Offer in Compromise Tax Lien Tax Levy Wage Garnishment Tax Filing

Offer in Compromise Help - OIC Firm

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 (Reg. §301.7122-1(b)); 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(c)(1)). As a result, the IRS revised its procedures in this area, as set forth in regulations (Reg. §301.7122-1), the 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 Sec. 7122(c)(1) and Code Sec. 7122(c)(2)).

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(c)(3)).

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.

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.

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. May 2001), p. 6).

Compromise process, generally

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.

Taxpayers are responsible for initiating the first specific proposal for compromise and will not be advised on the amount to be offered. The offer should be a legitimate compromise proposal based on ability to pay. It should not be considered a fishing expedition based on the theory that the IRS will accept any amount.

Taxpayers are encouraged to submit a deposit as a sign of good faith. The IRS will return the deposit if the offer is rejected, unless the taxpayer authorizes in writing that the deposit may be applied to the liability. If the offer is accepted, taxpayers waive certain refunds or credits that they might otherwise be entitled to receive. On doubt as to collectibility offers only, acceptance of the offer will require the taxpayer to comply fully with all filing and payment requirements over the next five years. Failure to comply will be treated the same as a default in payment.

Compromises: Submitting the compromise

Offers in compromise must be submitted using Form 656, Offer in Compromise (Rev. October 2004). 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).

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. October 2004); Internal Revenue News Release IR-1999-105, December 29, 1999).

User fees

The IRS imposes a $150.00 user fee for the processing of offers in compromise (Reg. §300.3; IRS News Release IR-2003-99, 8/15/03). However, the user fee will not apply to (1) offers "based solely on doubt as to liability" as defined in Reg. §301.7122-1(b)(1) and (2) offers made by a "low income taxpayer." A low income taxpayer is defined as an individual who falls at or below the poverty guidelines set by the Department of Health and Human Services or such other measures as the IRS may adopt (Reg. §300.3(b)(1)(ii)). Taxpayers who claim the poverty guideline exception must certify their eligibility using Form 656-A, Offers in Compromise Application Fee Instructions and Certification (Rev. July 2004).

Taxpayers with offers that do not fall within the doubt as to liability or low-income exceptions must submit the user fee along with the offer to compromise. If the offer is accepted to promote effective tax administration or is accepted based on doubt as to collectibility and a determination that collecting more than the amount offered would create an economic hardship, the fee will be applied to the amount of the offer or, if the taxpayer requests, the fee will be refunded to the taxpayer (Reg. §300.3(b)(2)). The fee will not be refunded if an offer is withdrawn, rejected, or returned as nonprocessable after accepted for processing (Reg. §300.3(b)(3)). However, no additional fee will be charged if a taxpayer resubmits an offer the IRS determines to have been rejected or returned in error (Reg. §300.3(b)(4)).

Compromises: Determination of an adequate offer

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. . 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,.

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.

Compromises: Acceptance of offer

The IRS 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 433-B, as appropriate; the taxpayer is not in bankruptcy; the taxpayer has complied with all the filing and payment requirements listed in the instructions to Form 656; the taxpayer has enclosed the application fee as required; and the offer meets any other minimum requirements established by the IRS. A determination that the offer meets these minimum requirements means that the offer is processable (Rev. Proc. 2003-71. In addition, the taxpayer must agree to suspend the running of the statutory period of limitations on both or either assessment or collection of the tax liability involved for the period during which the offer is pending, or the period during which any installment remains unpaid, and for one year thereafter (Instructions to Form 656 (Rev. October 2004)). The agreement extends the applicable statutes of limitation:

(1) while the IRS is processing and evaluating the taxpayer's offer;

(2) while the amount that the taxpayer has agreed to pay under an accepted offer remains unpaid;

(3) while any other term or condition of the offer remains unsatisfied;

(4) for 30 days following the a rejection of the taxpayer's offer;

(5) while the IRS Appeals Office considers a rejection appeal; and

(6) for one year in addition to the total of all of the above periods (Instructions to Form 656 (Rev. October 2005)).

Offer acceptance report. Form 7249, Offer Acceptance Report, will be prepared if the offer is accepted. If one taxpayer or related taxpayers, such as a husband and wife, partners, or a group of consolidated corporations, file several offers to compromise separate assessments, and the collectibility of the liabilities arises from the principal source, a separate Form 7249 will be prepared for each offer, with one report setting forth the reasons for acceptance. A report that fully supports the acceptance recommendation will also be prepared. A supplemental information report will be prepared only if the examining officer wants to discuss issues about the taxpayer's private affairs that would be pertinent to the delegated official's overall understanding of the case. Information already stated on Form 7249 will not be reiterated in the supplemental report (Internal Revenue Manual 5.8.24, 02-01-2004.

Finality of acceptance. An acceptance of an offer in compromise by the IRS conclusively settles the taxpayer's liability for the specified tax period. Neither the taxpayer nor the IRS is permitted to reopen the case except in instances where:

(1) false information or documents are supplied in conjunction with the offer;

(2) the taxpayer's ability to pay and/or the taxpayer's assets are concealed; or

(3) a mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered (Reg. §301.7122-1(d)(5)).

Installment agreements. The IRS and a taxpayer can enter into an agreement allowing payment of taxes on an installment basis to facilitate collection. The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) requires the IRS to enter into an installment payment agreement in certain cases. An installment agreement can be modified or terminated if the information provided by the taxpayer prior to the date of the agreement is inaccurate or incomplete or if the IRS subsequently determines that collection of the tax is in jeopardy. The agreement may also be modified or terminated if the financial condition of the taxpayer significantly changes, or if the taxpayer fails to pay any installment on time, to pay any other tax liability on time, or to provide the IRS with a financial condition update when requested to do so (Code Sec. 6159).

Compromises: Special circumstances as basis of acceptance

In situations where doubt as to collectibility or doubt as to liability would not be grounds for acceptance of an offer, the IRS may accept the offer in order to promote effective tax administration if:

(1) collection of the full amount of the liability will create economic hardship under Reg. §301.6343-1; or

(2) regardless of the taxpayer's financial condition, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by the taxpayer; and

(3) compromise of the liability will not undermine compliance by taxpayers with the tax laws (Reg. §301.7122-1(b)(3)).

Factors that support (but are not conclusive of) a determination that acceptance of the offer would not undermine compliance by taxpayers with the tax laws include:

(1) the taxpayer does not have a history of noncompliance with the filing and payment requirements under the Code;

(2) the taxpayer has not taken deliberate actions to avoid payment of taxes; and

(3) the taxpayer has not encouraged others to refuse to comply with the tax laws (Reg. §301.7122-1(c)(3)(iii).

In determining whether to accept or reject an offer to compromise, all facts and circumstances are considered, 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 (Reg. §301.7122-1(c)).

Examples of factors or special circumstances that might be considered by the IRS when evaluating whether economic hardship or special circumstances exist in a particular case may include, but are not limited to:

(1) advanced age;

(2) serious illness where recovery is unlikely; or

(3) any other factors that might impact the taxpayer's ability to pay the reasonable potential collection amount and still provide for the taxpayer's family.

Economic hardship. Factors that support a finding of economic hardship for purposes of Reg. §301.7122-1(c)(3)(i) may include factors such as:

(1) the taxpayer is incapable of earning a living due to a long-term illness, medical condition, or disability and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted providing for care and support during the course of the condition;

(2) the liquidation of the taxpayer's assets would render the taxpayer unable to meet basic living expenses; and

(3) the taxpayer cannot borrow against the equity in the taxpayer's assets and disposition or seizure of such assets would have sufficient negative consequences such that enforced collection is unlikely (Reg. §301.7122-1(c)(3)(i)).

Example (1):

Jamie Jones has submitted an offer in compromise but has sufficient assets to satisfy her outstanding tax liability. However, Jamie provides full-time care and assistance to Sue, her dependent child who suffers from a rare kidney disorder. It is expected that Jamie will need to use the equity in her assets to provide for the basic living expenses and medical care for her child. If Jamie has an overall compliance history that does not weigh against compromise, her offer will be accepted.

Example (2):

Marcia Munson is retired and her only income is from her pension. Marcia's only asset is an IRA and the funds are sufficient to satisfy the liability. However, liquidation of the IRA would leave Marcia without means to pay for her basic living expenses. If Marcia has an overall compliance history that does not weigh against compromise, her offer will be accepted.

Example (3):

Mortenson Marketing, Inc. suffered an embezzlement loss despite retaining outside auditors and adopting other precautions. Although Mike Mortenson, the president and CEO, signed employment tax returns and signed checks for payment of all employment tax liabilities, the embezzling employee was able to intercept the checks and divert the funds. At the time the embezzlement is discovered, Mike contacts the IRS and begins recovery efforts. However, Mike's recovery efforts fail miserably. Although the company has sufficient accounts receivable to satisfy the tax liability, the company would not be able to remain in business if the funds were seized. Further, while the company would continue to generate a profit if it remained in business, those profits would not be sufficient to pay the liability before the statute of limitations expired with respect to the liability. If the company's overall compliance history does not weigh against compromise, the company's offer will be accepted.

Exceptional circumstances. The following examples illustrate situations when offers may be accepted for exceptional circumstances:

Example (4):

In October, 2005, Mark Day developed a serious illness that resulted in almost continuous hospitalizations for a number of years. Mark's medical condition was such that he was not able to attend to his financial affairs or file his tax returns during his illness. Mark's health has now improved and he has promptly begun to attend to his tax affairs. Mark discovers that the IRS filed a substitute return for the 2005 tax year based on information returns it had received and assessed a tax deficiency. When Mark discovers the liability, the total tax bill is more than three times the original tax liability. If Mark's tax compliance history does not weigh against compromise, his offer will be accepted.

Compromises: Withdrawal of offer

An offer in compromise (OIC) may be withdrawn by the taxpayer or the taxpayer's representative at any time prior to its acceptance. The offer is considered withdrawn upon the IRS's receipt of written notification of the withdrawal of the offer by personal delivery or certified mail, or upon issuance of a letter by the IRS acknowledging the taxpayer's intent to withdraw the offer (Reg. §301.7122-1(d)(3)). The IRS will advise the taxpayer that withdrawing the offer will forfeit the taxpayer's right to appeal (Internal Revenue Manual 5.8.7.4, 09-01-2005.

Compromises: Rejection of offer

If an offer is not acceptable, has been withdrawn, or the taxpayer dies during consideration, the offer is considered rejected once the IRS issues a written notice to the taxpayer or the taxpayer's representative informing the taxpayer of the reason(s) of rejection and the taxpayer's right to an appeal (Reg. §301.7122-1(f)). Offers based on Doubt as to Collectibility are most commonly rejected on the basis that more can be collected than was offered (Internal Revenue Manual 5.8.7.6, 09-01-2005.. IRS policy is to inform the taxpayer prior to the issuance of the rejection letter that an acceptance cannot be recommended. The computation of reasonable collection potential (RCP) is explained to the taxpayer, a copy of the financial analysis is provided, and the taxpayer is given an opportunity to submit any additional financial information.

In addition to concerns about the amount of the offer, an offer may also be rejected if the IRS determines that acceptance is not in the best interests of the government. This situation would require a review by an IRS territory manager or a similar review. Examples of situations that might result in rejection on this basis include: (1) an egregious history of past noncompliance indicating that the it would be unlikely the taxpayer would remain in compliance during the offer period; (2) a business taxpayer compromising employment taxes where the business apparently does not have the ability to fund the offer while at the same time paying current taxes and business expenses; (3) any offer involving deferred payment where financial analysis indicates the taxpayer cannot fund the offer; (4) situations in which the taxpayer is the primary responsible party on a related entity (corporation, partnership, etc.) that is not in compliance with its filing and paying requirements; or (5) the offer is from an ongoing business that appears to be insolvent, and it appears that the government's position would be better protected through a formal insolvency proceeding (the IRS would gain a greater share of assets in a bankruptcy filing) (Internal Revenue Manual 5.8.7.6, 09-01-2005.

The analysis of whether a particular offer qualifies as an acceptable offer may include evaluating factors such as:

(1) the potential economic hardship to the taxpayer brought about as a result of the IRS's collection of the entire tax liability; or

(2) whether acceptance of the offer would undermine compliance by taxpayers with the tax laws (Reg. §301.7122-1(b)(3)).

Public policy rejections. Offers in compromise may be also rejected because they are contrary to public policy. The Internal Revenue Manual states that a rejections of an offer in compromise upon public policy grounds should be extremely rare and limited to situations where the acceptance of the offer could be so negative as to diminish future voluntary compliance by the general public (Internal Revenue Manual 5.8.7.6, 09-01-2005.. This could include:

(1) situations in which the taxpayer has openly encouraged others to refuse to comply with the tax laws; or

(2) situations in which there is a suspicion that the financial benefits of a criminal activity are concealed or the criminal activity is continuing.

However, offers in compromise will not be rejected on public policy grounds solely because (1) it would generate considerable public interest (some of it critical) or (2) a taxpayer was criminally prosecuted for a tax or non-tax violation (Internal Revenue Manual 5.8.7.6, 09-01-2005.

Administrative review of proposed rejections. The IRS is required under the IRS Restructuring and Reform Act of 1998 (P.L. 105-206) to establish procedures for independent administrative review of any rejection of an offer in compromise. The procedures provide that this review is to occur before the rejection is communicated to the taxpayer and is not to be conducted by front-line managers with direct supervisory authority over revenue officers working offer in compromise cases (Independent Administrative Reviewers) (Internal Revenue Manual 5.8.7.6.2, 09-01-2005.

Rejection report. When an offer in compromise is not acceptable or has been withdrawn, Form 1271, Rejection or Withdrawal Memorandum, is prepared, along with a rejection or withdrawal letter to the taxpayer and a memorandum outlining the reasons for the rejection. The IRS will document the history regarding the decision, including the (1) Amount of the reasonable collection potential (RCP); (2) Attempts to negotiate an alternate resolution; (3) Key issues in the disagreement. and (4) Discussion of any special circumstances (Internal Revenue Manual 5.8.7.6.2, 09-01-2005. The amount tendered with the offer, including all installments paid, will be refunded without interest, unless the taxpayer has agreed that the amount tendered may be applied to the liability with respect to which the offer was submitted (Internal Revenue Manual 5.8.7.6.2, 09-01-2005.

Death of offeror. As with any other contract, the death of the offeror prior to the IRS's acceptance invalidates the offer, and the tax liability remains uncompromised. In such circumstances, the IRS will issue a rejection letter to the taxpayer's estate or surviving spouse. The estate or the surviving spouse, as appropriate, may then submit an offer in compromise, and the IRS will evaluate the offer in light of the amount that could be collected from the enforcement of liability for the tax against a beneficiary or transferee (Internal Revenue Manual 5.8.10.4, 09-01-2005.

Appeal of rejection. The taxpayer must be allowed to appeal any rejection of any proposed offer in compromise or installment agreement to the IRS Office of Appeals (Code Sec. 7122(d)). The taxpayer may administratively appeal a rejection of an offer to the IRS Office of Appeals if, within the 30-day period commencing on the day following the date on the letter of rejection, the taxpayer requests an administrative review (Reg. §301.7122-1(f)(5)).

Compromises: Stay of collection actions

While a person has a compromise offer pending, the IRS may not levy against that person's property to satisfy the liability covered by the offer. If the offer is ultimately rejected, the levy prohibition remains in effect for 30 days after the rejection and during the pendency of any timely filed appeal of the rejection. An offer is pending from the date that it is accepted by the IRS for processing (Code Sec. 6331(k)(1)).

Similarly, the IRS may not levy on the property or rights to property of a person while that person has an installment agreement offer pending with the IRS. The prohibition extends for 30 days after an installment agreement offer is rejected by the IRS and during the pendency of any appeal of the rejection, providing the appeal is filed within 30 days of the rejection. Furthermore, no levy may be made while an installment agreement is in effect. If the IRS terminates the installment agreement, no levy may be made for 30 days after the termination and during the pendency of any appeal of the rejection, providing the appeal is filed within 30 days of the rejection (Code Sec. 6331(k)(2)).

The prohibition does not apply to any unpaid tax if the taxpayer files a written notice waiving the levy prohibition. Moreover, the prohibition does not apply to any levy to carry out an offset under Code Sec. 6402 or to any levy predating the pendency of the compromise offer (Code Sec. 6331(i)(3) and Code Sec. 6331(k)(3)). The prohibition against levy does not apply if the IRS believes that collection of the liability is in jeopardy (Code Sec. 6331(i)(3)(A)(ii) and Code Sec. 6331(k)(3)).

The IRS is also prohibited from initiating any court action with respect to the liability that is the subject of the compromise offer. However, this prohibition does not apply to any counterclaim with respect to the liability or any related proceeding (Code Sec. 6331(i)(4) and Code Sec. 6331(k)(3)). Moreover, the 10-year statute of limitations on collection is suspended during the period the IRS is prohibited from making a levy or taking other collection measures against the liability that is subject to the compromise offer (Code Sec. 6331(i)(4) and Code Sec. 6331(k)(3)).

The IRS will not levy against the property or rights to property of a taxpayer who has submitted an offer to compromise, in order that the IRS may collect the liability that is the subject of the offer, (1) during the period the offer is pending; (2) for 30 days immediately following rejection of the offer; and (3) for any period when a timely filed appeal from the rejection is being considered by Appeals (Reg. §301.7122-1(g)(1)).

The IRS may levy to collect a liability that is subject to an offer in compromise during the period that it is evaluating such offer, if it determines that the collection of the liability is in jeopardy (Reg. §301.7122-1(g)(3)).

Compromises: Public inspection of accepted offers in compromise

Return information may be disclosed to the general public to the extent necessary to permit inspection of any accepted offer-in-compromise (Code Sec. 6103(k)(1); Reg. §301.7122-1(j)). Notably, neither the Code nor the Regulations define "to the extent necessary." However, the Internal Revenue Manual specifies that the inspection file of accepted offers will be maintained and available for public examination in the office of the district director having jurisdiction:

(1) for a period of one year; and

(2) each accepted offer will have a copy of the relevant Form 7249, Offer Acceptance Report, available for review (Internal Revenue Manual 5.8.24.3, 09-01-2005.

Compromises: Statute of limitations

The statute of limitations on collection will be suspended while levy is prohibited (1) during the period the offer is pending; (2) for 30 days immediately following rejection of the offer; and (3) for any period when a timely filed appeal from the rejection is being considered by Appeals (Reg. §301.7122-1(i)(1)).

Although the IRS may continue to require, when appropriate, the extension of the statute of limitations, the IRS must notify the taxpayer of the taxpayer's right to (1) refuse to extend the limitations period or (2) limit the extension to particular issues and/or particular periods of time (Reg. §301.7122-1(i)(2)).

Compromises: Default on agreement

The IRS can treat the taxpayer's failure to pay as a breach of contract and exercise the default provisions of the offer. This means that the IRS can:

(1) reinstate the entire unpaid balance of the offer;

(2) file a Notice of Federal Tax Lien on any tax liabilities without liens;

(3) file suit to collect an amount equal to the original amount of the tax liability as liquidated damages, minus any payments already received under the terms of the offer;

(4) disregard the amount of the offer and apply all amounts already paid against the original amount of the tax liability; or

(5) file suit or levy to collect the original amount of the tax liability, without further notice of any kind (Instructions to Form 656, Offer in Compromise (Rev. October 2004)).

A default on the agreement can have serious consequences, especially if the taxpayer's financial situation has improved. If a new offer has to be made, the taxpayer's previous financial situation at the time of the first offer is no longer relevant. Thus, the IRS could require higher payments on a subsequent offer.

Compromises: Records

A written opinion from the Office of the IRS Chief Counsel is required for offers in compromise of $50,000 or more (Code Sec. 7122(b)). In addition to the reasons for the compromise, this record is to state:

(1) the amount of tax assessed,

(2) the amount of interest, additional amount, addition to tax or assessable penalty imposed on the taxpayer, and

(3) the amount actually paid in accordance with the terms of the compromise (Reg. §301.7122-1(e)(6)).

Compromises below the increased $50,000 threshold are subject to continuing IRS quality review.

Sec. 7122 - OFFER IN COMPROMISE STATUTE

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) STANDARDS FOR EVALUATION OF OFFERS. --

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

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

7122(c)(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; and

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

7122(c)(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(c)(3)(B)(ii) the taxpayer shall not be required to provide a financial statement.

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

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

.01 Amended by P.L. 105-206 and P.L. 104-168.

OFFER IN COMPROMISE RETULATIONS

§ 301.7122-0., Table of contents. --This section lists the major captions that appear in the regulations under §301.7122-1.

§ 301.7122-1. Compromises.

(a) In general.

(b) Grounds for compromise.

(d) Procedures for submission and consideration of offers.

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

(f) Rejection of an offer to compromise.

(g) Effect of offer to compromise on collection activity

(h) Deposits.

(i) Statute of limitations.

(j) Inspection with respect to accepted offers to compromise.

(k) Effective date.

§ 301.7122-0 Adopted 7/18/2002 by T.D. 9007.

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.

(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

(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.
Offer to compromise fee

(a) Applicability. --This section applies to the processing of offers to compromise tax liabilities pursuant to §301.7122-1 of this chapter. Except as provided in this section, this fee applies to all offers to compromise accepted for processing.

(b) Fee

(1) The fee for processing an offer to compromise is $150.00, except that no fee will be charged if an offer is --

(i) Based solely on doubt as to liability as defined in §301.7122-1(b)(1) of this chapter; or

(ii) Made by a low income taxpayer, that is, an individual who falls at or below the dollar criteria established by the poverty guidelines updated annually in the Federal Register by the U.S. Department of Health and Human Services under authority of section 673(2) of the Omnibus Budget Reconciliation Act of 1981 (95 Stat. 357, 511) or such other measure that is adopted by the Secretary.

(2) The fee will be applied against the amount of the offer, unless the taxpayer requests that it be refunded, if the offer is --

(i) Accepted to promote effective tax administration pursuant to §301.7122-1(b)(3) of this chapter; or

(ii) Accepted based on doubt as to collectibility and a determination that collection of an amount greater than the amount offered would create economic hardship within the meaning of §301.6343-1 of this chapter.

(3) Except as otherwise provided in this paragraph (b), the fee will not be refunded to the taxpayer if the offer is accepted, rejected, withdrawn, or returned as nonprocessable after acceptance for processing.

(4) No additional fee will be charged if a taxpayer resubmits an offer the Secretary determines to have been rejected in error or returned in error after acceptance for processing.

(c) Person liable for the fee. --The person liable for the processing fee is the taxpayer whose tax liabilities are the subject of the offer. [Reg. §300.3.]

.01 Historical Comment: Proposed 11/6/2002. Adopted 8/14/2003 by T.D. 9086.

Committee Reports on P.L. 105-206 (IRS Restructuring and Reform Act of 1998)

.17 Offers-in-compromise. --Rights of taxpayers entering into offers-in-compromise. --The provision requires the IRS to develop and publish schedules of national and local allowances that will provide taxpayers entering into an offer-in-compromise with adequate means to provide for basic living expenses. The IRS also will be 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 would not be limited by the national or local allowances.

The provision prohibits the IRS from rejecting an offer-in-compromise from a low --income taxpayer solely on the basis of the amount of the offer.36 The provision 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 provision 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 provision 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 provision 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 provision 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 provision 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. --The provision requires the IRS to publish guidance on the rights and obligations of taxpayers and the IRS relating to offers in compromise, including a compliant spouse's right to apply to reinstate an agreement that would otherwise be revoked due to the nonfiling or nonpayment of the other spouse, providing all payments required under the compromise agreement are current.

Liberal acceptance policy. --It is anticipated 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. --The provision is 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 the 60th day after the date of enactment. --Senate Committee Report (S. REP. NO. 105-174).

Senate Floor Debate. --Mr. MOYNIHAN. --* * * Mr. President, it was with these challenges in mind that Senator Kerrey and I offered this amendment to briefly delay some of the effective dates in the Finance Committee's IRS Restructuring legislation in order to allow time for the Y2K conversion to be completed. This amendment has been drafted based on Commissioner Rossotti's recommendations, and has been modified after consultations with the Majority.

The amendment would delay the effective date on a list of provisions from date of enactment until after the century date change. --Senate Floor Debate for Amendment No. 2380 (144 CONG. REC. 56, S4510).

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. --Conference Committee Report (H.R. CONF. REP. NO. 105-599).

36 This provision does not affect the ability of the IRS to reject an offer in compromise made by a taxpayer (other than a low-income taxpayer) because the amount offered is too low.

Rev. Proc. 2003-71, Internal Revenue Bulletin: 2003-36, September 8, 2003
Table of Contents

SECTION 1. PURPOSE
SECTION 2. BACKGROUND
SECTION 3. SCOPE
SECTION 4. SUBMITTING AN OFFER TO COMPROMISE
SECTION 5. WHEN AN OFFER BECOMES PENDING AND RETURN OF OFFERS
SECTION 6. CASE BUILDING, INVESTIGATION, AND EVALUATION
SECTION 7. WITHDRAWING AN OFFER TO COMPROMISE
SECTION 8. ACCEPTING AN OFFER TO COMPROMISE
SECTION 9. REJECTING AN OFFER TO COMPROMISE
SECTION 10. EFFECT ON OTHER DOCUMENTS
SECTION 11. EFFECTIVE DATE
SECTION 12. DRAFTING INFORMATION
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:

The Service determines that the offer was submitted solely to delay collection;
The taxpayer fails to file a return or pay a liability;
The taxpayer files for bankruptcy;
The offer is no longer processable; or
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 at (202) 622-3620 (not a toll-free call).

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