|
OFFERS IN COMPROMISE with IRS: hardship, fairness, and equity. Public Policy and promoting Effective Tax Administration.
Internal Revenue Manual Provisions.
|
|
IRS Handbook 5.8
Offer in Compromise
Chapter 11
Effective Tax Administration (formerly ABC Offer)
Contents
|
|
- Historically, the Service's compromise
authority has been limited to cases in which
either doubt as to collectibility or doubt as to
liability or both is established. The Internal
Revenue Service Restructuring and Reform Act of
1998, however, has expanded the Service's
compromise authority. The Service now has the
authority to compromise, where appropriate,
cases involving issues such as equity, hardship,
and public policy. The Service may now
compromise cases involving equity and hardship
issues where compromise would "promote
effective tax administration."
- The effective tax administration basis for
compromise applies only where the taxpayer does
not meet the requirements for doubt as to
liability or doubt as to collectibility.
- Taxpayers seeking a compromise under the
effective tax administration standard will
submit Form 656, Offer in Compromise. Item 9 of
Form 656 should be completed to explain why the
Service should consider their offer under
effective tax administration.
- Like all other offers in compromise, the
Service will only consider an effective tax
administration offer when taxpayers have filed
all required tax returns and/or not involved in
bankruptcy proceeding. For in-business owners,
they must have timely filed and timely deposited
their quarterly federal taxes for the two
preceding quarters and paid all federal tax
deposits due in the quarter in which the offer
was submitted.
|
[5.8] 11.2 (02-04-2000)
Grounds for Effective Tax Administration Offer
|
- The Service is required to first determine
whether doubt as to collectibility and/or doubt
as liability exist before considering an
effective tax administration offer. In other
words, we must first decide whether taxpayers
owe the entire tax and can pay the amount due in
full.
- In reaching these determinations:
|
| If: |
Then: |
| The Service decides that there is doubt as
to the amount of the liability the taxpayer
owes |
Taxpayer is not eligible for effective tax
administration offer consideration |
| The Service decides that the taxpayer's
equity in assets and future income do not
exceed the amount of the tax liability |
Taxpayer is not eligible for effective tax
administration offer consideration |
| The Service decides that taxpayer is not
eligible for compromise based on doubt as to
liability or doubt as to collectibility and
taxpayer has exceptional circumstances that
merit consideration of the offer |
Taxpayer is eligible for consideration
under effective tax administration |
| The Service decides that taxpayer is not
eligible for compromise based on doubt as to
liability or doubt as to collectibility and
taxpayer has exceptional circumstances that
merit consideration of the offer |
Taxpayer is eligible for consideration
under effective tax administration |
- When there are no grounds to compromise the
liability under doubt as to collectibility or
doubt as to liability criteria and compromise of
the liability would not undermine compliance
with tax laws (see Section 11.2.3), a compromise
may be entered into when:
- Collection of the full liability would
create an economic hardship, or
- Collection of the full liability would be
detrimental to voluntary compliance.
- Before we can consider a compromise based on
economic hardship or other equitable
considerations, three factors must exist:
- A liability has been or will be assessed
against taxpayers before acceptance of the
offer,
- The net equity in assets plus future
income must be greater than the amount owed,
and
- An exceptional circumstance exists that
warrants consideration of the offer, even
though the assets and future income are
sufficient to fully satisfy the tax
liability.
|
|
|
- An offer may be accepted when the taxpayer has
the ability to pay, however, due to the
circumstances of the case, collection of the
full amount of the tax liability would create an
economic hardship. Acceptance of an offer in
this type of case would promote effective tax
administrative.
- Listed below are factors supporting a
determination of economic hardship (not all
inclusive):
- Long term illness, medical condition, or
disability that renders the taxpayer
incapable of earning a living;
- Liquidation of assets to pay the tax
liability would render the taxpayer unable
to meet basic living expenses; and
- Taxpayer is unable to borrow against the
equity in assets and sale of the assets
would have sufficient adverse consequences
such that enforced collection is unlikely.
- The following examples illustrate cases that
may be compromised under economic hardship:
|
| Example 1: The taxpayer has assets
sufficient to satisfy the tax liability.
Taxpayer provides full time care and
assistance to her dependent child, who has
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. |
| Example 2: 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.
Taxpayer's overall compliance history does
not weigh against compromise. |
| Example 3: Taxpayer is disabled and
lives on a fixed income that will not, after
allowance of adequate basic living expenses,
permit full payment of his liability under
an installment agreement. Taxpayer also owns
a modest house that has been specially
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. |
| Example 4: Taxpayer is a business
that despite the adoption of a wide array of
precautions, including the employment of
outside auditors, suffered an embezzlement
loss. Although the taxpayer reviewed and
signed employment tax returns and signed
checks for payment of all employment tax
liabilities, the embezzling employee
successfully intercepted these checks and
diverted the funds. At the time taxpayer
discovers the divisions, taxpayer promptly
contacts the IRS and begins proceedings to
obtain recovery from either the employee or
the auditor. While taxpayer has accounts
receivables that will satisfy the tax
delinquencies, taxpayer would be unable to
remain in business if those receivables were
seized by the IRS. Further, while taxpayer
will continue to generate some profit if
permitted to remain in business, those
profits would not be sufficient to pay the
accrued liability prior to the time
collection of the liabilities became barred
by the statute of limitations. Taxpayer's
overall compliance history does not weigh
against compromise. |
- In offers based on economic hardship, an
acceptable offer amount should be determined
based on the facts and circumstances of the
taxpayer's situation and the financial
information analysis. For example, the taxpayer
has $100,000 liability and assets and income of
$125,000. To avoid economic hardship, it is
determined that the taxpayer will need $75,000.
The remaining $50,000 should be considered in
determining an acceptable offer amount.
|
|
|
- Regardless of the taxpayer's financial
situation, an offer may be accepted when
exceptional circumstances exist such that
collection of the full liability would be
detrimental to voluntary compliance by
taxpayers.
- The following examples illustrate cases that
may be compromised under detrimental to
voluntary compliance (not all inclusive):
|
| Example 1: In October 1998, 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. Taxpayer's overall
compliance history does not weigh against
compromise. |
| Example 2: Taxpayer is a salaried
sales manager at a department store who has
been able to place $2000 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 a 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 made the redeposit within
60 days. Had it not been for the erroneous
advise that is reflected in the taxpayer's
retained copy of the IRS E-Mail response to
his inquiry, taxpayer would have made the
redeposit within the required 60 day period.
Taxpayer's overall compromise history does
not weigh against compromise. |
- Generally, the Service would expect that a
taxpayer in this situation would offer an amount
at least equal to the amount of the assessed
tax, exclusive of penalty and interest. However,
in some cases equity and fairness would warrant
acceptance of some lesser amount. In such cases,
consideration should be given to accepting the
offer of a taxpayer who has offered less.
|
[5.8] 11.2.3 (02-04-2000)
Compromise would not Undermine Compliance with
Tax Laws
|
- The determination to accept or reject offers
to compromise that promote effective tax
administration will be based upon consideration
of all facts and circumstances of the taxpayers'
case, including the taxpayer's record of overall
compliance with the tax laws.
- The taxpayer's overall compliance history
should be weighed against the economic hardship
or the inequity in determining whether the
taxpayer's case is appropriate for compromise.
- Listed below are factors (not all inclusive)
that should be evaluated in determining the
taxpayer's overall compliance history:
- Compliance with the filing and payment
requirements of the Internal Revenue Code;
- Deliberate actions to avoid the payment of
taxes, and
- Encouraging others to refuse to comply
with the tax laws.
- In addition to the above list, consider
factors such as cause of the delinquency, length
of non-compliance, and efforts to resolve
non-compliance. Generally, we will review the
last 3-5 years for compliance.
|
[5.8] 11.3 (02-04-2000)
Using Form 656 for Effective Tax Administration
Offers
|
- Taxpayer must complete the following items for
the effective tax administration offers:
- Form 656, Offer in Compromise
- Form 433-A, Collection Information
Statement for Individuals and/or 433-B,
Collection Information Statement for
Businesses.
- Taxpayers must also complete item 9 of Form
656 or provide a statement indicating why full
payment of the liability would either create an
economic hardship or why the full amount of the
tax liability should not be paid.
|
[5.8] 11.4 (02-04-2000)
Receipt of Effective Tax Administration Offers
|
- Initial receipt of offers will occur in
Collection Division.
- Follow IRM 5.8, Chapter 3, Processability
Determination, for initial processing of offers.
- When loading the offer onto AOIC, select the
area for doubt as to collectibility. After
evaluating the offer, if the taxpayer's income
and assets exceed the tax liability, the case
will be changed to the effective tax
administration offer.
- We will continue to work with the taxpayer to
perfect the offer if all items are not completed
on Forms 656.
- Generally, Examination will consider
compromises based on effective tax
administration which allege that full collection
of the liability would be detrimental to
voluntary compliance by taxpayers. Since
Collection maintains control of these offers,
contact the Exam OIC Coordinator for assistance
and resolution. Provide a copy of Form 656 to
Exam.
|
|
|
- Effective tax administration offers cannot be
considered if the taxpayer qualifies for Doubt
as Collectibility or Doubt as to Liability.
Follow Chapter 4, Evaluation of Offers, for
doubt as to collectibility issues and
determining reasonable collection potential.
- After determining that the taxpayer's assets
and future income exceed the tax liability, the
taxpayer's offer can be considered under the
effective tax administration basis.
- If the assets and future income do not exceed
the tax liability, the taxpayer's offer must be
considered under doubt as to collectibility
and/or doubt as to liability. The taxpayer must
be notified prior to proceeding with case
actions. If taxpayer disagrees, the offer should
be considered as a rejection with appeal rights
and submitted for independent review after
managerial approval.
|
|
|
- Procedures for financial analysis are
contained in Chapter 5, Financial Statement
Analysis.
- See Chapter 5, Section 5.6 for information on
offers submitted by a taxpayer who shares
household expenses community property issues.
- In offers based on economic hardship, an
acceptable offer amount should be determined
based on the facts and circumstances of the
taxpayer's situation and the financial
information analysis. For example, the taxpayer
has $100,000 liability and assets and income of
$125,000. To avoid economic hardship, it is
determined that the taxpayer will need $75,000.
The remaining $50,000 should be considered in
determining an acceptable offer amount.
- In offers based on detriment to voluntary
compliance, generally the Service would expect
that a taxpayer to offer an amount at least
equal to the amount of the assessed tax,
exclusive of penalty and interest. However, in
some cases equity and fairness would warrant
acceptance of some lesser amount. In such cases,
consideration should be given to accepting the
offer for a lesser amount.
- Generally, we will use the Cash option (90
days) for payment of the offer amount. If the
circumstances indicate that the additional time
is needed to pay the offer amount, short term or
deferred payment options may also be used.
|
|
|
- The procedures in IRM 5.8, Chapter 7,
Rejection/Withdrawal Processing, should be
followed when processing rejected/withdrawn
offers.
- Chapter 7 provides instructions for
independent administrative review, returned and
rejection of offers.
- Effective tax administration offers that are
rejected must be approved by the collection
division chiefs.
- Chapter 7, Section 7.6 discusses dates that
will be used when offers are withdrawn.
|
|
|
- The procedures in IRM 5.8, Chapter 8,
Acceptance Processing, should be followed when
processing accepted offers.
- Chief Counsel's opinion is required on offers
where the unpaid amount of tax assessed
including any interest, additional amount,
addition to the tax, or assessable penalty is
$50,000 or more.
- The District Director is the official with
delegated authority to accept offers based on
the promotion of effective tax administration.
|
|
Internal Revenue Manual
|
Hndbk. 5.8 Chap. 11 Effective Tax
Administration (formerly ABC Offer)
|
(02-04-2000)
|
|
|
|
Source of Above is IRS
Handbook 5.8 11/2/2000 |
|
| The above limited information is intended for
informational purposes only. If legal advice or other expert
assistance is required, the services of a competent professional should
be sought, and this general information should not be relied upon
without such professional assistance. |
|
|
| Brought to you by A.
Nathan Zeliff, Attorney at Law. E-Mail: zlaw@dnai.com |
For assistance, please contact me.
P.O. Box 6515
Moraga, CA 94570
Telephone: (925) 820-1004
FAX: (925) 299-0363
This page is hosted by Direct
Network Access
TO
MAIN PAGE |
