The basic classification of an Offer in Compromise

The IRS may compromise a tax liability on any of the following grounds:

doubt as to liability;

doubt as to collectibility; or

to promote effective tax administration because either (a) collection of the full amount would cause economic hardship for the taxpayer, or (b) the taxpayer identifies compelling public policy or equity considerations providing a sufficient basis for compromising the liability. Reg §301.7122-1(b).

For the standards and taxpayer safeguards IRS must apply in evaluating compromise offers, including some special rules for offers based on doubt as to liability and offers based on doubt as to collectibility, see ¶71,224.01.

Doubt as to liability.

There is doubt as to liability where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. There is no doubt as to liability where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. Reg §301.7122-1(b)(1).

Doubt as to collectibility.

Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the liability. Reg §301.7122-1(b)(2).

Promotion of effective tax administration.

A compromise may be entered into to promote effective tax administration, if:

collection of the full liability could be achieved, but collection of the full liability would cause the taxpayer economic hardship within the meaning of Reg §301.6343-1 (relating to release of levy due to economic hardship, RIA United States Tax Reporter Income Taxes¶63,354.06), Reg §301.7122-1(b)(3)(i),or

there are no other grounds for compromise (i.e., no doubt as to liability, doubt as to collectibility, or economic hardship as described above), but compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability (the “non-hardship” effective tax administration standard). Reg §301.7122-1(b)(3)(ii); Preamble to TD9007, 7/18/2002.

But no compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. Reg §301.7122-1(b)(3)(iii). Factors supporting (but not conclusive of) a determination that a compromise would undermine compliance include, but aren't limited to, whether the taxpayer has: (i) a history of noncompliance with the filing and payment requirements of the Code; (ii) taken deliberate actions to avoid the payment of taxes; and (iii) encouraged others to refuse to comply with the tax laws. Reg §301.7122-1(c)(3)(ii).

Economic hardship.

Reg §301.6343-1 (which is applied in considering compromises, as described above) defines economic hardship as the inability to pay reasonable basic living expenses, and directs IRS, in determining reasonable living expenses, to relevant information such as the taxpayer's age, employment status and history, number of dependents, and other “unique circumstances,” e.g., special education expenses, a medical catastrophe or a national disaster. Thus, in determining whether an economic hardship compromise may be made, the central inquiry is whether full collection would render the taxpayer unable to provide for reasonable basic living expenses. Preamble to TD9007, 7/18/2002

Because the economic hardship standard under Reg §301.6343-1 specifically applies only to individuals, economic hardship isn't a basis for compromise for non-individuals. Preamble to TD9007, 7/18/2002.

Factors supporting (but not conclusive of) a determination that collection would cause economic hardship, include, but aren't limited to:

taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition.

although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support.

although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets, and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses. Reg §301.7122-1(c)(3)(i).

Compelling public policy or equity considerations.

A compromise will be justified under this standard only where due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. A taxpayer proposing compromise under this ground will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. Reg §301.7122-1(b)(3)(ii). IRS expects these compromises will be appropriate only in those rare cases where collection would adversely affect the overall tax system. Preamble to TD9007, 7/18/2002.

Before accepting an offer based on public policy and equity considerations, IRS says that it must conclude that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Preamble to TD9007, 7/18/2002.

IRS will presume that the correct application of the tax laws produces a fair and equitable result, absent exceptional circumstances. Preamble to TD9007, 7/18/2002.

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