The Law, Tax Policy, and the IRS Internal – Position on Offers in Compromise
The tax policy for Offers in Compromise is stated in 57(10)1 of the IRS Manual. It states that the compromise process is available "to provide delinquent taxpayers with a fresh start toward future compliance with the tax laws."
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 as 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.
The success of the 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 Service. Acceptance of an adequate offer will also result in creating, for the taxpayer, an expectation of and a fresh start toward compliance with all future filing and payment requirements.
Section 57(1)1.2 of the IRS Manual deals with the IRS Compromise Objectives:
- To resolve accounts receivable that cannot be collected in full or on which there is a legitimate dispute as to what is owed;
- To effect collection of what could reasonably be collected at the earliest time possible at the least cost to the government;
- To give taxpayers a fresh start to enable them to voluntarily comply with the tax law;
- To collect funds which may not be collectible through any other means.
Section 7122(a) of the Internal Revenue Code of 1986 authorizes the Secretary of the Treasury to "compromise any civil or criminal case arising under the Internal Revenue Service laws."
Section 301.7122-1(a) of the regulations states that the IRS may compromise a civil case only upon one or both of the following two grounds:
- Doubt as to liability; or
- Doubt as to collectibility.
The regulations authorize a compromise to the extent the Government cannot collect the amounts owed.
An Offer in Compromise relates to the entire tax liability of the taxpayer; all question of that liability will be conclusively settled in that agreement.
H.R. 2676, The Internal Revenue Service Restructuring and Reform Act of 1998, signed by the President on July 22, 1998, adds Sub-Section C to section 7122, as follows:
Sub-Section C: STANDARD for EVALUATION of OFFERS
- 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.
- Allowances for Basic Living Expenses
Special Rules Relating to Treatment of Offers
- In General — In prescribing guidelines under paragraph (1), the Secretary is to 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.
- 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 sub-paragraph (A) is appropriate and shall not use the schedules to the extent that such use would result in the taxpayer not having adequate means to provide for basic living expenses.
- 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
- In the case of an Offer in Compromise which relates only to issues of liability of the taxpayer, 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
- The taxpayer shall not be required to provide a financial statement.
The Code permits the IRS to compromise a taxpayer’s tax liability. An Offer in Compromise is an offer by the taxpayer to settle unpaid tax accounts for less than the full amount of the assessed balance due. An Offer in Compromise may be submitted for all types of taxes, as well as interest and penalties, arising under the Internal Revenue Code.
There are two bases upon which an offer can be made:
- Doubt as to liability for the amount owed; and
- Doubts as to the ability to pay the amount owed.
A compromise agreement based upon doubt as to ability to pay requires the taxpayer to file returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do so permits the IRS to begin immediate collection actions for the original amount of the liability. The Internal Revenue Manual provides guidelines for revenue officers to determine whether an Offer in Compromise is adequate. An offer is adequate if it reasonably reflects collection potential. Although the revenue office is instructed to consider the taxpayer assets and future and present income, the IRS advises that rejection of an offer solely based upon narrow assets and income evaluations should be avoided.
Pursuant to the IRS, collection normally is withheld during the period an Offer in Compromise is pending, unless it is determined that the offer is a delaying tactic and collection is in jeopardy.
IMPORTANT ADDED CONGRESSIONAL THOUGHTS IN CONFERENCE
The Conference Report explanation notes that under the Senate amendment to H.R. 2676 the IRS is "required to consider the facts and circumstances of a particular taxpayer’s case in determining whether the national and local schedules are inadequate for that particular taxpayer. If the facts indicate that the use of scheduled allowances would be inadequate under the circumstances, the taxpayer is not limited by the national or local allowances."
Liberal acceptance policy — The Senate amendment provides 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.
The Conference Agreement states that the Secretary is authorized to prescribe guidelines for the IRS to determine whether an Offer in Compromise is adequate and "should be accepted to resolve a dispute." The Conferees expect that the present regulations will be expanded so as to permit the IRS, in certain circumstances, to consider:
Additional factors 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 foregoing penalties and interest that 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.
The report states that its provisions are generally effective for Offers in Compromise submitted after the date of enactment of June 22, 1998.
IRS Restructuring and Reform Act of 1998, the IRS has published its comments on section 3462 as follows:
- Provision covered: R.R.A. § 3462. Offers in Compromise. I.R.C. §§ 6159, 6331, and 7122
- Background: Section 7122 of the Internal Revenue Code generally provides that the Service may compromise any case arising under the Internal Revenue Service laws, prior to referring that case to the Department of Justice for defense or prosecution. Current regulations provide two bases for compromise: doubt as to collectibility and doubt as to liability. The Internal Revenue Service manual provides guidance for determining an adequate doubt as to a collectibility offer. Congress believes that the Service should be more flexible in working with taxpayers who are sincerely trying to satisfy their tax obligations and, thus, the Service should make it easier for taxpayers to enter into Offers in Compromise. The tax writing committees have indicated that taxpayer compliance is enhanced by the ability to compromise and to make payments via an installment agreement.
- Change(s): The following changes have been made with regard to the Offer in Compromise procedures:
- The applicability of the allowable expense procedures will be determined on the facts and circumstances of each taxpayer's case;
- Offers from low income taxpayers cannot be rejected solely on the basis of the amount of the offer;
- Taxpayers will no longer be required to waive the statute of limitations on collection;
- Regulations will be expanded to provide additional bases for compromise, other than doubt as to liability and doubt as to collectibility;
- Compromise of a joint liability that is defaulted because of the actions of one spouse, can be reinstated as to the non-defaulting spouse, upon application.
- Impact: This provision expands the authority for the Service to accept Offers in Compromise. The current Offer in Compromise program will, thus, be substantially revised with the drafting of the new regulations. In the interim, however, most of the changes are directed at providing greater consideration to the taxpayer in resolving collection issues through compromise. For example, all the facts and circumstances of the taxpayer’s condition must be considered in determining the applicability of the allowable expense procedures. Because the Offer in Compromise program will be administered with more flexibility, offer receipts will likely increase.
- Necessary Actions:
- Notice/instructions to the field regarding deviations from allowable expense standards. Determinations of when to deviate will be in the discretion of the offer examiner/RO/group manager. Procedures will be forthcoming.
- Determination of what is a "low income" taxpayer and creation of supplemental procedures based on that designation.
- Define what is a "pending" installment agreement and create procedures/transaction codes to ensure that levies are not issued while such agreements are pending.
- Modify Form 656 to eliminate statutory waiver provisions; to provide for severability in the event of default by jointly liable taxpayers with joint offers.
- Preparation of statement regarding the rights of taxpayers and the obligations of the Service in the Offer in Compromise process; and an instruction to taxpayers with offers of the advantage of notifying the Service of any change in address or marital status.
- Define/clarify "independent administrative review" for purposes of proposed Offer in Compromise and installment agreement rejections.
- Draft regulations providing additional bases for the compromise of individual income tax liabilities, which include considerations such as equity, hardship, and public policy.
An addendum to Form 656 should be created that provides for severability of a joint offer after the payments required under the offer are satisfied, so that in the event of a default relating to the compliance provisions, the compromise will only default as to the non-compliant party. The addendum will be in use until Form 656 can be modified. Because the Service can no longer condition the acceptance of an installment agreement upon the taxpayer’s waiver of the right to receive a state income tax refund, any language on an installment agreement form authorizing the Service to levy on state income tax refunds as a condition of the agreement should be eliminated.