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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

[5.8] 11.1  (02-04-2000)
Overview

  1. 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."
  2. 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.
  3. 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.
  4. 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

  1. 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.
  2. 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:
    1. Collection of the full liability would create an economic hardship, or
    2. 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:
    1. A liability has been or will be assessed against taxpayers before acceptance of the offer,
    2. The net equity in assets plus future income must be greater than the amount owed, and
    3. 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.

[5.8] 11.2.1  (02-04-2000)
Economic Hardship

  1. 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.
  2. Listed below are factors supporting a determination of economic hardship (not all inclusive):
    1. Long term illness, medical condition, or disability that renders the taxpayer incapable of earning a living;
    2. Liquidation of assets to pay the tax liability would render the taxpayer unable to meet basic living expenses; and
    3. 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.
  3. 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.

[5.8] 11.2.2  (02-04-2000)
Detriment to Voluntary Compliance

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. Listed below are factors (not all inclusive) that should be evaluated in determining the taxpayer's overall compliance history:
    1. Compliance with the filing and payment requirements of the Internal Revenue Code;
    2. Deliberate actions to avoid the payment of taxes, and
    3. Encouraging others to refuse to comply with the tax laws.
  4. 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

  1. Taxpayer must complete the following items for the effective tax administration offers:
    1. Form 656, Offer in Compromise
    2. Form 433-A, Collection Information Statement for Individuals and/or 433-B, Collection Information Statement for Businesses.
  2. 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

  1. Initial receipt of offers will occur in Collection Division.
  2. Follow IRM 5.8, Chapter 3, Processability Determination, for initial processing of offers.
  3. 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.
  4. We will continue to work with the taxpayer to perfect the offer if all items are not completed on Forms 656.
  5. 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.

[5.8] 11.5  (02-04-2000)
Evaluation of Offers

  1. 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.
  2. 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.
  3. 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.

[5.8] 11.6  (02-04-2000)
Financial Statement Analysis

  1. Procedures for financial analysis are contained in Chapter 5, Financial Statement Analysis.
  2. See Chapter 5, Section 5.6 for information on offers submitted by a taxpayer who shares household expenses community property issues.
  3. 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.
  4. 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.
  5. 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.

[5.8] 11.7  (02-04-2000)
Rejection/Withdrawal Processing

  1. The procedures in IRM 5.8, Chapter 7, Rejection/Withdrawal Processing, should be followed when processing rejected/withdrawn offers.
  2. Chapter 7 provides instructions for independent administrative review, returned and rejection of offers.
  3. Effective tax administration offers that are rejected must be approved by the collection division chiefs.
  4. Chapter 7, Section 7.6 discusses dates that will be used when offers are withdrawn.

[5.8] 11.8  (02-04-2000)
Acceptance Processing

  1. The procedures in IRM 5.8, Chapter 8, Acceptance Processing, should be followed when processing accepted offers.
  2. 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.
  3. 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.

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Moraga, CA 94570

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