OFFER IN COMPROMISE BASICS
What is an “Offer in Compromise?” It is an offer made by a taxpayer to the IRS to eliminate past-due federal income tax liability by establishing a repayment plan through the IRS “Offer in Compromise” program, which is commonly known as the “Fresh Start Initiative.” An overview is presented to help navigate the labyrinth known as the Internal Revenue Code (the “Tax Code”) and its concomitant Treasury regulations, Internal Revenue Manual, Policy Statements, Revenue Procedures, and IRS Notices. These courses explain the procedures applicable to the submission and processing of offers to compromise a tax liability under Section 7122 of the Tax Code, 26 U.S.C. § 7122.
The Tax Code authorizes the Secretary of the Treasury or his/her delegate to compromise any civil or criminal liability arising under the internal revenue laws before the case is referred to the Department of Justice for prosecution or defense. 26 U.S.C. § 7122. The IRS is a delegate of the Secretary of the Treasury. The Secretary of the Treasury has issued Treasury regulations that promulgate guidelines and procedures for the submission and evaluation of offers to compromise under 26 U.S.C. § 7122. These guidelines can be found in 26 C.F.R. § 301.7122-1, the Internal Revenue Manual, revenue procedures, and various forms and publications issued by the IRS.
Only the IRS may process an Offer in Compromise, and only under the various regulations, rules, guidelines, and revenue procedures established under 26 U.S.C. § 7122. In re 1900 M. Restaurant Associates, Inc., 352 B.R. 1, 5 (D.D.C. 2006). The IRS will accept an Offer in Compromise offer when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. IRM § 220.127.116.11.17(1) (01-30-1992), (aka Policy Statement 5-100). An Offer in Compromise is a legitimate alternative to declaring a case currently not collectible or to executing a protracted installment agreement. IRM § 18.104.22.168.17(1) (01-30-1992); IRM § 22.214.171.124.3(1) (05-05-2017). The IRS’ goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the United States. IRM § 126.96.36.199.17(1) (01-30-1992).
The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the IRS makes prompt and reasonable decisions. IRM § 188.8.131.52.17(4) (01-30-1992). Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The goal is a compromise which is in the best interest of both the taxpayer and the IRS. IRM § 184.108.40.206.17(4) (01-30-1992). 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. IRM § 220.127.116.11.17(4) (01-30-1992).
A taxpayer initiates the Offer in Compromise process by submitting an application requesting that the past-due tax liability be reduced or “compromised” to an amount the taxpayer can afford to pay. An offer to compromise a tax liability must be submitted in writing on IRS Form 656, Offer in Compromise, which contains various terms that form the agreement between the taxpayer and the IRS to reduce the tax liability. None of the standard terms may be stricken or altered, and the form must be signed under penalty of perjury. Rev. Proc. 2003-71, § 3; Cummings v. USA, No. 4:15-cv-00123-TWP-DML, pg. 14 (S.D. In. 3/19/17). The offer should include all liabilities to be covered by the compromise, the legal grounds for compromise, the amount the taxpayer proposes to pay, and the payment terms. Payment terms include the amounts and due dates of the payments. The offer should also contain any other information required by Form 656. The IRS occasionally revises Form 656 and requires offers to be submitted on the most recent version of the form. The most recent version of the form and instructions are available on the IRS’ website at www.irs.gov.
The offer to compromise a tax liability must set forth the legal grounds for compromise and needs to provide enough information for the IRS to determine whether the offer fits within its acceptance policies. There are three (3) grounds for debt relief pursuant to the IRS Offer in Compromise program: (1) doubt as to collectibility; (2) doubt as to liability; and (3) the promotion of effective tax administration. 26 C.F.R. § 301.7122-1(b). The courses on this website focus on “doubt as to collectability” offers.
Doubt as to Collectibility Offers
Doubt as to collectibility exists in any case where the taxpayer’s assets and income cannot satisfy the full amount of the liability (in one payment or through an installment agreement) before the collection statute expiration date.
An offer to compromise based on doubt as to collectibility generally will be considered acceptable by the IRS if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the IRS could collect through other means, including administrative and judicial collection remedies. This collectible amount is the reasonable collection potential (“RCP”) of a case. In determining the reasonable collection potential of a case, the IRS calculates the taxpayer’s reasonable basic living expenses. In some cases, the IRS may accept an offer of less than the total reasonable collection potential of a case if there are special circumstances.
Doubt as to Liability Offers
Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence of the liability.
An offer to compromise based on doubt as to liability generally will be considered acceptable if it reasonably reflects the amount the IRS would expect to collect through litigation. This analysis considers the hazards of litigation that would be involved if the liability were litigated. The hazards of litigation evaluation are not an exact science and is within the IRS’ discretion.
Promotion of Effective Tax Administration Offers
A taxpayer may find it difficult to obtain a compromise based on “effective tax administration.” See Fargo v. C.I.R., 447 F.3d 706 (9th Cir. 2006). Nevertheless, a discussion of effective tax administration is beneficial.
(a) The IRS may compromise to promote effective tax administration where it determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship. Economic hardship is defined as the inability to pay reasonable basic living expenses. No compromise may be entered on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.
An offer to compromise based on economic hardship generally will be considered acceptable when, even though the tax could be collected in full, the amount offered reflects the amount the IRS can collect without causing the taxpayer economic hardship. The determination to accept a particular amount will be based on the taxpayer’s individual facts and circumstances.
(b) If there are no other grounds for compromise, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner. The taxpayer will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. No compromise may be entered into on this basis if compromise of the liability would undermine compliance by taxpayers with the tax laws.
An offer to compromise based on compelling public policy or equity considerations generally will be considered acceptable if it reflects what is fair and equitable under the particular facts and circumstances of the case.
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