Offers in Compromise

Effective Tax Administration

Internal Revenue Manual    
 
 

Part 5. Collection Process

Chapter 8. Offer in Compromise

Section 22. Effective Tax Administration Offers

5.8.22  Effective Tax Administration Offers

 

5.8.22.1  (01-01-2000)
Overview

 
  1. This section provides guidance for examiners in considering effective tax administration OIC requests.
  2. Offer in Compromise, Form 656, and Form 656–A, Additional Basis for Compromise, should be completed by taxpayers requesting consideration of an offer to compromise based on effective tax administration.

5.8.22.2  (01-01-2000)
Considering the Effective Tax Administration Issue

 
  1. If there are no grounds for compromise under the doubt as to collectibility or doubt as to liability provisions, a compromise may be entered into to promote effective tax administration when compromise of he liability will not undermine compliance with the tax laws, and:
    1. Collection of the full liability will create economic hardship within the meaning of Treasury Regulation section 301.6343–1; or,
    2. Regardless of the taxpayer's financial circumstances, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance.

     

  2. Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance with the tax laws include:
    1. Taxpayer does not have a history of noncompliance with the filing and payment requirements of the IRC;
    2. Taxpayer has not taken deliberate actions to avoid the payment of taxes; and,
    3. Taxpayer has not encouraged others to refuse to comply with the tax laws.

      Note:

      These factors should be considered but no minimum compliance requirement exists.

       

     

  3. Factors supporting a determination of economic hardship include:
    1. Taxpayer has a serious illness that renders the taxpayer incapable of earning a living and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the illness;
    2. Although taxpayer has certain assets, liquidation of those assets to pay outstanding liabilities would render the taxpayer unable to meet basic living expenses;
    3. Although taxpayer has certain assets, the taxpayer is unable to borrow against equity in those assets and disposition by seizure/sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely.

      Note:

      Economic hardship offers will not be considered by Examination, but will be considered by Collection.

       

     

  4. The following examples illustrate cases in which collection of the full liability will create economic hardship:
    1. Taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of his tax liability under an installment agreement. Taxpayer also owns a modest house that has been especially equipped to accommodate his disability. 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, 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, making such a sale unlikely. Taxpayer's overall compliance history does not weigh against compromise.
    2. Taxpayer has assets sufficient to satisfy the tax liability. 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 her assets to provide for adequate basic living expenses and medical care for her child. Taxpayer's overall compliance history does not weigh against compromise.
    3. 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 tax liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. Taxpayer's overall compliance history does not weigh against compromise.

     

  5. The following examples illustrate cases in which, regardless of the taxpayer's financial circumstances, compromise would not be detrimental to voluntary compliance with the tax laws:
    1. In October of 1986, 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 of 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. Taxpayer's overall compliance history does not weigh against compromise.
    2. 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. 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, 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 new IRA account within 90 days. Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, 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, taxpayer would have redeposited the amount within the required 60-day period. Taxpayer's overall compliance history does not weigh against compromise.

     

5.8.22.3  (02-01-2004)
Jurisdiction—Effective Tax Administration

 
  1. Compliance Collection has jurisdiction over offers based on Effective Tax Administration. Collection will retain offers based on economic hardship, and Detriment to Voluntary Compliance (DVC) offers (where tax law fairness is at issue) will generally be forwarded to Compliance Examination for consideration.

    ( Note These cases may also fall under the jurisdiction of Appeals if the taxpayer raises the issue during a Collection Due Process (CDP) or equivalent proceeding. See Sections 5.8.26.4 and 5.8.26.4.1 of this handbook for additional information.)

     

  2. Because effective tax administration offers require a determination that neither doubt as to liability or doubt as to collectibility apply, Collection may forward such offers to Examination for a determination of whether there is any doubt as to liability. Generally, if the taxpayer did not raise the doubt as to liability issue, this determination may readily be made by the Examination OIC Coordinator.
  3. In instances where Examination consideration is warranted (paragraph 1 or 2 above), Collection will forward a copy of the Offer in Compromise (and/or a written referral) to Examination, and retain the original. Examination will subsequently provide a written disposal recommendation to Collection.
  4. Examination action/offer consideration should be initiated within 30 days and monthly contact should be maintained with Collection to inform them of the status and projected closure date. A 60 day objective is established for reaching a determination by Examination and returning the file to Collection.

5.8.22.4  (02-01-2004)
Examination Considerations

 
  1. If the taxpayer requested consideration of the Effective Tax Administration provisions on Form 656–A and the case has been forwarded from Collection for consideration, the examiner is required to fully document any and all relevant tax law considerations and provide a recommendation as to whether the case is appropriate for compromise based on the specific facts and issues raised.
  2. Examiners should be careful not to confuse DVC with economic hardship offers. Economic hardship offers will always be considered by the Collection.
  3. The examiner should consider equity already established in the tax law in assessing/analyzing the taxpayer's DVC offer. For example, if the taxpayer is requesting compromise of interest accruals, the examiner should be cognizant of the current tax laws concerning interest abatement (managerial, ministerial act), and why current parameters were so established.
  4. During the course of examination of a doubt as to liability issue, if the taxpayer did not request consideration under the effective tax administration standard but the examiner assigned the OIC case identifiers the provisions may apply, the examiner should suggest to the taxpayer that he/she complete Forms 656–A and 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or 433-B, Collection Information Statement for Businesses.

    Note:

    Form 433, Statement of Financial Condition and Other Information, was obsoleted by Collection in April, 1992. Forms 433-A & 433-B are adequate for use in its place.

     

  5. If the taxpayer completes Form 656–A, the entire offer package should be forwarded to Collection for consideration of the collectibility and effective tax administration issues.
  6. Where the examiner believes that there is a DVC issue that warrants consideration, the examiner should clearly address the issues and why it is believed that compromise may be warranted before forwarding the case to Collection.

5.8.22.5  (01-01-2000)
Determination of Liability

 
  1. See procedures as outlined under "doubt as to liability " provisions above.

5.8.22.6  (02-01-2004)
Offer Accepted

 
  1. See procedures as outlined under "doubt as to liability " provisions above.
  2. Approval authority for accepted effective tax administration offers may not be delegated below Area Director level. Form 7249, Offer Acceptance Report, will be annotated "effective tax administration" as the reason for acceptance.
  3. The acceptance recommendation and correspondence is routed through the Field Territory Manager, and submitted to Collection.
  4. Collection is responsible for finalizing offer acceptance, processing, and issuing appropriate correspondence.

5.8.22.7  (01-01-2000)
Offer Withdrawn

 
  1. See procedures as outlined under "doubt as to liability " provisions above.
  2. The Examination OIC coordinator will forward the OIC file to Collection for final processing.

5.8.22.8  (01-01-2000)
Offer Rejected

 
  1. See procedures as outlined under "doubt as to liability " provisions above.
  2. Approval authority for rejected effective tax administration offers is delegated to Field Territory Manager.
  3. After Independent Administrative Review is completed within Examination (on the Examination issues), the rejection recommendation and correspondence is routed through the Field Territory Manager, and submitted to Collection.
  4. Collection is responsible for finalizing offer rejection, processing, and issuing appropriate correspondence.