An IRS Appeals officer's decision to sustain the filing of a federal tax lien against an individual was not an abuse of discretion. The taxpayer failed to make a proper offer in compromise using Form 656, Offer in Compromise. Further, assuming that the taxpayer had made a formal offer in compromise, the decision to reject it would have been proper based on the Appeals officer's correct determination that the taxpayer's reasonable collection potential exceeded the amount of his tax liability. The Appeals officer's decision was not an abuse of discretion because he considered the unique circumstances of the taxpayer's individual situation and, based on additional communication with the taxpayer, made adjustments to his calculations of the taxpayer's income. Further, the Appeals officer's decision to not adjust his calculation to reflect the anticipated termination of the taxpayer's disability benefits was justified. Although the taxpayer anticipated losing his disability benefits as a source of income, his unique circumstances suggested that he would be gaining the ability to return to work

Ernest Romero, Jr. v. Commissioner., U.S. Tax Court, CCH Dec. 57,996(M), T.C. Memo. 2009-264, (Nov. 19, 2009)
U.S. Tax Court, Dkt. No. 24327-07L, TC Memo. 2009-264, November 19, 2009.

. Accordingly, the Appeals officer's determination was sustained.




MEMORANDUM FINDINGS OF FACT AND OPINION


VASQUEZ, Judge: Pursuant to section 6330(d), 1 petitioner seeks review of respondent's determination to proceed with collection of his unpaid 2002, 2003, and 2004 income tax liabilities. The issue for decision is whether respondent abused his discretion by sustaining the filing of the notice of Federal tax lien against petitioner. We find respondent did not abuse his discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in California at the time he filed the petition.
Background
Petitioner requested and received extensions to file his 2002 and 2003 income tax returns; these returns were due August 15, 2003 and 2004, respectively. His 2004 return was due April 15, 2005. Petitioner filed his 2002, 2003, and 2004 income tax returns on or about April 10, April 3, and March 27, 2006, respectively.
On August 2, 2006, respondent mailed to petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (notice of Federal tax lien) regarding tax years 2002, 2003, and 2004. The notice of Federal tax lien stated petitioner owed liabilities as follows:
Type of Tax Tax Period Amount Owed
Form 1040 12/31/2002 $5,354.27
Form 1040 12/31/2003 4,855.34
Form 1040 12/31/2004 1,724.22
On August 31, 2006, petitioner timely submitted Form 12153, Request for a Collection Due Process Hearing (request), regarding 2002, 2003, and 2004 to respondent.
Petitioner's Offer-in-Compromise Proposal
In the request petitioner stated the lien would impair his efforts to procure employment and would damage his credit. He further stated he had previously suggested and again was suggesting the following offer-in-compromise (OIC): if the penalties and interest were waived, he would be able to borrow the money from his father and pay the taxes in full.
Settlement Officer Vic Morel (Officer Morel) was the Appeals settlement officer assigned to petitioner. Petitioner requested a face-to-face collection due process hearing (CDP hearing).
Before the CDP hearing, Officer Morel requested that petitioner submit a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, along with backup documentation and information. Petitioner submitted the requested information, and Officer Morel used it to calculate petitioner's tentative reasonable collection potential (RCP) to be $49,926 (future income value (FIV) of $45,168 plus net equity in assets of $4,758). At the time petitioner's entire tax liability (including years not at issue in the notice of Federal tax lien) was approximately $29,000. 2 Officer Morel determined that petitioner's RCP precluded him from having an OIC accepted because he could pay the entire tax liability and the sole basis on which petitioner sought an OIC was doubt as to collectibility.
Officer Morel sent petitioner a letter scheduling the face-to-face CDP hearing and asking petitioner for additional information. He asked petitioner to explain or describe special circumstances which might affect his ability to pay and to provide the following additional information for his use in recalculating petitioner's RCP: Income information; bank statements; leases on his rental property; and information on his transportation expenses, health care expenses, and legal expenses. Petitioner sent Officer Morel most of the information requested and included reports from a psychiatrist and a psychologist to support his claim of special circumstances.
Using this information, Officer Morel decreased petitioner's FIV, which reduced petitioner's RCP from $49,926 to $49,110 (FIV of $44,352 plus asset/equity table value of $4,758). However, Officer Morel determined on the basis of the reports of the psychiatrist and the psychologist that petitioner did not meet the criteria for special circumstances. The psychiatrist's report stated petitioner would be able to return to work by November 30, 2006, and as of that date, he would be considered fully recovered. The psychologist's report gave petitioner a guardedly optimistic prognosis and reported that petitioner ceased psychotherapeutic sessions on October 19, 2006.
Face-to-Face CDP Hearing
Officer Morel conducted the face-to-face CDP hearing on July 12, 2007, at the IRS Appeals Office in Los Angeles. As of July 9, 2007, petitioner's total outstanding tax liability for all periods was approximately $29,000.
Petitioner orally proposed an OIC of $10,000. Officer Morel explained to petitioner that he did not qualify for an OIC because his RCP exceeded the liability owed, and Officer Morel provided petitioner with copies of the income/expense table, asset/equity table, and the RCP calculation.
Petitioner said he would pay the tax in full if penalties and interest were abated. Officer Morel explained that, absent reasonable cause or administrative delay, the penalties and interest could not be compromised. Officer Morel suggested an installment agreement, and petitioner stated he was not interested.
Petitioner did not dispute Officer Morel's finding that he did not meet the criteria for special circumstances.
Post-CDP Hearing
Petitioner contacted Officer Morel after the CDP hearing and questioned the FIV Officer Morel determined and used in calculating petitioner's RCP. Petitioner sent a letter to Officer Morel stating that his monthly income was lower than the figure Officer Morel used and that he expected his disability benefits to terminate in 2 months. Petitioner stated that after his disability benefits terminated, his monthly expenses would exceed his monthly income and he did not understand why he would not qualify for an OIC.
Subsequently, Officer Morel talked with petitioner over the phone and decreased petitioner's FIV, which decreased petitioner's RCP. Initially, in calculating petitioner's FIV Officer Morel included income from three sources: Employment with Venturi Staffing Partners, unemployment benefits, and disability benefits. Petitioner informed Officer Morel that he had worked for Venturi Staffing for only 2 days, and Officer Morel decreased petitioner's FIV by removing this as a source of income. Petitioner also informed Officer Morel that he received unemployment benefits biweekly instead of weekly; Officer Morel adjusted petitioner's FIV to reflect this change in timing. Finally, petitioner informed Officer Morel that he expected his unemployment benefits to terminate in 2 months, but Officer Morel did not adjust petitioner's FIV because it was a future event. These adjustments resulted in a net decrease in petitioner's FIV from $44,352 to $34,414, which decreased petitioner's RCP from $49,110 to $39,414.
Even with these adjustments, petitioner's RCP still exceeded the tax liability, and Officer Morel determined acceptance of petitioner's $10,000 OIC was precluded by statute and regulations. Officer Morel informed petitioner of this and suggested an installment agreement. Petitioner rejected the installment agreement.
Notice of Determination
On October 2, 2007, Officer Morel issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination). The notice of determination sustained the filing of the lien, stated that petitioner had suggested a $10,000 OIC to satisfy his $29,000 liability and this OIC could not be accepted because it was less than petitioner's RCP of $39,414, and verified that the requirements of applicable laws had been met, that the issues raised had been considered, and that the proposed collection action balanced the need for efficient collection of taxes with the legitimate concerns that such action be no more intrusive than necessary. See sec. 6330(c)(3).
Petitioner timely petitioned this Court for review of the notice of determination sustaining the lien for 2002, 2003, and 2004. Petitioner asserts Officer Morel made his determination with erroneous information and failed to recalculate his RCP once correct information was brought to his attention. Respondent asserts petitioner did not submit an OIC for consideration and Officer Morel properly determined petitioner's ineligibility for an OIC.
OPINION
I. Jurisdiction and Standard of Review
Section 6320(a)(1) provides that the Secretary shall furnish the person described in section 6321 with written notice (i.e., the hearing notice) of the filing of a notice of lien under section 6323. Section 6320(a) and (b) further provides that the taxpayer may request administrative review of the matter (in the form of a hearing) within a 30-day period. The hearing generally shall be conducted in a manner consistent with the procedures set forth in section 6330(c), (d), and (e). Sec. 6320(c).
Pursuant to section 6330(c)(2)(A), a taxpayer may raise at the section 6330 hearing any relevant issue with regard to the Commissioner's collection activities, including spousal defenses, challenges to the appropriateness of the Commissioner's intended collection action, and alternative means of collection. Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000). Where the validity of the underlying tax liability is not at issue, we review the Commissioner's determination for abuse of discretion. Sego v. Commissioner, supra at 610.
Petitioner does not dispute the underlying tax liability; rather, petitioner disputes respondent's rejection of his alleged OIC. Accordingly, we review this determination for abuse of discretion.
Under an abuse of discretion standard, “we do not interfere unless the Commissioner's determination is arbitrary, capricious, clearly unlawful, or without sound basis in fact or law.” Ewing v. Commissioner, 122 T.C. 32, 39 (2004), vacated 439 F.3d 1009 (9th Cir. 2006); see also Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
II. Offer-in-Compromise
Section 7122(a) authorizes the Commissioner to compromise a taxpayer's outstanding liabilities. The regulations and procedures under section 7122 provide the exclusive method of effecting a binding nonjudicial compromise. Laurins v. Commissioner, 889 F.2d 910, 912 (9th Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265; Shumaker v. Commissioner, 648 F.2d 1198, 1199-1200 (9th Cir. 1981) (citing Botany Worsted Mills v. United States, 278 U.S. 282, 288-289 (1929)), affg. in part, revg. in part and remanding per curiam on other grounds T.C. Memo. 1979-71.
Section 301.7122-1(d)(1), Proced. & Admin. Regs., provides:
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. * * *
See Nash v. Commissioner, T.C. Memo. 2008-250; Harbaugh v. Commissioner, T.C. Memo. 2003-316; see also Wagner v. Commissioner, T.C. Memo. 1990-443 (“compromise agreements under section 7122 are required to be in writing”); Prakash v. Commissioner, T.C. Memo. 1990-106 (same); Foulds v. Commissioner, T.C. Memo. 1989-29 (same).
An OIC must be submitted on a special form prescribed by the Secretary. Riederich v. Commissioner, 985 F.2d 574 (9th Cir. 1993), affg. without published opinion T.C. Memo. 1991-164; Laurins v. Commissioner, supra at 912. Section 601.203(b), Statement of Procedural Rules, identifies Form 656, Offer in Compromise, as the form required for an OIC:
Offers in compromise are required to be submitted on Form 656, properly executed, and accompanied by a financial statement on Form 433 (if based on inability to pay). Form 656 is used in all cases regardless of whether the amount of the offer is tendered in full at the time the offer is filed or the amount of the offer is to be paid by deferred payment or payments. * * *
See also Godwin v. Commissioner, T.C. Memo. 2003-289 (“Taxpayers who wish to propose an offer in compromise must submit a Form 656, Offer in Compromise”), affd. 132 Fed. Appx. 785 (11th Cir. 2005); Ringgold v. Commissioner, T.C. Memo. 2003-199 (“settlement of tax liabilities for less than the amount owed requires the completion of Form 656”).
Petitioner did not submit a Form 656 or any other writing made under penalty of perjury to compromise his tax liabilities. Petitioner proposed in writing an offer to pay the full amount of the tax in exchange for respondent's waiving penalties and interest. Later, petitioner orally proposed a $10,000 OIC. Petitioner was cooperative in submitting requested documentation to respondent, and using this documentation, respondent was able to calculate petitioner's RCP. Using the information petitioner provided, respondent repeatedly advised him that he would not qualify for an OIC based on his RCP. Without the submission of a formal OIC, we cannot determine whether respondent abused his discretion in sustaining the filing of the lien. See O'Neil v. Commissioner, T.C. Memo. 2009-183. However, assuming petitioner made a formal OIC in either of the amounts he proposed, we would sustain respondent's calculation of petitioner's RCP and find there was no abuse of discretion.
III. Calculation of RCP
Petitioner asserts Officer Morel should have lowered his RCP to reflect the anticipated termination of petitioner's disability benefits.
A compromise based on “doubt as to collectibility” (which petitioner seeks) may be accepted “where the taxpayer's assets and income are less than the full amount of the liability.” Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. With respect to offers-in-compromise on this basis, we observed in Murphy v. Commissioner, 125 T.C. 301, 309 (2005), affd. 469 F.3d 27 (1st Cir. 2006):
Generally, under * * * [the Commissioner's] administrative pronouncements, an offer to compromise based on doubt as to collectibility will be acceptable only if the offer reflects the reasonable collection potential of the case (i.e., that amount, less than the full liability, that the IRS could collect through means such as administrative and judicial collection remedies). Rev. Proc. 2003-71, sec. 4.02(2), 2003-2, C.B. 517. * * *
See also Internal Revenue Manual (IRM), pt. 5.8.1.1.3(3) (Sept. 1, 2005) (“Absent special circumstances, a Doubt as to Collectibility (DATC) offer amount must equal or exceed a taxpayers [sic] reasonable collection potential (RCP) in order to be considered for acceptance.”).
The taxpayer's RCP includes realizable equity in assets owned by the taxpayer as well as amounts collectible from the taxpayer's future income after allowing for payment of necessary living expenses. Id. pt. 5.8.4.4.1. Generally, where an Appeals employee has followed the Commissioner's guidelines to ascertain a taxpayer's RCP and rejected the taxpayer's collection alternative on that basis, we have found no abuse of discretion. Lemann v. Commissioner, T.C. Memo. 2006-37; see also Schulman v. Commissioner, T.C. Memo. 2002-129.
Petitioner asserts Officer Morel abused his discretion in calculating petitioner's RCP because Officer Morel did not reduce petitioner's FIV after being informed that petitioner's disability benefits were expected to terminate in 2 months.
The IRM defines future income as an estimate of a taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. IRM pt. 5.8.5.5(1) (Sept. 1, 2005). The IRM instructs the settlement officer to consider the taxpayer's general overall situation including such facts as age, health, marital status, number and age of dependents, level of education or occupational training, and work experience. Id. pt. 5.8.5.5(3). The IRM further states that some situations may warrant placing a different value on future income than current or past income indicates and lists, inter alia, two situations relevant here: Where income will increase or decrease or current necessary expenses will increase or decrease, and where a taxpayer is temporarily unemployed or underemployed. Id. pt. 5.8.5.5(5).
Where income or current necessary expenses will increase or decrease, the IRM instructs the settlement officer to adjust the amount or number of payments to what is expected during the appropriate number of months. Id.
Where the taxpayer is temporarily unemployed or underemployed, the IRM instructs the settlement officer to use the level of income expected if the taxpayer were fully employed if the potential for employment is apparent. Id. It further states that each case should be judged on its own merit, including consideration of special circumstances or relating to effective tax administration issues. Id.
We are satisfied Officer Morel judged petitioner's case on the unique circumstances of petitioner's individual situation and did not abuse his discretion in determining petitioner's FIV and RCP. Officer Morel repeatedly worked with petitioner in petitioner's attempts to become eligible for an OIC. After a tentative RCP determination revealed petitioner was ineligible for an OIC, Officer Morel asked petitioner to explain special circumstances 3 and provide additional information which could affect his eligibility for an OIC. After the additional information revealed that petitioner did not meet the criteria for special circumstances and was still ineligible for an OIC, Officer Morel continued to communicate with petitioner about his calculations. After discussing the matter with petitioner, Officer Morel made adjustments to petitioner's FIV to reflect the loss of a source of income (Venturi Staffing) and a difference in the timing of benefits (biweekly), but he did not make an adjustment to reflect the anticipated termination of petitioner's disability benefits.
We are satisfied Officer Morel made appropriate adjustments to petitioner's FIV. Although pursuant to the IRM Officer Morel could have decreased petitioner's FIV to reflect the anticipated termination of disability benefits, he is equally justified in not decreasing petitioner's FIV. Petitioner was unemployed and receiving unemployment and disability benefits when he began discussing the possibility of an OIC. Upon receiving two mental health reports suggesting that petitioner was able to return to work immediately and was no longer disabled, Officer Morel decided not to decrease petitioner's FIV to reflect the anticipated termination of disability benefits. Where a taxpayer is presently unemployed, the settlement officer is instructed to look to the level of income expected if the taxpayer were fully employed if the potential for employment is apparent. Although at one time petitioner was unable to work because of his disability, this was no longer the case. Petitioner was not disabled and was able to work. Although petitioner anticipated losing a source of income, the unique circumstances of petitioner's situation suggested that petitioner was losing this source of income about the same time as he was gaining the ability to return to work. Accordingly, we are satisfied that Officer Morel followed the IRM in determining petitioner's FIV and calculating petitioner's RCP and did not abuse his discretion.
To reflect the foregoing,
Decision will be entered for respondent.

Footnotes


1
Unless otherwise indicated, all section references are to the Internal Revenue Code.
2
The record is unclear for which tax periods in addition to 2002, 2003, and 2004 petitioner owed tax liabilities. However, tax liabilities for 1993, 1994, 1995, 1999, and 2000 were in uncollectible status.
3
In some cases the Secretary will accept an offer of less than the reasonable collection potential of the case if there are special circumstances. Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517. Special circumstances are: (1) Circumstances demonstrating that the taxpayer would suffer economic hardship if the IRS were to collect from him an amount equal to the reasonable collection potential of the case or (2) if no demonstration of such suffering can be made, circumstances justifying acceptance of an amount less than reasonable collection potential of the case based on public policy or equity considerations. IRM pt. 5.8.4.3 (Sept. 1, 2005) (effective tax administration and doubt as to collectibility with special circumstances). To demonstrate that compelling public policy or equity considerations justify a compromise, the taxpayer must be able to demonstrate that, because of exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs.


Revenue Procedure 2003-71,I.R.B. 2003-36,Rev. Proc. 2003-71,Internal Revenue Service, (Sep. 8, 2003)
Revenue Procedure 2003-71, to be published in I.R.B. 2003-36, September 8, 2003.
[ Code Sec. 7122]
Estate, gift, generation-skipping transfer and income taxes: Returns and procedure: Offers to compromise: Guidelines.–
The IRS has supplemented and clarified the procedures identified in Reg. §301.7122-1 for submitting and processing offers to compromise a tax liability under Code Sec. 7122. An offer to compromise, which must be submitted in writing on Form 656, Offer in Compromise, should include the legal grounds for compromise, as well as the amount the taxpayer proposes to pay and the payment terms. An offer becomes processable when the IRS determines that it meets the following minimum requirements: (1) the offer is submitted on the proper version of Form 656 and Form 433-A or B, as appropriate; (2) the taxpayer is not in bankruptcy; (3) the taxpayer has complied with all filing and payment requirements listed in the Form 656 instructions; (4) the taxpayer has enclosed the application fee, if required; and (5) the offer meets any other minimum requirements established by the IRS. The decision as to whether to accept an offer to compromise is within the discretion of the IRS and an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the IRS. A taxpayer may withdraw an offer to compromise anytime prior to acceptance of the offer. An offer to compromise is not considered accepted until the IRS issues written notification of acceptance to the taxpayer. This procedure is effective August 21, 2003, but provisions relating to the offer in compromise application fee are not effective for offers submitted before November 1, 2003. Rev. Proc. 96-38, 1996-2 CB 300, is obsoleted. Back references: ¶15,897.03 and ¶15,897.151.
SECTION 1. PURPOSE
The purpose of this revenue procedure is to explain the procedures applicable to the submission and processing of offers to compromise a tax liability under section 7122 of the Internal Revenue Code. These procedures reflect changes to the law made by the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685, 764).
SECTION 2. BACKGROUND
.01 Section 7122 permits the Secretary of the Treasury or his delegate to compromise any civil or criminal liability arising under the internal revenue laws before the case is referred to the Department of Justice for prosecution or defense.
.02 The Secretary has developed guidelines and procedures for the submission and evaluation of offers to compromise under section 7122. These guidelines can be found in § 301.7122-1 of the Regulations on Procedure and Administration, the Internal Revenue Manual, and various forms and publications issued by the Internal Revenue Service (Service). This revenue procedure supplements and clarifies the procedures identified in § 301.7122-1.
.03 This revenue procedure includes provisions relating to the offer in compromise application fee, required under § 300.3 of the Regulations on User Fees and effective November 1, 2003.
SECTION 3. SCOPE
This revenue procedure applies to all offers to compromise a civil or criminal liability under section 7122 submitted to the Service, except for those offers submitted directly to the Office of Appeals. This revenue procedure does not apply to offers to compromise a tax liability after a case involving a civil or criminal liability has been referred to the Department of Justice for prosecution or defense.
SECTION 4. SUBMITTING AN OFFER TO COMPROMISE
.01 An offer to compromise a tax liability must be submitted in writing on the Service's Form 656, Offer in Compromise. None of the standard terms may be stricken or altered, and the form must be signed under penalty of perjury. The offer should include all liabilities to be covered by the compromise, the legal grounds for compromise, the amount the taxpayer proposes to pay, and the payment terms. Payment terms include the amounts and due dates of the payments. The offer should also contain any other information required by Form 656. The Service occasionally revises Form 656 and may require offers to be submitted on the most recent version of the form. The most recent version of the form and instructions are available on the Service's website at www.irs.gov.
.02 An offer to compromise a tax liability should set forth the legal grounds for compromise and should provide enough information for the Service to determine whether the offer fits within its acceptance policies.
(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 of the liability.
An offer to compromise based on doubt as to liability generally will be considered acceptable if it reasonably reflects the amount the Service would expect to collect through litigation. This analysis includes consideration of the hazards of litigation that would be involved if the liability were litigated. The evaluation of the hazards of litigation is not an exact science and is within the discretion of the Service.
(2) Doubt as to collectibility. Doubt as to collectibility exists in any case where the taxpayer's assets and income cannot satisfy the full amount of the liability.
An offer to compromise based on doubt as to collectibility generally will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the Service could collect through other means, including administrative and judicial collection remedies. See Policy Statement P-5-100. This amount is the reasonable collection potential of a case. In determining the reasonable collection potential of a case, the Service will take into account the taxpayer's reasonable basic living expenses. In some cases, the Service may accept an offer of less than the total reasonable collection potential of a case if there are special circumstances.
(3) Promotion of effective tax administration.
• (a) The Service may compromise to promote effective tax administration where it determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship. Economic hardship is defined as the inability to pay reasonable basic living expenses. See § 301.6343-1(d). No compromise may be entered into on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.
An offer to compromise based on economic hardship generally will be considered acceptable when, even though the tax could be collected in full, the amount offered reflects the amount the Service can collect without causing the taxpayer economic hardship. The determination to accept a particular amount will be based on the taxpayer's individual facts and circumstances.
• (b) If there are no other grounds for compromise, the Service 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. The taxpayer will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. No compromise may be entered into on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.
An offer to compromise based on compelling public policy or equity considerations generally will be considered acceptable if it reflects what is fair and equitable under the particular facts and circumstances of the case.
.03 The offer should include all information necessary to verify the grounds for compromise. Except for offers to compromise based solely on doubt as to liability, this includes financial information provided in a manner approved by the Service. Individual or self-employed taxpayers must submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, together with any attachments or other documentation required by the Service. Corporate or other business taxpayers must submit a Form 433-B, Collection Information Statement for Businesses, together with any attachments or other documentation required by the Service. The Service may require the corporate officers or individual partners of a business taxpayer to complete a Form 433-A.
.04 An offer to compromise a tax liability should be mailed to the appropriate address listed on Form 656. The Service may, in its discretion, receive offers to compromise in other manners. Simply because the Service has received an offer does not mean that it has accepted the offer for processing such that the offer is considered pending within the meaning of section 6331(k)(1). Accepting an offer for processing is addressed in Section 5.01 of this revenue procedure.
.05 If a deposit is submitted with the offer to compromise and the taxpayer authorizes application of a deposit to tax liabilities, it will be credited to the taxpayer's account as of the day the deposit is first received.
SECTION 5. WHEN AN OFFER BECOMES PENDING AND RETURN OF OFFERS
.01 Section 6331(k)(1) generally prohibits the Service from making a levy on a taxpayer's property or rights to property while an offer to compromise a liability is pending with the Service, for 30 days after the rejection of an offer to compromise, or while an appeal of a rejection is pending. The statute of limitations on collection is suspended while levy is prohibited. An offer to compromise becomes pending when it is accepted for processing. The Service accepts an offer to compromise for processing when it determines that: the offer is submitted on the proper version of Form 656 and Form 433-A or B, as appropriate; the taxpayer is not in bankruptcy; the taxpayer has complied with all filing and payment requirements listed in the instructions to Form 656; the taxpayer has enclosed the application fee, if required; and the offer meets any other minimum requirements established by the Service. A determination that the offer meets these minimum requirements means that the offer is processable.
.02 A determination is made to accept an offer to compromise for processing when a Service official with delegated authority to accept an offer for processing signs the Form 656. The date the Service official signs the Form 656 is recorded on the Service's computers. As of this date, levy is prohibited unless the Service determines that collection of the liability is in jeopardy.
.03 If the Service determines that an offer to compromise a liability does not meet the minimum requirements the Service has established for a processable offer, the offer to compromise is not processable and may be returned to the taxpayer. Because the offer to compromise was never accepted for processing, it was never pending and levy was never prohibited.
.04 If an offer to compromise accepted for processing does not contain sufficient information to permit the Service to evaluate whether the offer should be accepted, the Service will request that the taxpayer provide the needed additional information. These requests for information are described in Section 6 below. If the taxpayer does not submit the additional information that the Service has requested within a reasonable time period after such a request, the Service may return the offer to the taxpayer. The Service also may return the offer after it has been accepted for processing if:
(1) The Service determines that the offer was submitted solely to delay collection;
(2) The taxpayer fails to file a return or pay a liability;
(3) The taxpayer files for bankruptcy;
(4) The offer is no longer processable; or
(5) The offer was accepted for processing in error.
When an offer is returned under this Section 5.04, the Service will not refund the application fee submitted with the offer unless the offer was accepted for processing in error.
.05 If a determination is made to return the offer to compromise as described in Sections 5.03 and 5.04, the return of the offer does not constitute a rejection. The taxpayer is not entitled to appeal the matter to Appeals under the provisions of § 301.7122-1(f)(5). If the Service initiates collection action following a return of an offer to compromise, the taxpayer may be able to appeal the collection action under section 6320, section 6330, or under the Collection Appeals Program.
.06 An offer to compromise is considered to be returned on the day the Service mails, or personally delivers, a written letter to the taxpayer informing the taxpayer of the decision to return the offer. 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 offer is returned. The Service may levy to collect the liability that was the subject of the offer anytime after it returns the offer to the taxpayer.
SECTION 6. CASE BUILDING, INVESTIGATION, AND EVALUATION
.01 Once the Service accepts an offer to compromise for processing, it begins to gather the basic information necessary to begin evaluating the offer. During this initial processing, the Service may contact the taxpayer to secure information or documentation that was incorrect or omitted from the offer documents.
.02 After all of the basic information has been obtained from the taxpayer, the Service evaluates the information and determines whether the taxpayer's offer is acceptable. In the course of evaluating the offer to compromise, the Service may request additional information or documentation from the taxpayer.
.03 The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.
.04 For all offers to compromise, except for those based solely on doubt as to liability, the Service verifies the taxpayer's income and assets according to the Service's policies and procedures. Verification allows the Service to determine whether or not the taxpayer can fully pay the liability and, if not, to determine the reasonable collection potential of the liability.
(1) The Service uses a variety of sources to verify the taxpayer's valuation of the taxpayer's property. The Service relies on internal sources, such as its computer databases or other records, public and electronic sources, such as state motor vehicle records and credit bureau reports, and taxpayer supplied documentation.
(2) Section 7122 requires the Service to prescribe and publish guidelines to ensure that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. The amount of basic living expenses will be determined based on an evaluation of the individual facts and circumstances presented by the taxpayer's case. The Service maintains a schedule of national and local allowances to account for the basic living expenses of taxpayers seeking to compromise. To determine whether an offer is adequate, the Service uses these schedules to analyze the income and expenses of the taxpayer to determine the monthly income available to pay the liability. These schedules are available in the Financial Analysis Handbook, IRM 5.15, and on the Service's website at www.irs.gov. The schedules are not applied when doing so would leave the taxpayer without adequate means to provide for basic living expenses.
(3) For purposes of evaluating an offer to compromise, the Service allows expenses only to the extent it determines they are necessary for the health and welfare of the taxpayer or the taxpayer's family or are necessary for the production of income.
SECTION 7. WITHDRAWING AN OFFER TO COMPROMISE
.01 The taxpayer may withdraw an offer to compromise a liability anytime prior to acceptance of the offer. An offer that has been withdrawn is no longer pending and the Service may levy to collect the liability that was the subject of the offer. When an offer is withdrawn the Service will not refund the application fee submitted with the offer.
.02 The taxpayer may withdraw an offer to compromise by delivery of written notification of the withdrawal in person, by mail, or by fax. An offer assigned to Centralized Offer in Compromise Units, however, may not be withdrawn by personal delivery, because documents cannot be personally delivered to these units. A taxpayer may also request withdrawal of an offer telephonically. A notice of intent to withdraw an offer should be directed to the Service office assigned to the case.
(1) If the taxpayer withdraws an offer to compromise by personal delivery, the offer will be considered withdrawn when written notification of the withdrawal is received by the Service.
(2) If the taxpayer withdraws an offer to compromise by mailing written notification of the withdrawal via U.S. certified mail, the offer will be considered withdrawn on the date the Service receives the certified mail.
(3) In all other cases, including withdrawal by non-certified mail, fax, or phone, the offer will be considered withdrawn on the date the Service mails, or personally delivers, a written letter to the taxpayer acknowledging the withdrawal.
SECTION 8. ACCEPTING AN OFFER TO COMPROMISE
.01 An offer to compromise has not been accepted until the Service issues written notification of acceptance to the taxpayer. Acceptance is effective as of the date on the acceptance letter.
.02 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 any person not named in the offer who is also liable for the tax to which the offer relates. The Service may take action to collect from any person not named in the offer.
SECTION 9. REJECTING AN OFFER TO COMPROMISE
.01 An offer to compromise has not been rejected until the Service issues written notification of rejection to the taxpayer. Section 7122(d) requires the Service to conduct an independent administrative review before the rejection of an offer to compromise is communicated to the taxpayer. The Service reviews each case to determine if the proposed rejection is reasonable based on the facts and circumstances of the case. Rejection is effective as of the date on the rejection letter. When an offer is rejected the Service will not refund the application fee submitted with the offer.
.02 The taxpayer may appeal the rejection of an offer to compromise to Appeals. The taxpayer must timely file the appeal with the Service office that rejected the offer. An appeal is timely filed if it is delivered to the Service or postmarked within thirty days from the date of the letter of rejection.
.03 Pursuant to section 6331, the Service may not make a levy on the taxpayer's property or rights to property for thirty days following the rejection of an offer to compromise or while an appeal of a rejection is pending.
SECTION 10. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 96-38 is obsoleted.
SECTION 11. EFFECTIVE DATE
This revenue procedure is effective August 21, 2003, the date this revenue procedure was announced by news release, except that the provisions relating to the offer in compromise application fee are not effective for offers submitted prior to November 1, 2003.
SECTION 12. DRAFTING INFORMATION
The principal author of this revenue procedure is Sheara L. Krvaric of the Office of the Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division. For further information regarding this revenue procedure contact Branch 2 of Collection, Bankruptcy & Summonses on (202) 622-3620 (not a toll free call).