COMREP ¶ 71,221.009 Offers-in-compromise. (IRS Restructuring and Reform Act of 1998, , PL 105-206, 7/22/98)
House Report
Present Law
Section 7122 of the Code permits the IRS to compromise a taxpayer's tax liability. In general, this occurs when a taxpayer submits an offer-in-compromise to the IRS. An offer-in-compromise is a proposal to settle unpaid tax accounts for less than the full amount of the assessed balance due. An offer-in-compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.
Taxpayers submit an offer-in-compromise on Form 656. There are two bases on which an offer can be made. The first is doubt as to the liability for the amount owed. The second is doubt as to the taxpayer's ability fully to pay the amount owed. An application can be made on either or both of these grounds. Taxpayers are required to submit background information to the IRS substantiating their application. If they are applying on the basis of doubt as to the taxpayer's ability fully to pay the amount owed, the taxpayer must complete a financial disclosure form enumerating assets and liabilities.
As part of an offer-in-compromise made on the basis of doubt as to ability fully to pay, taxpayers must agree to comply with all provisions of the Internal Revenue Code relating to filing returns and paying taxes for five years from the date the IRS accepts the offer. Failure to observe this requirement permits the IRS to begin immediate collection actions for the original amount of the liability.
Reasons for Change
The Committee believes that taxpayers should be fully informed of the offer-in-compromise procedures, including the responsibilities created by those procedures. In determining whether there is doubt as to the taxpayer's ability fully to pay the amount owed, the Committee believes that the Secretary should take into consideration a taxpayer's need to provide for the basic living expenses of his or her family, based on the cost of living in the taxpayer's locality.
Explanation of Provision
The bill requires the IRS to develop and publish schedules of national and local allowances designed to provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The bill also provides that, in the case of a compromise agreement that is terminated due to the actions of one spouse or former spouse, the spouse or former spouse remaining in compliance with the agreement may obtain reinstatement of such agreement on application. All payments required under the offer-in- compromise must be current for either spouse or former spouse to be in compliance with the agreement. Finally, the bill requires the IRS to prepare a publication or statement providing guidance to taxpayers on the rights and obligations of taxpayers and the IRS relating to offers in compromise. This statement will include materials explaining to married taxpayers their responsibilities should their marital status change and instructions for applying to have an offer- in-compromise reinstated under the circumstances discussed above. It is expected that this publication or statement will be provided to taxpayers considering an offer in compromise at appropriate times.
Effective Date
The provision is effective on the date of enactment. It is expected that the materials required by this provision will be published as soon as practicable, but no later than 180 days after the date of enactment. It is expected that offers-in-compromise based on this provision will be available as of the date of enactment.
Senate Report
Present Law
A compromise agreement based on doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual 35 provides guidelines for revenue officers to determine whether an offer-in-compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue officer is instructed to consider the taxpayer's assets and future and present income, the IRM advises that rejection of an offer solely based on narrow asset and income evaluations should be avoided.
35
Pursuant to the IRM, collection normally is withheld during the period an offer-in-compromise is pending, unless it is determined that the offer is a delaying tactic and collection is in jeopardy.
Reasons for Change
The Committee believes that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.
Conference Report
Senate Amendment
Rights of taxpayers entering into offers-in-compromise: Same as the House bill, except as follows. Under the Senate amendment, the IRS also is required to consider the facts and circumstances of a particular taxpayer's case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate under the circumstances, the taxpayer is not limited by the national or local allowances.
The Senate amendment prohibits the IRS from rejecting an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer.
The Senate amendment provides that, in the case of an offer-in-compromise submitted solely on the basis of doubt as to liability, the IRS may not reject the offer merely because the IRS cannot locate the taxpayer's file. The Senate amendment prohibits the IRS from requesting a financial statement if the taxpayer makes an offer-in-compromise based solely on doubt as to liability.
Suspend collection by levy while offer-in-compromise is pending:
The Senate amendment prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer-in- compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, and (3) during any period in which an appeal of the rejection of an offer is being considered. Taxpayers whose offers are rejected and who made good faith revisions of their offers and resubmitted them within 30 days of the rejection or return would be eligible for a continuous period of relief from collection by levy. This prohibition on collection by levy would not apply if the IRS determines that collection is in jeopardy or that the offer was submitted solely to delay collection. The Senate amendment provides that the statute of limitations on collection would be tolled for the period during which collection by levy is barred.
Procedures for reviews of rejections of offers-in-compromise and installment agreements:
The Senate amendment requires that the IRS implement procedures to review all proposed IRS rejections of taxpayer offers-in-compromise and requests for installment agreements prior to the rejection being communicated to the taxpayer. The Senate amendment requires the IRS to allow the taxpayer to appeal any rejection of such offer or agreement to the IRS Office of Appeals. The IRS must notify taxpayers of their right to have an appeals officer review a rejected offer-in-compromise on the application form for an offer-in-compromise.
Publication of taxpayer's rights with respect to offers- in-compromise:
Same as the House bill.
Liberal acceptance policy:
The Senate amendment provides that the IRS will adopt a liberal acceptance policy for offers-in- compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.
Effective date: Generally effective for offers-in- compromise submitted after the date of enactment. The provision suspending levy is effective with respect to offers-in-compromise pending on or made after December 31, 1999.
Conference Agreement
The conference agreement follows the Senate amendment, with the following additions. First, the provision suspending collection by levy while an offer-in-compromise is pending is also expanded to apply while an installment agreement is pending.
Second, the provision authorizes the Secretary to prescribe guidelines for the IRS to determine whether an offer-in- compromise is adequate and should be accepted to resolve a dispute. Accordingly, the conferees expect that the present regulations will be expanded so as to permit the IRS, in certain circumstances, to consider additional factors (i.e., factors other than doubt as to liability or collectibility) in determining whether to compromise the income tax liabilities of individual taxpayers. For example, the conferees anticipate that the IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer's income tax liability would promote effective tax administration. The conferees anticipate that, among other situations, the IRS may utilize this new authority to resolve longstanding cases by forgoing penalties and interest which have accumulated as a result of delay in determining the taxpayer's liability. The conferees believe that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the conferees believe that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability of such agreements.
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