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Special Circumstances

Special Circumstances are an Exception to “Reasonable Collection Potential”

The IRS will agree to an offer in compromise settlement based on “reasonable collection potential” (RCP). RCP is determined based on the net value of assets plus income in excess of reasonable and necessary expenses in all doubt-as-to-collectability (DATC) cases. There is an exception for “special circumstances.”

The RCP calculation is made at the time the OIC is being considered and evaluated by the IRS. The “special circumstances are the same as those considered for “effective tax administration” (ETA). The ETA rules apply when a taxpayer’s RCP is in excess of the outstanding tax debt.

The “special circumstances” exception in offer in compromise justify acceptance of an Offer at less than total reasonable collection potential. The IRS anticipates acceptance of less than reasonable collection potential in cases where, despite the proper application of the Service’s allowable expense standards and asset valuation rules, the taxpayer could not pay the full reasonable collection potential without suffering economic hardship. Economic hardship is defined as the inability to meet reasonable basic living expenses. See Treas. Reg. § 301.6443-1(b)(4). Economic hardship does not include mere inconvenience or the inability to maintain a luxurious or affluent standard of living. Under the Service’s procedures, the amount accepted should reflect what could reasonably be collected less the amount a taxpayer must retain to avoid economic hardship.

SPECIAL CIRCUMSTANCES INCLUDE  “ECONOMIC HARSHIP”

When a taxpayers liability can be collected in full but collection would create an economic hardship, an ETA offer based on economic hardship can be considered. The definition of economic hardship as it applies to ETA offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer.

The taxpayers financial information and special circumstances considered by the IRS includes reviewing basic living expenses as well as other considerations.  The taxpayer’s income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health, welfare, and production of income of the taxpayer and the taxpayer’s family. National and local standard expense amounts are designed to provide accuracy and consistency in determining taxpayer’s basic living expenses. These standards are guidelines and if it is determined that 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.

In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:

  • The taxpayers age and employment status,
  • Number, age, and health of the taxpayers dependents,
  • Cost of living in the area the taxpayer resides, and
  • Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.

Factors that support an economic hardship determination may include:

The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability, and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.

The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.

The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.

The following examples illustrate the types of cases that may be compromised under the economic hardship standard.

The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.

The taxpayer is retired and the only income is from a pension. The 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 adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.

The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.

Reg. Section 301.7122-1(c)(3) is authority is ETA cases, and, correspondingly, special circumstances case.. Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to—

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;

Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

 Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

IRS Regulation 301.6343-1(b)(4) defines “economic hardship” in the context of an IRS levy but these rules are accepted by the IRS for special circumstances. In levy cases, if the levy is creating an economic hardship due to the financial condition of an individual taxpayer. tthe IRS must release the levy This condition applies if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

In these levy cases, applicable to define “special circumstances”, the information required from a tax payer in determining a reasonable amount for basic living expenses, the IRS will consider any information provided by the taxpayer including—

The taxpayer's age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else;

 The amount reasonably necessary for food, clothing, housing (including utilities, home-owner insurance, home-owner dues, and the like), medical expenses (including health insurance), transportation, current tax payments (including federal, state, and local), alimony, child support, or other court-ordered payments, and expenses necessary to the taxpayer's production of income (such as dues for a trade union or professional organization, or child care payments which allow the taxpayer to be gainfully employed);

These factors are considered in Speltz v. Commissioner , 454 F.3d 782, 786 (8th Cir. 2006), affg. 124 T.C. 165 (2005).