OIC in Examination

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4.18.1  Offers in Compromise Received in Exam

• 4.18.1.1   Overview
• 4.18.1.2   Introduction
• 4.18.1.3   Classification & Screening Procedures
• Exhibit 4.18.1-1   Pattern Letter—14 Day Additional Information Letter
• Exhibit 4.18.1-2   Pattern Letter—Follow-up 14 Day Additional Information Letter
• Exhibit 4.18.1-3   Pattern Letter 2842(P)
• Exhibit 4.18.1-4   Pattern Letter 2843(P)

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 An offer, having been filed, will be acted upon by recommendation for acceptance, rejection, or it may be withdrawn by the taxpayer or the taxpayer's duly authorized agent.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   Overview
• 4.18.2.2   Considering the Liability Issue
• 4.18.2.3   Jurisdiction—Doubt as to Liability
• 4.18.2.4   Examination Considerations
• 4.18.2.5   Determination of Liability
• 4.18.2.6   Offer Accepted
• 4.18.2.7   Offer Withdrawn
• 4.18.2.8   Offer Rejected

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   Overview
• 4.18.3.2   Considering the Effective Tax Administration Issue
• 4.18.3.3   Jurisdiction—Effective Tax Administration
• 4.18.3.4   Examination Considerations
• 4.18.3.5   Determination of Liability
• 4.18.3.6   Offer Accepted
• 4.18.3.7   Offer Withdrawn
• 4.18.3.8   Offer Rejected

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:

A.       Taxpayer has a serious illness that renders the taxpayer incapable of earning a living and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the illness;

B.       Although taxpayer has certain assets, liquidation of those assets to pay outstanding liabilities would render the taxpayer unable to meet basic living expenses;

C.      Although taxpayer has certain assets, the taxpayer is unable to borrow against equity in those assets and disposition by seizure/sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely.

Note:

Economic hardship offers will not be considered by Examination, but will be considered by Collection.

4.       The following examples illustrate cases in which collection of the full liability will create economic hardship:

A.       Taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of his tax liability under an installment agreement. Taxpayer also owns a modest house that has been especially 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.

B.       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.

C.      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 tax 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.

5.       The following examples illustrate cases in which, regardless of the taxpayer's financial circumstances, compromise would not be detrimental to voluntary compliance with the tax laws:

A.       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 of 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.

B.       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 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.

4.18.3.3  (01-01-2000)
Jurisdiction—Effective Tax Administration

1.       Collection has jurisdiction over offers based on Effective Tax Administration. Collection will retain offers based on economic hardship, and Detriment to Voluntary Compliance (DVC) offers (where tax law fairness is at issue) will generally be forwarded to Examination for consideration. (

Note:

These cases may also fall under the jurisdiction of Appeals if the taxpayer raises the issue during a Collection Due Process (CDP) or equivalent proceeding. See Sections 7.4 and 7.4.1 of this handbook for additional information.

2.       Because effective tax administration offers require a determination that neither doubt as to liability or doubt as to collectibility apply, Collection may forward such offers to Examination for a determination of whether there is any doubt as to liability. Generally, if the taxpayer did not raise the doubt as to liability issue, this determination may readily be made by the Examination OIC Coordinator.

3.       In instances where Examination consideration is warranted (paragraph 1 or 2 above), Collection will forward a copy of the Offer in Compromise (and/or a written referral) to Examination, and retain the original. Examination will subsequently provide a written disposal recommendation to Collection.

4.       Examination action/offer consideration should be initiated within 30 days and monthly contact should be maintained with Collection to inform them of the status and projected closure date. A 60 day objective is established for reaching a determination by Examination and returning the file to Collection.

4.18.3.4  (01-01-2000)
Examination Considerations

1.       If the taxpayer requested consideration of the Effective Tax Administration provisions on Form 656–A and the case has been forwarded from Collection for consideration, the examiner is required to fully document any and all relevant tax law considerations and provide a recommendation as to whether the case is appropriate for compromise based on the specific facts and issues raised.

2.       Examiners should be careful not to confuse DVC with economic hardship offers. Economic hardship offers will always be considered by the Collection.

3.       The examiner should consider equity already established in the tax law in assessing/analyzing the taxpayer's DVC offer. For example, if the taxpayer is requesting compromise of interest accruals, the examiner should be cognizant of the current tax laws concerning interest abatement (managerial, ministerial act), and why current parameters were so established.

4.       During the course of examination of a doubt as to liability issue, if the taxpayer did not request consideration under the effective tax administration standard but the examiner assigned the OIC case identifiers the provisions may apply, the examiner should suggest to the taxpayer that he/she complete Forms 656–A and 433. If the taxpayer completes Form 656–A, the entire offer package should be forwarded to Collection for consideration of the collectibility and effective tax administration issues.

5.       Where the examiner believes that there is a DVC issue that warrants consideration, the examiner should clearly address the issues and why it is believed that compromise may be warranted before forwarding the case to Collection.

4.18.3.5  (01-01-2000)
Determination of Liability

1.       See procedures as outlined under "doubt as to liability" provisions above.

4.18.3.6  (01-01-2000)
Offer Accepted

1.       See procedures as outlined under "doubt as to liability" provisions above.

2.       Approval authority for accepted effective tax administration offers may not be delegated below Area Director level. Form 7249 will be annotated "effective tax administration" as the reason for acceptance.

3.       The acceptance recommendation and correspondence is routed through the Field Territory Manager, and submitted to Collection.

4.       Collection is responsible for finalizing offer acceptance, processing, and issuing appropriate correspondence.

4.18.3.7  (01-01-2000)
Offer Withdrawn

1.       See procedures as outlined under "doubt as to liability" provisions above.

2.       The Examination OIC coordinator will forward the OIC file to Collection for final processing.

4.18.3.8  (01-01-2000)
Offer Rejected

1.       See procedures as outlined under "doubt as to liability" provisions above.

2.       Approval authority for rejected effective tax administration offers is delegated to Field Territory Manager.

3.       After Independent Administrative Review is completed within Examination (on the Examination issues), the rejection recommendation and correspondence is routed through the Field Territory Manager, and submitted to Collection.

4.       Collection is responsible for finalizing offer rejection, processing, and issuing appropriate correspondence.

Section 4. Combination Offers

4.18.5  Review, Closing and Reporting Requirements

• 4.18.5.1   Overview
• 4.18.5.2   Independent Administrative Review Procedures
• 4.18.5.3   Case Closing Procedures
• 4.18.5.4   Examination Annual Compromise Case Report

4.18.5.1  (01-01-2000)
Overview

1.       This section provides administrative review, closing and reporting procedures for OIC requests.

4.18.5.2  (01-01-2000)
Independent Administrative Review Procedures

1.       IRC Section 7122 (d) requires the Service to provide for independent administrative review of all proposed rejections of offers in compromise prior to the rejection being communicated to the taxpayer.

2.       For Examination, this review should occur within the quality review function where one reviewer shall be designated as the Independent Administrative Reviewer (IAR). This person may be the Offer in Compromise coordinator; however, the IAR cannot be anyone who works on the case or is a part of the initial rejection or acceptance decision.

Note:

The IAR cannot be the OIC Coordinator if he/she made the initial rejection recommendation.

3.       In areas without a quality review function, the Area Director can determine the placement of this independent review function.

4.       The grade level of the IAR should be the same or greater than the individual making the initial rejection or acceptance decision.

5.       The IAR should be independent, defined as "free from the influence, guidance, or control of others" . This indicates the review should be made by one who is not influenced by the maker of the original rejection decision, i.e. not an employee who reports to the reviewer. In instances where the IAR is the supervisor of the OIC coordinator, the supervisor must clearly make an independent judgment after a full review of the case. To the extent that an immediate supervisor may defer too much to the judgment of the OIC coordinator, the supervisor should not be appointed as the IAR. In instances where the OIC coordinator made the rejection recommendation, to avoid any possible question concerning independence, the area may want to consider appointing someone other than the OIC coordinator's immediate supervisor as the IAR.

6.       The IAR will review all proposed rejections of offers in compromise prior to any indication or notification of such action being given to the taxpayer. The purpose of the review is to evaluate the case and determine if rejection was the correct decision.

7.       The following review criteria will be considered (but not limited to) for evaluation of the case:

A.       Whether IRM requirements were followed [procedural & mathematical accuracy] ;

B.       Whether the tax law was correctly considered and applied;

C.      Whether the facts/circumstances were thoroughly developed and the law applied.

8.       If the rejection is sustained, the IAR will:

A.       Sign Form 1271, Rejection or Withdrawal Memorandum, as reviewer signifying concurrence with the recommendation;

B.       Provide a brief comment in the remarks section (findings/conclusions from review) ;

C.      Return the case file to the delegated official for signing, dating and mailing the rejection letter to the taxpayer.

9.       If the IAR determines that the rejection is not appropriate, the case file will be returned to the examiner with an explanation on the activity record stating why the rejection was inappropriate. The IAR will allow 21 days for a response. If an agreement cannot be reached between the examiner and the IAR, the issue will be elevated to management levels as appropriate.

4.18.5.3  (01-01-2000)
Case Closing Procedures

1.       The Examination Offer in Compromise Coordinator is responsible for the forwarding, coordination and control of cases received in Examination. This includes unprocessable/returned offers and those sent to the field for further consideration.

2.       After consideration of an OIC case is completed in the field, the file is forwarded to the Exam OIC coordinator for further action.

3.       Independent Administrative Review is required for offers with a rejection recommendation.

4.       Acceptance, withdrawal and rejection letters are forwarded with the case file for the appropriate approval and signatures on the rejection letter, Forms 1271 and 7249. The Technical Support Manager or Field Territory Manager may approve rejections & withdrawals, and the Field Territory Manager is required to approve acceptances. There will be no redelegation below this level.

5.       Accepted and withdrawn offers are forwarded for processing and abatement.

A.       Appropriate letters are sent to the taxpayer.

B.       The OIC file (consisting of Form 656, letter to the taxpayer, withdrawal letter from the taxpayer, Form 1271 or 7249, Form 3040, and Form 2848) is forwarded to the appropriate Service Center OIC Unit.

C.      The Service Center OIC Unit processes the payment transfer (Form 3040), and in instances where the OIC coordinator is unable to do so, may also input the appropriate IDRS transaction code for acceptance (780), withdrawal (482) or rejection/return (481) of the OIC, and reversal of the STAUP (if applicable).

D.      The Administrative file (consisting of the tax return, original workpapers/report, Form 3870, revised workpapers/report, and Form 2848 if applicable), is forwarded to Case Processing Support for processing of the abatement and/or returning the administrative file to the Service Center.

6.       The OIC coordinator should, at a minimum, maintain copies of Forms 1271, 7249, 2515, and 2848 if applicable. Current and prior calendar year closed offer files should be retained in the area office per IRM 1(15)59.22, Records Control Schedule for Examination. Records should be shipped to the Federal Record Center after this time.

7.       For a period of one year, a copy of the appropriate Form 7249 (with a MFTRAX print) for each accepted offer will be made available for public inspection. After the 1 year period has ended, Form 7249 should be returned to the OIC coordinator for association with the retained office file.

8.       Upon issuance of rejection letter, the administrative file is maintained for a period of not less than 30 days to allow the taxpayer sufficient opportunity to exercise his/her appeal rights. If an appeal request is received from the taxpayer, the file is forwarded to Appeals for consideration. If no request is received, the file is forwarded/closed for final processing.

4.18.5.4  (01-01-2000)
Examination Annual Compromise Case Report

1.       Form 4778, Examination Annual Compromise Case Report, shows disposition of tax offers in compromise considered by Examination. This report includes only offers on which Examination prepares the Acceptance, Withdrawal and Rejection Memoranda and which the Area Director has been delegated authority to finally reject, finally accept, or recommend acceptance for the Commissioner's approval.

2.       Form 4778 report is a fiscal year report and is submitted to the AC (Examination) by October 30 of each year.

3.       The information needed for this report is obtained from Form 2515, Record of Offer in Compromise. One copy of each record card is detached from the offer when it is received in Examination. The cards are filed alphabetically under the various classifications so they may be available for preparing the report. The progress and disposition of the offer in compromise is promptly posted on the card so the current status and disposition of the offer may be readily determined.

4.       Part I shows progress in disposing of doubt as to liability offers submitted to compromise tax liabilities, including penalties and interest. Column requirements for Part I follow:

A.       Class of tax covered is shown in Item 8 of Form 2515 record card;

B.       "Amount of liabilities" is obtained from the total unpaid liabilities to be compromised based on the date the OIC was received by the Service (including penalties and interest) which are listed in block 7 of the Form 2515 record card;

Note:

IMFOLI may be used to determine unpaid liabilities (including accruals). This field should be updated (for any additional accruals) upon case closing.

C.      "Amount of offers" is obtained from the amount shown in block 5 of the Form 2515 record cards. This column should reflect the total sum offered, not merely the amount of deposit.

D.      Line 7 includes transfers out of area and transfers to Collection or Appeals when the file will not be returned to Examination.

5.       Part II shows progress in disposing of effective tax administration offers submitted to compromise tax liabilities, including penalties and interest. Lines 1 through 9 of Part II are prepared similarly to Part I above. Items 10 and 11 should reconcile with the totals shown in Part II, 3(b) and 3(c) respectively. Additional data fields for effective tax administration offers are included for the purpose of monitoring the recent (1998) provisions.

6.       Part III provides an overview of the currency and aging of OIC requests/inventory. Offers in Compromise should be held to the same inventory aging objectives as other Examination cases; however OICs should be considered and worked as priority inventory. Column requirements for Part III follow:

A.       Entries reflecting the period offers have been in Examination are obtained from item 2 on the Form 2515 record card;

B.       "Average age" is obtained by averaging the periods from line 2;

C.      Line 15 includes cases sent to Appeals where Examination controls were not closed (i.e. case will be returned from Appeals after consideration).

Section 6. Case Processing & Controls

4.18.6  Case Processing & Controls

• 4.18.6.1   Overview
• 4.18.6.2   Payments Made with Form 656
• 4.18.6.3   Statutory Period of Limitation
• 4.18.6.4   Innocent Spouse Procedures
• 4.18.6.5   Examiner's Time
• 4.18.6.6   Return Controls
• 4.18.6.7   Dual Notice Requirement

4.18.6.1  (01-01-2000)
Overview

1.       This section provides guidance for various processing issues and case controls.

4.18.6.2  (01-01-2000)
Payments Made with Form 656

1.       If a payment is received with Form 656, or any payment is made on the offer before the taxpayer's offer is accepted by the Service, these payments are treated as deposits and not collections of tax. The Record of OIC, Form 2515, is used to process these payments. Once the offer is determined to be processable, the deposit is attached to Form 2515 and, forwarded via overnight delivery to the Service Center OIC Unit.

2.       If the taxpayer's offer is rejected or withdrawn and the taxpayer paid an amount with Form 656, the Service is required to refund the deposit when the offer is processed by the Service Center . The taxpayer, however may authorize the application of the deposit amount to any outstanding liability. This is done using Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability.

3.       Form 3044 is executed by the taxpayer after the offer case is completed if the taxpayer wants the deposit amount applied to any outstanding liability. The completed Form 3040 is forwarded to the Service Center OIC Unit along with the OIC file upon closing/final processing of he case.

4.18.6.3  (01-01-2000)
Statutory Period of Limitation

1.       The normal statutory period for collection purposes is ten years from the assessment of the tax liability.

2.       The Offer in Compromise, Form 656, provides that the taxpayer agrees to the waiver and suspension of the running of the statutory period of limitations on both assessment and collection of the liability sought to be compromised for the period the offer is pending, during the period any offered amount remains unpaid, during the time that any term or condition of the offer remains unsatisfied, and for one additional year thereafter.

A.       The waiver must be executed by the Service to acknowledge agreement to the suspension period.

B.       The Service does not sign the waiver of the statute of limitations until the taxpayer's offer is determined to be processable.

C.      When the offer is formally rejected by the Service, or withdrawn by the taxpayer, the statute of limitations begins to run again.

3.       Effective January 1, 2000 , the waiver can no longer be used. The statute of limitations will be suspended (by statute) only during the period the offer in compromise is considered pending by the IRS .

4.       Waivers secured before January 1, 2000 will have no effect after December 31, 2002 .

5.       The Offer in Compromise DOES NOT extend the statute for additional tax assessments or overpayments. Steps should be taken to protect the interest of the Government before the statutory period expires.

6.       IRC Section 6511(a) prescribes the period of limitation for a refund of tax. Offer to compromise are not considered for tax amounts that have already been paid.

7.       If the taxpayer submitted an offer to Appeals during a Due Process (CDP) proceeding, the statutory period of limitations is suspended by law until a final determination is reached. Final determination occurs after the Office of Appeals issues a determination, and an expiration of he taxpayer's right to judicial review, or after a final determination by the court. This suspension could exceed the pending period of the offer. Taxpayers who submit offers to Appeals during an Equivalent appeal proceeding are not entitled to a suspension of he statutory period, provided for in IRC Section 6320 or 6330 (CDP).

4.18.6.4  (01-01-2000)
Innocent Spouse Procedures

1.       In processing an offer with an "innocent spouse" issue, once an innocent spouse determination is made, the Master File joint assessment is transferred to a Non-Master File assessment established on the liable spouse. This can be done on the bottom portion of Form 3870 - Request for Adjustment. The examiner must be specific on the exact amount of tax for each spouse. In such instances, all time is charged to indirect activity code 720.

4.18.6.5  (01-01-2000)
Examiner's Time

1.       Offer in Compromise cases are received in Technical Support for control (by the OIC Coordinator) and are then sent to the examination group.

2.       Time applied to investigating an OIC is charged (below the line) to activity code 720. If it is determined that a tax adjustment should be made, time spent examining books/records and preparing the report is charged directly to the case (return). Time spent preparing the rejection/withdrawal memorandum and taxpayer letters is charged to activity code 720.

3.       If all time was charged to indirect exam time activity code 720:

A.       Return not on AIMS and ordered under source code 45—Form 5344 is not submitted when the case is closed from the group; return is surveyed using disposal code 45.

B.       Return on AIMS—Close using Form 5344 and original source code.

4.18.6.6  (01-01-2000)
Return Controls

1.       For AIMS purposes, the statute is controlled under Claim status AA alpha code if he normal statute has expired.

2.       In some situations, the case file may not include the administrative file and tax return. A copy of the return should be secured from the taxpayer or internally.

3.       If the return is still reflected on AIMS when the offer in compromise was received, command codes ESTAB and AMSTUR should be used to order and establish he return. The originating source code is retained. ERCS controls must be reopened manually.

4.       If the return is not on AIMS when the offer in compromise is received, the return should be ordered using source code 45. The source code and status code are updated to 73 and 12, respectively, once it is determined that a tax adjustment should be made.

5.       Tax abatements for accepted OICs are completed using Form 3870. All other tax abatements (in arriving at correct tax) are completed on report Form 4549, Income Tax Examination Changes.

4.18.6.7  (01-01-2000)
Dual Notice Requirement

1.       Section 3201 of the IRS Restructuring and Reform Act of 1998 requires that, wherever practicable, any notice relating to a joint return be sent separately to each individual filing the joint return.

This requirement also applies to offers in compromise filed on joint liabilities. See IRM Handbook 4.10, Text 1.6.8 for a description of applicable correspondence and notice procedures. In general, the dual notice requirement applies to letters issued as described within this handbook.

Section 7. Special Case Processing

4.18.7  Special Case Processing

• 4.18.7.1   Offer in Compromise Filed During the Audit
• 4.18.7.2   Federal Employees/Retiree Delinquency Initiative
• 4.18.7.3   Collateral Agreements
• 4.18.7.4   Offers Under Office of Appeals Jurisdiction
• 4.18.7.5   Rescission of Accepted Offers in Compromise

4.18.7.1  (01-01-2000)
Offer in Compromise Filed During the Audit

1.       This section provides procedures for consideration and processing of Offers in Compromise (Doubt as to Collectibility) filed during an examination.

2.       While Collection has jurisdictional responsibility for offers based on doubt as to collectibility and effective tax administration, Examiners play a role in the initiation and processing of offers. Policy Statement P–5–100 provides in cases where an OIC appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. This generally does not occur until the examiner has already made a determination of the proper amount of tax liability/deficiency.

3.       Examiners must exercise good judgment in identifying when an offer represents the best means to resolve a deficiency. The primary objective is to secure full payment of the deficiency. However, when the examiner identifies an offer as the best alternative for securing payment, a discussion of collectibility concerns will take place between the examiner and his/her group manager prior to initiating a discussion of the offer alternative with the taxpayer. A comment regarding this discussion and applicability of limited scope procedures will be made in the ARDI section of the workpapers.

4.       The taxpayer may submit an offer to the examiner during the course of the examination or at the conclusion of the examination. Upon receipt of the offer, the examiner will date stamp the back of all copies of Form 656, Offer in Compromise, and will review all forms for completeness prior to forwarding to Collection. The examiner will not sign the Offer in Compromise, Form 656.

5.       The examiner will perform a cursory review to expedite processing of the offer and better service the taxpayer. The examiner should ensure the offer package is complete as required on Form 656, and includes the following:

A.       Full Identification of Taxpayer: Name, address, social security number or employer identification number; both taxpayer names and signatures in instances of a joint liability offer;

B.       Identification of the liability (type of tax);

C.      Amount and terms of the offer;

D.      Appropriate signature(s);

E.       Basis for compromise;

F.       Completed Form 433–A and/or Form 433–B;

G.      Minimum of equity in assets offered;

H.      All outstanding liabilities and returns included.

6.       The offer should be forwarded to Collection within three calendar days of receipt.

7.       If the examination is not complete and the examiner and group manager concur that a legitimate collectibility concern exists, the limited scope procedures may be applied. Otherwise the examination should continue and issues resolved as normal.

8.       If agreement is obtained, the case will be closed following existing procedures. The Collection employee handling the OIC case will be provided a copy of the audit report.

9.       Examiners should not solicit and obtain conditional agreements wherein the taxpayer only agrees to the proposed tax with the condition that an offer in compromise simultaneously submitted (doubt as to collectibility) is accepted.

10.    If agreement is not obtained, the case will be closed following normal unagreed procedures. Such action must clearly be communicated to the Collection employee handling the OIC case. The taxpayer's submission of the offer should be postponed until final resolution of the issues and resulting liability; the taxpayer loses his right to appeal the issues if the offer is accepted by Collection.

11.    If the taxpayer submits the offer directly to Collection during the course of an audit, Collection should determine whether any years are being examined and if so, contact the examiner for further coordination.

12.    If an offer is to be accepted by Collection, an acceptance letter cannot be mailed to the taxpayer until an assessment of the liability has been made. To obtain a quick assessment of the liability, Form 3198, Special Handling Notice, must be annotated in the "other" section, "Prompt Assessment Request—Offer Pending in Collection" .

13.    While the offer is under consideration, the taxpayer will not receive notices requesting payment.

4.18.7.2  (01-01-2000)
Federal Employees/Retiree Delinquency Initiative

1.       Offers in Compromise submitted by Federal retirees are considered and evaluated through normal offer processing.

2.       Offers submitted by Federal employees will be considered. However, due to the sensitivity associated with the acceptance of an offer in compromise from a Federal employee, public policy implications must be considered in all cases. Local management will make the determination based on the facts and circumstances of each case.

3.       The Area Director is the delegated official for both acceptances and rejections of offers submitted by Federal employees. There will be no redelegation below this level. Rejections must take into consideration the public policy implications in addition to other reject reasons.

4.18.7.3  (01-01-2000)
Collateral Agreements

1.       In appropriate situations, collateral agreements are used to collect amounts in addition to the amount actually secured by the offer. These agreements may be secured by Collection with Doubt as to Collectibility offers.

2.       Collateral agreements may provide for: payments from future income; reduction in basis of assets for computing depreciation, and gain or loss for tax purposes; waiver of net operating loss or unused investment credit carrybacks or carryovers; and waiver of bad debt loss or other deductions. These are the most common types of collateral agreements secured as additional consideration for the acceptance of an offer.

3.       The service center initiates follow-up action on future income and collateral agreements in force. After receipt of Statement of Annual Income (Individual) or (Corporation), Forms 3439 and 3439–A, respectively, with copy of related income tax return, the Offer in Compromise Clerk sends these to the service center, Examination Branch, for compliance check.

4.       When the Service Center , Examination Branch, compliance check results in any question regarding compliance with the terms of future income or other collateral agreements, the complete files with related returns will be referred to Area Examination for follow-up action.

5.       These cases require consideration to ensure compliance with the terms of the agreements and to determine the correct tax liability for the years affected by the agreements. An appropriate report and Form 3440 (Adjustments to Statement of Annual Income) must be sent to the service center when adjustments affect the "annual income" or where the taxpayer's computation is in error.

4.18.7.4  (01-01-2000)
Offers Under Office of Appeals Jurisdiction

1.       A taxpayer may submit an offer to the Appeals function during a Collection Due Process (CDP) or an equivalent proceeding, to exercise their rights granted under IRC Section 6330 and 6320. The Office of Appeals has statutory jurisdiction of such offers, whether submitted on the basis of doubt as to liability, doubt as to collectibility, or effective tax administration.

2.       The Office of Appeals also has jurisdiction over doubt as to liability offers where the assessment was previously determined by Appeals. This includes Trust Fund Recovery Penalty and Personal Liability for Excise Taxes that were determined in Appeals. These offers should be forwarded directly to Appeals for consideration.

4.18.7.4.1  (01-01-2000)
CDP and Equivalent Appeal Offer Processing

1.       If an offer, regardless of the basis, is received in Appeals during a CDP or Equivalent proceeding, the Office of Appeals may request the Area Director to conduct any investigation deemed necessary to reach a conclusion on the merits of the case.

2.       An Appeals Referral Investigation ( ARI ) will be forwarded to Area Examination for doubt as to liability offers submitted to Appeals under a CDP or an equivalent proceeding. The ARI will request Examination to verify the validity and legality of the tax. Examination action should be initiated within 30 days and monthly contact should be maintained with Appeals to inform them of the status and projected completion date.

3.       Area Examination will neither accept nor reject these offers and may not even receive a copy of the Form 656 in question. Instead, Area Examination will provide a report of facts regarding the accuracy of the tax and include sufficient supporting documentation to enable Appeals to reach a determination as to whether the offer should be accepted or rejected.

4.       These cases are handled/controlled as a referral from Appeals rather than controlled as an OIC ( DOL ) case. Accordingly, they are not included in Form 4778, Examination Annual Compromise Case Report.

5.       If information from the taxpayer is needed, and the taxpayer does not provide the information necessary to complete the investigation, he/she will be notified by letter that additional information is needed and allowed 14 days to respond. If no response to the request is received, a second request will be issued within 10 days of the initial response date, and the taxpayer will be allowed an additional 14 days for a response. If no response to the second request is received, the ARI will be returned to Appeals.

4.18.7.5  (01-01-2000)
Rescission of Accepted Offers in Compromise

1.       A compromise is binding and conclusive on both the government and the taxpayer. In the absence of fraud or mutual mistake, the courts have consistently denied either party recovery of any part of the consideration given when it was properly rendered under a compromise agreement. However, an offer in compromise, which has been accepted under a mutual mistake as to a material fact, or because of the false representations made about a material fact, may be rescinded or set aside.

2.       The appropriate function will prepare a letter to the taxpayer identifying the OIC, advising that the acceptance is rescinded and acceptance letter revoked.

3.       All rescission letters, regardless of the amount of the liability, must be approved by Area Counsel.

4.       If the offer had been accepted by Appeals, the case should be forwarded to Appeals for final determination.