IRS OFFER IN
COMPROMISE OVERVIEW - IRM
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The government, like other creditors, encounters situations where
an account receivable cannot be collected in full or there is a
legitimate dispute as to what is owed. It is an accepted business
practice to resolve these issues through negotiation and compromise.
This IRM provides procedures for collection employees to follow
when considering a taxpayers proposal to compromise.
An Offer in Compromise is an agreement between a taxpayer and
the government that settles a tax liability for payment of less
than the full amount owed.
The Secretary of the Treasury is granted broad authority to
compromise tax liabilities in IRC Section 7122.
The Commissioner of Internal Revenue, under Treasury Regulation
§ 301.7122-1 approved by the secretary, is authorized to
compromise a liability on any one of three grounds; Doubt as to
Collectibility (DATC), Doubt as to Liability (DATL), or to promote
Effective Tax Administration (ETA).
Delegation Order No. 5–1 (formerly known as Delegation Order
11, Rev. 29) in IRM 1.2, Organization, Finance, and Management ,
re-delegates the Commissioner's authority to compromise.
Policy Statement P-5-100 states:
The Service will accept an offer in compromise when it is unlikely
that the tax liability can be collected in full and the amount
offered reasonably reflects collection potential. An offer in
compromise is a legitimate alternative to declaring a case
currently not collectible or to a protracted installment
agreement. The goal is to achieve collection of what is
potentially collectible at the earliest possible time and at the
least cost to the Government.
In cases where an offer in compromise appears to be a viable
solution to a tax delinquency, the Service employee assigned the
case will discuss the compromise alternative with the taxpayer
and, when necessary, assist in preparing the required forms. The
taxpayer will be responsible for initiating the first specific
proposal for compromise.
The success of the offer in compromise program will be assured
only if taxpayers make adequate compromise proposals consistent
with their ability to pay and the Service makes prompt and
reasonable decisions. Taxpayers are expected to provide reasonable
documentation to verify their ability to pay. The ultimate goal is
a compromise which is in the best interest of both the taxpayer
and the government. Acceptance of an adequate offer will also
result in creating for the taxpayer an expectation of a fresh
start toward compliance with all future filing and payment
Offers will not be accepted if it is believed that the
liability can be paid in full as a lump sum or through installment
payments extending through the remaining statutory period for
collection (CSED), unless special circumstances exist. See IRM
5.14, Installment Agreements.
Absent special circumstances, a Doubt as to Collectibility (DATC)
offer amount must equal or exceed a taxpayers reasonable
collection potential (RCP) in order to be considered for
acceptance. The exception is that if special circumstances exist
as defined in IRM 18.104.22.168, Effective Tax Administration and Doubt
as to Collectibility with Special Circumstance , or IRM 5.8.11,
Effective Tax Administration , the offer may be accepted on the
basis of hardship or Effective Tax Administration (ETA).
The objectives of the offer in compromise program are:
Effect collection of what can reasonably be collected at
the earliest possible time and at the least cost to the
Achieve a resolution that is in the best interest of both
the individual taxpayer and the government.
Provide the taxpayer a fresh start toward future
voluntary compliance with all filing and payment
Secure collection of revenue that may not be collected
through any other means.
Revenue Procedure 2003-71 effective August 21, 2003, defines
the procedures applicable to the submission and processing of
offers to compromise tax liability. This handbook further
describes, in detail, those processes.
Timeliness of Offer Investigations
The timeliness of case actions in an offer investigation is
important not only to ensure the efficiency of the process, but
also as a key component of taxpayer satisfaction in this program
area. Managers and employees need to ensure that communications
from taxpayers are addressed in a timely manner, and the
timeliness of case actions ensure the length of the offer
investigation process is as brief as reasonably possible. The
guidelines for timely case actions outlined in this IRM are
intended to provide structure for the overall offer process and to
ensure investigations are completed in a responsive and efficient
These guidelines are not intended as absolute measures of
performance for individual employees. Performance evaluations of
individual employees must be based on reviews of the actual work
produced by the employees, and take into account any special
circumstances that may have impacted the ability of the employees
to meet the specified guidelines. In general, unwarranted
inactivity gaps in an offer investigation should be avoided, and
offer managers should establish controls to ensure that cases with
unwarranted inactivity gaps are identified and addressed
The following list, while not all inclusive, provides a brief
summary of various functions' activities related to offer in
Tax Cases Controlled by Department of Justice
The Internal Revenue Service may not have the authority to
accept an offer in compromise when:
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.
The federal tax liability for all or part of the periods
the taxpayer owes has been reduced to a judgment.
The Internal Revenue Service has a civil or criminal
prosecution pending against the taxpayer in the Department
of Justice (DOJ) or United States Attorneys Office.
Acceptance by the Internal Revenue Service is dependent
upon the DOJ accepting a related offer or settlement.
If there is a closed Criminal Investigation Division (CID)
indicator on the account, contact should be made with Technical
Services to verify if restitution was ordered. If restitution
was ordered, the tax period may be under the control of the DOJ.
In those cases, request the guidance of local Counsel before
If there is any indication that one or more of the above
conditions exist, contact Area Counsel for guidance.
In some instances, the DOJ may request the case be forwarded to
them for inclusion in pending litigation. However, in Doubt as to
Collectibility (DATC) offers, DOJ generally requests the Offer
Investigator conduct the investigation and make a recommendation
whether the offer should be accepted or rejected. In those cases,
coordinate with Area Counsel to determine if the request should be
worked as a courtesy investigation or if Collection has
jurisdiction to process the offer.
The Collection function is responsible for processing and
investigating the following offers:
All offers based on Doubt as to Collectibility (DATC),
including proposed liabilities still subject to settlement
in Examination or Appeals.
All offers based on Effective Tax Administration (ETA).
All offers submitted under Doubt as to Liability (DATL)
for either a trust fund recovery penalty (TFRP) or Personal
Liability for Excise tax (PLET) assessment.
Examination function is responsible for processing and
investigating offers submitted based on Doubt as to Liability (DATL),
excluding offers submitted to compromise Trust Fund Recovery Penalty
(TFRP) or Personal Liability for Excise Tax (PLET). DATL only offers
are not controlled on the Automated Offer in Compromise (AOIC)
system and Examination is responsible for all case processing.
Examination function employees must also provide the Collection
function with a recommendation on offers based on Effective Tax
Administration (ETA) with public policy/equity issues, when
requested by Compliance. See IRM 22.214.171.124.2, Public Policy or Equity
Offers secured in Appeals offices in conjunction with related
casework such as Collection Due Process (CDP), will be forwarded to
the Centralized Offer in Compromise (COIC) sites for processability
determination, processing of the application fees, and mailing of
processability letters provided by Appeals. These offers are not
controlled on the Automated Offer in Compromise (AOIC) system. COIC
will be responsible for the input of necessary transaction codes to
the Integrated Data Retrieval System (IDRS). See IRM 126.96.36.199.2,
Determining Processability for Appeals Collection Due Process
Offers. Appeals will normally investigate their own offers but if
complex issues are identified, they may require the assistance of
Collection or Examination through the issuance of an Appeal Referral
Counsel attorneys provide opinions on offers recommended for
acceptance when the total liability, including additions and accrued
penalty and interest, is $50,000 or greater. Counsel attorneys, when
requested, may also provide legal opinions for matters related to
investigation and processing of offers.
Taxpayer Advocate Service
Taxpayer Advocate Service (TAS) employees assist taxpayers in
solving tax problems that have not been resolved through normal
channels or who are experiencing significant hardships. TAS
employees may request expedite processing of an offer if they deem
such action necessary. The Service Level Agreement (SLA) negotiated
between TAS and Small Business Self Employed (SBSE) describes when
the request for expedited processing would be appropriate and
provides instructions for processing the case between the TAS and
Cases classified under TAS criteria 1 – 4 involving economic
hardship, must acknowledge receipt to the designated TAS liaison via
Form 3210, Document Transmittal, within one (1) workday of receipt
of the case. Case resolution must be submitted in writing via
facsimile or hand delivery to the TAS Associate within three (3)
workdays of receipt, if no other deadline has been negotiated.
When appropriate, TAS employees may issue Form 12412, Taxpayer
Advocate Service Assistance Request, to initiate the Operations
Assistance Request (OAR) process. Upon receipt of an OAR, Collection
Follow the instructions for expedite processing and/or
assignment of the offer, based on the reason for the request.
Control the request and ensure a response is provided to
the TAS office within requested time frames.
Contact the TAS office and negotiate additional time if it
is determined that the time frame cannot be met.
Contact the TAS office and discuss the OAR issue with the
Respond to the OAR indicating how the issue is being
addressed or how the offer was closed, if appropriate.
The Taxpayer Advocate Service (TAS) cannot issue a Taxpayer
Assistance Order (TAO) requiring the Service accept an offer or
apply a value to an asset or expense item. However, TAS may issue
a TAO requesting that an action be reconsidered or reviewed at a
Liabilities to be Compromised
Offers accepted based on Doubt as to Collectibility (DATC) or
Effective Tax Administration (ETA) must include all unpaid tax
liabilities and periods for which the taxpayer is liable.
If a taxpayer submits an offer to compromise income tax
liabilities is also responsible for business liabilities for a
sole-proprietorship, both the income tax liabilities and the
business liabilities must be included in an accepted offer.
Offers accepted based on Doubt as to Liability (DATL) should only
include the tax years or periods in question. Other tax periods that
the taxpayer owes should not be included in the offer.
Taxes, Penalties, and Interest Constitute One Liability
A compromise is effective for the entire assessed liability for
tax, penalties, and interest for the years or periods covered by
the offer. All questions of tax liability for the years or periods
covered by the agreement are conclusively settled. Neither the
taxpayer nor the government can reopen a compromised tax year or
period unless there was falsification of information or documents,
concealment of ability to pay and/or assets, or a mutual mistake
of a material fact which would be sufficient to set aside or
reform a contract.
Taxpayers may submit, and the Service will consider, an offer
to compromise taxes due on tax returns which have been filed but
have not yet been assessed. However, before the offer can be
accepted, the taxes must be assessed.
A compromise will not be accepted on any tax liability which
has become unenforceable due to the expiration of the statutory
period for collecting the debt.
If a taxpayer desires to make a voluntary payment on a
liability for which the statutory period for collection has
expired, the payment should be accepted but the taxpayer should be
asked to sign a statement indicating that they are aware
collection of the tax is barred. Attach the statement to the
payment posting document and process the payment through normal
remittance processing procedures. Do not treat these payments as
IRC Section 6305 authorizes the Secretary of the Treasury to
assess and collect certain child support obligations on behalf of
the Secretary of Health and Human Services. These liabilities are
identified on the non-master file with a master file tax code of
The Secretary of the Treasury is not authorized to compromise
these liabilities. However, the individual may seek a legal,
equitable or administrative action in a state court or before a
state agency to determine the correct liability or to recover an
amount collected under this section.
Effective November 1, 2003, the Service began charging an
application fee for offers submitted after that date.
The application fee applies only to certain offers processed
under Treasury regulations. It does not apply to offers in
settlement under the jurisdiction of the Department of Justice
Form 656, Offer in Compromise
Taxpayers who wish to propose an offer in compromise should
submit Form 656, Offer in Compromise, using the most current version
of the form. Computer generated or photocopied versions of Form 656
are also acceptable provided they contain the following statement:
" I/we affirm that this form is a verbatim duplicate of the
official Form 656, and I/we agree to be bound by all terms and
conditions set forth in the official Form 656."
Offers submitted on the basis of Doubt as to Collectibility (DATC)
or Effective Tax Administration (ETA) must include a current version
of the collection information statement. For offers based solely on
Doubt as to Liability (DATL), no collection information statement is
required. However, the taxpayer must include a written statement
explaining why the liability is incorrect and must include a
statement addressing the validity of the actual assessment(s) or a
portion of the assessment(s).
Name and Address of Taxpayer
The full name, address, Social Security Number, and/or Employer
Identification Number, or Individual Taxpayer Identification
Number (ITIN) of the taxpayer must be entered on Form 656. If the
taxpayer(s) uses a mailing address that is different from the
physical living address, the physical address must be included as
Basis for Compromise
Taxpayers must indicate the basis(es) upon which they propose
to compromise; Doubt as to Collectibility (DATC), Doubt as to
Liability (DATL) and/or to promote Effective Tax Administration
The total amount of money offered must be indicated. The amount
offered may not include money already paid, expected future
refunds, funds attached by levy, or anticipated benefits from
capital/net operating losses.
Taxpayers are expected to pay the entire amount offered in as
short a time as possible. Acceptable offer terms should be
determined by the Offer Investigator and should not be limited to
the proposal of the taxpayer.
The amounts and due dates of payments must be specified.
There are three (3) types of payment terms that the Service and
the taxpayer may agree to:
Cash — must be paid
within 90 calendar days from notice of acceptance
Short Term Deferred —
must be paid within two years (24 months) or less from
notice of acceptance
Deferred Payment —
must be paid within the time remaining on the statutory
period for collection
Taxpayers must agree to all the standard conditions of the
agreement as they are printed on the Form 656.
Offers accepted under Doubt as to Liability (DATL) or Effective
Tax Administration (ETA) based on Public Policy/Equity are not
subject to the waiver of refund condition. See IRM 5.8.11,
Effective Tax Administration, discussing Public Policy/Equity
Interest on the Compromise Amount
For all offers accepted after December 31, 1999 interest on the
compromise amount is also compromised.
Prior to accepting an offer that was pending on January 1, 2000:
The original Form 656 must be retained in the case file because
it establishes when the offer became "pending" for
purposes of either the waiver or any statutory suspension.
For all offers accepted before January 1, 2000, on Form 656
revisions prior to 1–2000, interest continues to accrue until the
compromise amount is paid in full.
Effect of Previous Offers on Collection Statute
Over the years various changes in the tax law has had an effect
on the statutory collection period. See IRM 5.8.10, Special Case
Processing, for additional guidance.
Common Abbreviations Used in the IRM
Below is a list of common abbreviations used throughout this IRM.
AET – Asset Equity Table – A table
listing all the taxpayers assets, encumbrances, and exemptions. It then
calculates the equity which is included in the reasonable collection
potential (RCP) calculation.AOIC –
Automated Offer in Compromise – Computer application where offers in
compromise are recorded and monitored from receipt to closure. History of
the offer investigations conducted by COIC employees and of actions taken
by Monitoring OIC (MOIC) units are also maintained on this system. ARI
– Appeals Referral Investigation – A request from Appeals for
assistance from the appropriate Collection function on verifying the
accuracy of information reported on a CIS or assistance in completing the
offers investigation.ASED – Assessment
Statute Expiration Date – The date the statutory period for assessing
tax expires.ATAT – Abusive Tax
Avoidance Transactions – Abusive transactions taken by taxpayers to
avoid paying, such as creating trusts, using off shore credit cards, etc.CDP
– Collection Due Process - Allows taxpayers a right to a hearing before
Appeals regarding proposed collection enforcement actions or filed Notice
of Federal Tax Lien.CIS – Collection
Information Statement – A financial statement listing assets, income,
liabilities, and expenses submitted by the taxpayer.COIC
– Centralized Offer in Compromise – Units located in Brookhaven and
Memphis campus that complete initial processing and work less complicated
offers to completion. Do not confuse this with MOIC – COIC units do not
monitor or default accepted offers.CSED
– Collection Statute Expiration Date – The date the statutory period
for collecting the tax expires.DATC –
Doubt as to Collectibility – Basis for acceptance of an offer where
there is doubt that the tax can be paid in full. DATL
– Doubt as to Liability – Basis for acceptance of an offer where there
is doubt that the liability is correct.DCSC
– Doubt as to Collectibility with Special Circumstance – Basis for
acceptance of an offer where there is doubt that the tax can be paid in
full and special circumstances exist that warrants accepting the offer for
less than the reasonable collection potential (RCP).ETA
– Effective Tax Administration – Basis for acceptance of an offer
where this is no doubt that the liability is correct or can be paid in
full. However, requiring the taxpayer to fully pay the tax would either
create an economic hardship or be a public policy/equity issue.FICA
– Future Income Collateral Agreement – An agreement secured in
connection with an accepted offer that requires a taxpayer to pay a
percentage of future income for a set number of years as additional
consideration for acceptance of the offer. FMV –
Fair Market Value – The value a taxpayer would receive if an asset was
sold to a willing buyer given time to obtain the best and highest possible
price. IA – Installment Agreement –
An agreement to pay the liability over an established period of time not
to exceed the statutory period for collection.IAR
– Independent Administrative Reviewer – An independent third party who
reviews a decision to reject an offer prior to that decision being
conveyed to a taxpayer. This person is not in the chain of command of the
employees responsible for the rejection of the offer. IBTF
– In Business Trust Fund – a taxpayer who is in business and owes
trust fund (Form 941) taxes. ICS –
Integrated Collection System – Computer application used by Compliance
employees to monitor inventory. Histories of OIC investigations conducted
by area office employees are maintained on this system. IET
– Income/Expense Table – A table that lists the income and expenses
both claimed and allowed for purposes of calculating reasonable collection
potential (RCP). MOIC – Monitoring OIC
Unit – Unit in Compliance Services located in a campus that completes
end processing and monitoring of accepted offers. NFTL
– Notice of Federal Tax Lien - The notice of the filed Federal Tax LienNRE
– Net Realizable Equity – Quick sale value less the amount owed on an
asset. PLET – Personal Liability for
Excise Tax – Assessments made on individual taxpayers for withheld
excise tax.OE – Offer Examiner – a
tax examiner appointed as an offer investigator and located in COIC.OS
– Offer Specialist – A revenue officer appointed as an offer
investigator, generally located in an area office.PE
– Process Examiner – a tax examiner who completes initial
processability determinations on offers and located in COIC.POD
– Post of Duty – Internal Revenue Service local office(s).QSV
– Quick Sale Value – The amount that could be obtained if an asset is
sold quickly, usually less than FMV.RCP
– Reasonable Collection Potential – The amount that could reasonably
be collected from the taxpayer.TFRP –
Trust Fund Recovery Penalty – Assessments made on individual taxpayers
for the withheld or trust fund portion of delinquent employment taxes.
|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.
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CAUTION: There are many providers of services on the
internet who will submit your Offer in Compromise forms.
However, such providers merely have you complete the forms.
These bargain basement "Offer experts" may be only
mailing the forms you prepare to the Internal Revenue Service.
Thus, they have done nothing for you. In fact, they may end up
costing you more because critical review and analysis has not
been done. When completing the financial statement forms and
making the Offer, you are painting a financial picture that will
determine the amount of an acceptable Offer. Unless your
representative has the necessary skills and experience, you may
have paid a small fee, only to be subjected to settling for more
under the Offer than you otherwise should have. Your
professional must have experience in: calculating your income
and expenses; determining the amount of the offer you should
make; valuing your assets and liabilities; reviewing joint
ownership considerations; working with the tax law and IRS
internal procedures; arguing the facts and the law, and
negotiating with the IRS.
The IRS has a history of intimidation, and let's face it,
they will take advantage of any taxpayer who represents himself,
and even a taxpayer's advocate who is weak. Remember, IRS Offer
Specialists generally have "collection" backgrounds
and they come at you from the perspective of getting as much
money as they can.
In the end analysis, you should measure the benefits
you derive from the final result. For a taxpayer to engage
someone who merely mails in your Offer forms for a $300.00 fee,
what at first blush looked like "such a deal", may in
reality end up costing you many thousands of dollars more
because you didn't choose a tax professional who would negotiate
the best settlement for you.
contact A. Nathan Zeliff, Attorney at Law