Section 7122 - Offer in Compromise


An offer in compromise (OIC) is a contractual agreement between the IRS and a taxpayer under which the taxpayer agrees to pay a specified amount in full settlement of assessed tax liabilities, including interest and most penalties (Code Sec. 7122(a)). The compromise process is primarily used by taxpayers experiencing financial difficulties, as a means by which they can have their tax liability reduced and settled without resorting to expensive litigation. While closing agreements relate to the agreed-upon tax liability of the taxpayer, offers in compromise are agreements between the taxpayer and the IRS as to the amount of tax liability that will be paid and how that amount will be paid.

The IRS has authority to compromise any civil or criminal case arising under the internal revenue laws. A taxpayer's offer to compromise tax liability must be based on one or all of the following grounds:
(1) doubt as to liability for the amount of taxes assessed;

(2) doubt as to the collectibility of the full amount of tax, penalty and interest assessed


7122(a) AUTHORIZATION. --The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.

7122(b) RECORD. --Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of --

7122(b)(1) The amount of tax assessed,

7122(b)(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed, and

7122(b)(3) The amount actually paid in accordance with the terms of the compromise.

Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary.

7122(c) RULES FOR SUBMISSION OF OFFERS-IN-COMPROMISE. --

7122(c)(1) PARTIAL PAYMENT REQUIRED WITH SUBMISSION. --

7122(c)(1)(A) LUMP-SUM OFFERS. --

7122(c)(1)(A)(i) IN GENERAL. --The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.

7122(c)(1)(A)(ii) LUMP-SUM OFFER-IN-COMPROMISE. --For purposes of this section, the term "lump-sum offer-in-compromise" means any offer of payments made in 5 or fewer installments.

7122(c)(1)(B) PERIODIC PAYMENT OFFERS. --

7122(c)(1)(B)(i) IN GENERAL. --The submission of any periodic payment offer-in-compromise shall be accompanied by the payment of the amount of the first proposed installment.

7122(c)(1)(B)(ii) FAILURE TO MAKE INSTALLMENT DURING PENDENCY OF OFFER. --Any failure to make an installment (other than the first installment) due under such offer-in-compromise during the period such offer is being evaluated by the Secretary may be treated by the Secretary as a withdrawal of such offer-in-compromise.

7122(c)(2) RULES OF APPLICATION. --

7122(c)(2)(A) USE OF PAYMENT. --The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.

7122(c)(2)(B) APPLICATION OF USER FEE. --In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in-compromise.

7122(c)(2)(C) WAIVER AUTHORITY. --The Secretary may issue regulations waiving any payment required under paragraph (1) in a manner consistent with the practices established in accordance with the requirements under subsection (d)(3).

7122(d) STANDARDS FOR EVALUATION OF OFFERS. --

7122(d)(1) IN GENERAL. --The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.

7122(d)(2) ALLOWANCES FOR BASIC LIVING EXPENSES. --

7122(d)(2)(A) IN GENERAL. --In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.

7122(d)(2)(B) USE OF SCHEDULES. --The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) 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.

7122(d)(3) SPECIAL RULES RELATING TO TREATMENT OF OFFERS. --The guidelines under paragraph (1) shall provide that --

7122(d)(3)(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer,

7122(d)(3)(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer --

7122(d)(3)(B)(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and

7122(d)(3)(B)(ii) the taxpayer shall not be required to provide a financial statement, and

7122(d)(3)(C) any offer-in-compromise which does not meet the requirements of subparagraph (A)(i) or (B)(i), as the case may be, of subsection (c)(1) may be returned to the taxpayer as unprocessable.

7122(e) ADMINISTRATIVE REVIEW. --The Secretary shall establish procedures --

7122(e)(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and

7122(e)(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.

7122(f) DEEMED ACCEPTANCE OF OFFER NOT REJECTED WITHIN CERTAIN PERIOD. --Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.


7122(f)[(g)] FRIVOLOUS SUBMISSIONS, ETC. --Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.

.01 Amended by P.L. 109-432, P.L. 109-222, P.L. 105-206 and P.L. 104-168. For details, see the Code Volumes.


(Reg. §301.7122-1(b));
Compromises
In general

(1) If the Secretary determines that there are grounds for compromise under this section, the Secretary may, at the Secretary's discretion, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal liability for taxes, interest, or penalties. 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, nor does acceptance of an offer to compromise a criminal liability remit a civil liability.

(b) Grounds for compromise

(1) Doubt as to liability. --Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability. See paragraph (f)(4) of this section for special rules applicable to rejection of offers in cases where the Internal Revenue Service (IRS) is unable to locate the taxpayer's return or return information to verify the liability.

(2) 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.
(3) Promote effective tax administration

(i) A compromise may be entered into to promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343-1.

(ii) If there are no grounds for compromise under paragraphs (b)(1), (2), or (3)(i) of this section, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified 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 paragraph (b)(3)(ii) will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.

(iii) 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.
(c) Special rules for evaluating offers to compromise

(1) In general. --Once a basis for compromise under paragraph (b) of this section has been identified, the decision to accept or reject an offer to compromise, as well as the terms and conditions agreed to, is left to the discretion of the Secretary. The determination whether to accept or reject an offer to compromise 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 Secretary's policies and procedures.

(2) Doubt as to collectibility

(i) Allowable Expenses. --A determination of doubt as to collectibility will include a determination of ability to pay. In determining ability to pay, the Secretary will permit taxpayers to retain sufficient funds to pay basic living expenses. The determination of the amount of such 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, guidelines published by the Secretary on national and local living expense standards will be taken into account.

(ii) Nonliable spouses

(A) In general. --Where a 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. The assets and income of a nonliable spouse may be considered, however, 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 such property (e.g., property that was conveyed in fraud of creditors), 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 provided in paragraph (c)(2)(ii)(B) of this section. The IRS also may request information regarding the assets and income of the nonliable spouse for the purpose of verifying the amount of and responsibility for expenses claimed by the taxpayer.

(B) Exception. --Where collection of the taxpayer's liability from the assets and income of the nonliable spouse is permitted by applicable state law (e.g., under state community property laws), the assets and 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 demonstrate that collection of such assets and income would have a material and adverse impact on the standard of living of the taxpayer, the nonliable spouse, and their dependents.
(3) Compromises to promote effective tax administration

(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to --

(A) 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;

(B) 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; and

(C) 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.

(ii) Factors supporting (but not conclusive of) a determination that compromise would undermine compliance within the meaning of paragraph (b)(3)(iii) of this section include, but are not limited to --

(A) Taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

(B) Taxpayer has taken deliberate actions to avoid the payment of taxes; and

(C) Taxpayer has encouraged others to refuse to comply with the tax laws.

(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section:

Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer. The taxpayer's overall compliance history does not weigh against compromise.

(iv) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary's discretion, under the public policy and equity provisions of paragraph (b)(3)(ii) of this section:

Example 1. In October of 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. The taxpayer's overall compliance history does not weigh against compromise.

Example 2. The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, the taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, the taxpayer would have redeposited the amount within the required 60-day period. The taxpayer's overall compliance history does not weigh against compromise.

(d) Procedures for submission and consideration of offers

(1) In general. --An offer to compromise a tax liability pursuant to section 7122 must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be made in writing, must be signed by the taxpayer under penalty of perjury, and must contain all of the information prescribed or requested by the Secretary. However, taxpayers submitting offers to compromise liabilities solely on the basis of doubt as to liability will not be required to provide financial statements.
(2) When offers become pending and return of offers. --An offer to compromise becomes pending when it is accepted for processing. The IRS may not accept for processing any offer to compromise a liability following reference of a case involving such liability to the Attorney General for prosecution or defense. If an offer accepted for processing does not contain sufficient information to permit the IRS to evaluate whether the offer should be accepted, the IRS will request that the taxpayer provide the needed additional information. If the taxpayer does not submit the additional information that the IRS has requested within a reasonable time period after such a request, the IRS may return the offer to the taxpayer. The IRS may also return an offer to compromise a tax liability if it determines that the offer was submitted solely to delay collection or was otherwise nonprocessable. An offer returned following acceptance for processing is deemed pending only for the period between the date the offer is accepted for processing and the date the IRS returns the offer to the taxpayer. See paragraphs (f)(5)(ii) and (g)(4) of this section for rules regarding the effect of such returns of offers.
(3) Withdrawal. --An offer to compromise a tax liability may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to the IRS' acceptance of the offer to compromise. An offer will be considered withdrawn upon the IRS' receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail, or upon issuance of a letter by the IRS confirming the taxpayer's intent to withdraw the offer.

(e) Acceptance of an offer to compromise a tax liability

(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

(2) As additional consideration for the acceptance of an offer to compromise, the IRS may request that taxpayer enter into any collateral agreement or post any security which is deemed necessary for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is contingent upon the immediate and simultaneous release of a tax lien in whole or in part, such payment must be made in accordance with the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle the liability of the taxpayer specified in the offer. Compromise with one taxpayer does not extinguish the liability of, nor prevent the IRS from taking action to collect from, any person not named in the offer who is also liable for the tax to which the compromise relates. Neither the taxpayer nor the Government will, following acceptance of an offer to compromise, be permitted to reopen the case except in instances where --

(i) False information or documents are supplied in conjunction with the offer;

(ii) The ability to pay or the assets of the taxpayer are concealed; or

(iii) A mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered.

(6) Opinion of Chief Counsel. --Except as otherwise provided in this paragraph (e)(6), if an offer to compromise is accepted, there will be placed on file the opinion of the Chief Counsel for the IRS with respect to such compromise, along with the reasons therefor. However, no such opinion will be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. Also placed on file will be a statement of --

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the compromise.
(f) Rejection of an offer to compromise

(1) An offer to compromise has not been rejected until the IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed.

(3) No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.

(4) Offers based upon doubt as to liability. --Offers submitted on the basis of 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.
(5) Appeal of rejection of an offer to compromise

(i) In general. --The taxpayer may administratively appeal a rejection of an offer to compromise to the IRS Office of Appeals (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.

(ii) Offer to compromise returned following a determination that the offer was nonprocessable, a failure by the taxpayer to provide requested information, or a determination that the offer was submitted for purposes of delay. --Where a determination is made to return offer documents because the offer to compromise was nonprocessable, because the taxpayer failed to provide requested information, or because the IRS determined that the offer to compromise was submitted solely for purposes of delay under paragraph (d)(2) of this section, the return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals under the provisions of this paragraph (f)(5). However, if the offer is returned because the taxpayer failed to provide requested financial information, the offer will not be returned until a managerial review of the proposed return is completed.

(g) Effect of offer to compromise on collection activity

(1) In general. --The IRS will not levy against the property or rights to property of a taxpayer who submits an offer to compromise, to collect the liability that is the subject of the offer, during the period the offer is pending, for 30 days immediately following the rejection of the offer, and for any period when a timely filed appeal from the rejection is being considered by Appeals.
(2) Revised offers submitted following rejection. --If, following the rejection of an offer to compromise, the taxpayer makes a good faith revision of that offer and submits the revised offer within 30 days after the date of rejection, the IRS will not levy to collect from the taxpayer the liability that is the subject of the revised offer to compromise while that revised offer is pending. (3) Jeopardy. --The IRS may levy to collect the liability that is the subject of an offer to compromise during the period the IRS is evaluating whether that offer will be accepted if it determines that collection of the liability is in jeopardy.

(4) Offers to compromise determined by IRS to be nonprocessable or submitted solely for purposes of delay. --If the IRS determines, under paragraph (d)(2) of this section, that a pending offer did not contain sufficient information to permit evaluation of whether the offer should be accepted, that the offer was submitted solely to delay collection, or that the offer was otherwise nonprocessable, then the IRS may levy to collect the liability that is the subject of that offer at any time after it returns the offer to the taxpayer.

(5) Offsets under section 6402. --Notwithstanding the evaluation and processing of an offer to compromise, the IRS may, in accordance with section 6402, credit any overpayments made by the taxpayer against a liability that is the subject of an offer to compromise and may offset such overpayments against other liabilities owed by the taxpayer to the extent authorized by section 6402.

(6) Proceedings in court. --Except as otherwise provided in this paragraph (g)(6), the IRS will not refer a case to the Department of Justice for the commencement of a proceeding in court, against a person named in a pending offer to compromise, if levy to collect the liability is prohibited by paragraph (g)(1) of this section. Without regard to whether a person is named in a pending offer to compromise, however, the IRS may authorize the Department of Justice to file a counterclaim or third-party complaint in a refund action or to join that person in any other proceeding in which liability for the tax that is the subject of the pending offer to compromise may be established or disputed, including a suit against the United States under 28 U.S.C. 2410. In addition, the United States may file a claim in any bankruptcy proceeding or insolvency action brought by or against such person.

(h) Deposits. --Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. If an offer to compromise is withdrawn, is determined to be nonprocessable, or is submitted solely for purposes of delay and returned to the taxpayer, any amount tendered with the offer, including all installments paid on the offer, will be refunded without interest. If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.

(i) Statute of limitations
(1) Suspension of the statute of limitations on collection. --The statute of limitations on collection will be suspended while levy is prohibited under paragraph (g)(1) of this section.
(2) Extension of the statute of limitations on assessment. --For any offer to compromise, the IRS may require, where appropriate, the extension of the statute of limitations on assessment. However, in any case where waiver of the running of the statutory period of limitations on assessment is sought, the taxpayer must be notified of the right to refuse to extend the period of limitations or to limit the extension to particular issues or particular periods of time.
(j) Inspection with respect to accepted offers to compromise. --For provisions relating to the inspection of returns and accepted offers to compromise, see section 6103(k)(1).

(k) Effective date. --This section applies to offers to compromise pending on or submitted on or after July 18, 2002. [Reg. §301.7122-1.]

.01 Historical Comment: Adopted 7/18/2002 by T.D. 9007. [Reg. §301.7122-1 does not reflect P.L. 109-222 (2006).




and/or

(3) promotion of an effective tax administration (Reg. §301.7122-1(b)(3)).


The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) required the IRS to develop employee guidelines for determining whether a proposed offer in compromise is adequate and should be accepted to resolve a dispute (Code Sec. 7122(d)(1), as redesignated by the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222)). As a result, the IRS revised its procedures in this area, as set forth in regulations (Reg. §301.7122-1), the Internal Revenue Manual (see CCH IRS OFFER IN COMPROMISE HANDBOOK; Internal Revenue Manual 5.8, 09-01-2005), and Rev. Proc. 2003-71. These guidelines include national and local allowances under which IRS employees may determine the basic living expenses of a taxpayer entering into a compromise. The IRS was directed to determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the standard allowances is appropriate. Local and national standards are not to be used to the extent that they would result in a taxpayer not having adequate means to provide for basic living expenses (Code Secs. 7122(d)(1) and (2), as redesignated by P.L. 109-222).

Under the offer-in-compromise guidelines, IRS employees may not reject an offer from a low-income taxpayer solely on the basis of the amount of the offer. If an offer in compromise is based on doubt as to liability, the IRS may not reject an offer solely because the IRS cannot locate a taxpayer's return or return information for verification purposes. Moreover, anyone seeking an offer in compromise based on doubt as to liability is not required to provide a financial statement (Code Sec. 7122(d)(3), as redesignated and amended by P.L. 109-222).

The Conference Committee Report to P.L. 105-206 contemplates that the IRS will consider factors such as equity and hardship when determining whether to accept an offer in compromise. The conferees urge the IRS to be flexible in finding ways to work with taxpayers who are sincerely trying to meet their tax obligations. This could be accomplished, for example, by forgoing penalties and interest amounts that have accumulated while determinations of taxpayer liability were being made.

A compromise may be entered into before a case is referred to the Department of Justice for prosecution or defense. The Attorney General or delegate may compromise a case after it has been referred to the Department of Justice (Code Sec. 7122(a)).

The IRS views an offer in compromise as a legitimate alternative to declaring a case currently uncollectible or to participating in a protracted installment agreement, and it has provided guidelines that set forth the procedures to be followed by taxpayers and IRS personnel when accepting an offer in compromise (Internal Revenue Manual 5.8, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

The IRS's objectives in accepting offers in compromise are:
(1) to effect collection of what could reasonably be collected at the earliest time possible and at the least cost to the government;

(2) to achieve a resolution that is in the best interest of both the individual taxpayer and the government;

(3) to give taxpayers a fresh start toward future voluntarily compliance with all filing and payment requirements; and

(4) to collect funds which may not be collectible through any other means (Internal Revenue Manual 5.8.1.1.4, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

As a contract, the offer in compromise is subject to the rules governing general contract law (Walker v. Alamo Foods Co., 1 USTC ¶207, and Ely & Walker Dry Goods Co., 1 USTC ¶423, at ¶41,130.50, as well as R.C. Lane, 62-1 USTC ¶9467, and B.R. Kurio, 71-1 USTC ¶9112, at ¶41,130.25).

The contract spells out the terms for payment of the tax liability. The underlying assessment is not abated, and interest accrues even if the offer in compromise is accepted by the IRS. The original liability can be revived if the taxpayer defaults on the terms of the compromise agreement (Instructions to Form 656, Offer in Compromise (Rev. February 2007), p. 16).

The IRS does not have the authority to accept an offer in compromise (OIC) when:
(1) questions concerning the amount of the taxpayers liability or the collection of a liability for all or part of the periods the taxpayer owes is in litigation;

(2) the federal tax liability for all or part of the periods the taxpayer owes has been reduced to a judgment;

(3) the IRS has a civil or criminal prosecution pending against the taxpayer in the Department of Justice (DOJ) or United States Attorneys Office;

(4) acceptance of the offer is dependent upon the acceptance of a related offer or upon a settlement under the authority of the Department of Justice (Internal Revenue Manual 5.8.1.2.1, 09-01-2005).

Offers in compromise must be submitted using Form 656, Offer in Compromise (Rev. February 2007). The offer should include all information necessary to verify the grounds for compromise. If the offer is based on doubt as to collectibility, the taxpayer must include a completed financial statement on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B, Collection Information Statement for Businesses, or any other financial statement prepared by the taxpayer, as long as it conforms with the information requested on either of the forms and is signed by the taxpayer under penalties of perjury. If a taxpayer is self-employed, both financial statements are required (Instructions to Form 656, Offer in Compromise). The offer must also include the required partial payment of 20 percent of the amount offered or the first proposed installment, depending on the type of offer submitted on or after July 16, 2006.

If the offer is based on doubt as to liability, submission of a financial statement is not required, but the taxpayer must submit a detailed statement as to why the amount is not owed to the IRS.

Fixed monthly payment option. A simplified method of settling taxpayer debts under the offer in compromise program will allow taxpayers a fixed monthly payment option and will assist taxpayers and practitioners in situations where the full amount of the debt cannot be met. Under the program, the IRS will calculate the exact amount an individual will owe during the life of the offer in compromise payments (Instructions to Form 656, Offer in Compromise (Rev. February 2007); IRS News Release, IR-1999-105, December 29, 1999).
An offer in compromise based on Doubt as to Collectibility (DATC) amount must generally equal or exceed a taxpayers reasonable collection potential (RCP) in order to be considered for acceptance (Internal Revenue Manual 5.8.1.1.3, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK). There may be exceptions for cases with unusual or special circumstances, such as advanced age, serious illness from which recovery is unlikely, or unusual circumstances that impact the ability to pay the tax and continue to provide for the taxpayer's family. If special circumstances apply, the taxpayer should fill out the "Explanation of Circumstances" portion of Form 656, Offer in Compromise.

A taxpayer's reasonable collection potential is the net equity of the taxpayer's assets plus the amount that the IRS could collect from the taxpayer's future income. If the IRS's analysis indicates that the taxpayer has the ability to pay the tax liability in full, either immediately or through an installment arrangement, then the IRS will not accept the offer in compromise.

The IRS provides a worksheet for the taxpayer to use to estimate the amount that the IRS will view as the taxpayer's reasonable collection potential (Instructions to Form 656, Offer in Compromise). The worksheet indicates that the IRS will generally expect to collect all of a taxpayer's financial assets, plus 80 percent of the taxpayer's equity in cars and real estate, plus 80 percent of the taxpayer's equity in other personal assets, reduced by a small allowance (less than $10,000). The IRS will also expect to collect an additional amount based on the taxpayer's income. The amount the IRS expects to collect from a taxpayer is made up of the following components:
(1) the amount collectible from the taxpayer's assets;

(2) the amount collectible from the taxpayer's future income;

(3) the amount collectible from third parties, such as transferees; and

(4) the amount collectible from the taxpayer that the taxpayer should reasonably be expected to raise from assets in which he has an interest that is beyond the reach of the government, such as property located outside the United States or property owned by tenancy by the entirety.

The starting point in the consideration of an offer submitted based on doubt as to collectibility is the value of the taxpayer's assets less encumbrances that have priority over the federal tax lien. Ordinarily, the liquidating or quick sale value of assets is to be used. In some cases, it is reasonable to consider minimum bid price in determining collection potential. All assets must be considered in determining the amount collectible from the taxpayer (Internal Revenue Manual 5.8.5, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

A taxpayer's education, profession or trade, age and experience, health, and past and present income will be considered in evaluating his future income prospects for purposes of determining collectibility. An evaluation must be made of the likelihood that any increase in real income will be available to pay the delinquent taxes. Cost of living increases must also be taken into account in determining amounts potentially collectible from future income (Internal Revenue Manual 5.8.5, 09-01-2005, CCH IRS OFFER IN COMPROMISE HANDBOOK).

Frivolous submissions. The civil penalty for frivolous tax returns has been increased from $500 to $5,000, and now applies to all taxpayers and all types of federal taxes and submissions (Code Sec. 6702(a), as amended by the Tax Relief and Health Care Act of 2006 (P.L. 109-432)). Therefore, the $5,000 civil penalty now also applies to any request for a collection due process hearing, an installment agreement, or an offer-in-compromise that raises frivolous arguments. The Secretary will prescribe, and periodically revise, a list of positions identified as frivolous.

As extended, the penalty applies to any "person" who files a return, not just to an "individual" (Code Sec. 6702(a), as amended by P.L. 109-432). The definition of the term "person" includes an individual, a trust, estate, partnership, association, company or corporation, as defined in Code Sec. 7701(a)(1).

A "specified frivolous submission" is a specified submission that either:
-- based on a position that the Secretary has identified as frivolous in his prescribed frivolous positions list; or

-- reflects a desire to delay or impede the administration of federal tax laws

(Code Sec. 6702(b)(2)(A), as added by P.L. 109-432). A "specified submission" is:
(1) a request for a hearing after --

(a) the IRS files a notice of lien under Code Sec. 6320, or

(b) the taxpayer receives a pre-levy Collection Due Process Hearing Notice under Code Sec. 6330,

and
(2) an application relating to --

(a) agreements for payment of tax liability in installments under Code Sec. 6159;

(b) compromises under Code Sec. 7122; or

(c) taxpayer assistance orders under Code Sec. 7811

(Code Sec. 6702(b)(2)(B), as added by P.L. 109-432). Any portion of an application for an offer-in-compromise under Code Sec. 7122 or for an installment agreement under Code Sec. 6159 will be treated as if it were never submitted and will not be subjected to any further administrative or judicial review, if that portion of the application meets either requirement for a specified frivolous submission (Code Sec. 7122(f)[(g)], as added by P.L. 109-432).

The IRS has issued a news release announcing updated guidance which describes and rebuts frivolous arguments that taxpayers should avoid when filing their tax returns (IRS News Release, IR-2006-45, March 16, 2006). The IRS has also updated the document entitled "The Truth About Frivolous Tax Arguments" (November 30, 2006; available at www.irs.com), that addresses false arguments about the legality of not paying taxes or filing returns.