IRS Offers In Compromise Tax Settlement

Offer In Compromise

FRESH START INITIATIVE

2012- Fresh Start Initiative For offers in Compromise

1.10    On May 21, 2012 the Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers clear up their tax problems and in many cases more quickly than in the past.

 

Criticism of OIC Policies

1.20    Over the years the IRS offer in compromise program has been the subject of a great deal of criticism by Congress, the National Taxpayer Advocate and taxpayer representatives. The new initiative represents the most dramatic liberalization of IRS settlement policies ever announced. It represents a welcome change from an agency which has always placed substantial roadblocks to those seeking to compromise their tax obligations.

The announcement focused on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

Changes

1.30    The changes announced included:

•           Revising the calculation for the taxpayer’s future income.

•           Allowing taxpayers to repay their student loans.

•           Allowing taxpayers to pay state and local delinquent taxes.

•           Expanding the Allowable Living Expense allowance category and amount.

 

Can Liability Be Paid

1.40    In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

 

Past Reluctance to Accept OIC’s

1.50    In the past they are strictly applied its rules with respect to taxpayers’ budgets and valuation of assets. As a result most taxpayers who sought a compromise received a rejection from the Internal Revenue Service. Below are the statistics for offer acceptances during the past several years:

Offers in compromise (thousands) [6]:

2012

 2013

 2014

Number of offers received

64

74

68

Number of offers accepted

24

31

27

Amount of offers accepted

195,652

195,379

179,354

% accepted

38%

42%

40%

 

Reasonable Collection Potential

1.60    Under the new policy when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The prior policy resulted in IRS demands for very large compromise payments even when the taxpayer had few assets. The revisions will result in a 75% reduction in the amount required to settle tax obligations in five or fewer months. They will result in a 60% reduction in the amount required to be fully paid within 24 months.

Dissipated Assets

1.70    Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. Over the past several years the IRS’s use the concept of dissipated assets to demand Supp substantial amounts in compromise of taxes even after the taxpayer had lost assets. For example in one matter a taxpayer had lost substantial amounts of money in the 2008 and 2009 stock market collapse. Notwithstanding that loss the IRS offer in compromise examiner took the position that the taxpayer would have to include the value of those losses in his total assets in order to receive a compromise. The IRS also aggressively claimed that taxpayers who lived and upper-middle-class lifestyle after their tax problems arose would be subject to its draconian dissipated asset theory.

Exclusion of Income Producing Property

1.80    The IRS also announced that equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses

1.90    When reviewing a taxpayer’s budget the IRS applies Allowable Living Expense standards to determine a taxpayer’s ability to pay.  The standard allowances impose strict budgets upon a taxpayer in collection determinations by incorporating average expenditures for basic necessities. Notwithstanding substantial criticism of the IRS over the years it is insisted upon applying the same standards for food and clothing in all areas of the country whether high cost locales likeAlaska,Hawaii, andNew York City or lower cost Midwestern areas. These standards are used when evaluating offer in compromise requests.

Expanded Allowable Expenses

1.100  In response to criticisms from the national taxpayer advocate and taxpayer representatives the IRS expanded the National Standard miscellaneous allowance to include additional items.  Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

In the past the IRS refused to recognize taxpayer obligations to pay student loans and state tax delinquencies. The new guidance now allows payments for loans guaranteed by the federal government for the taxpayer’s post-high school education.  In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

Expanding Universe of Eligible Taxpayers

1.110  The new offer in compromise policies should dramatically expand the universe of taxpayers eligible to compromise their outstanding tax obligations. In the past taxpayers generally had to pay the IRS the total value of all their assets plus 60 times their net monthly income after using the IRS strict allowable expense standards. The greater flexibility of the new policies will reduce the valuation of taxpayer assets and reduce the value of the future income component used to determine acceptable offers.

Offer in Compromise Forms

1.120  In 2012 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

1.130  In 2011 the IRS also expanded its 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.

TIPRA

1.140  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.”

Payments With Offers

1.150  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.

Failure to Make Deposit

1.160  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).

Not Refundable

1.170  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)).

Specify Payments

1.180  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.

Failure to Make Installment Payments

1.190  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.

Low Income Taxpayers

1.200  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                                  $2,431                                    $2,796            $3,038

2                                  $3,277                                    $3,769            $4,096

3                                  $4,123                                    $4,742            $5,154

4                                  $4,969                                    $5,715            $6,213

5                                  $5,815                                    $6,688            $7,271

6                                  $6,660                                    $7,660            $8,329

7                                  $7,506                                    $8,633            $9,388

8                                  $8,352                                    $9,606            $10,446

For each

additional person, add        $ 846                                     $ 973             $1,058

 

Deemed Accepted

1.220  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.

Background

1.230  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.

Offer In Compromise Procedures

1.240  The IRS released a new Form 656 in 2015. The form requires that the taxpayer submit extensive forms 433A and 433B. All OIC’s are processed centrally at two Service Centers:Memphis for taxpayers most western states and Brookhaven for eastern states. All but the most complex offers will be worked from the centers.

Supporting Documents

1.250  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.

$186 Processing Fee

1.260  The Internal Revenue Service now charges a $186 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.

Addresses

1.270  All offers are submitted to a Service Center based upon address of the taxpayer.

If you reside in:                                                       Mail your application to:

AK, AL, AR, AZ, CO, FL, GA, HI, ID, KY,

LA, MS, MT, NC,  NM, NV, OK, OR, SC,

TN, TX, UT, WA, WI, WY                                        Memphis IRS Center

COIC Unit P.O. Box 30803,

AMC Memphis, TN 38130-0803

1-866-790-7117

 

CA, CT, DE, IA, IL, IN, KS, MA, MD,

ME, MI, MN, MO, ND, NE, NH, NJ,

NY, OH, PA, RI, SD, VT, VA, WV;

DC, PR, or a foreign address                                Brookhaven IRS Center

COIC Unit P.O. Box 9007

Holtsville, NY 11742-9007

1-866-611-6191

Prohibition Of Levy

1.280  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)]

Appeal Rights

1.290  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.

Doubt as to Liability Offers

1.300  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.

Computation of Offer Amount

1.310  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 5 or fewer installments or
  2. Periodic offer: Paid in 5 or more payments over up to 24 months).

NOTE: In both 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.

Cash Offer

1.320 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). The IRS will not 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.

Periodic Offer

1.330  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.

Deferred Payment Offers

1.340  This payment was eliminated in 2012.

Future Income for Offers in Compromise

1.350  The Internal Revenue Service March 10, 2011 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.

Agency Notes Variety of Situations

1.360  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.

Income Averaging Addressed

1.370  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.

Facts and Circumstances Approach Directed

1.380  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.

New more Onerous Allowable Expense Standards

1.390  In March, 2015 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 forHawaii andAlaska. 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 $116 for one person up to $235 for 4 persons. The IRS allows a total of $300 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]

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.

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.

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.

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.

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

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 ]

Corporate Trust Fund Liabilities

1.400  Several years ago the IRS 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.

Pursuit of Officers After Compromise

1.410  Under this 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.

Promote Effective Tax Administration

1.420  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.

Encourage Compliance

1.430  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

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

1.440  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]

Rules for Evaluating Offers to Promote Effective Tax Administration

1.450  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.

Factors

1.460  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.

Undermine Compliance

1.470  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)]

Exceptional Circumstances

1.480  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.

 

EXHIBITS

 

 

National Standards: Food, Clothing and Other Items

Expense One Person Two Persons Three Persons Four Persons
Food  $315 $588 $660 $821
Housekeeping supplies $32 $66 $65 $78
Apparel & services $88 $162 $209 $244
Personal care products & services $34 $61 $64 $70
Miscellaneous $116 $215 $251 $300
Total $585 $1,092 $1,249 $1,513
More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $378

 

 

National Standards: Out-of-Pocket Health Care
The table for health care expenses, based on Medical Expenditure Panel Survey data, has been established for minimum allowances for 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.The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

 

 

 

Out-of-Pocket Costs

Under 65

$60

65 and Older

$144

 

Transportation

 

Public Transportation


National 
$185

 

  1. Ownership Costs
  One Car Two Cars
National  $517 $1,034
  1.  Operating Costs
  One Car Two Cars
Northeast Region $278 $556
Boston $277 $554
New York $342 $684
Philadelphia $299 $598
Midwest Region $212 $424
Chicago $262 $524
Cleveland $226 $452
Detroit $295 $590
Minneapolis-St. Paul $217 $434
South Region $244 $488
Atlanta $256 $512
Baltimore $250 $500
Dallas-Ft. Worth   $277 $554
Houston $312 $624
Miami $346 $692
Washington, D.C. $277 $554
West Region $236 $472
Los Angeles $295 $590
Phoenix $291 $582
San Diego $301 $602
San Francisco $306 $612
Seattle $192 $384

 

Florida Housing & Utilities

County

 

Family of 1

Family of 2

Family of 3

Family of 4

Family of 5

or more

Alachua

1,438

1,688

1,779

1,984

2,016

Baker

1,202

1,412

1,488

1,659

1,686

Bay

1,378

1,619

1,706

1,902

1,933

Bradford

1,159

1,361

1,434

1,599

1,625

Brevard

1,418

1,666

1,755

1,957

1,989

Broward

1,833

2,153

2,269

2,530

2,571

Calhoun

1,028

1,207

1,272

1,418

1,441

Charlotte

1,401

1,645

1,733

1,933

1,964

Citrus

1,152

1,353

1,425

1,589

1,615

Clay

1,470

1,726

1,819

2,028

2,061

Collier

1,842

2,163

2,279

2,541

2,582

Columbia

1,116

1,311

1,381

1,540

1,565

DeSoto

1,219

1,431

1,508

1,682

1,709

Dixie

1,024

1,202

1,267

1,413

1,436

Duval

1,425

1,673

1,763

1,966

1,997

Escambia

1,294

1,519

1,601

1,785

1,814

Flagler

1,456

1,710

1,802

2,009

2,042

Franklin

1,220

1,432

1,509

1,683

1,710

Gadsden

1,167

1,370

1,444

1,610

1,636

Gilchrist

1,079

1,267

1,335

1,489

1,513

Glades

991

1,164

1,227

1,368

1,390

Gulf

1,411

1,657

1,746

1,947

1,978

Hamilton

953

1,119

1,179

1,315

1,336

Hardee

1,126

1,322

1,393

1,553

1,578

Hendry

1,128

1,325

1,396

1,557

1,582

Hernando

1,244

1,461

1,540

1,717

1,745

Highlands

1,129

1,326

1,397

1,558

1,583

Hillsborough

1,604

1,884

1,985

2,213

2,249

Holmes

1,061

1,246

1,313

1,464

1,488

Indian River

1,474

1,731

1,824

2,034

2,067

Jackson

1,041

1,223

1,288

1,437

1,460

Jefferson

1,162

1,365

1,438

1,603

1,629

Lafayette

1,197

1,406

1,482

1,652

1,679

Lake

1,432

1,682

1,772

1,976

2,008

Lee

1,590

1,868

1,968

2,194

2,230

Leon

1,455

1,709

1,801

2,008

2,041

Levy

1,087

1,276

1,345

1,500

1,524

Liberty

1,042

1,223

1,289

1,437

1,460

Madison

1,018

1,196

1,260

1,405

1,428

Manatee

1,599

1,878

1,979

2,207

2,243

Marion

1,194

1,402

1,477

1,647

1,674

Martin

1,726

2,027

2,136

2,382

2,420

Miami-Dade

1,807

2,122

2,236

2,493

2,534

Monroe

2,292

2,692

2,837

3,163

3,214

Nassau

1,460

1,715

1,807

2,015

2,047

Okaloosa

1,500

1,761

1,856

2,069

2,103

Okeechobee

1,207

1,418

1,494

1,666

1,693

Orange

1,634

1,919

2,022

2,255

2,291

Osceola

1,561

1,833

1,932

2,154

2,189

Palm Beach

1,809

2,125

2,239

2,496

2,537

Pasco

1,405

1,650

1,739

1,939

1,970

Pinellas

1,516

1,780

1,876

2,092

2,126

Polk

1,318

1,548

1,631

1,819

1,848

Putnam

1,033

1,214

1,279

1,426

1,449

St. Johns

1,779

2,089

2,201

2,454

2,494

St. Lucie

1,484

1,743

1,836

2,047

2,080

Santa Rosa

1,419

1,667

1,756

1,958

1,990

Sarasota

1,577

1,853

1,952

2,177

2,212

Seminole

1,641

1,928

2,031

2,265

2,301

Sumter

1,205

1,415

1,491

1,662

1,689

Suwannee

1,023

1,201

1,266

1,412

1,434

Taylor

1,020

1,198

1,262

1,407

1,430

Union

1,194

1,402

1,477

1,647

1,674

Volusia

1,392

1,635

1,723

1,921

1,952

Wakulla

1,301

1,528

1,610

1,795

1,824

Walton

1,349

1,584

1,669

1,861

1,891

Washington

1,034

1,214

1,279

1,426

1,449

 

 

 

Attachment 1

IRM 5.8.5, Financial Analysis

 

IRM 5.8.5.5.1, Income-Producing Assets

 

(3) As a general rule, equity in income producing assets will not be added to the RCP of a viable, ongoing business unless it is determined the assets are not critical to business operations.  The following examples provide guidance in evaluating equity and income produced by assets.

 

Example (1) A business depends on a machine to manufacture parts and cannot operate without this machine.  The equity is $100,000.  The machine produces net income of $5,000 monthly.  The RCP should include the income produced by the machine, but not the equity.  Equity in this machine will generally not be included in the RCP because the machine is needed to produce the income, and is essential to the ability of the business to continue to operate.

 

Note: It is in the government’s best interest to work with this taxpayer to maintain business operations, particularly in a bad economy.

 

Example (2) The same business in the prior example, but the business can continue to operate without the machine, i.e. the equipment is not used in the process of generating the key product of the business. The machine generates only $500 net monthly income.   Consider including the equity in the RCP and remove $500 from the business income.

 

Example (3) A trucking company has ten trucks.  Eight are fully encumbered and two trucks have no encumbrances and $30,000 in equity.  The two trucks combined generate net income of $12,000 per year.  Add the net income from the trucks to the RCP and do not add the equity.

 

Example (4) The same trucks described in the previous example generate only $1000 per year in net income, but have $30,000 in equity. If the business can successfully operate without the two trucks, consider removing the income from the RCP and including the equity in the RCP.

 

Example (5) A real estate salesman has a vehicle with $30,000 in equity.  The vehicle is used to transport clients and assists in the production of income.  The taxpayer’s net monthly disposable income is $3000. The equity in the vehicle generally will not be included in the RCP.

 

Example (6) The same salesman in the previous example only has net monthly disposable income of $500 per month. Consider including the equity in the vehicle, yet allow for the impact the loss of the vehicle may have on the taxpayer’s income.

 

(4) When considering equity in income producing assets and the effect on income streams and expenses, you must exercise sound judgment consistent with the unique facts of each case.

 

(5) Each case must be thoroughly documented regarding equity decisions in income producing property.

 

 

IRM 5.8.5.6, Cash

 

(1) Use the amount listed on the Form 433-A (OIC) for the amount of cash in the taxpayer’s bank accounts.  Reduce the total amount listed by $1,000. If the total amount listed on the Form 433-A (OIC) is over $1,000 and you have reason to believe the money will be used to pay for the taxpayer’s monthly allowable living expenses, do not include it on the AET. Document the AOIC or ICS history with the findings.

 

(2) Review checking account statements over a reasonable period of time, generally three months for wage earners and six months for in-business taxpayers.  Look for any unusual activity, such as deposits in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the CIS. The OE/OS should discuss these inconsistencies, if appropriate, with the taxpayer.

 

Example: The taxpayer lists $10,000 on Form 433-A (OIC) The taxpayer’s allowable living expenses are $3,000. Include $6,000 ($10,000 less $1,000 less $3000) as an asset value on the AET.

 

Example: The taxpayer lists $3,000 on the Form 433-A (OIC) and his allowable living expenses are $2,700.  Do not include any amount on the AET since the $300 difference is less than $1000.

 

(3) Review savings account statements over a reasonable period of time, generally three months.

 

  • If the account has little withdrawal activity, use the ending balance on the latest statement, less $1,000, if not previously applied to other accounts, as the asset value for the AET.

 

  • If it is apparent that the account is used for paying monthly living expenses, treat it as a checking account and follow the instructions in paragraphs (1) and (2) above to determine its value.

 

(4) If analysis of the bank statement reveals large amounts of recently expended funds, see IRM 5.8.5.6 below for a full discussion of the treatment of dissipated assets.

 

(5) If the taxpayer offers the balances of accounts (for example, certificate of deposit, savings bonds, etc.) to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.

 

IRM 5.8.5.11, Motor Vehicles, Airplanes, and Boats

 

(2) Exclude $3,450 per car from the net equity valuation of vehicles owned by the taxpayer(s) and used for work, the production of income, and/or the welfare of the taxpayer’s family, up to two cars per household.

 

IRM 5.8.5.16, Dissipation of Assets

 

(1) Inclusion of dissipated assets in the calculation of the reasonable collection potential (RCP) is no longer applicable except in situations where it can be shown the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the assets or proceeds (other than wages, salary, or other income) for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or within six months prior to the tax assessment.

 

(2) Generally, a three year timeframe will be used to determine if it is appropriate to include a dissipated asset in RCP. Include the year of submission as a complete year in the calculation, For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

 

  • If the tax liability did not exist prior to the transfer or the transfer occurred prior to the taxable event giving rise to the tax liability, generally, a taxpayer cannot be said to have dissipated the assets in disregard of the outstanding tax liability.

 

  • If a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the funds were not dissipated.

 

(3) If it is determined inclusion of a dissipated asset is appropriate and the taxpayer is unwilling or unable to include the value of the dissipated asset in the offer amount, the offer should be rejected as not in the government’s best interest.

 

NOTE: Even if the transfer and/or sale took place more than three years prior to the offer submission, it may be appropriate to include the asset in the calculation of RCP if the asset transfer and/or sale occurred either within six months prior to or within six months after the assessment of the tax liability.  In these instances, a determination on whether the funds were used for health/welfare of the family or production of income would be appropriate.

 

(4) See below for examples of the types of situations where it may be appropriate to include, or not include, the value of an asset in the calculation of RCP. The examples provided are not meant to be all inclusive as each case must be evaluated on its own merit.

 

(5) Examples of situations in which the value of an asset should be included in RCP include, but are not limited to:

 

Note: Each of the examples in paragraph (5) occurred within three years prior to the offer submission or during the offer investigation, and the taxpayer dissipated the assets after incurring the tax liability or within six months prior to the tax assessment.

 

  • The taxpayer dissolved an IRA or other investment account to pay for specific non-priority items, i.e. child’s wedding, child’s university tuition, extravagant vacation, etc.

 

  • The taxpayer refinanced their house and used the funds to pay off credit card and non-secured debt. The credit cards were NOT used for payment of necessary living expenses and/or the production of income.

 

  • The taxpayer inherited funds and used the funds for non-priority items (other than health/welfare of the family or production of income).

 

  • The taxpayer closed bank/investment accounts and will not disclose how the funds were spent or if any funds remain.

 

  • A taxpayer filed a CAP to avoid the filing of a NFTL and insisted the lien would impair his credit and his ability to successfully operate his business.  After the non-filing was granted, the taxpayer fully encumbered his assets, used the funds for non-priority items (items not necessary for the production of income or the health and welfare of the taxpayer and/or their family) and then submitted an OIC.

 

  • The taxpayer sold real estate and gifted the funds from the sale to family members.

 

(6) Situations may occur in which the transfer happened over 3 years prior to the offer submission, yet because of the timing of the transfer (within six months prior to or six months after the tax assessment), the inclusion of the asset in RCP may be appropriate.

 

Example: The taxpayer filed tax returns for five years (2001 – 2005) in February of 2007, which were assessed in March 2007. In January of 2007, the taxpayer transferred real property to a family member for no consideration. An offer was submitted in January 2012. In this instance, since the transfer was within six months of the tax assessments, it may be appropriate to include the value of the real property in RCP.

 

(7) Examples of situations in which the value of an asset should NOT be included in RCP, include but are not limited to:

 

  • When it can be shown through internal research or substantiation provided by the taxpayer that the funds were needed to provide for necessary living expenses, these amounts should not be included in the RCP calculation.

 

  • Dissolving an IRA during unemployment or underemployment. Review of available internal sources verified the taxpayer’s income was insufficient to meet necessary living expenses. In this case, do not include the funds up to the amount needed to meet allowable expenses in the RCP calculation.

 

  • Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical or other necessary living expenses. This amount will not be included in the RCP calculation.

 

  • Disposing of an asset and using the funds to purchase another asset that is included in the offer evaluation. Do not include the value of the asset disposed of as a dissipated asset.

 

(8) Prior to including the dissipated asset in the RCP, the taxpayer should be contacted by telephone and afforded the opportunity to explain or verify the dissipation of the asset.

 

(9) The case history must be clearly documented with the basis for your decision regarding the dissipated asset.

 

IRM 5.8.5.17, Retired Debt

 

(3) Do not retire the first $400 of a loan on a vehicle (limited to one vehicle for a single taxpayer and two vehicles for a joint offer)

 

Example:  If the taxpayer has a car payment of $750 per month and the maximum standard is $450, $50 would be retired beginning the date the loan is paid.

 

IRM 5.8.5.20.3, Transportation Expenses

 

(5) When the taxpayer owns a vehicle that is six years or older or has reported mileage of 75,000 miles or more, allow an additional operating expenses of $200 or more per vehicle.  The additional operating expense will be allowed on any vehicle meeting the criteria, up to two cars per household.

 

Example: The taxpayer who has a 1998 Chevrolet Cavalier with 50,000 miles will be allowed the standard of $231 per month plus $200 per month operating expenses for a total operating expense of $431 per month.

 

 

IRM 5.8.5.20.4, Other Expenses

 

(3) Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education.  Proof of payment must be provided. If student loans are owed, but no payments are being made, do not allow them, unless the non-payment is due to circumstances of financial hardship, e.g. unemployment, medical expenses, etc.

 

(7) When a taxpayer owes both delinquent federal and state or local taxes, and does not have the ability to full pay the liabilities, monthly payments to state taxing authorities may be allowed in certain circumstances.

 

a) Determine the disposable income on a Collection Information Statement (CIS), Forms 433-A (OIC or 433-B (OIC).  Do not include any amount that is being paid for outstanding state or local tax liabilities in the calculation of the future income value component (FIV) of the reasonable collection potential (RCP).  FIV is the difference between gross income and allowable living expenses.

 

Calculate the dollar amounts for IRS and state or local payments based on the total liability owed to each agency (including penalties and interest to date).

 

Example: The taxpayer owes the state $20,000 and owes the IRS $100,000, a total of $120,000 ($20,000/$120,000 = 17%; $100,000/$120,000 = 83%). The taxpayer has disposable income of $300 per month.  A monthly payment to the state taxing authority of $51 may be allowed until the debt is retired.  See the If/Then table below for examples.

 

  • Seventeen percent (17%) of $300 = $51
  • Eighty-three percent (83%) of $300 = $249

 

b) To determine allowable payments for delinquent state or local tax debts follow the procedures below:

 

If… And… Then…
(1) The taxpayer does not have an existing agreement for payment of the delinquent state or local tax debts, Provides a complete CIS and verification of state or local tax debts, Follow procedures in paragraph (a) above to establish the calculated percentage amount that will be determined as the allowable monthly payment for delinquent state or local taxes.
(2) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment, The payment amount on the state or local agreement is less than the calculated percentage amount, The monthly amount due on the existing state or local agreement will be listed as the allowable delinquent state or local tax payment.

 

Example: The calculation based on the example in paragraph (a) above shows the taxpayer should pay $51 but the State agreement is for $50.  Allow the State agreed payment of $50.

 

The payment to IRS will be increased by the amount allowed for the monthly state or local payment with the state or local liability is scheduled to be full paid.(3) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established after the earliest IRS date of assessment,The payment amount on the agreement is more than the calculated percentage amount,The amount allowed as the delinquent state or local tax payment will be the calculated percentage amount. Advise the taxpayer that he/she can use the amount IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment.

 

Example: The calculation based on the example in paragraph (a) above shows the taxpayer should pay $51 but the State agreement is for $52.  Allow the calculated payment of $51.

 

The payment to IRS will be increased by the amount allowed for the monthly state of local payment when the state or local liability is scheduled to be full paid.(4) The taxpayer has an existing agreement for delinquent state or local tax debts, which was established prior to the IRS earliest date of assessmentThe payment is not greater than the taxpayer’s net disposable incomeAllow the state or local tax agreement.

 

IRM 5.8.5.23, Calculation of Future Income

 

(2) 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.  The number of months used depends on the payment terms of the offer.

 

If… Then…
The offer will be paid in 5 or fewer installments in 5 months or less Use the realizable value of assets plus the amount that could be collected in 12 months.
The offer will be paid in more than 5 installments or more than 5 months up to a maximum of 24 months Use the realizable value of assets plus the amount that could be collected in 24 months.

 

Note: The deferred payment option which allows payment over the life of the statute is no longer available. With implementation of the multipliers, the maximum number of months for a deferred payment cannot exceed 24 months.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portions Reprinted from

 

“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”

 

AND

 

REPRESENTATION BEFORE THE COLLECTION DIVISION OF

THE IRS

 

by

 

Robert E. McKenzie

 

WITH PERMISSION FROM

 

THOMSON WEST

Rochester, NY

 

All Rights Reserved

 

COPYRIGHT 2015

 

Custom Search

 

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, AMCMemphis,TN38130-0803 MemphisInternal Revenue ServiceCenter COIC UnitPO Box 30804, AMCMemphis,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 9007Holtsville,NY11742-9007 Brookhaven Internal Revenue ServiceCenter COIC UnitPO Box 9008Holtsville,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.