Offers
in Compromise Received in Exam
 
4.18.1 Offers in Compromise Received in Exam
4.18.1.1 (01-01-2000)
Overview
1.
This section
provides an introduction to offers in compromise
received in Examination and initial processing
procedures.
4.18.1.2 (01-01-2000)
Introduction
1.
Form 656,
Offer in Compromise (OIC), is a taxpayer's proposal
to the Government for settlement of a liability for
an amount less than previously determined and
assessed. An offer, having been filed, will be acted
upon by recommendation for acceptance, rejection, or
it may be withdrawn by the taxpayer or the
taxpayer's duly authorized agent.
2.
An accepted
offer in compromise is a legally binding agreement
between the Service and the taxpayer, and is
enforceable by either party. Contract law principles
apply to compromise agreements. The compromise of a
tax liability can rest upon doubt as to
collectibility, doubt as to liability, doubt as to
liability and collectibility, or promotion of
effective tax administration. In general, Collection
has jurisdiction over Doubt as to Collectibility
offers, and Examination has jurisdictional
responsibility for the investigation and processing
of offers based on doubt as to liability. In certain
circumstances, the Office of Appeals will have
jurisdiction of offers. (See Sections 7.4 and 7.4.1
of this Handbook regarding Appeals jurisdiction).
3.
Offers that
do not meet the doubt as to liability or doubt as to
collectibility criteria may be compromised under the
criteria for the promotion of effective tax
administration. Jurisdiction of these offers rests
with Collection; however, some may be forwarded to
Examination for consideration.
4.
The
Service
Center
has the authority to consider penalty offers based
upon doubt as to liability. Area Office action or
investigation is not necessary unless the offer is
based on doubt as to collectibility or there are
unusual circumstances or complex questions involved.
Penalties that are not subject to reasonable cause
determination are not subject to compromise based on
doubt as to liability. Penalty liabilities alone may
not be compromised unless there is substantial doubt
as to liability and therefore must be processed in
the same manner as a tax offer.
4.18.1.3 (01-01-2000)
Classification & Screening Procedures
1.
Offer in
compromise cases may be forwarded from
Service/Customer Service Center Classification or
transferred from Collection to Examination for
further investigation. Examination will make a
determination whether the offer merits further
consideration.
2.
Upon receipt
of offers in compromise in Exam, the OIC Coordinator
(generally located within Technical Support) will
insure input of transaction code 480, jurisdiction
code 2. In some cases, STAUP 71 should also be input
and is necessary to suspend collection activity
(offer merits consideration and there is no reason
to believe that collection of the tax liability is
in jeopardy). Form 2515, Record of Offer In
Compromise, should be completed and used for
monitoring offer cases received in Exam.
Note:
In instances where the OIC Coordinator
is unable to input the STAUP and/or appropriate IDRS
transaction codes, the Service Center OIC Unit may
be requested to do so.
3.
Offer
receipts will fall into 3 categories: processable,
non-processable, and offers that must be perfected.
Processable offers are those where Form 656 is
properly prepared and required documents are
attached. Non-processable offers are those which may
be returned immediately [5 below] or those that are
not perfected within 14 days [4 below]. Offers that
must be perfected are those where items are omitted
from Form 656 and contact must be made with the
taxpayer to obtain the information needed to make
the offer processable.
4.
The Service
should work with taxpayers to provide an opportunity
to perfect defects or errors in the offers. A 14-day
additional information letter may be used for this
purpose, and may be issued a maximum of two times.
See Exhibits 4.18.1–1 and 4.18.1–2 for examples
of letters which may be used for this purpose.
Offers that are not perfected by the taxpayer within
14 days of request should be returned to the
taxpayer as non-processable; this time frame may be
extended if warranted.
5.
The OIC
coordinator will analyze the offer to determine if
it is non-processable or may be returned without
further investigation. Offers that are not
processable (per
IRM
Handbook 5.8, Section 3) will be returned to the
taxpayer within 14 days. Offers may be returned
immediately if: the offer is frivolous, groundless,
or has been submitted for the purpose of delaying
collection (i.e. not raising a valid collectibility
or liability issue, repetitive resubmission of
offers which have already been rejected).
Appropriate managerial approval must be obtained
before an offer can be returned on these grounds.
6.
If the offer
is based solely on doubt as to liability and the
liability has been finally determined by the Tax
Court, other courts, or by the Commissioner's Final
Closing Agreement, there is no doubt as to liability
and the offer should be rejected.
Note:
IDRS may reflect litigation/reversal of
litigation when a case has been dismissed (and not
considered by the Court). Coordination with Counsel
and/or Appeals may be necessary to ensure a decision
was made by the Tax Court.
7.
Bankruptcy
or noncompliance in filing other required returns
should not be used as a basis for returning or
rejecting a doubt as to liability offer in
compromise request. This is distinguished from doubt
as to collectibility offers which may be returned
for such purposes. (
Note:
The 5 year compliance requirement is
also not applicable for doubt as to liability
offers).
8.
Doubt as to
liability offers may be considered on a tax period
by period basis. If the taxpayer is submitting
separate doubt as to liability offers for more than
1 period, they are not required to be considered
simultaneously but may be, particularly if the same
issue applies in each tax period.
9.
Pattern
Letter 2842 (P) may be used for returning offers.
[See Exhibit 4.18.1–3.]
10.
If it is evident
that Appeals determined the liability, the offer
should be forwarded directly to Appeals for
consideration.
11.
The Service
does not have the authority to accept an offer in
compromise in the following cases under jurisdiction
of the Department of Justice:
A.
An offer
covering a liability in "suit" ;
B.
Cases where
the liability has been reduced to judgement;
C.
Cases in
which recommendation for federal criminal
prosecution is pending;
D.
Cases in
which acceptance is dependent upon acceptance of a
related offer under the jurisdiction of the
Department of Justice.
Note:
In such instances, contact and/or
coordination should occur with Department of Justice
and/or locally through Counsel.
12.
When an
offer is received in an area office and the taxpayer
is not located within the receiving area, the offer
will generally be forwarded to the area office where
the taxpayer resides.
13.
Doubt as to
liability offers submitted without any consideration
(zero dollar amount offered) should not be
considered processable as an offer in compromise.
The taxpayer should be advised to amend the offer to
reflect what the taxpayer believes to be the correct
liability. If the taxpayer does not amend or
withdraw the offer, the request may be considered as
an audit reconsideration or informal claim, but may
not be considered as an offer in compromise.
Note:
The taxpayer should generally pay the
tax and file a claim (or request an audit
reconsideration) rather than submit an OIC if the
liability in question did not originate from an
examination assessment. However, this should not be
used as the basis for returning or rejecting an
offer.
14.
Offers that
are deemed processable and not returned, are
generally sent to the field (revenue agents &
tax compliance officers) for further consideration.
Pattern Letter 2843(P) may be used to notify the
taxpayer of receipt and processability of the offer.
[See Exhibit 4.18.1–4.] Examinations of offers in
compromise based on doubt as to liability (and/or
effective tax administration) will generally be
conducted by tax compliance officers, revenue
agents, or specialists in the tax areas involved. It
is not required that offers always be sent to the
field, particularly when the determination may
readily be made by the OIC coordinator. However, as
with all offers, an Independent Administrative
Review (IAR) is required for proposed rejections.
15.
Offers in
Compromise, Form 656, are not controlled on AIMS
(although the subject to return generally should
be). Transmittal Form 3210 should always be used for
transmitting Form 656 between functions, offices,
and groups.
16.
Because OICs
are priority cases, the OIC coordinator should
effectively monitor OIC cases assigned to the field
and in process. Monthly status updates should be
obtained on offers in process over 6 months.
Section 2. Doubt as to Liability Offers
4.18.2 Doubt as to Liability Offers
4.18.2.1 (01-01-2000)
Overview
1.
This section
provides guidance for examiners in considering doubt
as to liability OIC requests.
4.18.2.2 (01-01-2000)
Considering the Liability Issue
1.
Doubt as to
liability exists where there is a genuine dispute as
to the existence or amount of the correct tax
liability under the law. Doubt as to liability does
not exist where the liability has been established
by a final court decision or judgment concerning the
existence or amount of the tax liability.
2.
Before a
doubt as to liability offer can be accepted, there
must be some doubt as to the correctness of the
liability. Validity of the offer is determined by
evaluating the supporting evidence and
circumstances. The taxpayer is required to submit
documentation and/or other evidence to support
his/her doubt as to liability claim. The evidence
available for both parties must be weighed in order
to determine the extent of any "doubt" .
Note:
Because the role of Examination is
generally to make determinations of the correct
tax liability, acceptance of such offers in
compromise by Examination should be uncommon. (See
Section 2.5(2) below.) The extent of any
determination of "doubt" should be in
keeping with Policy Statement P–4–117,
Examination Authority to Resolve Issues.
3.
A doubt as
to liability offer may not be rejected solely
because the Service is unable to locate the
taxpayer's return or return information. The
taxpayer cannot be required to submit a financial
statement for a doubt as to liability offer.
4.18.2.3 (01-01-2000)
Jurisdiction—Doubt as to Liability
1.
Examination
has jurisdiction over offers based on doubt as to
liability, including preparation of the necessary
documents and letters to effect their disposition.
2.
Collection
has jurisdiction of doubt as to liability offers
involving the Trust Fund Recovery Penalty and
Personal Liability for Excise Tax (IRC Section
4103). Liability offers concerning assessments made
during bankruptcy proceedings may also fall under
the jurisdiction of Collection (i.e. inappropriate
assessment because automatic stay was in place, and
whether liability was discharged in bankruptcy).
Penalty offers may be considered by either the
Service
Center
, Collection, or Examination. (See Section 1.2(4) of
this handbook.)
4.18.2.4 (01-01-2000)
Examination Considerations
1.
An offer in
compromise is normally filed by taxpayers in an
effort to stop collection proceedings while
Examination reconsiders a tax assessment. The
examination should be conducted in a manner similar
to an audit reconsideration.
2.
The offer
should be examined and additional documents
requested from the taxpayer, if necessary. All
conclusions should be documented and all arguments
raised by the taxpayer addressed in the workpapers.
Form 4318 is used to summarize the workpapers.
3.
Taxpayer
contact should generally be made within 30 days.
Offers in process over 6 months are considered
overaged.
4.
When
considering a compromise based on substitute for
return (SFR) assessments, the return must be
reviewed to determine if all the taxpayer's income
was included in the assessment. If the offer
investigation reveals additional income not included
in the SFR assessment, the taxpayer will be required
to file an amended return to include the income (and
the amended return considered with the offer in
compromise).
4.18.2.5 (01-01-2000)
Determination of Liability
1.
If the
taxpayer's liability changes as a result of the
examination determination, a re-examination report
(i.e. Form 4549) is prepared. The line for taxable
income per return or previously adjusted should be
the corrected taxable income from the previous
report. This should be verified from a transcript of
account.
2.
If the
re-examination report is based on settlement of the
liability (based on, degree of doubt), offer
acceptance procedures should be followed. If it is
based on determination of the correct
tax liability, offer withdrawal procedures should be
followed and the excess tax liability abated.
4.18.2.6 (01-01-2000)
Offer Accepted
1.
Whether the
amount offered by the taxpayer is adequate for a
compromise based on doubt as to liability will
depend on the degree of doubt established. See
Section 2.4 above for further explanation.
2.
Acceptance
of an offer requires special processing procedures
outlined in
IRM
Handbook 5.8, Section 8.
3.
IRM
1229, Delegation Order
Handbook, Delegation Order 11 delineates approval
authority for Offers in Compromise. In general, the
Territory Manager is the approving official for
Examination OICs. A legal sufficiency opinion by
Counsel is required for all offers with total
liability amounts of $50,000 or more.
4.
Form 7249,
Offer Acceptance Report, is completed for accepted
offers.
5.
If the OIC
is accepted, full payment of the amount offered is
expected as a condition of acceptance.
6.
If the
taxpayer is unable to pay the amount offered, it
should have also been submitted as a doubt as to
collectibility offer (combination offer) and
considered initially by Collection. The deferred
payment option may be considered for doubt as to
collectibility offers but not doubt as to liability
offers alone.
7.
The
completed case is routed (via Form 3198, Special
Handling Instructions) to the attention of the Offer
in Compromise Coordinator. The Coordinator will
review the case, secure approval from the Technical
Support Manager and the Field Territory Manager,
issue the acceptance letter [Pattern Letter 673(P)],
and prepare and process the appropriate abatement
(Form 3870). [See Exhibit 4.18.2–1.]
4.18.2.7 (01-01-2000)
Offer Withdrawn
1.
Where the
examiner and taxpayer can reach an agreement on the correct
tax liability, a "compromise" is not
required. In order to process the case as agreed it
is necessary for the taxpayer to withdraw the offer.
2.
Any
adjustments required to correct the outstanding tax
liability are accomplished through abatement of the
erroneously assessed tax. The following procedures
are completed by the examiner:
A.
Prepare an
audit report, but do not issue the report to the
taxpayer. The report must start with tax as
previously determined. Verify this from a transcript
of account. Explain the recommendation to the
taxpayer, with the caveat that it is subject to
review.
B.
Request that
the taxpayer withdraw the offer by submitting a
letter (statement). An example:
C.
The
taxpayer's signature is always required on the
letter of withdrawal. If the offer was filed
jointly, signatures of both spouses are required.
The taxpayer's representative (per the power of
attorney) may authorize withdrawal of the OIC on the
taxpayer's behalf.
D.
Prepare Form
1271, Rejection or Withdrawal Memorandum. Check box
indicating offer withdrawn. Do not complete
"date of rejection/ withdrawal letter" at
the top of the form. A Form 1271 attachment (Form
886–A), is prepared with an analysis of each
Summary, Facts as to Liability, and Conclusion.
E.
Inform the
taxpayer that when the offer is withdrawn, this
action forfeits any appeal rights and also resumes
the running of the statutory period for collection.
F.
The
completed case is routed (via Form 3198, Special
Handling Instructions) to the attention of the Offer
in Compromise Coordinator. The Coordinator will
secure approval from the Technical Support Manager
or the Field Territory Manager, prepare and process
the appropriate abatement, and issue the withdrawal
letter [Pattern Letter 241(P)] to the taxpayer. [See
Exhibit 4.18.2–2.]
"I hereby withdraw my offer for the
tax year (insert year(s)), contingent upon
acceptance and processing of a reduction of ($
amount) in previously assessed tax and penalties,
respectively, plus interest" .
"I authorize you to apply the ($ if applicable)
deposited with the offer against any outstanding
account" (or) "and request that the amount
of ($ amount) deposited with the offer be refunded
to me" .
In another example, in the case where there is no
adjustment to the tax liability and the taxpayer
agrees, the letter would state:
"I have been advised that my offer cannot be
recommended for acceptance, so I withdraw the
offer" (and complete deposit statement a
indicated above).
The written statement provided to the examiner
should generally be an original, and not a copy or
facsimile.
4.18.2.8 (01-01-2000)
Offer Rejected
1.
If the
taxpayer does not agree with the examiner's
conclusions and will not or does not withdraw the
offer, the following procedures are completed by the
examiner:
A.
Prepare a
report to reflect any decrease in tax and penalties
(based on the correct
tax liability determined by the examiner). Do not
issue the report to the taxpayer or solicit a
signature. A report is not required if no abatement
of tax is recommended. If requested, explain the
recommendation to the taxpayer with the caveat that
it is subject to review. See Section 6.2 of this
handbook regarding refund or application of a
deposit.
B.
Prepare Form
1271, Rejection or Withdrawal Memorandum. Check box
indicting rejection. Do not fill in date of
rejection letter at the top of the form. Prepare a
Form 1271 attachment (Form 886–A), with an
analysis of each Summary, Facts as to Liability, and
Conclusion.
2.
File is
routed (via Form 3198, Special Handling
Instructions) to the Offer in Compromise Coordinator
for Independent Administrative Review. See
procedures for Independent Administrative Review (IAR)
and case closing below. After IAR is completed, the
OIC Coordinator will secure approval from the
Technical Support Manager or Field Territory Manager
before the rejection letter [Pattern Letter 238(P)]
is issued to the taxpayer. [See Exhibit 4.18.2–3.]
3.
If the
taxpayer does not agree with the examiner's
conclusions, the case is processed as a rejection
and any partial abatement (in arriving at the
correct tax) is made before the file is forwarded
for final processing.
The taxpayer has 30 days from the date of the
rejection letter to file an appeal request. If the
taxpayer requests an appeal, the file will be
forwarded to the Office of Appeals.
Section 3. Effective Tax Administration Offers
4.18.3 Effective Tax Administration Offers
4.18.3.1 (01-01-2000)
Overview
1.
This section
provides guidance for examiners in considering
effective tax administration OIC requests.
2.
Offer in
Compromise, Form 656, and Form 656–A, Additional
Basis for Compromise, should be completed by
taxpayers requesting consideration of an offer to
compromise based on effective tax administration.
4.18.3.2 (01-01-2000)
Considering the Effective Tax Administration Issue
1.
If there are
no grounds for compromise under the doubt as to
collectibility or doubt as to liability provisions,
a compromise may be entered into to promote
effective tax administration when compromise of he
liability will not undermine compliance with the tax
laws, and:
A.
Collection
of the full liability will create economic
hardship within the meaning of Treasury
Regulation section
301.6343
–1; or,
B.
Regardless
of the taxpayer's financial circumstances,
exceptional circumstances exist such that collection
of the full liability will be detrimental
to voluntary compliance.
2.
Factors
supporting (but not conclusive of) a determination
that compromise would not undermine compliance with
the tax laws include:
A.
Taxpayer
does not have a history of noncompliance with the
filing and payment requirements of the IRC;
B.
Taxpayer has
not taken deliberate actions to avoid the payment of
taxes; and,
C.
Taxpayer has
not encouraged others to refuse to comply with the
tax laws.
Note:
These factors should be considered but
no minimum compliance requirement exists.
3.
Factors
supporting a determination of economic
hardship include:
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