. If the taxpayer verbally withdraws the offer or sends a written withdrawal via regular mail or fax, the offer will be considered withdrawn as of the date Appeals mails the Letter 241 (CG), Offer in Compromise Withdrawal Letter, to the taxpayer.
5. Document the case activity record as to the manner in which the withdrawal was received.
6. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record. See IRM 8.23.3.12 for details concerning alternative resolutions in a non-CDP offer case.
Reminder:
Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.
7. Appeals is responsible to make a lien filing determination as part of the alternative resolution. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL must be clearly documented in the case activity record if such filing is generally required.
8. The offer may also be considered withdrawn under IRC 7122(c)(1(B)(ii) if the taxpayer fails to make a proposed periodic installment payment. However, taxpayers are not required to continue making proposed periodic installment payments on either a Short-term Periodic Payment or Deferred Periodic Payment offer after such offer is rejected by Collection. For this reason, instances of mandatory withdrawal of a non-CDP offer should be uncommon.
Note:
Periodic installment payment requirements start again upon receipt of an amended Short-term Periodic Payment or Deferred Periodic Payment offer. The AO/SO is responsible to secure the TIPRA payment required with the amended offer and to monitor receipt of the proposed periodic installment payments until the case is closed by Appeals. If Appeals secures an amended offer well in advance of closing out the non-CDP offer and the taxpayer fails to make a proposed periodic installment payment, follow the procedures in IRM 8.23.5.3.1 regarding mandatory withdrawal.
8.23.4.4.1 (10-16-2007)
Withdrawn Offer Closing Documents and AO/SO Procedures
1. The ACM for a withdrawn offer case should contain the following:
A. Sufficient information indicating the type of withdrawal (voluntary or mandatory) and the manner in which the offer was withdrawn, e.g. verbal, written, certified mail, mandatory, etc.
B. The taxpayer's reason for withdrawing the offer, if known.
C. Information as to alternative resolution proposals considered by Appeals and/or recommended for approval.
D. Information as to the disposition of any offer deposits.
Note:
The Form 5402 may be used in place of an ACM if there is sufficient room to reflect the above.
2. Review Delegation Order 5-1, which is available at the Appeals OIC Home Page to determine the appropriate approving official.
3. When closing out a non-CDP offer as withdrawn, prepare and assemble the following:
A. Customized Form 5402 generated from APGolf
B. ACM, if more details are needed than can fit in the Form 5402
C. An undated Letter 241 (CG) to notify the taxpayer that the offer is withdrawn, the effective date of the withdrawal, and the disposition of any offer deposit
D. Form 3040 or other written authorization, as applicable
E. Form 433-D, Installment Agreement, and a Form 13844, Application for Reduced User Fee for Installment Agreement, as applicable
Note:
A Form 1271 is not needed for a withdrawn offer. See IRM 5.8.7.
4. Once all of the above documents are complete and assembled, update the ACDS case status to AC/FR and submit the case file to the ATM for approval.
8.23.4.5 (10-16-2007)
Potential Default Offers
1. A potential default offer is loaded onto ACDS as an OIC case.
2. If the taxpayer was able to remedy the potential default issue and Appeals is not going to default or terminate the offer, document the case activity record and close the case using Closing Code 15. Close the Form 2209 back to MOIC advising that the offer should not be defaulted.
3. If the taxpayer was not able to remedy the potential default issue, Appeals must issue the formal default or termination letter. See IRM Exhibit 5.8.9-4. The letter notifying the taxpayer of the termination of the offer must be signed by the Appeals official who accepted the offer or his or her successor. See Delegation Order 5-1, which is available on the Appeals web site at the Appeals OIC Home Page. Document the case activity record and close the case using Closing Code 14. Close the Form 2209 back to MOIC advising that the offer was defaulted. Attach a copy of the signed default letter and MOIC will then reinstate the compromise liability.
4. When the Form 2209 advises Appeals of the death of a taxpayer, the AO/SO must determine whether there is an estate. An Appeals Referral Investigation (ARI) may be needed. See IRM 8.23.5.6 regarding ARI procedures. If there is an estate, the Service should file a proof of claim for the balance owed on the offer. If there is no estate, the offer should simply be closed out as satisfied. Use Closing Code 14 and send the Form 2209 back to MOIC advising that the offer should not be defaulted.
5. Follow the same general procedures outlined above for a compromise of a compromise case.

Part 8. Appeals
Chapter 23. Offers in Compromise
Section 5. Collection Due Process OIC Procedures
________________________________________
8.23.5 Collection Due Process OIC Procedures
• 8.23.5.1 Offers Received During Collection Due Process and Equivalent Hearings
• 8.23.5.2 Processing CDP/EH Offer Receipts
• 8.23.5.3 TIPRA Considerations
• 8.23.5.4 Offers Filed Concurrent with Request for CDP/EH Hearing
• 8.23.5.5 NFTL Filed by Collection During a Non-CDP OIC Investigation
• 8.23.5.6 Requesting Assistance from Compliance
• 8.23.5.7 Closing Procedures for CDP and EH Offers
8.23.5.1 (07-22-2008)
Offers Received During Collection Due Process and Equivalent Hearings
1. IRM 8.23.5 was prematurely obsoleted in February 2008. The information contained in the version issued on October 16, 2007 remains in effect and is reinstated.
2. IRC 6320 and IRC 6330 generally afford taxpayers with an opportunity for an administrative Appeals hearing after IRS
A. files a Notice of Federal Tax Lien (NFTL), or
B. issues a Notice of Intent to Levy and Notice of Your Right to a Hearing.
3. Alternatives to collection, including an offer in compromise (OIC), are among the issues taxpayers may raise for Appeals' consideration as part of a Collection Due Process (CDP) or equivalent hearing (EH) matter.
4. IRM 8.22, Collection Due Process, contains Appeals procedures for CDP and EH cases.
5. The OIC constitutes a component of the final determination/decision that Appeals is required to reach with regard to the hearing. An OIC being considered by Appeals as an alternative to collection in a CDP or EH case is considerably different than a rejected offer received from Collection. Appeals' jurisdiction over the CDP/EH generally runs from its initial receipt through its conclusion and is continuous. Appeals is generally responsible for:
A. securing the CDP/EH offer
B. perfecting and submitting it for initial processing
C. developing all aspects of the offer
D. determining the offer's acceptability
E. preparing the required closing documents
F. securing the necessary approvals
6. It's the responsibility of the taxpayer to raise collection alternatives in CDP/EH hearings. The Appeals or Settlement Officer will make reasonable efforts to assist the taxpayer in preparing the required offer forms. This may be especially important with an unrepresented taxpayer.
Caution:
Policy Statement P-5-100 (which is also IRM 1.2.14.1.17 ) states, in part (emphasis added): The taxpayer will be responsible for initiating the first specific proposal for compromise. Despite the increased financial investment that a taxpayer must now make to have an offer considered, it is not appropriate for Appeals to negotiate an acceptable offer amount before an OIC is submitted. This kind of "pre-negotiation" potentially leads to the government negotiating against itself and the taxpayer offering as little as possible to settle the liability. The OIC program is not about relieving a taxpayer's liability for the least possible amount.
7. Inform the taxpayer of the following:
• General OIC policies and procedures including processability requirements, how reasonable collection potential (RCP) is generally determined, and basic compliance and acceptance requirements
• OIC application fee, and that such fee is refundable if the offer is not processed, but is not refundable once the offer is processed
• Up-front TIPRA payment required with submission of the offer and that such payment is not refundable regardless of whether the offer is processed
• That the application fee and TIPRA payment(s) are applied to the taxpayer's liability
• Taxpayer's right to designate application of required TIPRA payments, but that such designation must be in writing at the time the payment is made, and that the right to designate offer payments ends once the offer is accepted
• That the application fee and TIPRA payment requirements don't apply if the basis of the offer is doubt as to liability or the taxpayer meets the low-income qualifications
• Approvals needed in the event the AO/SO is able to make an acceptance recommendation
8. IRM 5.8.3 and Collection's July 26, 2007 Replacement TIPRA Interim Guidancecontain OIC processability requirements and procedures.
9. IRM 8.22 contains guidance on Appeals procedures for processing OICs received as part of an open CDP case.
10. An offer received as an alternative to collection in a CDP or EH case will not be added to Collection's Automated Offer in Compromise (AOIC) database. The CDP/EH offer is entered on a separate Appeals database that does not interface with AOIC. This stand-alone platform was created to enable Collection to reconcile the OIC application fee collected by Appeals in the CDP/EH offer.
Note:
An offer case will remain open on AOIC pending the outcome of an appeal if Collection issues its rejection letter, concurrently files a Notice of Federal Tax Lien (NFTL) and then receives both an appeal of the rejected offer and a request for a 6320 hearing.
11. Sometimes taxpayers will submit an offer to COIC and request a CDP/EH hearing at the same time, or they will send an offer to COIC while an open CDP/EH case is pending. If Collection identifies an offer case as having an open CDP or EH control, the COIC site's CDP coordinator will research ACDS to determine whether the CDP/EH is still open and whether the determination or decision letter was issued. If ACDS indicates the CDP/EH case is still open and the Case Summary screen doesn't indicate the determination or decision letter was issued, COIC will contact the AO/SO to determine the status of the case. The purpose of COIC's contact is simply to find out whether the determination or decision letter was issued. If a determination or decision letter has not yet been issued, the offer is under Appeals' jurisdiction and COIC will forward the offer to the proper AO/SO. If the determination or decision letter was issued, COIC will retain and work the offer.
8.23.5.1.1 (10-16-2007)
Certain CDP/EH Liability Offers Precluded
1. IRC 6330 states that the underlying liability may not be raised at the CDP/EH hearing unless the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. An offer based upon doubt as to liability concerns the underlying tax liability, and therefore such an offer generally should not be considered if challenges to the liability itself are precluded.
2. The statute, which also applies to CDP hearings under IRC 6320, also precludes issues from the hearing if they were considered at a prior administrative Appeals or judicial proceeding in which the taxpayer meaningfully participated. Examples include, among others:
A. Taxpayer properly received a Letter 1153, and neglected to exercise his/her appeal right regarding a proposed Trust Fund Recovery Penalty (TFRP) assessment, or had a prior Appeals hearing on the TFRP liability
B. The current CDP/EH case concerns an IRC 6330 hearing and the taxpayer had a prior Appeals hearing for the same tax liability under IRC 6320, or vice versa.
3. IRM 8.22, Collection Due Process, for additional information on when liability issues are precluded from consideration in a CDP/EH matter.
8.23.5.2 (10-16-2007)
Processing CDP/EH Offer Receipts
1. For consistency purposes and OIC application fee processing, the Centralized Offer in Compromise (COIC) sites in Brookhaven, NY and Memphis, TN are responsible for processability determinations. Generally, the COIC site will try to make the processability determination within 14 days of receipt.
2. IRS changed the rules for determining the processability of post-TIPRA offers. Now, an offer will be deemed non-processable only if one or more of the following criteria are present:
A. Taxpayer in Bankruptcy: An offer will not be considered during an open bankruptcy proceeding.
B. Taxpayer did not submit the application fee with the offer: An application fee of $150 or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), must accompany the Form 656. The Form 656-A applies to individual taxpayers only. No application fee or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
C. Taxpayer did not submit the required initial payment with the offer: See the above for initial payment requirements. No initial payment or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.
The IRS will no longer automatically return an offer as not processable if IMF and BMF taxpayers are not in filing compliance or if BMF taxpayers seeking to compromise employment tax debts are not compliant with FTDs prior to submitting the offer. An offer will be returned as not processable if the taxpayer does not come into filing compliance within the time the IRS provides after the offer is submitted. The new criteria are reflected on the revised processability letters available on APGolf.
3. Taxpayers are encouraged (but not required) to send separate checks for the application fee and 20% initial payment or initial periodic installment payment. The reason for this is the 20% initial payment and initial periodic installment payment are not refunded if IRS determines that the offer is not processable, but the application fee may be refunded. Page 12 of the February 2007 Form 656 instruction booklet portrays the various OIC application fee and initial TIPRA payment scenarios.
4. See IRM 5.8.3, Offer in Compromise Processability and Collection's July 26, 2007 Replacement TIPRA Interim Guidance.
8.23.5.2.1 (10-16-2007)
Appeals Procedures
1. When an offer is received in Appeals as part of a CDP/EH case:
A. Date stamp the Form 656 (upper right corner of Page 1) with the date the offer was received in Appeals and document its receipt in the case activity record. DO NOT SIGN THE FORM 656.
Note:
The date the CDP/EH offer is received in Appeals begins the 24-month period after which the offer will be deemed accepted under IRC 7122(f). Proper documentation of the received date is critical.
B. Review the offer package and make sure it meets the basic processability requirements detailed above. If it doesn't, remedy any deficiency prior to sending the offer package to COIC for the processability determination.
C. Determine whether the offer was submitted solely to delay collection. See IRM 5.8.3.19.
Caution:
A determination that the offer was submitted solely to delay collection is an issue for which the taxpayer could seek judicial review under CDP. Make sure the case fits the criteria spelled out in IRM 5.8.3.19 before arriving at this conclusion.
D. Prepare Form 3210, Document Transmittal, Letter 3820, Offer is Processable, and Letter 3821, Offer is Not Processable. The Letters 3820 and 3821 must contain all Appeals contact information. Do not sign or date either Letter. The COIC unit will complete these items after its processability review.
Note:
A package Form 3210, which includes Letters 3820 and 3821, is available on APGolf.
2. Send the following items to the appropriate COIC site:
• Form 3210 (two copies) which includes the sender's name, phone and fax numbers and is clearly labeled "CDP Offer in Compromise"
• Form 656
• Either the required OIC application fee and TIPRA payment or a Form 656-A
• Any written documentation from the taxpayer as to designation of the TIPRA payment
• Form 433-A and/or Form 433-B
• Letters 3820 and 3821 (including POA copies, if applicable)
• A return envelope to assist COIC in returning the offer to the correct person
Note:
Review the Form 433-A/B to see if the taxpayer lists a prior bankruptcy filing which was likely closed out. Advise the taxpayer to include the discharge or dismissal date on the Form 433-A/B. COIC will now check the Integrated Data Retrieval System (IDRS), Automated Insolvency System (AIS) and the Public Access to Court Electronic Records (PACER) system before returning the offer as not processable.
8.23.5.2.2 (10-16-2007)
COIC Processability Procedures for CDP/EH Offers
1. IRM 5.8.3.4.2 contains COIC's processability procedures for Appeals' CDP/EH offers.
2. If the CDP/EH offer is processed, COIC will:
A. Sign the Form 656
B. Mail Letter 3820 to the taxpayer (and POA, if applicable)
C. Input a TC 480 to all OIC periods
D. Input a STAUP 71 to the OIC periods that are not part of the underlying CDP case (and not already in ST 53 or 60) if it's a timely CDP case
Note:
The CDP periods are already protected from levy by the TC 520 and ST 72.
E. Input a STAUP 71 to all of the OIC periods (if not already in ST 53 or 60) if it's an EH case
F. Fax a copy of the Letter 3820 to the AO/SO advising that the offer was processed
G. Mail the offer package, including the signed Form 656 and Letter 3820, to the AO/SO
Reminder:
The OIC is under Appeals' jurisdiction, so the AO/SO is responsible to make sure the TC 480 is properly input to all periods, both CDP and non-CDP, and a STAUP 71 is input to the appropriate non-CDP periods. Appeals is also responsible to resolve the TC 480 with the appropriate TC 481, 482, 483 or 780 when the offer case is concluded.
3. COIC will also advise Appeals if an additional Form 656, application fee or initial payment is needed.
4. If the CDP/EH offer is not processable, COIC will:
A. Mail Letter 3821 to the taxpayer (and POA, if applicable)
B. Send the original Form 656 back to the taxpayer as an attachment to the Letter 3821
C. Fax a copy of the Letter 3821 and Form 2515, Record of Offer in Compromise, to the AO/SO. (The Form 2515 reflects application of the application fee and TIPRA payment and the unprocessable issues)
Note:
The taxpayer may dispute the determination that the CDP/EH offer was not processable, so Appeals must concur with COIC's unprocessable determination. Be sure to fully document the case activity record as to the reason(s) why the offer was not processable in case the taxpayer petitions Tax Court over Appeals' CDP determination and lists the unprocessable determination as an issue.
5. If Collection is notified that either the OIC application fee or the up-front TIPRA payment are dishonored (returned due to non-sufficient funds), COIC will query ACDS to determine the Appeals employee assigned the case and telephone the AO/SO to advise of the dishonored payment(s). COIC will fax a copy to Appeals. The AO/SO must promptly contact the taxpayer by telephone or letter to advise of the dishonored payment and that the offer will be returned if a replacement payment in certified form (money order, cashier's check, etc.) is not received within 14 days of the date of the letter or telephone contact. If the contact is made by telephone, document the case activity record. If the taxpayer has to overnight the payment to meet the deadline, follow the procedures for such in IRM 5.8.3.6.
A. If the taxpayer properly replaces the dishonored payment, proceed with considering the offer.
B. If the taxpayer does not properly replace the dishonored payment, the offer is considered "returned." Submit a Form 4844, Request for Terminal Action, to the Appeals Processing Section (APS) to have a TC 482 input to the OIC periods. Document the case activity record and return the taxpayer's offer with a cover letter containing the following language:
We are returning your Form 656, Offer in Compromise, because the check you sent for the offer in compromise application fee and/or offer in compromise initial payment was not honored by your bank. We gave you an opportunity to replace the dishonored check with certified payment, but did not receive the required replacement payment. We cannot consider your offer.
6. See IRM 8.22 for procedures regarding establishing a separate work unit (WUNO) on ACDS for the CDP/EH offer
8.23.5.2.3 (10-16-2007)
Non-CDP Periods in the CDP/EH Offer
1. Many offers received as an alternative to collection in a CDP/EH case include tax periods that are not the subject of the underlying CDP/EH case. These may include:
• Tax debts owed by the CDP/EH taxpayer but not listed on the CDP notice,
• Joint tax debts owed by a spouse who did not request a CDP/EH hearing, or
• Tax debts owed by a related entity such as a closely held corporation, partnership or LLC.
2. Appeals can use its general authority to render a decision on an offer in compromise listing non-CDP/EH tax debts even though there has been no appealable action taken by a Compliance function with regard to the non-CDP/EH periods.
3. IRC 6331(k) generally prohibits the IRS from levying to collect the tax debts which are the subject of the offer. The TC 520 and STAUP 72 protect from levy the tax debts which are the subject of a timely CDP case, but we must take the necessary steps to ensure both the TC 480 and STAUP 71 are input to all non-CDP tax periods, including EH periods, to make sure all OIC tax debts are protected from levy.
8.23.5.3 (10-16-2007)
TIPRA Considerations
1. The Tax Increase Prevention Act of 2005 (TIPRA) greatly impacted the offer in compromise (OIC) program. TIPRA did not significantly impact Non-CDP offers received in Appeals, but Appeals' responsibilities and procedures for CDP/EH offers have changed considerably.
2. An offer received as an alternative to collection in a CDP/EH case is subject to IRC 7122(f), which states that an offer is deemed accepted if such offer is not rejected, returned or withdrawn before the date which is 24 months after the date the offer is submitted. The regulations for IRC 7122 state that an offer is considered "submitted" as of the day IRS receives the offer. For this reason, it's important to date stamp the Form 656 and document the case activity record upon receipt of the offer.
3. Appeals employees can process all pre-acceptance TIPRA payments using a Form 3244except for the initial payment due with the Form 656. See IRM 8.23.1.4.1.1 for OIC payment processing procedures.
8.23.5.3.1 (10-16-2007)
Mandatory Withdrawal Procedures
1. If a taxpayer fails to make a proposed installment payment (other than the first installment), IRC 7122(c)(1)(B)(ii) allows the IRS to consider the offer withdrawn. Sections 5.8.4.7.2.1 and 5.8.7.4.2 of Collection's July 26, 2007 Replacement TIPRA Interim Guidancerefer to this as a "mandatory withdrawal."
Note:
Mandatory withdrawal procedures do not apply to a non-CDP offer because such an offer has already been rejected by Collection and the taxpayer is not required to continue making proposed periodic installment payments after the offer is rejected.
2. It is the AO/SO's responsibility to monitor the taxpayer's compliance with proposed periodic installment payment requirements while the offer is being worked by Appeals, which may include monitoring IDRS if the taxpayer is not sending such payments to Appeals. If COIC is doing a preliminary evaluation of the CDP/EH offer, Appeals is not responsible to monitor the proposed periodic installment payment requirements during the time the case is being worked by COIC.
3. The taxpayer will be allowed one opportunity to make up the missed payment. Notify the taxpayer by either telephone or correspondence of the need to make the payment and allow 14 calendar days to do so. Clearly document the case activity record. If such contact is attempted by telephone and no direct contact is made, send a letter.
A. If the taxpayer pays the missing payment within 31 days after the date of the telephone contact or letter (additional grace period to allow for mail time and to coincide with Collection's interim procedures), continue with the offer investigation.
B. If the taxpayer fails to pay the missing payment within 31 days after the date of the telephone contact or letter, the offer may be considered withdrawn.
Note:
The taxpayer will be afforded one opportunity to make up only one missed installment payment, unless special circumstances exist. An amended offer does not create an additional opportunity.
4. If a decision has already been made to reject the offer, then no contact is needed. Follow the procedures in IRM 8.22 to close out the CDP/EH case and the OIC for addressing other issues raised as part of the CDP/EH case and/or closing out the underlying CDP/EH case.
5. If the offer is withdrawn under IRC 7122(c)(1)(B)(ii) , follow the procedures in IRM for addressing other issues raised as part of the CDP/EH case and/or closing out the underlying CDP/EH case.
8.23.5.4 (10-16-2007)
Offers Filed Concurrent with Request for CDP/EH Hearing
1. Occasionally, a taxpayer will submit an offer to one of the COIC processing units and request a CDP or equivalent hearing at or around the same time. Depending on the timing and type CDP hearing request, different processes may be used. The following table reflects various scenarios:
If ... And ... Then ...
The timely CDP hearing request was made under IRC 6330 The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued after the offer was processed IRS was prohibited from levy under IRC 6331(k) and the Notice of Intent to Levy must be rescinded. Follow procedures in IRM 8.22.
The timely CDP hearing request was made under IRC 6330 The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued before the offer was processed There is no need to rescind the Notice of Intent to Levy. Appeals has jurisdiction over both the CDP case and the offer
The request for a CDP hearing under IRC 6330 was not made timely The Notice of Intent to Levy and Notice of Your Right to a Hearing was issued either before or after the offer was processed There is no need to rescind the Notice of Intent to Levy. Appeals has jurisdiction over both the EH case and the offer
Either a timely or late request for a CDP hearing was made under IRC 6320 The Notice of Federal Tax Lien was filed either before or after the offer was processed There is no prohibition against the IRS filing a Notice of Federal Tax Lien while an offer is pending, so there is no need to have the lien withdrawn. Appeals has jurisdiction over both the CDP/EH case and the offer
2. As discussed in previous sections of this IRM, Appeals has jurisdiction over an offer submitted to Appeals as an alternative to collection in an open CDP/EH case. If a taxpayer submits an offer directly to Collection while a CDP/EH case is open in Appeals, COIC will perform its standard processability review and send the offer to Appeals. If COIC receives an offer and determines that the CDP/EH case was closed with a determination/decision letter, waiver or withdrawal before it received the offer, COIC will process and work the offer.
8.23.5.5 (10-16-2007)
NFTL Filed by Collection During a Non-CDP OIC Investigation
1. IRM 5.8.4.9 requires the Offer Examiner to make a lien filing determination as part of the initial case review. There is no prohibition against filing a Notice of Federal Tax Lien (NFTL) while an offer is pending.
2. If Collection determines that a NFTL must be filed while the offer is still under consideration and the taxpayer requests a CDP hearing, the offer then becomes an alternative to collection in the CDP case. Both the CDP and OIC cases are under the jurisdiction of Appeals.
3. If the offer case is fully resolved and Collection is going to recommend acceptance, the taxpayer may withdraw the request for a CDP hearing. See IRM 8.22, Collection Due Process. A Form 12556, Withdrawal of Request for Collection Due Process Hearing, or other written request may be used (Form 12256 is preferred).
4. If it's an EH case, either a written or verbal withdrawal is sufficient.
5. Either Collection or Appeals can secure the withdrawal. If Appeals secures the withdrawal, the case file must be clearly documented with the following:
• The taxpayer did not want a resolution from Appeals
• The taxpayer understands the rights given up by withdrawing the CDP/EH hearing request
Note:
Appeals should not solicit a withdrawal if the offer resolution is reached with Appeals. A IRM 12257 waiver should be used instead. This way, the taxpayer doesn't lose retained jurisdiction rights.
6. Even though Collection is going to recommend acceptance of the offer, the taxpayer may not want to withdraw a timely CDP hearing request because Appeals retains jurisdiction over the determinations made in a CDP case. See IRM 8.22 for information on retained jurisdiction in a CDP case. If the taxpayer does not withdraw the request for a CDP/EH hearing, Collection will forward the complete offer file. The AO/SO must then decide whether to accept or reject the offer as part of the CDP/EH case.
8.23.5.6 (10-16-2007)
Requesting Assistance from Compliance
1. CDP and EH cases generally come to Appeals with little or no development of the factual issues. When an offer is submitted by the taxpayer as an alternative to collection in a CDP or EH case, Appeals has the sole jurisdiction to render a decision as to the acceptability of the offer. Appeals will generally work the offer investigation internally using electronic research sources and taxpayer documentation. However, if complex issues surface and additional documentation or verification is necessary to determine whether the offer is acceptable, Appeals may require the assistance of Compliance Field personnel. In these situations, Appeals may send an Appeals Referral Investigation (ARI) to Collection for asset verification, financial analysis, or other assistance with complex issues, or to Exam concerning the validity or legality of the assessment or other complex issues.
Note:
Per Q-A 6 in Section 3 of Rev. Proc. 2000-43, OIC cases are subject to ex parte provisions. The third party contact waiver provision found in paragraph (n) in Section V of Form 656 pertains to non-IRS contacts only.
Note:
In general, the ARI should be issued only if there is a reasonable probability that the offer will be accepted if the results of the ARI favor the taxpayer's position or if the acceptability of the offer simply cannot be determined without the information that will be asked for in the ARI. In other words, there is no point in issuing an ARI if its results will have little or no impact on the likely decision on the offer.
2. Appeals retains full jurisdiction of the open OIC while Collection or Exam is working the ARI. The offer will be deemed accepted by operation of law if it's not rejected, returned or withdrawn within 24 months after the date the offer was submitted. See IRM 8.23.5.3. This means that Appeals is responsible to monitor the ARI's completion as it relates to the 24-month period.
3. Appeals Officers or Settlement Officers will follow the procedures in IRM 8.22 regarding the CDP Tracking System and ARIs on CDP/EH OIC cases.
4. Collection has concentrated its Field OIC Groups in a few select areas. Offer in Compromise Specialists are not Field personnel and thus are generally no better equipped to handle the types of complex issues requiring an ARI than a Settlement Officer. For this reason, ARIs will only be issued to a Field Revenue Officer Group. If a complex Doubt as to Collectibility or ETA hardship offer is being worked by an Appeals Officer who is not sufficiently experienced in Collection issues, seek the assistance of a Settlement Officer. See also IRM 8.23.2.2, Assignment of OIC Case.
5. Before sending an ARI, review and analyze the supporting documentation already provided by the taxpayer and utilize all internal verification resources.
6. Generally if the taxpayer is a wage earner or a self-employed individual without employees the Appeals Officer or Settlement Officer can easily and quickly verify the financial statement through internal research.
7. If the taxpayer was given a proper opportunity to provide information necessary to adequately determine reasonable collection potential (RCP), then Appeals may use the criteria in IRM 5.8.7.2.2 used by Collection to "return" a processed offer as a basis to not accept the CDP/EH offer.
8. Carefully review the ex parte procedures in Rev. Proc. 2000-43.
8.23.5.6.1 (10-16-2007)
ARI to Field Revenue Officer Group
1. A request for Collection's expeditious treatment of the ARI may be made in accordance with locally agreed upon discussions or agreements. Appeals will follow up with Collection after 30 days from the ARI's issuance to ensure appropriate priority is being given. Because of ex parte issues, limit the extent of the discussion to only the general time frame of the ARI's completion. Be sure to carefully document the case activity record as to why you contacted the Revenue Officer, what question(s) was asked and the answer(s) received. See Rev. Proc. 2000-43.
2. The ARI will be sent to the Collection Field Revenue Officer Group to investigate the following:
• Collection Information Statement (CIS) analysis and verification when complex, specific questions or concerns exist,
• Asset verification requiring actual field observation, such as a search of court house records or personal observation and evaluation of the assets of an operating business,
• Potential alter ego, nominee or transferee issues,
• Trust Fund Recovery Program (TFRP) investigation.
3. This type of ARI may be appropriate when the assets on the financial statement are extensive, unusually complex, or in the hands of third parties, etc. An ARI will be sent to the Field Revenue Officer group covering the taxpayer's location.
4. The following are examples of offers that may require an asset investigation.
Example: The taxpayer’s financial statement shows she has antiques worth $10,000. Her offer is $15,000 and she owes $55,000. She incurred the liability when she was working for an art gallery but is now employed as a wage earner. She is buying her home worth $200,000 and drives a vehicle worth $85,000. You completed internal research but there was no information available on the antiques. The taxpayer states she does not have any papers authenticating the pieces and does not have any documentation of value. She provided an itemized list with the values based on her knowledge. She does not plan to sell the antiques to fund the offer. The offer funds will be a loan from a friend. The offer might be acceptable if the antiques are only worth $10,000 as stated on the financial statement. You request that the field make an on-site visit to visually inspect the antiques and or any other assets and obtain the values.
Example: The taxpayer submitted an offer on a Trust Fund Recovery Penalty (TFRP). The liability arose from a construction company that he formerly owned. The taxpayer submits a financial statement indicating that he is no longer in business and is working for wages. During the conference, he states that he works for his wife and has sufficient withholding. The taxpayer indicates that he has no administrative duties with his wife’s business. He further states that he does not have the financial savvy to run a business. In verifying the financial statement, the Appeals Officer or Settlement Officer discovers that for the past three years the wife had no income. Internal research revealed that the new corporation began almost immediately after the other one closed and the type of business is construction. Based on these facts there may be potential for an alter ego or nominee. Further investigation is required by Collection before a resolution can be determined.
8.23.5.6.2 (10-16-2007)
ARI to Examination
1. Before sending the ARI to Exam, make sure the taxpayer is not precluded from raising liability issues under IRC 6330(c).
2. With regard to liability issues, an ARI will be sent to Examination to provide Appeals a report of findings as to the validity and legality of the assessment, or other issues. Because of ex parte issues, limit the extent of the discussion to only the general time frame of the ARI's completion. Be sure to carefully document the case activity record as to why you contacted the Revenue Officer, what question(s) was asked and the answer(s) received. See Rev. Proc. 2000-43
3. Examination will initiate action on these referrals within 30 days.
4. Follow the procedures in IRM 8.22, regarding the CDP Tracking System and CDP/EH OIC cases.
8.23.5.6.3 (10-16-2007)
Originating Appeals Office ARI Responsibilities
1. When sending an ARI to Collection or Exam, the taxpayer should be notified via a brief referral letter stating, in part:
"You have requested consideration of certain issues that require the expertise of the investigative functions of the Service. While the Office of Appeals will maintain jurisdiction of your case, we have requested further assistance to research and verify the information you have provided. It may be necessary for a Revenue Officer/Agent to contact you for information necessary to expedite this review. The Revenue Officer/Agent may need to contact third parties to verify some of this information. The information we have requested is needed to help us reach a resolution of your appeal."
Note:
There is no need to verify the issuance of the Notice of Third Party Contact. The Form 656 operates as a waiver of the Third Party Notice requirement beginning with the January 2000 revision of Form 656.
2. If Collection will be verifying a financial statement on an ARI, Appeals is responsible for securing the verification required in IRM 5.8
3. The AO/SO will attach a copy of the taxpayer referral letter to the ARI. The purpose of the letter is two-fold: the taxpayer is more fully informed of the purpose and scope of Compliance's involvement, and the Collection or Examination employee is assured that the taxpayer is aware that contact may be necessary and appropriate while the case is under Appeals jurisdiction.
4. Prepare and forward Form 2209, Courtesy Investigation, and Form 10467 , Appeals Division Feedback Report and Transmittal Memorandum, or any other acceptable local form.
5. Annotate in red ink at the top "CDP Case in Appeals."
6. Provide specific instructions so that the Revenue Officer or Revenue Agent knows precisely what action(s)/information is needed.
7. Attach any relevant documents that will assist the Revenue Officer or Revenue Agent in providing the requested information and/or performing the requested investigation.
8. Appeals will follow up with the Compliance function after 30 days from the ARI's issuance to make sure appropriate priority is given. It's important to keep in mind that the offer is deemed accepted by operation of law 24 months after the offer is submitted. Management involvement may be required if the ARI has been open for an extended period of time or there are concerns with regard to the 24-month mandatory acceptance period.
9. Upon receipt of the ARI information from Compliance, Appeals must share such information with the taxpayer.
8.23.5.7 (10-16-2007)
Closing Procedures for CDP and EH Offers
1. Offers received as part of a CDP and EH are often one of multiple issues raised by the taxpayer. There are a number of aspects to closing the CDP/EH offer that are different than closing a non-CDP offer. Refer to IRM 8.22, Collection Due Process, for CDP/EH offer closing procedures.
Part 8. Appeals
Chapter 23. Offers in Compromise
Section 6. OIC Processing and Closing Procedures
________________________________________
8.23.6 OIC Processing and Closing Procedures
• 8.23.6.1 Establishing New OIC Receipts
• 8.23.6.2 Offer in Compromise Closing Procedures (non-CDP)
• 8.23.6.3 Examination Originated OIC Cases
• 8.23.6.4 Potentially Defaulted OIC Cases
8.23.6.1 (10-16-2007)
Establishing New OIC Receipts
1. This section provides instructions for Appeals Processing Section (APS) personnel in establishing new offer in compromise (OIC) receipts and controls.
2. On the case inventory screen, follow normal procedures except for the following:
A. TYPE — Enter OIC
Note:
If the offer is based upon Effective Tax Administration (ETA), add a Feature Code of "ET."
B. Proposed Offer Amount (WUpropsdOfrAmt) Enter the amount of offer as shown on Form 656, Offer in Compromise.
Note:
One case folder could have more than one Form 656 all related to the same taxpayer such as an individual Form 656, a joint Form 656, and a sole proprietor Form 656. Be careful to input the proper WUpropsdOfrAmt to the work unit number (WUNO) associated with that particular Form 656.
3. On the return information screen, enter the following:
A. AIMS Indicator — Enter E since these cases are not controlled on AIMS
B. Tax Period — Enter all tax periods associated with the case
C. Statute Date —Leave blank
D. Statute Code — Enter SUSP
E. Proposed Def/-OA (Tax) — Enter the total unpaid liability amount on the earliest tax period. This may be found on Form 1271 Form 1271. On all subsequent tax periods, enter $ -0- (zero). If the tax has not been assessed, enter $ -0- (zero) for all tax periods.
F. Duplication — Leave blank
4. If the offer involves multiple MFTs, the case will be treated as one work unit number, unless multiple TINs are present, such as with an individual owing income tax under his SSN and employment tax as a sole proprietor under an EIN. Separate work units are required for each TIN even if both TINs belong to the same taxpayer. Use the MFT of the earliest tax period as the key case, enter the amount of the offer in the NOTES field, and enter the total of all unpaid liabilities on the first tax period and enter zero in any remaining tax periods. On each related case, list all tax periods involved for that MFT but zero dollars for all tax periods.
Note:
If there are different entities in the same case file, such as individual and joint, different WUNOs would apply.
8.23.6.1.1 (10-16-2007)
Previously Accepted OIC (Potential Default) Cases Returned to Appeals
1. If an earlier "accepted" offer is proposed for default , Collection will send Form 2209, Other Investigation, to Appeals to consider issuing a formal termination letter. Establish the case on Appeals Centralized Database System (ACDS) as a new receipt. Follow the procedures above except for the following:
A. Notes: enter "Proposed Default - Appeals OIC"
2. Appeals also occasionally receives a taxpayer's request to consider a "compromise of a compromise." See IRM 5.8.9.4. Sometimes the taxpayer's request is made through one of the Monitoring Offer in Compromise (MOIC) units, in which case Appeals will receive a Form 2209. Often times, however, the request is made directly to the Appeals Officer or Settlement Officer (AO/SO), so there is no Form 2209 involved. If the request is made directly to the AO/SO, then open a new case following the same procedures as with a potential default case above except for the following:
• Notes: enter "Compromise of a Compromise - Appeals OIC"
8.23.6.1.2 (10-16-2007)
OICs Received with CDP/EH Case
1. OIC’s received with or initiated during the course of a Collection Due Process (CDP) or equivalent hearing (EH) may be added to ACDS as a separate work unit.
2. A CDP/EH case could result in more than one OIC. For example, related entities such as a joint return and a sole proprietorship will each be carded as a separate OIC work unit.
3. No periods should be added to the CDP/EH case merely because they are included on the OIC.
4. If the OIC and CDP/EH cases are received in Appeals together, and the OIC has already been determined to be processable (signed on page 4 of the Form 656 by an authorized IRS employee), both the CDP/EH case and the OIC case will be carded into ACDS at the same time, as separate work units. If the OIC is not signed on page 4, only the CDP/EH case will be carded in.
5. Follow normal procedures except for the following;
• Type= OIC
• Feature Code= DP, also input this feature code on the CDP/EH work unit, to indicate there is a related OIC.
• Entries in SOURCE, DO, and PBC for the OIC(s) will be the same as those entries in the related CDP/EH case(s).
• REQAPPL – date the authorized Service employee signed on page 4 of the Form 656.
6. If the OIC is received or determined to be processable after the CDP/EH case has been carded in, the AO/SO will provide a package to APS requesting they add the OIC unit to ACDS. The package will include:
• A copy of the related CDP/EH case summary card noted at the top in red ""Please input OIC work unit" " with feature code = DP and Notes – XREF (work unit number of the related OIC case)
• A copy of page one of Form(s) 656 identifying all periods included on the OIC. Input TPNAME, ADDRESS, TIN, MFT, Tax Periods, and offer amount as shown on Form 656
• A copy of page four (signature page) of Form(s) 656.
• IMFOLI or BMFOLI (AO/SO will add the TOTAL MOD BALANCE for all periods – input this amount in proposed tax on the earliest period.
8.23.6.2 (10-16-2007)
Offer in Compromise Closing Procedures (non-CDP)
1. This section provides procedures for closing out completed OIC cases, except for offers worked as part of a CDP or EH case. CDP/EH offer procedures are in IRM 8.22.3.10, Back-end Processing for CDP and Equivalent Hearing Cases.
2. The following types of offers originate in the Collection function and are controlled on the Automated Offer in Compromise (AOIC) system:
• Doubt as to Collectibility (DATC)
• Effective Tax Administration (ETA) based upon both economic hardship and public policy/equity considerations
• Combination Doubt as to Liability (DATL) and either DATC or ETA
3. DATL offers involving Trust Fund Recovery Penalty (TFRP) or Personal Liability for Excise Tax (PLET) assessments are worked by Collection and are controlled on AOIC.
4. DATL offers involving liabilities other than TFRP and PLET assessments originate in the Examination function and are not controlled on AOIC:
8.23.6.2.1 (10-16-2007)
Counsel Review of Accepted OIC
1. Counsel is required to review all offers when the total unpaid liability (including all assessed and accrued penalties and interest) for all related offers on the same taxpayer is $50,000 or more. This amount is generally shown on the Form 7249, Offer Acceptance Report. However, taxpayers must now make up-front payments when filing an offer and sometimes make additional periodic installment payments while the offer is being considered. These offer payments are applied directly to the tax debts and are not refundable. If the balance owed exceeded $50,000 before the offer payments were applied, Counsel's review is still required, so there may be cases where the Form 7249 shows a total balance owed of less than $50,000, but the case must still be sent to Counsel for review.
Example:
John and Jennifer Maple owe joint income tax debts for years 2002, 2003 and 2004. The amounts owed for are $36,000 for 2002; $16,000 for 2003; and $3,000 for 2004. The total amount owed for all three years is $55,000, so Counsel's review is required.
Example:
Bill Elm owes a TFRP totaling $47,000. He also owes a $7,000 joint income tax debt with Betty Elm. This is Betty's only tax debt. Counsel must approve Bill's offer because he owes a total of $54,000. Counsel is not required to approve Betty's offer. However, the separate offers are part of one case file, so the entire file must be sent to Counsel.
Example:
Jack Oak owes income tax debts for 2004 and 2005 totaling $48,000. He submitted a non-refundable up-front payment of $5,000 with his offer. Since he owed $53,000 before the offer up front payment, the case must be sent to Counsel for review even though the Form 7249 shows Oak now owes less than $50,000.
2. If acceptance of the offer is subject to Counsel's approval, local procedures will dictate how to proceed. Due to the variables involved in managing different sized offices and employees in remote offices, each office may utilize APS differently in order to most effectively manage and control the flow of cases and input the required data at the appropriate time.
A. The ATM will either sign or initial (per local procedures) but not date the Form 5402. This indicates the ATM's preliminary approval of the offer.
B. If the ATM routes the case to Counsel through APS, update ACDS to indicate when the case was sent to Counsel and then forward the file to Counsel using Form 3210.
C. If the ATM bypasses APS and forwards the case directly to Counsel, the ATM should contact APS so ACDS can be updated accordingly.
3. Counsel will sign and date Form 7249 to certify that all of the legal requirements for compromise have been met.
A. If Counsel does not sign the form, the case must be returned to the AO/SO or ATM (per local procedures) as the Offer cannot be compromised until the legal issues are resolved.
B. If Counsel signs the Form 7249, route the case to either the AO/SO or ATM (per local procedures) so the CAR can be updated, closing documents signed and ACAPDATE input.
8.23.6.2.2 (10-16-2007)
Collection Originated OIC Acceptance Procedures
1. The work unit will be assigned to the Tax Examiner on the Processing Employees Automated System (PEAs) for closing, with PEAs TYPE "CLS" and the appropriate SubTYPE for the case. Generally, PEAs SubTYPE "ACDS Only" will apply.
2. For an accepted OIC, the case will flow as follows:
1. The AO/SO completes the case and submits it to the ATM for approval. See IRM 8.23.6.2.1 if Counsel review is required.
2. The ATM signs the Form 7249 and OIC Acceptance Letter 673), dates and signs the Form 5402, and enters the ACAPDATE on ACDS.
3. The ATM submits the case to APS for final closing.
Note:
If the offer is based upon either Doubt as to Collectibility or Effective Tax Administration - Hardship, the Form 656 provides that IRS will keep any refund due the taxpayer for tax periods extending through the calendar year in which the IRS accepts the offer. In some cases, especially toward the end or beginning of a calendar year, the Acceptance Letter 673 have the wrong tax years. This typically occurs when the AO/SO prepares the acceptance letter near the end of a calendar year and for various reasons, including time the case is in Counsel for review, the case is not ready for the acceptance letter to be issued until the following calendar year. The acceptance letter should be mailed the same calendar year that it's signed by the ATM. If a new calendar year has begun and the acceptance letter contains the wrong years, return the case file to the ATM to have the acceptance letter corrected.
3. The Appeals Office will send the case to the appropriate APS office in either Brookhaven, NY or Memphis, TN for closing. The next section has information on closing the case on AOIC.
4. The OIC case file will contain the following documents:
• Original Form 656, Offer in Compromise
• Original Amended Form 656, if applicable
• Original Form 7249, Offer Acceptance Report
• Sanitized MFTRAX transcripts
• Form 5402, Appeals Transmittal and Case Memorandum
• Appeals Case Memorandum, if applicable
• Financial information, including Form 433-A and/or Form 433-B, bank statements, property records, and other information used to make the acceptability determination
5. If an offer is received from one spouse on a joint liability, the MOIC site is responsible for creating mirror assessments on the accepted OIC.
6. Close the OIC work unit on ACDS following general closing instructions. In addition:
. CLOSINGCD = 15 (OIC Accepted)
A. WUaccptOfrAmt = amount of accepted offer (see Form 5402 or the "Terms of this Offer" section on Form 7249)
B. RevsdTax = 0 (zero) for all tax periods
C. Paycode = 7
D. LACTION - Accepted OIC file to XXXXXXX (Offers worked by Collection Field), or Accepted OIC file closed on AOIC (Offers work by Collection Campus) and sent to XXXXXXXX
7. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.2.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the , which is available in the APS section on the Appeals web site at Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases.
• Collection will then update AOIC with the appropriate closing information.
8. Date and mail the acceptance letter to the taxpayer and/or POA and include as attachments:
. A copy of the Form 656 or amended Form 656
A. A copy of the co-obligor agreement, if applicable (used only if one spouse is compromising a joint tax debt)
B. A copy of the collateral agreement ( Form 2061), if applicable (collateral agreements are rare)
9. Make copies of the above and the Form 7249 for the office administrative file.
10. Send one copy of Form 7249 and the sanitized MFTRAX to the applicable Area Collection Field Office for filing in the Public Inspection File. The address list for where to send the OIC Public Inspection Files is in the APS section on the Appeals web site at OIC Public Inspection File Locations.
11. Send the case file to the appropriate campus MOIC unit based on the state where the taxpayer resides. The listing of states associated with both the Brookhaven and Memphis MOIC units (back-end OIC) and their mailing addresses are available on SERP under the "Who/Where" tab.
12. Close PEAs using Closing Code 03 with a completion date equal to the date the above actions were completed.
13. Process any OIC payments to the campus OIC unit. After the case is closed, the taxpayer should send payments directly to the campus OIC unit.
14. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
15. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.2.1 (10-16-2007)
AOIC Closing Procedures for Accepted Offer
1. This section provides general information for closing an accepted OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. As soon as possible after the Acceptance Letter 673 is issued, the case must be closed, validated and released on AOIC with the case file sent to the appropriate MOIC campus for monitoring. It is critical that the necessary actions are promptly taken to close the case on AOIC and the case immediately sent to MOIC because:
• MOIC is responsible to monitor the taxpayer's compliance with the terms and conditions of the offer and won't know what to do with incoming payments without the closing information and case file
• IRS has 30 days by law to release a tax lien if the taxpayer pays the accepted offer amount in full
3. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
4. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
Screen Number Input Fields
One • Offer amount
• Amended/Original
• Proposed Disposition
• DATC/Special Circumstances or ETA update Screen 1 with AOIC TYPE = "A"
• If strictly DATC, leave as TYPE = "C"
Note:
Check all of the above fields for accuracy and update as appropriate.
Five • MFT periods must match Form 656/amended Form 656
• To ADD - Add/Update
• To REMOVE - Control U
Six • Accepted Terms match Form 656/amended Form 656 and the terms shown on Form 7249
• Update Co-obligor or collateral terms, as appropriate
Screen four is the final screen for input to finalize the AOIC closure Keystrokes:
• C = Control
• D = Disposition
• F = Final
• 2 = Accepted by Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" Reject with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
Other Input Items:
• Date of Appeals Acceptance Letter
• Mailing date of the rejection letter previously issued by Collection before the case was referred to Appeals
New Field on OIC:
• Was Offer Accepted Under ETA/DCSC Criteria [ ] (Enter Y or N)
• Enter the number for the Accepted Criteria [ ]
• 1 = Economic Hardship ETA offer
• 2 = Equity/Public Policy ETA offer
• 3 = Economic Hardship DCSC (Doubt as to Collectibility with Special Circumstances
• 4 = Equity/Public Policy DCSC
5. Validate and Release the Closed Offer to the appropriate MOIC campus for monitoring as soon as possible after closing the accepted offer on AOIC. Validation and release on AOIC is required.
A. Maintenance Screen: V = Validate. Locate the case you have in the list and indicate "Y." Follow the screen prompts for entering. You can do multiple cases at one time.
B. Once the case is validated, the control of that offer goes to MOIC and the file must be sent to them as soon as possible. Use the destination list at the top to assist in determining where the case file should be sent.
Note:
If there are related cases with different BODs (SB and WI), the SB campus will monitor both offers.
6. Prepare Form 3210 and mail to the appropriate MOIC campus. Be sure the file contains the original copies of:
• Initial Form 656, Offer in Compromise
• Amended Form 656, if applicable
• Form 7249, Offer Acceptance Report
• Co-obligor agreement, if applicable
• Collateral agreement, if applicable
7. Update AOIC history screen with the actions taken on the case.
8.23.6.2.3 (10-16-2007)
Collection Originated Withdrawn OIC Procedures
1. The case file for a rejected or withdrawn offer in compromise should contain:
• Form 5402
• ACM
• Withdrawal Letter 241 signed by the ATM
• Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
• Form 433-D, Installment Agreement, if applicable
2. If an offer is received from one spouse on a joint liability, mirror assessment procedures apply. Collection is responsible for mirror assessment actions on a rejected OIC.
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 16 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
E. LACTION - Withdrawn offer file to XXXXXXXX (Collection Field) or closed on AOIC (Collection Campus). The notation will inform anyone where the case was shipped or how it was closed.
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.3.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases, which is available in the APS section on the Appeals web site.
• Collection will then update AOIC with the appropriate closing information.
6. Date and mail the Withdrawal Letter 241 to the taxpayer and/or POA concurrent with closing the case on ACDS. Keep a copy in the administrative file.
Note:
The legal withdrawal date is the IRS received date if the taxpayer’s withdrawal letter was mailed certified or hand delivered, in which case the date should be indicated by the AO/SO in the body of the Letter 241. If the request to withdraw was received via regular mail, fax or phone, it is the date the withdrawal letter is mailed to the taxpayer.
7. If an offer deposit was made and input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally returned to the taxpayer unless the taxpayer provides written authorization allowing IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization signed by the taxpayer should be included in the file and routed to the MOIC campus that processed the payment.
8. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
9. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
10. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.3.1 (10-16-2007)
AOIC Closing Procedures for Withdrawn Offer
1. This section provides general information for closing a withdrawn OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
3. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
4. KEYSTROKES: "C" = Control, "D" = Disposition, and "F" = Final
A. Final Disposition - 9 = withdrawn in Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" = Rejected with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
5. Input Items:
• Mail date of the Rej w/ Apl Right Ltr
• Mail date of the Appeals Withdrawal Ltr
• Legal withdrawal date ( See IRM 8.23.6.2.3 in paragraph (6) to determine the date)
6. If an offer deposit was made and input onto AOIC Screen 1 (Offer Deposit Amt), a pop-up box will appear at the time of closure asking what should happen with the deposit. Enter one of the following options:
• AN = Apply No Special Instructions
• AS = Apply Special Instructions
• RN = Refund No Special Instructions
• RS = Refund Special Instructions
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Update AOIC history screen with the actions taken on the case.
8. Print the first page of AOIC for the case and attach it to the front of the closed file. Route the case file back to the Area Office/COIC Offer Coordinators. They will maintain the closed offer file until time to ship to FRC. Attaching the first page from AOIC will assist them in routing the case properly.
8.23.6.2.4 (10-16-2007)
Collection Originated Rejected OIC Procedures
1. The file for a case where Appeals sustained Collection's rejection of the offer should contain:
• Form 5402
• ACM
• Rejection Sustention Letter 238 signed by the ATM
• Form 1271
Note:
The Form 1271 in the file will most likely be the one that was originally prepared by Collection. Appeals will prepare a Form 1271 if one was not previously prepared by Collection.
• Form 3040, if applicable
• Form 433-D, if applicable
2. If an offer is received from one spouse on a joint liability, mirror assessment procedures apply. Collection is responsible for creating mirror assessment actions on a rejected OIC.
3. Close the OIC work unit on ACDS following general closing instructions. In addition:
A. CLOSINGCD = 14 (OIC rejection sustained)
B. WUaccptOfrAmt = 0
C. Paycode = 7
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
E. LACTION - Rejected offer file to XXXXXXXX, or rejected offer closed on AOIC.
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The following table provides information on when Appeals can and cannot close the case on AOIC. The next section of this IRM contains information for actually closing applicable cases on AOIC.
If ... Then ...
The offer was originally worked by a COIC campus site Update AOIC with the appropriate closing information. See IRM 8.23.6.2.4.1.
The offer was originally worked by a Collection Field offer group • Print the first page of AOIC and attach it to the front of the case file.
• Forward the file to the appropriate Area Collection Field Office OIC Coordinator as shown on the Non-CDP OIC Cases (with CO Source Code) Field Area Drop Points for Closed Cases, which is available in the APS section on the Appeals web site.
• Collection will then update AOIC with the appropriate closing information.
6. Date and mail the OIC rejection sustention Letter 238 to the taxpayer and/or POA concurrent with closing the case on ACDS. Keep a copy in the administrative file.
7. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
8. Close PEAs using PEAs closing code 03 with a completion date equal to the date the above actions were completed.
9. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
10. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
8.23.6.2.4.1 (10-16-2007)
AOIC Closing Procedures for Rejected Offer
1. This section provides general information for closing are rejected OIC case on the Automated Offer in Compromise (AOIC) system. This applies only to offers that originated out of the applicable COIC site.
2. The case must be reassigned back to the Collection offer employee on AOIC immediately prior to closing the case on AOIC. The AOIC system will not let Appeals close the case until this step is done. ("C" = Control and "A" = Assign) Screen 12 provides the AOIC case assignment history to assist in determining the reassignment number (follow local procedures if a locally developed assignment number was provided). Be sure all information needed to input the closure is available prior to reassigning the case. The case must remain assigned to Appeals until all closure issues are resolved.
3. AOIC INPUT (Query Offer Number)
Note:
Make sure all screens are updated if an amended offer was secured.
Screen Number Input Fields
One • Offer amount
• Amended/Original
• Proposed Disposition
• DATC/Special Circumstances or ETA update Screen 1 with AOIC TYPE = "A"
• If strictly DATC, leave as TYPE = "C"
Note:
Check all of the above fields for accuracy and update as appropriate.
Five • MFT periods must match Form 656/amended Form 656
• To ADD - Add/Update
• To REMOVE - Control U
Screen four is the final screen for input to finalize the AOIC closure Keystrokes:
• C = Control
• D = Disposition
• F = Final
• 3 = Accepted by Appeals
Note:
There must be a prior disposition before you can input a final disposition. The prior disposition in these cases will be "2" = Reject with appeal rights. If there is no prior disposition, return the case to the originator for closure off of AOIC due to unique circumstances. Such a case requires special handling.
Other Input Items:
• Mailing date of Collection's Reject with appeal right letter
• Mailing date of Appeals letter sustaining rejection of the offer (Letter 238)
• Enter the Reasonable Collection Potential (RCP) amount determined by Appeals (from Form 5402 or ACM)
Note:
If an offer deposit was made and input onto AOIC Screen 1 (Offer Deposit Amt), a pop-up box will appear at the time of closure asking what should happen with the deposit. Enter one of the following options:
• AN = Apply No Special Instructions
• AS = Apply Special Instructions
• RN = Refund No Special Instructions
• RS = Refund Special Instructions
4. An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
5. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
6. Collection also works Doubt as to Liability offers when the tax debt involves a TFRP or PLET assessments. These case are also loaded on AOIC.
8.23.6.3 (10-16-2007)
Examination Originated OIC Cases
1. Offers originating in Exam are referred to a Doubt as to Liability, or DATL offers. Exam will also handle Effective Tax Administration (ETA) offers based upon public policy or issues of equity.
2. DATL offers are not controlled on the Automated Offer in Compromise (AOIC) system. ETA offers based upon public policy/equity consideration are controlled on the AOIC system.
3. The work unit will be assigned to the Tax Examiner on PEAs for closing, with PEAs TYPE "CLS" and the appropriate SubTYPE for the case.
4. Closing procedures for OICs that are part of a CDP case are found in IRM 8.22.3.10.
5. Collection handles DATL offers involving Trust Fund Recovery Penalties (TFRPs) and Personal Liability for Excise Tax (PLET) liabilities. For closing procedures for TFRP and PLET cases, See IRM 8.23.6.2.2 for closing procedures on accepted offers. See IRM 8.23.6.2.3 for closing procedures on withdrawn offers. See IRM 8.23.6.2.4 for closing procedures on rejected offers.
Reminder:
TFRP and PLET liabilities are loaded onto AOIC, so follow the AOIC closing procedures for accepted, withdrawn and rejected cases.
8.23.6.3.1 (10-16-2007)
Examination Originated OIC Acceptance Procedures
1. The OIC case file will contain the following documents:
• Original Form 656, Offer in Compromise
Note:
Counsel review and approval/signature on Form 7249, Offer Acceptance Report, is required when the total unpaid liability (including all assessed and accrued penalties and interest) for all related offers on the same taxpayer is $50,000 or more. See See IRM 8.23.6.2.1.
• Amended Form 656, if applicable
• Original Form 7249
• Sanitized MFTRAX transcripts
• Form 5402, Appeals Transmittal and Case Memorandum
• Appeals Case Memorandum, if applicable
• Acceptance Letter 673 signed by the ATM
2. The AO/SO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS. If the case is controlled on AIMS, close the case on AIMS according to standard procedures.
3. Close the OIC work unit on ACDS following general closing instructions. In addition:
A. CLOSINGCD = 15 (OIC Accepted)
B. WUaccptOfrAmt = Amount of the accepted offer (see Form 5402 or the "Terms of this Offer" section on Form 7249)
C. RevsdTax = 0 (zero) for all tax periods
D. Paycode = 7
4. The following closing actions should occur on the date the case is closed on ACDS:
. Date and mail the acceptance letter to the taxpayer and/or POA and include copies of the Form 656 or amended Form 656 and all collateral agreements as attachments
A. Copy the acceptance letter with attachments for the administrative file
B. Send one copy of Form 7249 and the sanitized MFTRAX to the applicable Area Collection Field Office for filing in the Public Inspection File. The address list for where to send the OIC Public Inspection Files is in the APS section on the Appeals web site at OIC Public Inspection File Locations.
C. Ensure the OIC file contains the information in (1) above (except MFTRAX)
D. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed
E. Return the case file to the originating Exam office.
F. Process any OIC payments to the campus OIC unit. After the case is closed, the taxpayer should send payments directly to the campus OIC unit.
8.23.6.3.2 (10-16-2007)
Examination Originated Withdrawn OIC Procedures
1. When the AO and the taxpayer reach an agreement on the correct tax liability, a "compromise" is not required and the taxpayer will generally withdraw the offer in compromise.
2. The case file for a withdrawn offer in compromise should contain:
A. Form 5402
B. ACM, if information not already contained in Form 5402
C. Withdrawal Letter 241 signed by the ATM
D. Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
E. Form 3870, Request for Adjustment, if applicable
F. Form 433-D, Installment Agreement, if applicable
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 16 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
4. If an alternative resolution was reached, such as an installment agreement (Form 433-D) or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The AO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS.
6. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Date and mail the Withdrawal Letter 241 to the taxpayer and/or POA. Keep a copy in the administrative file.
8. Return the case to the originating Exam office.
9. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
8.23.6.3.3 (10-16-2007)
Examination Originated Rejected OIC Procedures
1. A case is processed as Appeals sustaining rejection of the offer when the taxpayer does not agree with the AO's conclusions and does not otherwise withdraw the offer.
2. The case file for a rejected offer in compromise should contain:
A. Form 5402
B. Rejection sustention Letter 238 signed by the ATM
C. ACM
D. Form 1271, Rejection and Withdrawal Memorandum
Note:
The Form 1271 in the file will most likely be the one that was originally prepared by Exam. Appeals will prepare a Form 1271 if one was not previously prepared by Exam.
E. Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability, if applicable
F. Form 3870, Request for Adjustment, if applicable
G. Form 433-D, Installment Agreement, if applicable
3. Close ACDS following general closing instructions. In addition:
A. CLOSINGCD = 14 (OIC withdrawn)
B. Paycode = 7
C. WUaccptOfrAmt = 0
D. RevsdTax for earliest tax period = same as proposed tax (which should be the amount of the total unpaid liability). RevsdTax for other periods = $0
4. If an alternative resolution was reached, such as an installment agreement or having the account placed in currently non-collectible (CNC) status, process the collection alternative. If the alternative is to have the account placed in CNC status, the AO/SO should clearly state such a request and indicate the appropriate TC 530 Closing Code (24-32) on the Form 5402.
5. The AO will indicate if adjustment actions are required. If yes, input the appropriate adjustments to IDRS.
6. If an offer deposit was made and it was input onto AOIC, direct the disposition of the payment by selecting the appropriate option on ACDS.
Note:
An offer deposit is normally refunded unless the taxpayer provided written authorization allowing the IRS to apply the deposit to the existing tax liability. A Form 3040 is typically used, but any written authorization satisfies the requirement. The Form 3040 or other written authorization should be included in the file and routed to the appropriate MOIC campus that processed the payment.
7. Date and mail the Rejection Sustention Letter 238 to the taxpayer and/or POA. Keep a copy in the administrative file.
8. Return the case to the originating Exam office.
9. Close PEAs using PEAs Closing Code 03 with a completion date equal to the date the above actions were completed.
8.23.6.4 (10-16-2007)
Potentially Defaulted OIC Cases
1. A taxpayer must agree to the terms set forth in the Form 656and the compromised amount remains a tax liability until the taxpayer meets all the terms and conditions of the offer. See Paragraph (i) of Section V of Form 656 (Rev. 02-2007).
2. Taxpayers entering into either a DATC or ETA offer must agree to comply with all filing and paying obligations under the Internal Revenue Code for a period of 5 years after the offer is accepted, or until the deferred payment offer amount is paid in full, whichever is later. See Paragraph (d) of Section V of Form 656.
3. If a taxpayer fails to meet any of the terms of an offer, the Service has the right to terminate the offer, reinstate the compromised liability, and pursue collection action against the taxpayer. The default provisions apply only to the party failing to comply if the liabilities are jointly owed and the offer was jointly submitted. See Paragraph (d) of Section V of Form 656.
4. If an offer was originally accepted by Appeals, Collection's Monitoring Offer in Compromise (MOIC) unit will refer the case to the appropriate Appeals office via a Form 2209, Other Investigation, for review of the case and, if necessary, issuance of the default letter. See IRM 5.8.9.3, Possible Actions on Accepted Offers, Potential Default Cases.
5. MOIC takes care of all AOIC aspects of a potential default case. Appeals is responsible only for ACDS input. See IRM 8.23.6.1.1 for details on carding in a potential default OIC case.
A. If Appeals determines the offer is in default the AO/SO will prepare a formal Default Letter for the ATM's signature. See IRM Exhibit 5.8.9-4. Mail the signed letter to the taxpayer and/or POA and close the case on ACDS using Closing Code 14. Send the Form 2209 back to the originating MOIC unit. Be sure to include a copy of the signed Default Letter.
B. If the taxpayer remedies the problem that gave rise to the potential default, Appeals will not issue the default letter. Close the case on ACDS using Closing Code 15. Send the Form 2209 back to the originating MOIC unit.
6. Follow the same procedures as above in a "Compromise of a Compromise" case.