Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 1. Overview
- 22.214.171.124 Introduction
- 126.96.36.199 Functional Responsibilities
- 188.8.131.52 Examination Function
- 184.108.40.206 Appeals
- 220.127.116.11 Counsel
- 18.104.22.168 Taxpayer Advocate Service
- 22.214.171.124 Liabilities to be Compromised
- 126.96.36.199 Application Fee
- 188.8.131.52 Form 656, Offer in Compromise
- 184.108.40.206 Interest on the Compromise Amount
- 220.127.116.11 Effect of Previous Offers on Collection Statute
- Exhibit 5.8.1-1 Common Abbreviations Used in the IRM
Part 5. Collecting Process
Chapter 16. Currently Not Collectible
Section 1. Overview
- 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 requirements.
- 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 government.
- 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 requirements.
- 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 manner.
- 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 appropriately.
- The following list, while not all inclusive, provides a brief summary of various functions' activities related to offer in compromise processing.
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 proceeding.
- 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 Grounds.
- 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 Investigation (ARI).
- 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 SBSE functions.
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 management should:
- 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 TAS employee.
- 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 higher level.
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 offer payments.
- 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 59.
- 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 (DOJ).
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 well.
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 (ETA).
- 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 offer.
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:
- Secure an amended offer on the most current version of Form 656
- Ensure that both the amended Form 656 and the acceptance letter indicate the correct terms
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.
Exhibit 5.8.1-1 (09-01-2005)
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.