EXPANDED GROUNDS FOR OFFERS TO COMPROMISE
The IRS has issued final regulations ( TD 9007, 7/18/02 ) relating to the compromise of internal revenue taxes. The IRS has had a long-standing practice of compromising when there was doubt as to the existence or the amount of the tax liability, or doubt that the amount due could be collected. The final regulations continue these traditional grounds for compromise. In addition, to reflect changes made by RRA '98, the final regulations (as did temporary regulations—see Cruise, "Make an Offer the IRS Is Now Less Likely to Refuse," 63 PTS 330 (December 1999) ) allow compromise when there is no doubt as to liability or as to collectibility, but when compromise would promote effective tax administration because either:

(1) Collection of the liability would create economic hardship.
(2) Compelling public policy or equity considerations provide a sufficient basis for compromising the liability.
However, compromise based on these grounds may not be authorized if compromise would undermine compliance with the tax laws.

Reg. 301.7122-1(b)(3) retains a reference in the temporary regulations to the economic hardship standard in Reg. 301.6343-1 , which defines economic hardship as the inability to pay reasonable living expenses. In determining these expenses, Reg. 301.6343-1 directs the IRS to consider relevant information such as the taxpayer's age, employment, dependents, and other "unique circumstances." Reg. 301.7122-1(c)(3) supplements this standard by providing a nonexclusive list of factors that support a finding of economic hardship, and examples to illustrate application.

A fourth example in the temporary regulations that applied to business taxpayers was removed. The economic hardship standard of Reg. 301.6343-1 specifically applies only to individuals, and the IRS concluded that an economic hardship standard for non-individuals does not necessarily promote effective tax administration. The Service said that permitting compromise for non-individuals when there is no doubt about collectibility would raise an issue about government support of non-viable businesses.

The temporary regulations provided that the IRS may compromise a liability to promote effective tax administration even if no other basis for compromise is available. The standard for compromise in the temporary regulations was when collection of the full liability would be "detrimental to voluntary compliance by taxpayers." This standard was clarified in Reg. 301.7122-1(c)(3)(iv) to illustrate the types of cases that may qualify for compromise on these grounds. The Service said that compromise under the non-hardship effective tax administration standard was still expected to be appropriate only in rare cases in which collection would adversely affect the overall tax system.

Under Reg. 301.7211-1(b)(3)(ii) , a taxpayer seeking a compromise under the non-hardship standard must identify compelling public policy or equity considerations providing a sufficient basis for compromising the liability. The compromise must be justified even though a similarly situated taxpayer may have paid his or her liability in full. The IRS must conclude that collection of the full liability would undermine public confidence that the tax laws were being administered in a fair and equitable manner.

The final regulations do not prescribe the amount that must be offered in order for an offer to be acceptable. The amount to be paid, future compliance, and other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to IRS discretion. As required by Section 7122(c)(2)(A) and (B) , final Reg. 301.7122-1(c)(2) provides for the development and publication of national and local living allowances that permit taxpayers entering into offers to compromise to have adequate means to provide for basic living expenses. Section 7122(c)(3)(A) prohibits the rejection of an offer to compromise by a low-income taxpayer based solely on the amount of the offer, and Reg. 301.7122-1(f)(3) expands this rule to apply to all taxpayers, regardless of income level.

In accordance with Section 7122(d)(1) , Reg. 301.7122-1(f)(2) provides that all proposed rejections of offers to compromise will receive independent administrative review prior to final rejection. Section 7122(d)(2) requires and Reg. 301.7122-1(f)(5)(i) provides that the taxpayer may appeal any rejection. The temporary regulations provided that an offer could not be returned to a taxpayer for failure to submit requested financial information until an independent administrative review of the proposed return was completed. This requirement was deleted from the final regulations because it was the source of significant delays and was redundant because an IRS manager must review and approve all returns of offers for failure to submit requested financial information.

Pursuant to Section 6331(k) , Reg. 301.7122-1(f)(6) provides that the IRS may not levy to collect a liability while an offer to compromise is pending, or for 30 days following a rejection of the offer, or during any appeal period, when such appeal was instituted within 30 days following rejection. Levy will not be precluded when collection is in jeopardy or the offer to compromise was submitted solely to delay collection. Reg. 301.7122-1(g)(6) corrected an omission in the temporary regulations by providing that the IRS may not refer a case to the Department of Justice to collect an unpaid tax through a judicial proceeding while an offer to compromise that tax is pending or while a rejection of that offer is being considered by the IRS.

Finally, Reg. 301.7122-1(e)(6) specifies that Chief Counsel review of an accepted offer to compromise is required only for offers in compromise involving $50,000 or more in unpaid liabilities.