Offers in Compromise

In this article, tax attorney Robert E. Mckenzie discusses compromise with the IRS.
Robert E. McKenzie ©2011  

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Number of Offers

1.10    The total number of proposed offer has more than halved from 128,000 in FY 2001 to 52,000in FY 2009. The number of proposed offers rose from about 42,000 in 2008. The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001, 12,000 in FY 2007 (or 24%):10,677in 2008 (or 24%). and went down to 10,665.(about 20%) in 2009. In 2010 the number of accepted offers rose for the first time in a decade to 14,000 acceptances. The increased number of acceptances resulted primarily from an increase in submission and not as a result of any increased flexibility by the IRS.

 

Offers in compromise (thousands)

2007 

2008 

2009 

2010 

Offers received

46 

44 

52 

57 

Offers accepted

12 

11 

11 

14 

Offers accepted

228,975 

200,103 

157,261 

129,668 

 

1.15    Securing an Offer in Compromise        

The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.

 

 

1.16    Taxpayer Advocate Report

The Taxpayer Advocate’s report to Congress for 2009 was highly critical of the IRS offer program.  She pointed out five factors that she believes prevent offers in compromises:

            Daunting application process

            Centralization causes bottlenecks

            Internal perceptions and attitudes that slow

New rules and legislation have made it more difficult and expensive for taxpayers to submit an OIC

Public perception that OIC’s are not viewed as a viable collection alternative.

The TAS complete report on OIC’s is included as an exhibit to this class material.

1.17    Offer in Compromise Forms

In 2011 the IRS issued a new offer in compromise form. Taxpayers proposing compromises based upon doubt as to collectibility of effective tax administration must submit revised Form 656. Taxpayers proposing an offer based upon doubt as to liability must now submit Form 656-L and a narrative setting forth defenses to the liability. To comply with the new downpayment requirements taxpayers must submit Form 656-PPV with the required downpayment.

Offers in Compromise

1.18    The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

1.20    TIPRA

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006..TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”

1.30    Payments With Offers

A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments.

A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments.

1.40    Failure to Make Deposit

Taxpayers can avoid delays in processing their OIC applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by TIPRA).

1.50    Not Refundable

The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)).

1.60    Specify Payments

Taxpayers may specify in writing when submitting their offers how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the payments in the best interest of the government (IRC section 7122(c)(2)(A)).  For most taxpayers it is in their best interest to apply the payment to their newest income tax liabilities as they may have already reached the maximum late pate payment penalty of 25% on older liabilities.

The OIC application fee reduces the assessed tax or other amounts due. A taxpayer still must also submit a $150 application fee and may not specify how to apply the fee.

1.70    Failure to Make Installment Payments

Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.

Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer along with the $150 fee.

1.80    Low Income Taxpayers

Under the new law, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509.

A low-income taxpayer is an individual whose income falls at or below poverty levels based on guidelines established by the U.S. Department of Health and Human Services (HHS). Taxpayers claiming the low-income exception must complete and submit the Income Certification for Offer in Compromise Application Fee worksheet, along with their Form 656 application package.

 

IRS OIC Low Income Guidelines

Size of Family Unit

48 Contiguous States and D.C.

Hawaii

Alaska

1

$2,256

$2,596

$2,819

2

$3,035

$3,492

$3,794

3

$3,815

$4,388

$4,769

4

$4,594

$5,283

$5,744

5

$5,373

$6,179

$6,719

6

$6,152

$7,075

$7,694

7

$6,931

$7,971

$8,669

8

$7,710

$8,867

$9,644

For each additional person, add

$779

$896

$975

 

1.85    Interim Guidance Released for Low-Income Cases

The Internal Revenue Service March 1 posted to its website a memorandum (SBSE-05-0210-006) that provides reissued interim guidance for low-income processability procedures. The original guidance explained that the revised procedures will require a review of the Form 433-A, Collection Information Statement, on any offer that is received without a Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, and meets certain criteria. Based upon a review, if the offer meets IRS low-income guidelines, the offer will be considered processable.

1.90    Deemed Accepted

The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejected within 24 months after IRS receipt. When calculating the 24-month timeframe, the IRS will disregard any time periods during which a liability included in the OIC is the subject of a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA.

1.100  Background

An offer in compromise is a settlement of a delinquent tax account for less than the full amount due.  Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense. In the past very few offers were accepted because the standards were almost impossible to meet and the IRS really did not encourage them. But in 1992, the IRS decided that they had a major problem with accounts receivable inventory and a growing number of cases reported as currently not collectible.  The new policy espoused by the IRS was that they would accept an OIC when it was unlikely that the tax liability could be collected in full and the amount offered reasonably reflected collection potential.

1.110  Offer In Compromise Procedures

The IRS released a new Form 656 in 2009. The form also requires that the taxpayer submit extensive forms 433A and 433B. All OIC’s are processed centrally at two Service Centers:Memphisfor taxpayers most western states and Brookhaven for eastern states. All but the most complex offers will be worked from the centers.

1.120  Supporting Documents

The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to make a decision without field verification.

1.130  $150 Processing Fee

The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The IRS expects that this fee will help offset the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver.

1.140  Addresses

All offers from taxpayers living in Alaska, Alabama, Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin, or Wyomingmust be filed as follows:

Wage earner or self employed without employees Other than wage earner or self employed without employees
Then mail to: Then mail to:
MemphisInternal Revenue ServiceCenter COIC UnitPO Box 30803, AMC

Memphis,TN38130-0803

MemphisInternal Revenue ServiceCenter COIC UnitPO Box 30804, AMC

Memphis,TN38130-0804

 

All other states submit offers as follows:

Wage earner or self employed without employees Other than wage earner or self employed without employees
Then mail to: Then mail to:
Brookhaven Internal Revenue ServiceCenter COIC UnitPO Box 9007

Holtsville,NY11742-9007

Brookhaven Internal Revenue ServiceCenter COIC UnitPO Box 9008

Holtsville,NY11742-9008

 

1.150  Prohibition Of Levy

RRA98 prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer’s offer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer is being considered, and (4) while an installment agreement is pending. ['2462(b)] [IRC '6331(k)]

1.160  Appeal Rights

Although the Internal Revenue Service had previously provided for administrative review of Offers in Compromise by the Appeals Division there was no specific statutory requirement for such review. RRA98 provided specific rights of independent review of Offers in Compromise by the Internal Revenue Service Office of Appeals.

1.170  Doubt as to Liability Offers

Another protection provided by RRA98 is with respect for Offers in Compromise based on doubt as to liability.  In the past the Internal Revenue Service has occasionally rejected offers with respect to doubt as to liability solely because it could not find its administrative file.  The Internal Revenue Service is now prohibited from taking such action.  The Internal Revenue Service has imposed additional duties upon taxpayers seeking compromise liabilities solely on the basis of doubt as to liability by requiring those taxpayers to submit financial statements The Internal Revenue Service is now specifically prohibited from requiring financial statements when offers are submitted based solely on doubt as to liability.

1.180  Computation of Offer Amount

The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount.  The methods are:

  1. Cash (paid in 90 days or less), or
  2. Short-Term Deferred Payment (more than 90 days, up to 24 months), or
  3. Deferred Payment (offers with payment terms over the remaining statutory period for collecting the tax.).

NOTE: In all three cases, the IRS  will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued.

1.190  Cash Offer

You must pay cash offers within 90 days of acceptance. You should offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over forty-eight months of payments represent value of income). When the ten-year statutory period for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown in the instructions to Form 656. The IRS will charge interest on the offer amount from the acceptance date until it receives full payment. The Internal Revenue Service’s method of determining the adequacy of an offer could be best expressed by:

Quick Sale Value Plus Present Value of Income Equals Offer In Compromise             (QSV + PVI = OIC)

In applying this formula, the IRS determines the Quick Sale Value of all of the client’s assets and then adds the amount of the present value of the taxpayer’s ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount. The following paragraphs will discuss the Internal Revenue Service’s methodology for determining quick sale value and the present value of income.

1.200  Short-Term Deferred Payment Offer

This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets in addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments.  The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers.

1.210  Deferred Payment Offers

This payment option requires you to pay the offer amount within the remaining statutory period for collecting the tax. The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. The deferred payment option itself has three payment options:

Option One is:  Full payment of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Your future income in monthly payments during the remaining life of the collection statute;

Option Two is:  Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Monthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income;

Option Three is:  The entire offer amount in monthly payments over the life of the collection statute. Just as with short-term deferred payment offers, the IRS may file a Notice of Federal Tax Lien. You may however propose to pay an amount in installments for a period more than 24 months but less than period remaining to the end of the statute of limitations.

1.215  Future Income for Offers in Compromise

The Internal Revenue Service March 10 revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers.The memorandum (SBSE 05-0310-012) noted that future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.

 

1.220  Agency Notes Variety of Situations

IRS noted there are situations that may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.

 

Other situations may include those where a taxpayer:

  • is temporarily or recently unemployed or underemployed,
  • is unemployed and is not expected to return to a previous occupation or previous level of earnings,
  • is long-term unemployed,
  • is long-term underemployed, has an irregular employment history or fluctuating income,
  • is in poor health and the ability to continue working is questionable,
  • is close to retirement and has indicated he or she will be retiring, or will file for bankruptcy.

1.225  Income Averaging Addressed

IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

Further, IRS said, in situations where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.

As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.

1.230  Facts and Circumstances Approach Directed

The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.”

The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly in cases where the future income is uncertain, but where it is reasonably expected that the income will increase.

1.235  New more Onerous Allowable Expense Standards

In October, 2007 the IRS the IRS revised its allowable expense standards to make them more onerous. In March, 2009 the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials forHawaiiandAlaska. It also added a new category of expenses for out-of-pocket health care expenses.

Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income.  The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.

 

There are four types of necessary expenses:

  • National Standards
  • Out-of-Pocket Health Care
  • Local Standards
  • Other Expenses

 

National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above 4.

Note: All five standards are included in one total national standard expense.

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less.

  1. A.     Housing – Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:

 

The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer’s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [ IRM  5.15.1.9

  1. B.    Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed.

 

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.

Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [ IRM  5.15.1.9 ]

  1. C.    Other Expenses.  Other expenses may be considered if they meet the necessary expense test – they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

 

  1. D.    Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable for installment agreements but not offers in compromise if the tax liability, including projected accruals, can be fully paid within five years.

 

  1. E.     National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

 

  1. F.     Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. Verify exemptions claimed on taxpayer’s income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.

 

  1. G.    A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.

 

  1. H.    Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

 

1.240  Corporate Trust Fund Liabilities

The IRS has. recently changed its rules with respect to in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights. 

1.250  Pursuit of Officers After Compromise.

Under this new system the IRS could compromise with the corporate entity based upon its ability to pay and then continue to pursue responsible officers for the remaining trust fund liability. The owners and officers would face continuing economic risk. The system also makes it impossible for a company that had a change in leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the company to have its offer considered by the IRS.

1.260  Promote Effective Tax Administration

As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:

  • Hardship,
  • Public policy, and
  • Equity

 

Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues.  These offers are called Effective Tax Administration (ETA) offers.

1.270  Encourage Compliance

The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

  • Believe the laws are fair and equitable, and
  • Gain confidence that the laws will be applied to everyone in the same manner.

 

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:

  • The tax is legally owed, and
  • The taxpayer has the ability to pay it in full

 

1.280  Only Available If There Is No Doubt As to Liability Or Collectibility

An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals.  [IRM 5.8.1.1]

1.290  Rules for Evaluating Offers to Promote Effective Tax Administration

The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.

1.290  Factors

Factors supporting (but not conclusive of) a determination of economic hardship include:

  1. Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
  2. Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and
  3. Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]

Example 1. Taxpayer has assets sufficient to satisfy the tax liability. Taxpayer provides full time care and assistance to her dependent child, who has a 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.

 

1.300  Undermine Compliance

Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:

  • Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;
  • Taxpayer has not taken deliberate actions to avoid the payment of taxes; and
  • Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

1.310  Exceptional Circumstances

The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws:

Example 1.  In October of 1986, 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 $2,000 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 redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer’s retained copy of the IRS E‑Mail response to his inquiry, taxpayer would have redeposited the amount within the required 60‑day period. Taxpayer’s overall compliance history does not weigh against compromise.

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