Offer in Compromise - OIC

Offer in Compromise - OIC.

If the IRS determines that there are grounds for compromise, it may, in its discretion, compromise any civil or criminal liability arising under the internal revenue laws before reference of a case to the Justice Department for prosecution or defense. Where a case is referred to the Justice Department, the Attorney General, or his delegate, has authority to compromise the case. Code Sec. 7122(a); Reg §301.7122-1(a)(1).

Offer in Compromise agreement is, in general, a settlement of a claim by mutual concessions, which is reached in strict adherence to the statutory method. For the effect of the doctrine of estoppel where the prescribed procedure is not strictly followed.

Offer in Compromise acceptance  will conclusively settle the liability of the taxpayer specified in the offer. Reg §301.7122-1(e)(5). 

Unless the terms of the offer and acceptance expressly provide otherwise, acceptance of an offer to compromise a civil liability does not remit a criminal liability, and vice versa. Reg §301.7122-1(a)(2).

Some courts have held that a compromise relating to penalties or interest also settled the tax on which the penalty or interest, respectively, was computed. For decisions permitting recovery of part of the interest where part of the underlying tax liability is refunded.

Standards applied in evaluating compromises; taxpayer safeguards.

Once a basis for compromise has been identified, the decision to accept or reject an offer in compromise, as well as the terms and conditions agreed to, is left to the IRS's discretion. The determination whether to accept or reject an offers will be based upon consideration of all the facts and circumstances, including whether the circumstances of a particular case warrant acceptance of an amount that might not otherwise be acceptable under the IRS's policies and procedures. Reg §301.7122-1(c)(1). Thus, the amount to be paid, future compliance or other conditions precedent to satisfaction of a liability for less than the full amount due are matters left to the IRS's discretion. Preamble to TD9007, 7/18/2002.

The IRS is required to prescribe guidelines for its officers and employees to determine whether a taxpayer's offer of compromise is adequate and should be accepted to resolve a dispute. Code Sec. 7122(d)(1). For these guidelines, the IRS is required to develop and publish national and local allowance schedules designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. Code Sec. 7122(d)(2)(A). These schedules are available in IRS's Financial Analysis Handbook, IRM 5.15, and on IRS's website at www.irs.gov. Rev. Proc. 2003-71, 2003-36 IRB. IRS officers and employees must determine, on the basis of each taxpayer's facts and circumstances, whether use of the schedules is appropriate. They aren't to use the schedules to the extent doing so would result in the taxpayer not having adequate means to provide for basic living expenses. Code Sec. 7122(d)(2)(B).

The Code prohibits the IRS from rejecting an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer, Code Sec. 7122(d)(3)(A), and regs expand this rule to apply it to all taxpayers regardless of income level. Preamble to TD9007, 7/18/2002. Specifically, no offer in compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under (a) the compromise provisions, and (b) IRS's policies and procedures egarding compromise of cases. Reg §301.7122-1(f)(3).

Offer in Compromise based on doubt as to liability.

Offers in compromise based on doubt as to liability cannot be rejected solely because the IRS is unable to locate the taxpayer's return or return information for verification of the liability. Code Sec. 7122(d)(3)(B)(i); Reg §301.7122-1(f)(4). And taxpayers submitting offers solely on the basis of doubt as to liability won't be required to provide financial statements. Code Sec. 7122(d)(3)(B)(ii); Reg §301.7122-1(d)(1).

Special rules for evaluation of offers based on doubt as to collectibility.

A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, IRS will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of basic living expenses will be founded upon an evaluation of the individual facts and circumstances presented by the taxpayer's case. To guide this determination, IRS's published guidelines on national and local living expense standards described above will be taken into account. Reg §301.7122-1(c)(2)(i).

And with respect to an offer based on doubt as to collectibility, where the taxpayer is offering to compromise a liability for which the taxpayer's spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer. But a nonliable spouse's assets and income may be considered:

To the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to effect collection of the taxpayer's liability from that property (e.g., property that was conveyed in fraud of creditors), where property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as permitted by state law as discussed below. Reg §301.7122-1(c)(2)(ii)(A).

The IRS may also request information regarding the assets and/or income of the nonliable spouse for the sole purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer. Reg §301.7122-1(c)(2)(ii)(A).

Where collection of the taxpayer's liability from the assets and/or income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and/or income of the nonliable spouse will be considered in determining the amount of an adequate offer except to the extent that the taxpayer and the nonliable spouse show that such collection would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents. Reg §301.7122-1(c)(2)(ii)(B).

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