Offer in Compromise - Financial Analysis - Internal Revenue Manual
Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 5. Financial Analysis
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5.8.5 Financial Analysis
5.8.5.1 Overview
5.8.5.2 Verification
5.8.5.3 Equity in Assets
5.8.5.4 Dissipation of Assets
5.8.5.5 Future Income
5.8.5.6 Payment Terms
Exhibit 5.8.5-1 Deferred Payments Limited by Short Statute
Exhibit 5.8.5-2 Deferred Payments Limited by Small Amount Due
Exhibit 5.8.5-3 Deferred Payments Limited by Application of Payment From Equity in Assets
5.8.5.1 (09-01-2005)
Overview
This chapter provides instructions for analyzing the taxpayers financial condition to determine reasonable collection potential (RCP). IRM 5.15, Financial Analysis Handbook, provides information for the analyzing and verifying of financial information and should be used in conjunction with this section.
5.8.5.2 (09-01-2005)
Verification
A thorough verification of the taxpayers Collection Information Statement (CIS) involves reviewing information available from internal sources and requesting that the taxpayer provide additional information or documents that are necessary to determine reasonable collection potential (RCP).
Collection issues that have been previously addressed during a balance due investigation by field personnel will not be re-examined unless there is convincing evidence that such reinvestigation is absolutely necessary. It is expected that the results of a previous collection investigation will be used and only supplemented when necessary to make a determination on an offer in compromise. Investigative actions that are less than 12 months old may be used to evaluate the offer in compromise.
Example:
If a Revenue Officer has completed a full CIS analysis including verification of assets, income, and expenses and has made a determination of the fair market value (FMV) of assets, equity in assets and monthly ability to pay, this information should not be reinvestigated. The Offer Examiner (OE) should use the Revenue Officer's (RO) determinations to calculate reasonable collection potential (RCP). If the balance due case file does not provide documentation to indicate the source of the offer amount, the taxpayer will be contacted to determine the source of the offer funds
5.8.5.2.1 (09-01-2005)
Internal Sources
Verify as much of the collection information statement (CIS) as possible through internal sources.
When internal locator services are not available, or indicate a discrepancy, request that the taxpayer provide reasonable information necessary to support the Collection Information Statement (CIS).
A full credit report should be requested prior to accepting an offer when the current balance due exceeds $100,000.
Regardless of the amount of the liability the following information sources may be considered:
Internal Sources Review
ENMOD and INOLES Identify cross reference TINs for related business activity not declared on the CIS.
SUMRY, IMFOL and BMFOL Verify full compliance.
RTVUE (IMF) or copy of the last filed income tax return • Compare the amount of reported income to that declared on the CIS.
• Identify past sources of income:
Schedule B — interest and dividends
Schedule C — self-employment income
Schedule D — capital gains or losses
Schedule E — rental or other investment income, net operating loss deduction
Schedule F — farm income
IRPTRO and/or copy of older year income tax returns
•Compare real estate tax and mortgage interest deductions to the amounts declared on the CIS. Higher amounts may indicate present or past real property ownership not declared on the CIS. Lower amounts may indicate property has been recently sold or transferred.
•Identify accounts not reported on the CIS, such as certificates of deposit or investment accounts.
•Verify sources of income, such as employers, bank accounts, and retirement accounts.
•Identify recently dissipated assets.
BRTVUE (BMF) or copy of last filed income tax return • Compare the amount of reported income to that declared on the CIS.
• Compare the value of assets and the amount of reported depreciation to the asset values declared on the CIS.
State Motor Vehicle Records Identify motor vehicles registered to the taxpayer but not declared on the CIS. Also check for ownership in business names.
Real Estate Records • Identify real property titled to the taxpayer but not declared on the CIS.
• Identify property held by transferee, nominee, or alter ego. Also check for ownership in business names.
Credit Bureau Report • Identify past residences and employers.
• Verify competing lien holders, balances due and payment history.
•Identify property not listed on CIS.
5.8.5.2.2 (09-01-2005)
Taxpayer Submitted Documents
Collection Information Statements (CIS) submitted with an offer in compromise should reflect information no older than the prior six months. If during the processing of the offer, the financial information becomes older than 12 months, contact should be made with the taxpayer to update the information. However, in certain situations information may become outdated due to significant processing delays caused by the Service and through no fault of the taxpayer. In those cases, it may be appropriate to rely on the outdated information if there is no indication the taxpayers overall situation has significantly changed. Judgment should be exercised to determine whether, and to what extent, updated information is necessary. If there is any reason to believe the taxpayers situation may have significantly changed, secure a new CIS.
Do not make a blanket request for information. Tailor your request to each taxpayers specific situation. Do not require the taxpayer to provide information that is available from internal sources.
Offer Investigators may receive offers (other than those identified by the "Screen for Obvious Full Pay" process) where the taxpayers have not provided, either proof of payment for certain monthly expenses claimed in Section 9 of Form 433-A, or statements showing current real estate mortgage or motor vehicle loan balance. Often the taxpayers are not actually paying claimed expenses, or they are not allowable under offer program guidelines. For example, taxpayers frequently list their unsecured credit card bills under "secured debt" or " other expenses" . While a taxpayer may have a liability for a court ordered judgment that is senior to the Notice of Federal Tax Lien (NFTL), unless they are actually making payments on that liability it is not considered as an allowable monthly expense.
If taxpayers do not substantiate claimed expenses for Form 433-A categories of health care expenses, court ordered payments, child/dependent care, life insurance, other secured debt, or other expenses, Offers Investigators will complete the Income/Expense Table (IET) assuming that the taxpayer is not making any payments for the particular unsubstantiated expense, except for health care. In those cases, refer to LEM 5.3.1.
When computing equity in real estate or allowable motor vehicles, and the taxpayer has not submitted substantiation of loan balances claimed on the Form 433-A, Offers Investigators should request a credit report and use that loan balance information to determine the current balances of any relevant loans from commercial lenders. If the loan is from a private source, it may be necessary to contact the taxpayer/representative for the information.
If not present in the file when assigned for investigation, appropriate documentation from the chart below should be requested to verify the information on the Collection Information Statement (CIS).
Taxpayer Documentation Review
Wage Earner — wage statements for the prior three months or a current or a statement with current year–to–date figures. • Compare average earnings to the income declared on the CIS.
• Verify adequate tax withholding.
• Identify payroll deductions to ensure the expense is necessary and not claimed again on the CIS.
•Identify deductions to savings accounts, credit union accounts, or retirement accounts.
Self-employed — proof of gross income (invoices, accounts receivable, commission statements, etc.) for the prior three months. • Compare average earnings to the income declared on the CIS.
• Identify deductions to ensure the expense is necessary and not claimed again on the CIS.
Three (3) current months of bank statements that show the monthly transactions, withdrawals, and deposits. Compare deposit amounts to income reported on the tax return and CIS. Question deposits that exceed reported income and unusual expenses paid. Consider asking for the cancelled checks and deposit items for a specified time frame if questionable items cannot be adequately explained.
Retirement account statements and brochures, brokerage account statements, securities, or other investments Identify the type, conditions for withdrawal, and current market value.
Life insurance policies •Identify the type, conditions for borrowing or cancellation, and the current loan and cash values.
• Verify the amount of the required premiums and ensure payments are being made.
Motor vehicle purchase or lease contracts, statements from the lender indicating the payoff amount Verify equity and monthly payment expense.
Real estate warranty deeds, mortgage deeds, HUD closing statements, statements from the lender indicating the pay off amount Identify the type of ownership, amount of equity, and monthly payment expense.
Homeowners or renters insurance policies and riders. • Compare the insured value to the value declared on the CIS.
• Identify high value personal items such as jewelry, antiques or artwork.
Financial statements recently provided to lending institutions or others. Compare the financial information on the CIS to those submitted to other lending institutions.
Divorce court orders. Verify disposition of assets in the property settlement.
Court orders for child support and proof of payment. Verify responsibility for child support, that the payments are actually being made, and the length of time payments are required to be made. A copy of the court order is not critical or required if the taxpayer does not provide supporting documentation that payments are being made. In those cases, the payment will be disallowed as an expense. If the payment is to be allowed, a copy of the Court Order must be secured.
5.8.5.3 (09-01-2005)
Equity in Assets
Proper asset valuation is essential to determine reasonable collection potential (RCP).
Field calls may be made to locate or personally ascertain the condition of assets.
Assets will not be eliminated or valued at zero dollars simply because the Service may choose not to take enforcement action against the asset, even though the net result is rejection of the offer and reporting the case currently not collectible.
5.8.5.3.1 (09-01-2005)
Net Realizable Equity
For offer purposes, assets are valued at net realizable equity (NRE). Net realizable equity is defined as quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien.
Quick sale value (QSV) is defined as an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less. Generally, QSV is an amount less than fair market value (FMV) but greater than forced sale value (FSV). FSV is defined as no less than 75% of FMV.
Normally, quick sale value (QSV) is calculated at 80% of fair market value (FMV). A higher or lower percentage may be applied in determining QSV when appropriate, depending on the type of asset and/or current market conditions. If, based on the current market and area economic conditions, it is believed that the property would quickly sell at full FMV, then it may be appropriate to consider QSV to be the same as FMV. This is occasionally found to be true in real estate markets where real estate is selling quickly at or above the listing price. As long as the value chosen represents a fair estimate of the price a seller could get for the asset in a situation where the asset must be sold quickly (usually 90 calendar days or less) then it would be appropriate to use of a percentage other than 80%. Generally, it is the policy of the Service to apply QSV in valuing property for offer purposes.
When a particular asset has been sold (or a sale is pending) in order to fund the offer, no reduction for quick sale value (QSV) should be made. Instead, verify the actual sale price, ensuring that the sale is an arms length transaction, and use that amount as the QSV. A reduction may be made for the costs of the sale and the expected current year tax consequence to arrive at the net realizable equity (NRE) of the asset.
5.8.5.3.2 (09-01-2005)
Jointly Held Assets
When taxpayers submit separate offers but have jointly owned assets, allocate equity in the assets equally between the owners. However:
If… Then…
The joint owners demonstrate their interest in the property is not equally divided Allocate the equity based on each owner's contribution to the value of the asset.
The joint owners have joint and individual tax liabilities included in the offer investigation Apply the equity first to the joint liability and then to the individual liability.
See IRM 5.8.5.3.11(4) below for the treatment of assets held as tenancies by the entirety.
5.8.5.3.3 (09-01-2005)
Income-Producing Assets
When determining the reasonable collection potential (RCP) for an offer that includes business assets, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset was either liquidated or used as collateral to secure a loan to fund the offer .
When valuing income-producing assets:
If… Then…
There is no equity in the assets There is no adjustment necessary to the income stream.
There is equity and no available income stream (i.e. profit) produced by those assets There is no adjustment necessary to the income stream. Consider including the equity in the asset in the RCP.
There are both equity in assets that are determined to be necessary for the production of income and an available income stream produced by those assets Compare the value of the income stream produced by the income producing asset(s) to the equity that is available.
Determine if an adjustment to income or expenses is appropriate.
An asset used in the production of income will be liquidated to help fund an offer Adjusting the income to account for the loss of the asset.
A taxpayer borrows against an asset that is necessary for the production of income, and devotes the proceeds to the payment of the offer Consider the effect that loan will have on future expenses and the future income stream.
The taxpayer is either unable or unwilling to secure a loan on the equity in income producing assets Compare the equity in the assets with the income produced by those assets. Determine if an adjustment to income stream is appropriate to account for the potential loss of the assets.
These considerations should be fully documented in the case history. For example:
If… Then…
A self-employed construction tradesman sells a truck, which he used to haul materials, and devotes the proceeds to the offer Consider allowing the expected cost of delivery services as a business expense.
A tradesman borrows against the truck instead of selling it and devotes the proceeds to the offer Consider allowing the loan repayment as a business expense.
A loan cannot be secured and loss of the truck would create an economic hardship When special circumstances warrant acceptance of less than RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order No. 5-1 (formerly DO 11, Rev. 29).
An outside salesman has a luxury car when all that is necessary is a moderate value sedan The equity should be included in the offer. Consider allowing only a portion of the loan repayment that would be required to purchase a moderate value replacement vehicle.
An outside salesman has a luxury car but no ability to make installment payments for purchase of a moderate value replacement vehicle The equity should be included in the offer. When special circumstances warrant acceptance of less than the RCP, document the circumstances and recommend acceptance to the authorized official in Delegation Order No. 5-1 (formerly DO 11, Rev. 29). Determine the acceptable amount of a special circumstances offer by allowing the taxpayer to retain only enough equity to purchase a moderate value replacement vehicle.
A business owns a vacation property, which is used for annual board meetings. The equity should be included in the offer. Do not allow any loan repayment.
5.8.5.3.4 (09-01-2005)
Assets Held By Others as Transferees, Nominees, or Alter Egos
A critical part of the financial analysis is to determine what degree of control the taxpayer has over assets and income in the possession of others. This is especially true when the offer will be funded by a third party.
When these issues arise, apply the principles in IRM 5.17.1, Legal Reference Guide for Revenue Officers, or request a counsel opinion.
It is not necessary to actually seek or obtain any specific legal remedy in order to address these issues in an offer.
If the taxpayer has a beneficial interest in the asset or income stream then the value should be reflected in the reasonable collection potential (RCP).
5.8.5.3.5 (09-01-2005)
Cash
Review checking account statements over a reasonable period of time, normally three months.
Note:
Determine if there are funds in the account that are not spent on a monthly basis. Generally this would be the amount reflected on each month's statement when the account is at its lowest point. Treat overdrafts as a zero balance. This should represent the amount available in the account each month after all deposits and withdrawals. Average the lowest daily ending balance on each of the three statements and use this amount as the value of the account. This amount will be added to the AET as an asset, however, it cannot be valued for less than zero.
Determine the taxpayers interest in bank accounts by ascertaining the manner in which they are held and applying the principles described in IRM 5.17.1, Legal Reference Guide for Revenue Officers.
If analysis of the bank statements and/or discussions with the taxpayer reveal that an adjustment to the balance is appropriate based on unusual expenses that are necessary for the production of income or the health and welfare of the taxpayer, consider adjusting the balance. The case file should clearly document these determinations.
Analyze the statement for any unusual activity, i.e. deposit in excess of reported income, withdrawals, transfers, or checks for expenses not reflected on the Collection Information Statement (CIS). The Offer Investigator should question these inconsistencies, as appropriate.
Review savings accounts statements over a reasonable period of time, normally three months.
If the account has little withdrawal activity use the ending balance on the latest statement 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) through (4) above to determine its value.
If analysis of the bank statement reveals recently dissipated funds, see 5.8.5.4 below for a full discussion of the treatment of dissipated assets.
If the taxpayer offers the balances of accounts to fund the offer, allow for any penalty for early withdrawal and the expected current year tax consequence.
Verify whether deposits in escrow or trust accounts are actually held for the benefit of others.
For funds on deposit with the offer in compromise, allow as an encumbrance any amount borrowed under the provision that, if the offer is not accepted, it must be repaid.
5.8.5.3.6 (09-01-2005)
Securities
Financial securities are considered an asset and their value should be determined and included in the reasonable collection potential (RCP) when investigating an offer.
When the taxpayer will liquidate the investment to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
To determine the value of publicly traded stock, research a daily paper or inquire with a broker for the current market price. Then, allow for the estimated costs of the sale to arrive at the quick sale value (QSV).
To determine the value of closely held stock that is either not traded publicly or for which there is no established market, consider the following methods of valuing the company and assign a proportion of the company's value to the taxpayers stock:
Secure and verify a Collection Information Statement (CIS).
Review recent year's annual report to stockholders.
Review recent year's corporate income tax returns.
Request an appraisal of the business as a going concern by a qualified and impartial appraiser.
When a taxpayer holds only a negligible or token interest, has made no investment and exercises no control over the corporate affairs, it is permissible to assign no value to the stock.
5.8.5.3.7 (09-01-2005)
Life Insurance
Life insurance as an investment is not considered necessary. However, reasonable premiums for term life policies may be allowed as a necessary expense.
When determining the value in a taxpayers insurance policy, consider:
If… Then…
The taxpayer will retain or sell the policy to help fund the offer Equity is the cash surrender value.
The taxpayer will borrow on the policy to help fund the offer Equity is the cash loan value less any prior policy loans or automatic premium loans required to keep the contract in force.
5.8.5.3.8 (09-01-2005)
Retirement or Profit Sharing Plans
Funds held in a retirement or profit sharing plan are considered an asset and must be valued for offer purposes.
Contributions to voluntary retirement plans are not a necessary expense. Review of the retirement plan document is generally necessary to determine the taxpayers benefits and options under the plan.
When determining the value of a taxpayers pension and profit sharing plans consider:
If… And… Then…
The account is an Individual Retirement Account (IRA) or Keogh Account The taxpayer is not retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty.
The account is an Individual Retirement Account (IRA), 401(k), or Keogh Account The taxpayer is retired or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty. The plan may be considered as income, if the income from the plan is necessary to provide for necessary living expenses.
The contribution to a retirement plan is required as a condition of employment The taxpayer is able to withdraw funds from the account Equity is the amount the taxpayer can withdraw less any expense associated with the withdrawal
The contribution to an employer's plan is required as a condition of employment The taxpayer is unable to withdraw funds from the account but is permitted to borrow on the plan Equity is the available loan value.
Any retirement plan that may not be borrowed on or liquidated until separation from employment The taxpayer is retired, eligible to retire, or close to retirement Equity is the cash value less any expense for liquidating the account and early withdrawal penalty, or consider the plan as income if the income from the plan is necessary to provide for necessary living expenses.
The plan may not be borrowed on or liquidated until separation from employment The taxpayer is not eligible to retire until after the period for which we are calculating future income The plan has no equity.
The plan includes a stock option The taxpayer is eligible to take the option Equity is the value of the stock at current market price less any expense to exercise the option.
When the taxpayer will liquidate the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
When the taxpayer will borrow against the retirement plan to fund the offer, allow any penalty for early withdrawal and the current year tax consequence.
5.8.5.3.9 (09-01-2005)
Furniture, Fixtures, and Personal Effects
The taxpayers declared value of household goods is usually acceptable unless there are articles of extraordinary value; such as, antiques, artwork, jewelry, or collector's items. Exercise discretion in determining whether the assets warrant personal inspection.
There is a statutory exemption from levy that applies to the taxpayers furniture and personal effects. This exemption amount is updated on an annual basis.
Note:
This exemption applies only to individual taxpayers.
When determining the value consider the following:
If… Then…
The taxpayer qualifies as head of household, single, or married Grant a reduction in the value of personal effects for the levy exemption amount.
The property is owned jointly with any person who is not liable for the tax Determine the value of the taxpayers proportionate share of property before allowing the levy exemption.
Some of the furniture or fixtures are used in a business They are not personal effects, but they may qualify for the levy exemption as tools of a trade.
5.8.5.3.10 (09-01-2005)
Motor Vehicles, Airplanes, and Boats
Equity in motor vehicles, airplanes, and boats must be determined and included in the reasonable collection potential (RCP). The general rule for determining net realizable equity (NRE), as discussed in IRM 5.8.5.3.1 above, applies when determining equity in these assets. Unusual assets such as airplanes and boats may require an appraisal to determine fair market value (FMV), unless the items can be located in a trade association guide. The case file should document how the values were determined.
Generally, it is not necessary to personally inspect automobiles used for personal transportation. When it appears reasonable, accept the taxpayers stated value. No further investigation is required except for vehicles that are three years old or newer with no lien. For these vehicles, consult a trade association guide and discount the fair market value (FMV) to 80% to arrive at the quick sale value (QSV).
Example:
When investigating an offer in the year 2003, a 2001 model year is 3 years old or newer.
When these assets are used for business purposes they may be considered income producing assets. See IRM 5.8.5.3.3 above for a full discussion on the treatment of income producing assets.
5.8.5.3.11 (09-01-2005)
Real Estate
Equity in real estate is included when calculating the taxpayers reasonable collection potential (RCP) and in an acceptable offer amount.
When determining equity in real estate, the fair market value (FMV) of the property must be established. FMV is defined as the price a willing buyer will pay for the property, given time to obtain the best and highest possible price. The following methods may be used to establish FMV:
Recent purchase price or an existing contract to sell
Recent appraisals
Real estate tax assessment
Market comparable
Homeowners insurance replacement cost
Once the fair market value (FMV) of real estate is established, a determination regarding a reduction of value for offer purposes must be made. Procedures outlining reduction to quick sale value (QSV) are discussed in IRM 5.8.5.3.1 above. If the value of real estate is reduced beyond 80% or if FMV is not reduced to QSV, the case file should document the basis for the value used.
For real estate and other related property held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayers portion is usually 50% of the property's net realizable equity (NRE).
5.8.5.3.12 (09-01-2005)
Accounts and Notes Receivable
Accounts and notes receivable are considered assets unless a determination is made to treat them as part of the income stream when they are required for the production of income. When it is determined that liquidation of a receivable would be detrimental to the continued operation of an otherwise profitable business, it may be treated as future income.
To determine the value of accounts receivable:
Consider discounting the value of accounts that are over 90 calendar days past due.
When the receivables have been sold at a discount or pledged as collateral on a loan, apply the provisions of IRC 6323(c) to determine the lien priority of commercial transactions and financing agreements.
Closely examine accounts of significant value that the taxpayer is not attempting to collect, or that are receivable from officers, stockholders, or relatives.
To determine the value of a note receivable, consider the following:
Whether it is secured and if so by what asset(s)
What is collectable from the borrower
If it could be successfully levied upon.
5.8.5.3.13 (09-01-2005)
Inventory, Machinery, and Equipment
Inventory, machinery and equipment may be considered income producing assets. See IRM 5.8.5.3.3 above when it is determined that liquidation of these assets would be detrimental to the continued operation of an otherwise profitable business.
To determine the value of business assets use the following:
For assets commonly used in many businesses such as automobiles and trucks, the value may be easily determined by consulting trade association guides.
For specialized machinery and equipment suitable for only certain applications, consult a trade association guide, secure an appraisal from a knowledgeable and impartial dealer, or contact the manufacturer.
When the property is unique or difficult to value and no other resource will meet the need, follow local procedure to request the services of an IRS valuation engineer.
Consider asking the taxpayer to secure an appraisal from a qualified business appraiser.
There is a statutory exemption from levy that applies to an individual taxpayers tools used in a trade or business. This exemption for tools of the trade generally does not apply to automobiles. The levy exemption amount is updated on an annual basis.
5.8.5.3.14 (09-01-2005)
Business as a Going Concern
Evaluation of a business as a going concern is sometimes necessary when determining reasonable collection potential (RCP) of an operating business owned individually or by a corporation, partnership, or LLC. This analysis recognizes that a business may be worth more than the sum of its parts, when sold as a going concern.
To determine the value of a business as a going concern consider the value of assets, future income, and intangible assets such as:
Good will
Ability or reputation of a professional
Established customer base
Prominent location
Well known trade name, trademark, or telephone number
Possession of government licenses, copyrights, or patents
Generally, the difference between what an ongoing business would realize if sold on the open market as a going concern and the traditional reasonable collection potential (RCP) analysis is attributable to the value of these intangibles.
Request the assistance of an IRS valuation engineer when a difficult or complex valuation is necessary.
When determining reasonable collection potential (RCP) for an individual taxpayer that has an interest in a business entity, flexibility should be used with consideration given to the taxpayers control over the business.
5.8.5.4 (09-01-2005)
Dissipation of Assets
During an offer investigation it may be discovered that assets (liquid or non-liquid) have been sold, gifted, transferred, or spent on non-priority items and/or debts and are no longer available to pay the tax liability. This section discusses treatment of the value of these assets when considering an offer in compromise.
Note:
The scope of an offer investigation should not be expanded beyond the requirements defined in IRM 5.8.5.4, for the sole purpose of attempting to locate dissipated assets.
Once it is determined that a specific asset has been dissipated, the investigation should address whether the value of the asset, or a portion of the value, should be included in an acceptable offer amount.
Inclusion of the value of dissipated assets must clearly be justified in the case file and documented on the ICS/AOIC history. Justification should include an analysis of the following facts:
When the asset(s) were dissipated in relation to the offer submission,
How the asset was dissipated,
If the taxpayer realized any funds from the dissipation of assets,
How any funds realized from the dissipation of assets were used,
The value of dissipated assets and the taxpayers interest in those assets.
When the taxpayer can show that assets have been dissipated to provide for necessary living expenses, these amounts should not be included in the reasonable collection potential (RCP) calculation.
For Example:
Dissolving an IRA account to pay for necessary living expenses during unemployment
Using bank accounts to pay for medical expenses
An asset that was dissipated and the funds were used to purchase another asset that is included in the offer evaluation.
If the investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax liability, consider including the value in the reasonable collection potential (RCP) calculation.
Note:
The examples below are only guidelines and the value of the dissipated assets should not automatically be included in the calculation of the RCP. Each particular case must be evaluated on it's own merit and with the factors in (3) above in mind. In addition, if the tax liability did not exist prior to the dissipation or the dissipation occurred prior to the taxable event giving rise to the tax liability, a taxpayer cannot be said to have dissipated the assets with a disregard of the outstanding tax liability. For example, 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 fact that taxes are not withheld from the distribution does not result in the value of the funds being included in the RCP calculation.
For Example:
Dissolving an IRA account to pay unsecured credit card debt
Sale of real estate and "gifting" the funds from the sale to family members.
A recent refinancing of equity in property and using the funds to pay unsecured debt.
If the taxpayer cannot or will not provide information showing the disposition of funds from dissipated assets, consider including a portion or all of these values in an acceptable offer amount.
5.8.5.5 (09-01-2005)
Future Income
Future income is defined as an estimate of the taxpayers 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.
For cash offers — project for the next 48 months.
For short term deferred offers — project for the next 60 months.
For deferred payment offers — project for the number of months remaining on the statutory period for collection.
Detailed instructions for calculating future income are contained in IRM 5.8.5.5.5 below.
Consider the taxpayers overall general situation including such facts as age, health, marital status, number and age of dependents, highest education or occupational training, and work experience.
Retired Debts — A taxpayers ability to pay in the future may change during the period it is being considered because necessary expenses may increase or decrease. Adjust the amount or number of payments to be included in the future income calculation, based on the expected change in necessary expenses.
Example:
The taxpayer may pay off an auto loan 24 months from the date the offer is accepted. This would increase the monthly future income by the amount of the loan payment. Child support payments may stop before the future income period is complete because the child turns a certain age. It is expected that these retired payments would increase the taxpayers ability to pay.
Note:
Inclusion of retired debt should not be added automatically in the calculation of the reasonable collection potential (RCP). The Offer Investigator should use judgment in determining whether inclusion of the retired debt is appropriate based on the facts of the case; such as special circumstance or Effective Tax Administration (ETA) situations. In all instances, the case histories should be documented to support the inclusion and/or exclusion of the retired debt.
Some situations may warrant placing a different value on future income than current or past income indicates:
If… Then…
Income will increase or decrease or current necessary expenses will increase or decrease Adjust the amount or number of payments to what is expected during the appropriate number of months.
A taxpayer is temporarily unemployed or underemployed Use the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent. Each case should be judged on its own merit, including consideration of special circumstance or ETA issues.
Example:
Underemployed – If a taxpayer is a teacher but recently moved and is currently working as a janitor until a teaching position becomes available; or has been hired and does not begin work until the school season begins, is considered to be currently underemployed.
A taxpayer has a sporadic employment history or fluctuating income Average earnings over several prior years. Usually this is the prior 3 years.
Note:
This practice does not apply to wage earners.
A taxpayer is elderly, in poor health, or both and the ability to continue working is questionable Adjust the amount or number of payments to the expected earnings during the appropriate number of months. Consider special circumstance situations when making any adjustments.
A taxpayer will file a petition for liquidating bankruptcy Consider reducing the value of future income. The total value of future income should not be reduced to an amount less than what could be paid toward non-dischargeable periods, or what could be recovered through bankruptcy. When considering a reduction in future income also consider the intangible value to the taxpayer of avoiding bankruptcy.
Below are some examples on when it is and is not appropriate to income average. 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 when determining the appropriate application of income averaging, including special circumstance and Effective Tax Administration considerations.
The examples below are instances when income averaging may or may not be appropriate.
Example:
A taxpayer is a commissioned sales person and the income varies year to year. It would be appropriate to income average in this case.
Example:
Mr. taxpayer was on a fixed retirement and Mrs. taxpayer had not worked for over 2 1/2 years with no promise of future employment. Do not average income for the spouse during past employment.
Example:
The taxpayer had been unemployed for over a year and provided proof that Social Security Disability was the sole source of income. Do not apply income averaging in this case.
Example:
The taxpayer was incarcerated and unable to work for the past 4 years and provided proof that a relative was paying for all expenses, including child support payments. The taxpayer had no skills or promise of work in the near future but was planning on attending trade school to improve his chances of getting a job. Do not include income from the 4 years of employment prior to the incarceration. In this case, the income and expenses would be zero. Consideration should be given whether it would be in the best interest of the Government to accept the offer or to place it in Currently Not Collectible (CNC) status.
Example:
The taxpayer recently began working after several months of unemployment. Use the most recent 3 months pay statements to determine future income. Do not income average.
In some instances, a future income collateral agreement may be used in lieu of including the estimated value of future income in reasonable collection potential (RCP). When investigating an offer where current or past income does not provide an ability to accurately estimate future income, the use of a future income collateral agreement may provide a better means of calculating an acceptable offer amount. Future income collateral agreements should not be used to enable a taxpayer to submit an offer in a lesser amount than the current or past financial condition dictates. However, if the future is uncertain, but it is reasonably expected that the taxpayer will be receiving a substantial increase in income, it may be appropriate.
Example:
A taxpayer is currently in medical school and it is anticipated that upon graduation income should increase dramatically. See IRM 5.8.6.3.1, Future Income, for instructions on completing collateral agreements.
Example:
A taxpayer recently secured a job as an attorney with a starting salary at $80,000 per year, with potential for significant increases in salary.
5.8.5.5.1 (09-01-2005)
Allowable Expenses
Allowable expenses as defined in IRM 5.15.1, Financial Analysis Handbook, are those expenses that are necessary for the production of income or for the health and welfare of the taxpayers family. That handbook also contains national and local standard expense amounts designed to provide accuracy and consistency in determining a taxpayers basic living expenses. The standards are updated periodically based upon Bureau of Labor Statistics and Census Bureau information.
National and local expense standards are guidelines. If it is determined that a standard amount is inadequate to provide for a specific taxpayers basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.
Example:
A taxpayer with a physical disability or an unusually large family requires a housing cost that is not anticipated by the local standard. Require the taxpayer to provide copies of mortgage or rent payments, utility bills and maintenance costs to verify the necessary amount.
Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayers current year income tax return. There may be reasonable exceptions. Fully document the reasons for any exceptions.
Example:
Foster children or children for whom adoption is pending.
A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of excessively valued assets. In some situations, taxpayers may be expected to make life-style choices that will facilitate collection of the delinquent tax.
5.8.5.5.2 (09-01-2005)
Treatment of Non-Business Transportation Expenses
Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating offers in compromise are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear to be excessive should be questioned and, in appropriate situations, disallowed.
Operating Expenses — Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less .
Note:
Substantiation for this allowance is not required.
Ownership Expenses — Expenses are allowed for purchase and/or lease of a vehicle, with different rates established for a first car and, if allowed, a second or more cars.
Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. Generally, auto loan and/or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age and/or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer.
Therefore, in situations where the taxpayer owns a vehicle that is currently over six years old and/or has reported mileage of 75,000 miles or more, an additional operating expense of $200 will generally be allowed for the collection period that remains after the loan/lease has been "retired" plus the operating expense.
Note:
This also applies to those taxpayers that have no loan/lease on a vehicle over six years old and/orhas reported mileage of 75,000 miles or more.
Example:
The taxpayer, who lives in the Midwest Region, owns a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid; i.e., $300 plus the allowable operating expense of $231 per month (unless less is claimed), for a total transportation allowance of $531 per month. After the auto loan is "retired" in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.
Example:
The taxpayer who owns a 1998 Chevrolet Caviler with 50,000 miles, will be allowed the standard of $231 per month (unless less is claimed) plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $431 per month.
5.8.5.5.3 (09-01-2005)
Conditional Expenses
Conditional expenses are defined in IRM 5.15, Financial Analysis Handbook, as those that may be allowed when the tax will be paid in full by an installment agreement. For offers purposes, the full amount of the tax will not be collected; therefore, the rules for conditional expenses are different.
The one year rule which allows time for a taxpayer to adjust current expenses to meet the terms of an installment agreement is not allowed for Offers in Compromise.
The purchase of discretionary investments is not allowed.
Example:
Payroll savings plans, purchase of whole life policies, mutual funds or voluntary retirement plan contributions.
Repayment of loans incurred to fund the offer and secured by the taxpayers’ assets are allowed when those assets are of reasonable value and necessary to provide for the health and welfare of the taxpayers family. The same rule applies whether the equity is paid to tax before the offer is submitted or will be paid upon acceptance of the offer. See IRM 5.8.5.3.3, Income-Producing Assets, to determine when to allow repayment of loans on those assets used to fund the offer.
Repayment of student loans secured by the federal government is allowed only for the taxpayers higher education. If student loans are owed but no payments are being made, do not allow them.
Education expense is allowed only for the taxpayer and only if it is required as a condition of present employment. Expenses for dependents to attend colleges, universities or private schools are not allowed unless the dependents have special needs that cannot be met by public schools.
Child support payments for natural children or legally adopted dependents may be allowed, based on the taxpayers situation, even when they are not court ordered. Regardless of whether they are court ordered, if no child support payments are being made, do not allow them.
Monthly payments to state or local taxing agencies should not be allowed as a necessary expense, even if the state or local taxing agency has a lien that was choate prior to our lien or is collecting funds via a wage attachment or approved installment agreement. State and federal lien (regardless of priority) attach simultaneously to after acquired property. In general, if the federal tax lien attaches to after acquired property simultaneously with a competing perfected lien, the federal tax lien will take priority (see IRM 5.17.2, Legal Reference Guide). Since future earnings of the taxpayer are after acquired property the Service has first right to the earnings. Explain to the taxpayer that although the payment may be allowed in an installment agreement where the tax will be paid in full, it will not be allowed for computation of an acceptable offer amount because the Federal government has priority rights to the funds.
Note:
State or local liens may enjoy a priority in fixed payment streams such as annuity payments. If necessary, consult with area counsel to determine lien priorities.
Charitable contributions are not allowed.
Payments being made to fund or re-pay loans from voluntary plans will not be allowed. Taxpayers who cannot repay these loans will have a tax consequence in the year that the loan is declared in default and that consequence should be estimated and allowed as an additional tax expense on the IET for the required number of months necessary to cover the additional tax consequence. Request the taxpayer or their representative estimate the tax ramification of the failure to re-pay the loan or the Offers Investigator may request assistance from the Examination function or Customer Service to determine the tax consequences.
5.8.5.5.4 (09-01-2005)
Shared Expenses
This situation can happen one of two ways:
Separate offers are submitted by two or more persons who owe joint liabilities and/or separate liabilities and who share the same household.
An offer is submitted by a taxpayer who shares living expenses with a not liable person.
Generally, the assets and income of a not liable person are excluded from the computation of the taxpayers ability to pay. One notable exception is in community property states. Follow the community property laws in these states to determine what assets and income of the otherwise not liable person are subject to collection of the tax.
Regardless of community property laws, the Offers Investigator should secure sufficient information concerning the not liable person to determine the taxpayers proportionate share of the total household income and expenses. Review the entire household's information and:
Determine the total actual household income and expense.
Determine what percentage of the total household income the taxpayer contributes.
Determine necessary and allowable expense amounts using the rules in this chapter and IRM 5.15, Financial Analysis Handbook.
Determine which expenses are shared and which expenses are the sole responsibility of the taxpayer.
Apply the taxpayers percentage of income to the shared expenses.
Verify that the taxpayer actually contributes at least this amount to the total household expense.
Do not allow the taxpayer any amount paid toward a not liable person's discretionary expenses.
When the taxpayer can provide documentation that income is not commingled (as in the case of roommates who share housing) and responsibility for household expenses are divided equitably between co-habitants, (as documented by rental agreements, bank statement analysis, etc.) the total allowable expense should not exceed the total allowable housing standard for the taxpayer. In this situation, it would not be necessary to obtain the income information of the non-liable person(s), however sufficient financial information must be secured to verify the total household expenses and prove that the taxpayer is paying his/her proportionate share. The investigating employees should exercise sound judgment in these situations to determine which approach is most appropriate, based on the facts of each case.
Note:
In the situation where the taxpayer is renting an apartment or room and the owner of the property is the non-liable person, the rental agreement or signed statement from the owner of the property should support the decision to not require the owner to divulge any personal information regarding income or household expenses. In these cases, the investigating employee should accept the information provided by the taxpayer and make a determination based on that information.
If an in-house verification is conducted on the non-liable person, this information cannot be relayed to the taxpayer. This is not a Unauthorized Access (UNAX) violation but would be considered disclosure if any information is shared with someone other than the non-liable person in question.
5.8.5.5.5 (09-01-2005)
Calculation of Future Income
Generally, the amount to be collected from future income is calculated by taking the projected gross monthly income less allowable expenses and multiplying the difference times the number of months remaining on the statutory period for collection.
For cash and short term deferred offers, when there are less than 48 or 60 months remaining on the statutory period for collection, use the number of months remaining. To determine the amount collectible from future income on a deferred payment offer through the life of the statutory period for collection, take the following steps:
Subtract allowable expenses from the monthly income to determine the monthly installment amount.
Determine the valid Collection Statute Expiration Date (CSED) for each tax period included in the offer.
Sort the tax periods by earliest CSED.
For each tax period, determine the number of months remaining on the statutory period for collection. Begin with the day the offer was determined to be processable and end on the CSED. Round partial months up to the nearest whole month.
For each tax period, determine the number of installments that may be applied before running out available funds. Round partial payments up to the nearest whole payment.
Calculate the number of installments applied to each period. For succeeding periods, do not count months on the CSED that were used for applying installments to prior periods.
Caution:
If the allowed payment terms call for the first installment to begin later than 30 calendar days from acceptance, there will be one less month available to apply payments.
Add the number of installments applied to all the periods and multiply the sum by the monthly installment amount to arrive at the total amount collectible from future income. For examples of situations where the amount that may be applied to a period is limited. See Exhibits 5.8.5-1 through 5.8.5-3.
5.8.5.5.6 (09-01-2005)
Deferred Payment Offer in Compromise Received After Collection Statute Expiration Date Extension
Taxpayers that previously extended the Collection Statute Expiration Date (CSED) in connection with an installment agreement, may request approval of a deferred payment offer in compromise (DPOIC).
On March 24, 1998 the Service issued procedures that limited the length of CSED extensions. See IRM 5.14, Installment Agreements , for further instruction on the policy of the Service.
By policy, if extensions granted prior to October 18, 1999:
resulted in collection periods longer than 15 years; and,
a deferred payment offer in compromise (DPOIC) is later submitted on the balance due accounts (subject to the extension), then, for the purpose of reviewing the DPOIC request, CSEDs are considered to be the later of the following:
The original CSED (10 years from the tax assessment upon which the liability is based); or,
5 years from the date of acceptance of the offer in compromise.
IDRS will not reflect any adjustments based on these procedures; therefore, it is essential that case histories be fully documented and reflect the following statement:
"Time left prior to the CSED (per IDRS) was not used for computation of the deferred offer payment amount, per IRM 5.8.5.5.6. "
Note:
These procedures do not apply to extensions up to 6 years, but only applies to CSED extensions longer than 5 years as agreed to prior to October 18, 1999 and were granted in conjunction with an installment agreement.
5.8.5.6 (09-01-2005)
Payment Terms
Payment terms are negotiable, but should provide for payment of the offered amount in the least time possible. If a taxpayer is planning to sell asset(s) to fund all or a portion of the offer, the payment terms for the offer should provide for immediate payment of the amounts received from the sale. If the taxpayer is planning to borrow a portion of the money, the Offer Investigator should determine when the loan will be received and the payment terms of the offer should provide for payment of the borrowed portion at the time the funds are received.
For those taxpayers who agree to shorter payment terms, fewer months of future income is required:
Payment Type Payment Terms Number of Months Future Income Required
Cash Within 90 calendar days 48
Short term Deferred Within 2 years 60
Deferred Payment Within time remaining on the statute Number of months remaining on the statute
There are three possibilities for deferred payment terms:
Payment of an amount equal to the net realizable equity (NRE) in assets within 90 calendar days and payment of the future income amount by monthly installments over the time remaining on the statutory period for collection, or
Payment of a portion of the net realizable equity (NRE) in assets within 90 calendar days and payment of the balance of the equity in assets and the future income amount by monthly installments over the time remaining on the statutory period for collection, or
Payment of the entire compromise amount by monthly installments over the time remaining on the statutory period for collection.
Note:
A third party source of funds may be required to make the portion of the monthly payment that is greater than we determined the taxpayer can afford from future income.
Exhibit 5.8.5-1 (09-01-2005)
Deferred Payments Limited by Short Statute
For example, the taxpayer has accrued the following tax liability:
MFT–Period CSED Liability
30-9312 07/20/2005 $29,000
30-9412 07/20/2005 $61,000
30-9512 09/27/2006 $ 8,900
30-9612 09/20/2007 $ 7,400
The offer was determined processable on May 31, 1999. The taxpayer has no equity in assets and can pay $300 per month.
MFT–Period Months on the statute Installments Due Installments Applied
30-9312 74 96 74
30-9412 74 203 0
30-9512 87 29 14
30-9612 99 24 12
Total 99
The amount collectible from future income is: $300 times 100 months = $30,000.
Exhibit 5.8.5-2 (09-01-2005)
Deferred Payments Limited by Small Amount Due
For example the taxpayer accrued the following liability:
MFT–Period CSED Liability
30-8912 07/20/2000 $100,000
30-9512 09/27/2006 $ 1,200
30-9612 09/20/2007 $ 600
The offer was determined processable on May 31, 1999. The taxpayer has no equity in assets and can pay $300 per month.
MFT–Period Months on the statute Installments Due Installments Applied
30-8912 14 333 14
30-9512 87 4 4
30-9612 99 2 2
Total 20
The amount collectible from future income is $300 times 20 months = $6,000.
Exhibit 5.8.5-3 (09-01-2005)
Deferred Payments Limited by Application of Payment From Equity in Assets
For example the taxpayer accrued the following liability:
MFT–Period CSED Liability
30-8912 07/20/2000 $30,000
30-9512 09/27/2006 $ 1,200
30-9612 09/20/2007 $ 600
The offer was determined processable on May 31, 1999. The taxpayer has $30,000 equity in assets which he will pay within 90 calendar days and can pay $300 per month which he will begin paying within 30 calendar days.
MFT–Period Months on the statute Installments Due Installments Applied
30-8912 13 0 0
30-9512 87 4 4
30-9612 99 2 2
Total 6
After applying the $30,000 payment for the equity in assets, the amount collectible from future income is $300 times 6 months = $1,800. Reasonable collection potential is $31,800.
Part 5. Collecting Process
Chapter 8. Offer in Compromise
Section 3. Processability
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5.8.3 Processability
5.8.3.1 Overview
5.8.3.2 Routing Cases Based on Jurisdictional Responsibility
5.8.3.3 Combined Application Fee Payment Processing
5.8.3.4 Processability
5.8.3.5 Processing Application Fees
5.8.3.6 Dishonored Application Fee Payments
5.8.3.7 Forms 656 Application Fee Requirements and Perfection
5.8.3.8 Centralized Offers in Compromise Processability Determinations
5.8.3.9 Not Processable
5.8.3.10 Processable
5.8.3.11 Types of Perfection
5.8.3.12 Screen For Obvious Full Pay Processing
5.8.3.13 Centralized Offer in Compromise Case Building and Perfection Procedures
5.8.3.14 Centralized Offer in Compromise Internal Verification Research
5.8.3.15 Processing Taxpayer Responses to Combo Letters
5.8.3.16 Analyzing Taxpayer Responses to Combo Letter
5.8.3.17 "No Reply" Procedures
5.8.3.18 Withholding Collection
5.8.3.19 Offers Submitted Solely to Delay Collection
Exhibit 5.8.3-1 COIC Application Fee Tracking Report
5.8.3.1 (09-01-2005)
Overview
All offer receipts other than those based solely upon Doubt as to Liability (DATL) are reviewed to determine if they are processable. No fee is due on Doubt as to Liability (DATL) offers, including Trust Fund Recovery Penalty (TFRP). Processable offers are then "built" (i.e. internal and external information is secured to verify financial information), and perfected, if necessary, before being assigned for investigation. Not processable offers are returned to taxpayers. This chapter defines the procedures to be followed for determining jurisdictional responsibility, processability, and case building.
5.8.3.2 (09-01-2005)
Routing Cases Based on Jurisdictional Responsibility
The following table provides guidance when it has been determined that Collection does not have jurisdictional responsibility:
If responsibility lies with… Then…
Department of Justice (DOJ) Contact Area Counsel to determine the status of the pending bankruptcy or litigation and whether Collection has jurisdiction to process the offer. If the DOJ requests the offer be sent directly to them, delete the offer from the Automated Offer in Compromise (AOIC) system and forward the case to the DOJ.
Examination Send the offer directly to the OIC Coordinator in Technical Support. No fee is required for these offers. Do not open a record on the AOIC system. If the record was inadvertently loaded to AOIC, delete the record.
Appeals Determine processability, complete the AOIC " Appeals Fee Screen" and follow the established Appeals application fee procedures.
5.8.3.3 (09-01-2005)
Combined Application Fee Payment Processing
Multiple offers submitted with one remittance intended as the application fees for all will not be processed. Do not load the cases to the Automated Offers in Compromise (AOIC) system. Return the offers to the submitter (i.e.- Power of Attorney not the individuals) with the Letter 3796.
5.8.3.4 (09-01-2005)
Processability
Centralized Offers in Compromise (COIC) Process Examiners (PE) are responsible for determining processability of all offers received and worked by the Service, except those based solely on Doubt as to Liability (DATL) issues. This determination must be made within 14 calendar days of receipt of an offer in compromise in the appropriate COIC site.
Each new receipt will fall into one of the following categories:
Not processable – the taxpayer does not meet one or more of the minimum established criteria for offer consideration.
Processable – The taxpayer meets the minimum criteria for offer consideration.
5.8.3.4.1 (09-01-2005)
Determining Processability
An offer in compromise will be deemed not processable if one or more of the following criteria are present:
Taxpayer Not in Compliance — All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have "little or no tax due" . In-business taxpayers must have timely deposited, filed, and paid all required employment tax returns for the two (2) preceding quarters prior to filing the offer and must be current with federal tax deposits for the quarter in which the offer was submitted. An individual taxpayer should not be considered an in-business taxpayer because he owns or controls a corporation that is not in compliance. IRM 5.8.7.6(5), Rejection, discusses the criteria for possible rejection of an offer from such an individual if a related entity is not in compliance.
Note:
Generally speaking, IRM 5.1.11.1.3(2), Delinquent Return Program, only requires employees to conduct a compliance check to confirm and document all IMF tax returns were filed for the preceding 6-year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years.
IRM 5.1.11.4, Cases Requiring Special Handling, discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6-year period, which is calculated by starting with the tax year that is currently due and going back 6 years.
Taxpayer in Bankruptcy — An offer will not be considered during a bankruptcy proceeding. See IRM 5.8.10.2, Bankruptcy.
Note:
IRM 25.17.4.7, Offers-in-Compromise and Bankruptcy (09–01–2004) , states that "administrative and legal problems would be created if a tax liability was simultaneously the subject of a court-supervised bankruptcy case and the administrative offer-in-compromise process." Therefore, it is the policy of IRS that an offer will not be considered if a taxpayer is in bankruptcy. Offer materials including financial information should be forwarded to the Insolvency unit assigned to the bankruptcy.
Taxpayer did not submit the application fee with the offer — The application fee of $150 or the signed Form 656-A, Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656. No application fee is required for offers filed solely on the basis of Doubt as to Liability (DATL).
Note:
The Form 656-A applies only to individual taxpayers.
No deviations from or additions to processability criteria may be made without written authorization from the Headquarters Office.
An offer cannot be returned for the sole reason that the cost of an investigation may exceed the amount offered.
5.8.3.4.2 (09-01-2005)
Determining Processability for Appeals Collection Due Process Offers
Apply the same processability criteria as outlined in IRM 5.8.3.4.1, Determining Processablity, but do not load these offers on the Automated Offer in Compromise (AOIC).
Note:
If Collection files a lien while an offer is being investigated, and the taxpayer files a Collection Due Process (CDP) request because of that lien and the CDP remains open, the offer will become the jurisdiction of Appeals. Collection cannot work any offer that has an open CDP case. Appeals may require the assistance to complete the investigation on complex cases. In those cases, an Appeal Referral Investigation (ARI) may be issued to the field.
Appeals will provide Centralized Offer in Compromise (COIC) with both processable and not processable determination letters containing all necessary information, including the Appeals contact information. It is the responsibility of COIC to sign, date, and mail the applicable letter based on the processability determination.
If… Then…
The offer is not processable and a remittance was attached Prepare the not processable letter and the Form 656 to mail to the taxpayer in accordance with the procedures in IRM 5.8.3.5.1(5), Processing Application Fees. Fax a copy of the non-processable letter to the Appeals employee.
The offer is not processable and no remittance was attached Prepare the not processable letter and the Form 656 to mail to the taxpayer in accordance with procedures in IRM 5.8.3.5.1(5), Processing Application Fees.
If the offer is processable and a remittance is attached Access the "Appeals Fee Screen" application of AOIC and input the fee data.
Write the application fee serial number on the upper left corner of the remittance.
Prepare the Form 13479, COIC Application Fee Tracking Report, in accordance with IRM 5.8.3.5.1(3).
Mail the processability letter to the taxpayer.
Send a copy of the letter and the offer package to the designated Appeals employee on a Form 3210, Document Transmittal.
If the offer is processable and no remittance is attached Mail the processability letter to the taxpayer.
Send a copy of the letter and the offer package to the designated Appeals employee on Form 3210, Document Transmittal.
Offers submitted directly to the Compliance employee, are occasionally identified as having an open Collection Due Process (CDP) control. When this occurs, the Centralized Offer in Compromise (COIC) site CDP coordinator will research the Appeals Centralized database System (ACDS) to determine:
If the CDP is still open, and
If a determination letter has been issued.
If ACDS research indicates that there is an open CDP, contact the assigned Appeals/Settlement Officer (AO/SO) to determine the status of the CDP hearing.
Note:
If the CDP determination letter has not been issued or a withdrawal has not been signed and dated, the offer is considered to still be open and under the jurisdiction of Appeals.
If… Then…
It is determined that the case is under appeals jurisdiction and the CDP condition is identified while the offer is still in "U" (undetermined) status on AOIC The COIC site CDP coordinator will advise the AO/SO of the processability determination.
The AO/SO will generate and transmit via encrypted E-mail to the COIC site CDP coordinator the appropriate appeals processable and not processable letters.
The COIC site will delete the offer record from AOIC and load the fee information to the Appeals application fee screen of AOIC.
The COIC site will follow the procedures in IRM 5.8.3.4.2(2) to process the letter and application fee.
COIC will:
(1) Change the offer number on the Form 13479, COIC Application Fee Tracking Report, to the Appeals application fee serial number.
(2) Contact Receipt & Control or the mail team to change the number on the corresponding remittance.
It is determined that the case is under Appeals jurisdiction but the CDP condition is identified after the offer has already been deemed processable by COIC COIC will:
(1) Delete the offer record from AOIC.
(2) Load the fee information to the Appeals application fee screen on AOIC.
When an offer is received in conjunction with a CDP and is deemed to be processable, the COIC site will input the Transaction Code (TC) 480 on all tax periods relating to the offer submission. This includes the input of a TC 480 on all balance due periods not specifically listed on the Form 656. It will be the responsibility of Appeals to perfect the offer document.
COIC will advise the Appeals/Settlement Officer (AO/SO) when it is necessary for the Appeals employee to secure additional Form(s) 656 and/or application fee(s) prior to investigation by generating the letter identifying " Option Y" criteria. See IRM 5.8.3.7, Forms 656 Application Fee Requirements and Perfection, for examples of these situations. The COIC site will prepare the Form 3210, Document Transmittal, for transmittal of the processable offer back to Appeals. The Form 3210 will include the following information:
List the specific periods with the TC 480.
Identify an "Option Y" condition.
Note:
It will be the responsibility of Appeals to resolve each TC 480 (e.g., input of TC 481, 482, 483) after Appeals concludes the offer investigation.
5.8.3.4.3 (09-01-2005)
Exception Processing for Offers in Compromise Investigations Involving Taxpayers in Combat Zones
The following procedures are instructions on handling those taxpayers identified as being located in a "Combat Zone" (CZ) area. This determination should be based on correspondence, case history entries, or telephone contact. Relief provisions for extensions of deadlines are provided to taxpayers located in the designated CZ areas; such as, a contingency operation designated by the Department of Defense (DOD), a qualified hazardous duty area as defined by Congress, or direct support of military operations in a combat zone certified by the DOD. The relief provisions are also applicable to any support personnel on official duty in the CZ; such as, Merchant Marines serving aboard vessels under the operational control of the DOD, Red Cross personnel, accredited corespondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces.
Offers that are received and deemed not processable should be worked following standard procedures. If any of the following situations exist, exception processing should be followed:
Offers that are received and deemed processable;
Offers in which a Combo Letter was issued and Combat Zone notification is received after the letter was issued;
Offers in which a determination was made to accept, return, or reject the offer; or
Offers in which a Return or Rejection Letter was issued prior to the CZ notification.
In all of the situations identified in IRM 5.8.3.4.3(2) above, the following actions should be taken:
Prepare the Form 3244, Payment Posting Voucher , or Form 4844, Request for Terminal Action , requesting input of Transaction Code (TC) 500 Closing Code (CC) 56 on the taxpayers account. Use the current date for the incoming call or the IRS received date for the correspondence. The case should be suspended for 120 calendar days without taking any further action and should be reassigned on the Automated Offers in Compromise (AOIC) system to a designated or locally designated assignment number. Management should utilize the AOIC Follow-up Screen to monitor the progress on the case until the TC 500 is reversed.
The offer investigation may continue if there is a Power of Attorney or in the case of a joint offer, the spouse is able and willing to provide all substantiation.
The Service established an E-mail site at combatzone@irs.gov , which can be used by military personnel, support personnel, and their families to contact the IRS.
5.8.3.5 (09-01-2005)
Processing Application Fees
The following situations assume that the taxpayer has met the processability criteria for compliance and the Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B, Collection Information Statement for Business , as appropriate, were submitted:
If you receive a… Then…
Processable Form 656 and the $150 application fee Complete the AOIC Application Fee screen and Form 13479, COIC Application Fee Tracking Report, as described in IRM 5.8.3.5.1 below.
Processable Form 656 with a signed Form 656-A certification (instead of the $150 fee) Complete the AOIC Application Fee screen and input "LI" in the "Waiver Criteria" field.
Processable Form 656 from an individual taxpayer with both a $150 application fee and a signed Form 656-A certification Complete the AOIC "Application Fee" screen and the Form 13479, COIC Application Fee Tracking Report, to treat the $150 as the application fee.
DATL offer for a TFRP only liability with a separate application fee Return the $150 fee using combo letter "A" and optional combo letter paragraph "AM" .
DATL offer for a TFRP only liability with a single remittance that represents both an application fee and a deposit Apply the entire amount as a deposit to the offer. Complete the Form 13479, COIC Application Fee Tracking Report, as described in IRM 5.8.3.5.1 below.
Processable offer and one undesignated remittance greater than the $150 and there was no indication how to apply the funds. (i.e., TP did not specify where the money was to be applied). Treat $150 of the remittance as the application fee and apply the balance as a deposit to the offer. Complete the Form 13479, COIC Application Fee Tracking Report, as described in IRM 5.8.3.5.1 below.
5.8.3.5.1 (09-01-2005)
Completing the Form 13479, COIC Application Fee Tracking Report
Offers with remittances will be batched with the Form 13479, COIC Application Fee Tracking Report, for processability determinations. Each separate remittance will appear on its own line of the Form 13479. Offers submitted with separate remittances for the application fee and a deposit will have entries on two lines, while an offer submitted with a single remittance that combines the application fee and deposit will have only one entry. Batch integrity must be maintained throughout the processability determination.
Cases with deposits and/or tax payments must have a processability determination made and the remittance deposited within 48 hours of the IRS receipt date (unless "misdirected" ).
Those offers received with application fees only must have a processability determination made within 14 calendar days of the IRS receipt date.
Upon assignment to the Process Examiner (PE), the manager will ensure that the "PE Received Date" and " PE COIC #" fields on the Form 13479 are accurately completed.
The last four (4) columns of the Form 13479 are used to document the decision to process or return the remittance. They are:
"Deposit 4710/3244 Amt."
"Application Fee Amt."
"Return Non-Negotiable"
"Return Negotiable"
Form 13479 should be completed as follows:
If Processable, and… Then…
An Application Fee was submitted Enter $150 in the "Application Fee Amt." column.
An offer deposit was submitted Enter the amount of the deposit in the "Deposit 4710/3244 Amt" column and prepare the Form 2515, Record of Offer in Compromise.
A tax payment (e.g., installment agreement (IA) payment, estimated tax (ES) payment) was submitted Prepare the Form 3244, Payment Posting Voucher, for the amount and application of the payment and enter the amount in the "Deposit 4710/3244 Amt. " column.
If the offer has one remittance for any combination of the above three payments enter the appropriate amounts in the respective columns and ensure the amounts entered equal the "Check Amount" column.
If the offer is not processable take one of the following actions based on the type of remittance received:
If Not Processable, and… Prepare the offer package to be returned and…
There is an application fee or deposit to be returned to the taxpayer with the Not Processable Return letter Date and sign the Return letter,
Put the offer package and the letter in an addressed envelope to be returned to the taxpayer. Do not seal the envelope.
Close the offer with a disposition code "10" on AOIC.
Note:
This procedure does not apply to Appeals Collection Due Process (CDP) offers.
Annotate the amount of the remittance under the"Return Negotiable " or "Return Non-Negotiable" column, as appropriate, to indicate that the remittance is to be sent back to the taxpayer.
A separate tax payment (e.g., IA or ES payment) was submitted Prepare the Form 3244, Payment Posting Voucher , for the amount and application of the payment,
Enter the amount of the payment in the "Deposit 4710/3244 Amt." column.
One remittance was submitted that combined any tax payment (e.g., IA or ES payment) with an application fee or deposit amount Apply the entire remittance as the tax payment by preparing a Form 3244 and enter that amount in the "Deposit 4710/3244 Amt." column.
Processability determinations must be made for all offers listed on the Form 13479 before returning it to Receipt and Control for processing of the remittances. When all of the determinations have been made and the Form 13479 is complete, send the original with all Forms 2515, 3244, letters, and envelopes to Receipt & Control for processing of the checks. Acknowledgement of the receipt of the Form 13479 must be secured from the Receipt and Control/mail team employee by having them place their initials in the upper right hand corner of the Form 13479.
Personal checks will be stamped non-negotiable and enclosed in the return offer package to the taxpayer.
It is the responsibility of Receipt and Control to return all " negotiable" remittances back to the taxpayer in accordance with Receipt and Control procedures.
5.8.3.6 (09-01-2005)
Dishonored Application Fee Payments
Accounting Branch will hand carry or fax copies of dishonored application fee checks to the Centralized Offer in Compromise (COIC) site that originated the Form 13479, COIC Application Fee Tracking Report . Upon notification of a dishonored application fee payment, the site will determine the current Automated Offer in Compromise (AOIC) offer assignment by querying the offer number annotated on the upper left hand corner of the check. For Appeals Collection Due Process offers, see IRM 5.8.3.6.1(3), below.
Note:
Due to AOIC programming, only the assigned office can gain access to the "Action Cd" field of the "Application Fee" screen to input the dishonored check status.
5.8.3.6.1 (09-01-2005)
Centralized Offer in Compromise Procedures
If the offer is still assigned to a Centralized Offer in Compromise (COIC) site, COIC will immediately cease processing the associated offer, update the Automated Offer in Compromise (AOIC) "Application Fee" screen by entering "I" in the " Action Cd" field and return it to the taxpayer, utilizing letter option "RET-AA" .
If the offer is assigned to an Area office, COIC will telephone the employee assigned the offer (or the manager of the assigned function, if no individual is specified on AOIC) to advise of the dishonored payment. Once contact is made with the assigned area office employee or manager, COIC will fax a copy of the dishonored check to include in the case file and document AOIC to indicate the information was communicated and to whom.
If the case was processed as an Appeals Collection Due Process (CDP) offer, COIC should query the Appeals Centralized Database System (ACDS) to determine which Appeals employee is assigned the case. COIC will telephone the Appeals employee to advise of the dishonored check and fax a copy to include in the Appeals case file. COIC will update the "Appeals Fee Screen" application of AOIC by entering "I" in the "Action Cd" field.
Note:
Appeals Collection due Process (CDP) cases can be identified by the application fee number annotated on the upper left corner of the check.
If notification of the dishonored check occurs after the offer was closed on Automated Offer in Compromise (AOIC), the designated AOIC liaison within the COIC site, will contact the Headquarters AOIC analyst to correct the application fee record of the closed offer.
5.8.3.6.2 (09-01-2005)
Area Office Procedures
Upon notification by the Centralized Offer in Compromise (COIC) site of a dishonored fee payment, the Offer Specialist (OS) (or manager of the assignment function, if the offer is not assigned to an individual) will immediately:
Cease processing of the associated offer.
Update the AOIC Application Fee screen by entering "I" in the "Action Cd" field
Return the offer to the taxpayer utilizing letter option " RET-AA" .
5.8.3.6.3 (09-01-2005)
Notification of Dishonored Application Fee Check After Issuance of the Rejection Letter
If notification of the dishonored OIC application fee check occurred after issuance of a rejection letter, in addition to procedures in IRM 5.8.3.6.1 and 5.8.3.6.2 above, the employee should:
Date the return letter 31 days from the date of the rejection letter.
Include the open paragraph "RET-M" with the following language: "As a result, your request for appeal has been dismissed. "
Note:
This should only be used in those cases where a request for an Appeal was received within the 30-day appeal period.
Close the case on AOIC as a return using the mail date of the return letter and AOIC final disposition code "10."
5.8.3.7 (09-01-2005)
Forms 656 Application Fee Requirements and Perfection
Treasury Regulations §300.3 requires taxpayers to submit one fee for each Form 656, Offer in Compromise, received, if no Form 656–A, Income Certification for Offer in Compromise Application Fee, was submitted.
The table below is intended to assist in identifying a processable offer for application fee purposes and provide guidance to advise the taxpayer when more than one Form 656, application fee, and/or Form 656-A should be submitted. In the following scenarios the status of the taxpayer is not relevant (e.g. married, separated or divorced). The general rule is that there should only be as many Forms 656 as there are entities seeking to compromise. The following scenarios assume all processability criteria (other than for the application fee) are met.
Scenario Procedures
1) Two TPs have joint liabilities only. The TPs jointly submit one Form 656 and one $150 application fee. One offer was submitted therefore one fee is required.
2) Two TPs have joint liabilities only. The TPs submit two Forms 656 but only one $150 application fee without a signed Form 656-A. Two offers were submitted; therefore, two fees are required.
The Process Examiner (PE) must secure a copy of the remittance to make the appropriate determination as indicated below.
If it can be determined which TP paid the application fee (i.e., a personal check drawn on the account of one of the taxpayers), the offer from the TP that paid the fee is processable. The second offer should be returned as not processable because the TP did not submit the required processing fee.
If each TP contributed a portion of the $150 fee (e.g., each submitted a personal check for $75), then neither TP has paid the appropriate fee and both offers should be returned as not processable.
If it cannot be determined which TP paid the application fee treat it as though half were submitted by each individual. Return both offers as not processable, enclose the fee payment with the not processable return letter addressing it to the party with the primary SSN on the liability.
3) Two TPs have separate liabilities only. The TPs submit two Forms 656 but only one $150 application fee without a signed Form 656-A. Same as Scenario 2
4) Two TPs have joint liabilities and one or both of the TPs also have separate liabilities. The TPs submit one Form 656 listing both the joint and separate liabilities and only one $150 application fee without a signed Form 656-A. Although it is the policy of the Service to require separate offers when TPs have both joint and separate liabilities, the offer submitted in this scenario is processable. However, the Service can require the TP to perfect the original offer by submitting a new offer to separate the liabilities. In this instance, the new offer will require a second fee.
When requesting the perfection of an offer that requires the submission of a second offer, send the TPs two Forms 656:
Prepare an "amended/revised" Form 656 by completing items 1 through 5 with the entity and tax liability information of the individual with the primary SSN on the joint liability. Include both joint and separate liabilities in item 5. Note the original offer number on the top of the "Amended/Revised" Form 656.
Prepare a second Form 656 by completing items 1 through 5 with the entity and tax liability information of the individual with the secondary SSN on the joint liability. Include both joint and separate liabilities in item 5. Annotate the top of the Form 656 in red "Related to Offer Number ________" , inserting the number of the original offer. This will help identify that the offer submitted is in response to a perfection request.
Note:
Clerical units should be aware that new offers received in the PO Box designated for response correspondence must keep all correspondence and attachments associated with the offer to assist in the identification of the related offer.
Include Option "Y" in the combo letter:
Include Form 656-A and the a copy of the original Form 656 with the combo letter
If the TPs refuse to perfect the offer, the Service will return the offer without any further consideration.
5) One Form 656 is submitted that includes both corporation or partnership and individual liabilities, but only one $150 application fee without a signed Form 656-A for the individual. Follow the procedures outlined in Scenario 4 above.
6) Two taxpayers have joint liabilities and either or both of the taxpayers also have separate liabilities. The taxpayers submit two Forms 656, listing the joint liability on one and the separate liability on the other, but only one $150 application fee. Since the taxpayers submitted two offers, they require two fees. Only load the joint Form 656, treating it as processable and including the separate liabilities on the MFT screen. Follow procedures in Scenario 4 above.
5.8.3.8 (09-01-2005)
Centralized Offers in Compromise Processability Determinations
Centralized Offer in Compromise (COIC) sites determine offer processability. To accomplish this Process Examiners (PE) must take the following actions:
Check IDRS to determine if the taxpayer is currently in compliance or is in bankruptcy.
• This includes checking all Social Security Numbers (SSN), Employer Identification Numbers (EIN), and Individual Taxpayer Identification Numbers (ITINs) known or found for the taxpayer. At a minimum check the following IDRS command codes: ENMOD, INOLES, CFINK, BMFOLI, SUMRY, IMFOLI. If any data is found, print and include it in the file. Also, research IDRS command codes TXMOD and FFINQ for additional data, but it is not necessary to include printed copies in the file.
• Research the Master File to determine if the taxpayer has any unfiled tax returns. Review the offer package to determine if documentation submitted by the taxpayer or another Service employee indicates that the taxpayer has recently filed or was not required to file any delinquent returns. A delinquency check notification or taxpayer delinquency investigation (TDI) does not have to exist to determine if a taxpayer has unfiled delinquent returns.
Note:
If a delinquent return was recently filed and has not yet posted to IDRS, a copy of the return is sufficient verification of compliance.
Check for any freeze codes such as: -Y, -W, -Z, -A, -V, -L that may require special action. Refer to local guidelines.
Verify that the taxpayer has submitted the appropriate Form 656, Offer in Compromise, Form 433–A, Collection Information Statement for Wage Earners and Self-Employed Individuals , and/or Form 433-B, Collection Information for Businesses.
Verify that the taxpayer has submitted the application fee (or signed Form 656-A, Income Certification for Offer in Compromise Application Fee) for each offer submitted.
During the internal analysis, AOIC should be documented of any findings.
Review Automated Offer in Compromise (AOIC) and the history for any previous offers to determine if the offer was submitted "solely to delay collection." See IRM 5.8.3.19, Offers Submitted Solely to Delay Collection.
5.8.3.9 (09-01-2005)
Not Processable
When returning the offer as not processable, the return letter will specify all reasons for the determination.
If the offer is not processable:
Stamp the Form 656 "RETURN" in red (or circle the date in red if a red ink stamp is not available) and write the date that the offer was determined to be not processable.
Cross out all IRS received dates with a red"X."
Prepare the return letter with all applicable reason code paragraphs.
In addition to identifying all of the reasons for the determination, also address the issue of the combined joint and separate liabilities, if appropriate. For example, individual and corporate or partnership liabilities on one Form 656. In those cases, include Option "Y" in the return letter.
Complete the Form 13479, COIC Application Fee Tracking Report, if applicable.
Update the history specifying the reason(s) for the not processable determination.
Do not sign the Form 656 as pending.
Update AOIC "Proc Cd" field to "N" (not processable).
Managers and journey level Process Examiners (PE) may sign and date the letter and close the case on AOIC.
Send the Form 656, the Return letter, Publication 1 and Publication 594 to the taxpayer along with all other documents originally sent. If a Power of Attorney (POA) is present, send the representative a copy of the letter. If disclosure issues exist, use the appropriate paragraph to indicate this in the return letter, and do not send a copy to the representative.
If a Form 656 was forwarded by a Revenue Officer (RO) and is not processable, the COIC site should also forward the Form 657 and a copy of the " not processable" letter to the approving official of the Form 657.
Caution should be exercised to ensure that no IDRS prints or other internally generated documents are sent to either the taxpayer or the Power of Attorney (POA). All internal documents should be destroyed. Nothing is required to be maintained in local closed files on these cases.
If the offer was originally determined processable and the application fee was deposited, but it was later concluded that this determination was made in error, processing should stop. The case should be closed using not processable procedures defined above. In these cases, it is important to ensure the "N" (not processable) is input on AOIC to reverse the Transaction Code (TC) 480(s). This will result in the generation of a TC 483 posting to the appropriate modules, and a refund of the $150 application fee.
5.8.3.10 (09-01-2005)
Processable
An offer is considered pending when a delegated IRS official signs and dates the Form 656, Offer in Compromise, in the appropriate section. This date is the official offer pending date.
Note:
The pending date entered on AOIC must match the date the delegated official signed the Form 656. This date must also match the Transaction Code (TC) 480 date when it posts to IDRS.
If the offer is processable:
Sign and date the waiver on Form 656 (item 11).
Change the "Proc Cd" to a "Y" (processable).
Complete the AOIC Application Fee Screen.
Complete the MFT and "Terms" screen on AOIC.
Note:
If tax periods are in status 60, 61, or 53 (except for those status 53 modules with Closing Code "03" [unable to locate] or Closing Code "12" [unable to contact]) remove the "Y" on each tax period on the MFT screen. DO NOT change the status of those accounts, unless the taxpayer has defaulted the installment agreement.
On all IMF cases enter "P" if the offer is for the primary taxpayer or the controlling taxpayer identification number (TIN) on the entity, enter"S" if the offer is for the secondary taxpayer , or enter "B" if both husband and wife are making a joint offer.
Note:
If only one party of a joint liability is submitting the offer, remove the "Y" from the MFT screen. This will take the case out of Status 71.
Communication with the taxpayer and/or authorized representative may be necessary to perfect the offer while it is pending. This communication may be completed by letter or personal contact.
If processable and… Then…
The offer requires perfection due to an insufficient number of Forms 656 and application fees Except for examples in IRM 5.8.3.7, Form 656 Application Fee Requirements and Perfection, send the combo letter to request the following information:
Correct number of Forms 656 and fees (Option "Y" perfection),
Any required financial substantiation,
Any additional Form 656 perfection, including incorrect or old Form(s).
Assign to "5100"
The offer does not need Option "Y" perfection and falls into the category for direct field transfer. See IRM 5.8.2.2, Initial Receipt of Offers. Reassign on AOIC to the appropriate area office.
The offer does not need Option "Y" perfection and qualifies under the " Screen For Obvious Full Pay" procedures. See IRM 5.8.3.12, Screen for Obvious Full Pay. Process under "Screen For Obvious Full Pay" Procedures.
The offer does not need Option "Y" perfection and does not qualify under "Screen For Obvious Full Pay" procedures, but all required financial substantiation is not attached or needs Form 656 perfection before beginning the investigation. Assign to "5100"
Send the combo letter to address all perfection issues and request the required substantiation, including incorrect or old form(s).
The offer does not need Option "Y" perfection and does not qualify under "Screen For Obvious Full Pay" procedures and has attached all required substantiation except for proof of payment of certain expenses; such as, current real estate, or motor vehicle loan balances. Send the combo letter to request substantiation and Form 656 perfection, if appropriate, including incorrect or old Form(s).
Check internal verification sources,
Assign the case to"5300" .
Note:
If the taxpayer has provided a substantial amount of the information and a determination can be made, assign the case to 6000.
The offer does not need Option "Y" perfection and does not qualify under "Screen For Obvious Full Pay" procedures and is a total submission. Send the combo letter, Option "A."
Check internal verification sources.
Assign to "6000."
If an offer was submitted by an Revenue Officer (RO) and it is processable, but the RO has determined that the offer was submitted "solely to delay collection" , the COIC site will contact the originating RO to advise that the return letter has been issued. Unless a jeopardy situation exists, the RO must wait for COIC notification that the return letter has been issued before taking any collection enforcement action. See IRM 5.8.3.19, Offers Submitted Solely to Delay Collection, for delegated approval authority.
COIC will request Transaction Code (TC) 480 and Status 71 through the AOIC system. However, there may be situations when the Status 71 will not generate (e.g. MFT 31 modules created prior to January 2005, imminent statute, etc.). In those cases, the field Offer Specialist may request input of the TC 470 with Closing Code (CC) 90 to suspend collection activity.
5.8.3.10.1 (09-01-2005)
Erroneous Processability Determinations
The Service only collects the application fee for processable offers; therefore, fees associated with offers that are initially deemed processable but subsequently determined to be not processable must be returned to the taxpayer.
When an erroneous processability determination is corrected prior to forwarding the related application fee for deposit and it is still in the custody of Receipt and Control or the mail team, the COIC sites should follow campus procedures designed to include the remittance in the not processable return letter and to correct the AOIC fee screen record.
5.8.3.10.2 (09-01-2005)
"Application Fee Refund/Apply Listing" Validation
When an erroneous processability determination is corrected after forwarding the related application fee remittance for deposit, the COIC sites will need to determine whether the remittance has been deposited. An " Application Fee Refund/Apply Listing" should be generated from AOIC to identify application fees that were initially determined to be processable, but later determined to be not processable. Generation of this listing is required in order for the COIC site to verify and authorize a manual refund.
Note:
The COIC sites should request the Monitoring Offer in Compromise (MOIC) function to generate the "Application Fee Refund/Apply Listing" on a monthly basis.
Generally, when an offer is deemed "not processable" , the Service includes the taxpayers remittance with the return disposition letter. However, depending on the elapsed time between inputting a processability change on AOIC from a "YES" to a "NO" , the Service may have already deposited the related application fee.
To determine whether or not manual refunds of the application fee should be issued, research the completed Form 13479, COIC Application Fee Tracking Report, for those offers to determine whether the application fee was deposited by the Service or returned to the taxpayer.
Caution:
Thorough research and care is required when determining which offers on the "Application Fee Refund/Apply Listing" should receive manual refunds.
If… Then…
Research indicated that the application fee was returned to the taxpayer(s) The designated COIC site AOIC liaison should contact the Headquarters AOIC analyst to make the necessary adjustment to the application fee information to remove it from the "Refund/Apply Listing" . This action will eliminate the potential for the taxpayer to receive an erroneous refund.
Research indicated that the application fee was deposited Contact the Monitoring OIC (MOIC) function co-located with the COIC site and request a manual refund be generated to the taxpayer(s).
To request the Monitoring OIC (MOIC) function to issue manual refunds, the COIC sites must prepare a memorandum that includes:
The offer number
The taxpayer(s) name
The taxpayer(s) identification number (TIN)
Records that support the COIC sites decision to either remove the offer record from the "Refund/Apply Listing" or to issue a manual refund must be retained for one year. At a minimum, the file should consist of:
Copies of the "Refund/Apply Listing" .
Copies of the Form 13479, COIC Application Fee Tracking Report.
Any other supporting documentation necessary to support the decision; including, but not limited to the Remittance Processing System daily remittance register.
5.8.3.11 (09-01-2005)
Types of Perfection
Certain perfection errors must be corrected before beginning the offer investigation. The combo letter on the Automated Offer in Compromise (AOIC) system is designed to communicate with the taxpayer and their representative to request the necessary corrective action. If there is no response to the request letter, return the offer to the taxpayer as not perfected. A return for failure to perfect an offer does not require a Form 1271, Rejection or Withdrawal Memorandum. The taxpayer has no appeal rights when the offer is closed as a return. The following errors must be corrected before beginning the investigation:
The taxpayers name, physical address or taxpayer identification number (TIN) is missing or incorrect and cannot be determined from IDRS or other documents submitted with the offer.
The offered amount is blank or zero.
No tax liability has been assessed or pending and the amount(s) can not be determined.
Insufficient number of Forms 656 and application fees submitted.
When sending a combo letter to perfect the errors listed in (1) above or to request financial substantiation, also include a request to correct the following errors.
Note:
If acceptance of the offer is considered and a combo letter was not sent but the errors listed below exist, they must be corrected prior to the recommendation to accept the offer.
The offer was submitted on an obsolete Form 656.
The Form 656 is not a verbatim duplicate. Such as, preprinted terms of the Form 656 are altered, deleted or missing.
An amount of money is offered, but the payment terms are not specified.
The taxpayer(s) signature is missing on Form 656.
Form 433–A and/or 433–B is incomplete.
The taxpayer has included a period(s) for which no amount is due.
If a period with an amount due is missing from the Form 656, but all periods due can be determined from IDRS or other documents submitted with the offer, add the missing period(s) to the AOIC MFT screen. Do not add the missing period(s) to the Form 656 unless contact is made with the taxpayer.
When a taxpayer has included a period(s) for which there is no apparent amount due, do not add the period(s) to AOIC. Contact the taxpayer to determine if any issues are pending that may result in additional tax. If there is no tax due after contact with the taxpayer, document the history and do not add the period(s).
Note:
Contact may be made by telephone or by sending the AOIC combo letter requesting the inclusion of the missing period(s) or the deletion of the no tax due period(s) on the amended Form 656. If the taxpayer agrees to the addition of the missing period(s) or the deletion of the no tax due period(s), the history must document the method of agreement by the taxpayer.
If the taxpayers name, physical address, or TIN is missing or incorrect and the correct information can be located on IDRS or other documents submitted with the offer, input the correct information on AOIC.
If the basis for compromise is not indicated, but it can be determined by reviewing the package, begin the investigation.
Note:
The offer cannot be accepted unless an amended Form 656 is signed, correcting all errors listed in (1) and (2) above.
5.8.3.12 (09-01-2005)
Screen For Obvious Full Pay Processing
Taxpayers may submit an offer to compromise the liabilities based on Doubt as to Collectibility (DATC), yet indicate on their application an ability to pay the account in full. These cases, once determined to be processable, will be screened out. Absent any special circumstances they will be rejected with no further investigation or verification. The taxpayer will be directed toward the appropriate resolution for the delinquency. The rejection letter will be the first communication with the taxpayer. A decision to reject with appeals rights is adequately justified by the taxpayers self-disclosed ability to pay in full.
For processable offers one of the first considerations is to determine if the taxpayer can pay in full. The following initial review should be conducted by the Centralized Offer in Compromise (COIC) site on all processable offers to make that determination.
Complete the Full Pay worksheet using the taxpayers figures only, as reflected on the CIS.
Do not adjust any asset values or apply necessary expense standards.
If the amount shown by the taxpayer on the CIS reflect that the taxpayer can fully pay the tax due via either liquidation of assets or on an installment agreement, assign the offer to AOIC designation "6900."
Note:
If special circumstances or Effective Tax Administration (ETA) conditions are presented by the taxpayer, assign the case to an Offer Examiner (OE) for further evaluation and consideration.
5.8.3.13 (09-01-2005)
Centralized Offer in Compromise Case Building and Perfection Procedures
For all processable offers not directly transferred to an Area office or for those qualifying under the "Screen for Obvious Full Pay " procedures, the Collection Information Statement (CIS) should be reviewed to verify the taxpayer has submitted all supporting documents.
Prepare the combo letter using the paragraphs that address the missing substantiation or incomplete documents as well as any Form 656 perfection issues. Include Publications 1 and 594. Document the AOIC history to summarize the required substantiation submitted with the offer as well as all perfection issues.
A copy of the signed and dated letter must be retained in the file.
Note:
All combo letters will be postdated five (5) calendar days. Schedule follow up for the 45th day after the date of the letter. Thus, at least 50 calendar days (5 postdate plus 45 calendar days from the date of the letter) would have elapsed before following up.
Mail the letter to the taxpayer and representative, if applicable. If a disclosure issue exists, use the appropriate paragraph to indicate this in the combo letter, and do not send a copy to the representative.
Envelopes containing combo letters including Options "B " , "C" , or "D" must be stamped or otherwise marked "URGENT - TIME SENSITIVE" and include Notice 1326, Offer in Compromise (OIC) Applicant ALERT.
Document the mailing date of the letter and a follow up date on AOIC.
Assign the offer to AOIC designation "5100" or "5300" , as identified in IRM 5.8.3.10(3) above.
An analysis of the information provided on the Collection Information Statement (CIS) or any other documentation received should be made prior to issuing a document request or combo letter.
Note:
The letter(s) should only request information necessary to make a reasonable collection decision.
The following information is considered to be necessary to allow the Offer Examiner (OE) the ability to make a determination. If the following expenses were claimed on the CIS but substantiation was not included, supporting documentation should be requested.
Income statements for the last three months (a current year-to-date statement is acceptable as long as it represents at least three months).
For those taxpayers on Social Security or a fixed pension or retirement where the monthly income does not fluctuate, it may only be necessary to secure one monthly statement to verify the amount of income. In those cases, verification of income may be available through secured bank statements.
Note:
If applicable, substantiation for three months of income statements for any not liable person should also be requested in order to determine taxpayers share of living expenses. See IRM 5.8.5.5.4, Shared Expenses, for additional information on the treatment of shared expenses.
Bank statements for the last three months.
The current available cash value or loan value of 401(k), profit sharing or other retirement plans, and the current balance due on any existing loans against that plan. See IRM 5.8.5.3.8, Retirement or Profit Sharing Plans, for more information on valuing a Retirement or Profit Sharing plan.
Substantiation should also be requested for the following information; however, if the taxpayer fails to provide the supporting documentation, the expense should be disallowed and a determination made based on all other information. The following list is not all-inclusive. See IRM5.8.3.16, Analyzing Taxpayer Responses to Combo Letter.
Health insurance and out of pocket cost for the last three months (refer to LEM 5.3)
Current balance due on motor vehicle loans.
Court orders and proof of payment for the last three months.
Note:
Court orders will only be required if the payment is to be allowed in the computation of the Reasonable Collection Potential (RCP).
Current balance due on real estate mortgages
Child and dependent care for the last three months.
Other secured debt statements for the last three months.
Life insurance premiums for the last three months.
5.8.3.14 (09-01-2005)
Centralized Offer in Compromise Internal Verification Research
Prior to assigning the offer for investigation internal sources must be searched.
Conduct research using IDRS, the electronic locator source, state motor vehicle records, and in-house real property valuation sources, to verify claimed amounts and to identify undisclosed assets or sources of income.
Generally it will only be necessary to secure motor vehicle valuations from a trade association guide on vehicle(s) that are three years old or newer and have no lien
Example:
When considering an offer in the year 2004, a 2001 model is considered to be three years old or newer
5.8.3.15 (09-01-2005)
Processing Taxpayer Responses to Combo Letters
Update the Automated Offer in Compromise (AOIC) history to annotate the information and/or documents received and sign any amended or revised Forms 656 with the current date. Retain the original Form 656 and any amended Forms 656 in the file.
If the determination is made to return the offer for failure to provide the requested information, use the appropriate paragraph(s) in the AOIC return letter.
Retain the original Form 656, any amended Forms 656, and a copy of the return letter in the file.
Cross out all IRS received dates with a red"X" . Stamp the Form 656 with "RETURN" , in red, and add the current date.
Update the case history on AOIC including the reason for the return. Include a copy of the history in the file and give the file to the manager for approval.
If… Then…
The offer is assigned to "5100 " , no taxpayer response is received and the follow-up date passes Invoke the "No Reply" procedures.
The offer is assigned to "5100 " and the taxpayer responds Associate the mail and assign to " 5500" .
Note:
However, if the taxpayer has substantially replied to the request, but has not provided all the information the case should be assigned to an OE for review. The OE should review the reply to determine if the information provided is sufficient to make a decision. If not, the OE should attempt one phone call to secure the missing information before returning the offer as a"No Reply" .
The offer is assigned to "5300 " and the taxpayer has provided sufficient information to make a determination Assign to "6000" .
Process Examiners (PE) are required to initiate the next appropriate action on cases where taxpayers have responded to the combo letter within 10 calendar days from the date the offer is assigned to the PE.
If the taxpayer or their representative requests an extension of time to comply with the request for information, a reasonable amount of time should be granted. Document the Automated Offer in Compromise (AOIC) history indicating the new deadline for the response. If the taxpayer and/or their representative fails to meet the additional deadline, initiate the procedures as defined in IRM 5.8.3.17, "No Reply" Procedures .
5.8.3.16 (09-01-2005)
Analyzing Taxpayer Responses to Combo Letter
The failure to provide proof of payment of any Collection Information Statement (CIS) claimed monthly expense amounts for health care expenses, court orders/court ordered payments, child/dependent care, life insurance, other secured debt, other expenses, or the failure to submit current loan balance statements for real estate mortgages, or current loan balance statements for motor vehicles will by itself not be sufficient reason to return an offer.
If a court ordered payment is to be acknowledged as an expense, a copy of the court order must be secured to determine the number of months to allow for the remainder of the payments. If the court ordered payment is not to be allowed, a copy of the court order will not be required.
Process Examiner's (PE) will determine if the taxpayers response or original submission statements and/or documents addressed all requested items even when it may not have specifically included the information sought by the combo letter. The failure to provide the desired information/documents will by itself not be sufficient reason to return an offer, as long as the taxpayer addressed the particular information/document requested.
Note:
If the taxpayer has substantially replied to the request, but has not provided all the information requested, the case should be assigned to an Offer Examiner (OE) for further review and evaluation on whether a reasonable collection potential (RCP) can be calculated. The OE should attempt one phone call to secure the missing information before returning the offer as a "No Reply"
Below are some examples of when a taxpayer may address, while not actually providing the requested substantiation, may include but are not limited to the following:
Bank statements are provided , but not all pages were included or only two months were sent instead of three.
Wage statements are provided, but not all pages were included or only two months were sent instead of three.
The taxpayer indicates an inability to provide a particular requested document (e.g., court order or judgment, annual statement of Social Security annuity amount).
The taxpayer indicates that they did not understand the request or that all requested documentation is attached.
The taxpayer indicates that a non-liable person(s) has no income or refuses to provide the substantiation.
Offers for which the Process Examiner (PE) determined the taxpayer has substantially replied and/or adequately addressed the requested information and/or documents (even if they did not specifically include them in the response), or where they failed to substantiate certain claimed monthly expenses or loan balances, will be assigned to an Offer Examiner (OE) for further consideration.
If the Offer Examiner (OE) determines that the RCP calculation cannot be completed because of the missing information and/or documents, the OE will attempt to telephone the taxpayer (or representative, if applicable) to secure any needed substantiation, explaining the information is needed in order to conduct the offer investigation. If unable to contact the taxpayer by telephone after one attempt or if the taxpayer/representative is unable to provide the substantiation to the OE within five (5) calendar days (fax transmission is preferable), document the AOIC history and return the offer for failure to provide necessary information.
If any of the necessary Form 656 perfection errors identified in IRM 5.8.3.11(1) above were not corrected, the offer will be returned. The following conditions assume that the response corrected any perfection errors on the Form 656.
If the offer is assigned to "5500 " and… Then…
The response included all required financial substantiation. Check internal verification sources.
Assign to "6000"
The response included all requested financial information/substantiation except proof of payment of mortgage/motor vehicle loan balance, court order, or court ordered payments. Check internal verification sources.
Assign to"6000"
The taxpayer substantially replied or addressed the requested items Assign to an Offer Examiner (OE) to determine if the information is sufficient to make an RCP calculation.
The response neither included nor addressed requested income or bank statements, non-liable person, or 401(k) information. Return the offer.
5.8.3.17 (09-01-2005)
"No Reply" Procedures
After the offer is determined processable and the combo letter has been sent, the offer should be held for the required number of days to allow the taxpayer to provide the requested information. If after the designated time period has passed and the COIC site has not received a response, an automated return process will be completed. The AOIC system will generate all the necessary letters and documents to close the case. Before closing the offer the employee must check AOIC to verify that no response was received.
Note:
Processable returns for "No Reply" will not be made by the Process Examiner (PE) unless the taxpayer did not submit any requested documentation and the taxpayer did not provide substantive information with the original submission. Those cases where the PE determined that the taxpayer substantially provided the information will be assigned to an Offer Examiner for a determination whether the response was sufficient to make a determination or to return the offer.
Offers for which the Process Examiner (PE) determined the taxpayer has substantially replied and/or adequately addressed the requested information and/or documents (even if they did not specifically include them in the response), or where they failed to substantiate certain claimed monthly expenses or loan balances, will be assigned to an Offer Examiner (OE) for further consideration. The PE will not implement the "No Reply" procedures.
If the taxpayer or their representative requests an extension of time to comply with the request for information, a reasonable amount of time should be granted. Document the Automated Offer in Compromise (AOIC) history indicating the new deadline for the response. If the taxpayer and/or their representative fails to meet the additional deadline, initiate the "No Reply " procedures as defined above.
5.8.3.18 (09-01-2005)
Withholding Collection
Installment agreements remain in effect while the offer is pending.
For offers submitted after December 31, 1999, collection by levy on property owned by the offer taxpayer is prohibited while the offer is pending unless collection is in jeopardy.
The term "jeopardy" has the same definition described in IRM 5.11.3, Initial Processing of Effective Tax Administration Offers, and Policy Statement P-4-88. Collection is not considered to be in jeopardy because an undisclosed asset was discovered during the investigation.
Upon receiving information that a jeopardy levy has been approved, contact the employee issuing the levy and if it is agreed that the offer was filed to hinder or delay collection follow procedures in IRM 5.8.3.19, Offers Submitted Solely to Delay Collection, below to return the offer.
The prohibition on levy does not require release of a levy that was served prior to the offer submission. However, the taxpayers circumstances should be considered when making a determination to release a levy or keep it in place while the offer is pending.
The prohibition on levy while an offer is pending does not extend to filing notices of federal tax lien. See IRM 5.8.4.9, Notice of Federal Tax Lien Filing, for a discussion of filing notice of federal tax lien while an offer is pending.
5.8.3.19 (09-01-2005)
Offers Submitted Solely to Delay Collection
When it is determined that an offer is submitted "solely to delay collection" , the offer can be returned to the taxpayer without further consideration.
Note:
The term "solely to delay collection " means an offer that was submitted for the sole purpose of avoiding or delaying collection activity. See IRM 5.8.3.19.1, Solely to Delay Collection Determinations, below.
.
The Field OIC group manager and the Unit Manager at the COIC site, have delegated authority to approve returns based on "solely to delay collection" .
An offer is not considered submitted "solely to delay collection" just because there is an imminent CSED issue or if an offer has been investigated and rejected and the taxpayer exercises appeal rights.
5.8.3.19.1 (09-01-2005)
Solely to Delay Collection Determinations
When a taxpayer resubmits an offer that is not"materially" different from a previous offer that was considered and either rejected with appeal rights or returned, the offer may be returned as "solely to delay collection" .
Example:
The taxpayer fails to address the issues or defects of the previously submitted offer.
The offer may be considered as "materially" different when:
The amount reflected on the re-submission is substantially similar to, less than, or the same as the prior offer and the following exists:
1) The taxpayers financial situation has changed.
Note:
A change in the taxpayers financial situation may include:
•A change in employment and/or income,
•A change in marital status effecting future ability to pay or ownership of assets,
•The loss of an asset that was included in the original offer investigation,
•A change in circumstances that would affect allowable expenses and future ability to pay.
2) The taxpayer has raised special circumstances that were not considered during the prior offer investigation.
When the Service has accepted an offer in compromise and the taxpayer subsequently defaults on the offer agreement and then files a new offer within one year of the default, the offer may be returned as "solely to delay collection" unless the new offer indicates any of the following:
The current offer submission reflects special circumstances
The re-submission is materially different from the prior accepted and defaulted offer.
Although no provisions are provided for any formal appeal of a decision to return an offer submitted "solely to delay collection" , all employees must honor any taxpayers request to review this decision with their immediate manager.
In some situations it may be determined that an offer is submitted as "solely to delay collection" when no prior offer has been submitted. When a collection employee has determined that the next action necessary is to enforce collection through levy or seizure, but the taxpayer files an offer to delay this enforcement action the offer may be returned as " solely to delay collection" .
5.8.3.19.2 (09-01-2005)
Examples and Discussion
The following are examples of offers considered submitted " solely to delay collection" based on re-submission after a prior rejection or return:
Example:
During initial processing of an offer, it is discovered on AOIC that the taxpayer had a previous offer returned. This offer was closed six months ago as part of the "No Reply " process. The AOIC case history indicated that the taxpayer did not provide any bank statements with the first offer and did not respond to the combo letter sent. No bank statements were provided with the new offer submission. No special circumstances were indicated.
Example:
A taxpayer resubmits an offer that was rejected because the amount offered was $10,000 below the reasonable collection potential (RCP). The original amount offered was $10,000. The current amount offered is $10,100. There is no change in financial condition and no special circumstances were indicated.
Example:
A taxpayer submits an offer for $3,000 to be paid within 90 days of acceptance. A prior offer was submitted for $10,000 to be paid within 90 days. The investigation of the initial offer submission resulted in the offer being rejected with appeal rights. During that offer investigation it was determined that a piece of property was transferred to a non-liable spouse for no consideration and that a clear transferee issue exists. The value placed on the transferred property was $30,000, and was included in the reasonable collection potential (RCP). The taxpayer failed to request a timely appeal on the rejected offer. There were no special circumstances indicated.
Example:
During initial processing of an offer in compromise, AOIC indicates there have been three offers submitted by the taxpayer over the past 18 months. All three were returned for failure to provide requested CIS information. The closed return file indicates the taxpayer was asked to provide a financial statement for a closely held corporation, which the taxpayer holds 75% interest in and is the corporate president. A Form 433-B for this corporation was requested during the offer investigation. The offer specialist clearly documented in the file the taxpayers interest and position in this corporation. The request was clear and specific and the taxpayer refused to provide this information claiming the IRS has no right to place a value on the corporation when determining his ability to pay on personal tax liabilities. The newly submitted offer package does not include a Form 433-B for the corporation and the Form 433-A indicates the same corporation is the taxpayers current employer.
Example:
An offer is submitted for $30,000 payable within 90 days of acceptance. Research on AOIC indicates this the second offer submitted by the taxpayer. A prior offer was submitted for $20,000 payable within 90 days of acceptance. The original offer was rejected with appeal rights, the taxpayer filed a timely appeal, and Appeals sustained the rejection. A review of the prior offer file indicates the taxpayer has the ability to full pay the outstanding liability through an installment agreement. The total liability is for $40,000. A review of the financial information indicates the taxpayer still has the ability to full pay the liability. The original offer was received 18 months ago and no payments have been made during this period. There is no change indicated on the financial statement, except the taxpayer has a new employer. The taxpayers income remained the same. There are no special circumstances indicated.
Example:
A taxpayer filed an offer in January 2005. The offer was returned after the Offer Examiner requested that the taxpayer make estimated tax payments for the tax year 2004. The taxpayer failed to comply and therefore the offer was returned for noncompliance. In June 2005 the taxpayer submitted a second offer, which included the 2004 liability. Because the taxpayer failed to make the required estimated payments for 2004 and did not correct the defect by paying the full liability with the filing of the return, the offer should be returned. No special circumstances were indicated.
The following are examples of offers considered "solely to delay collection" based on re-submission after a prior default within the past year:
Example:
The taxpayer had an offer accepted 18 months ago for $20,000 to be paid within 90 days of acceptance. The taxpayer paid $5,000 within 120 days of acceptance and failed to pay the balance of offer funds. The offer was defaulted for failure to meet the terms of the offer. A new offer is now submitted for $10,000 to be paid within 90 days of acceptance. Financial statements submitted with the new offer show no decrease in ability to pay and special circumstances were not cited and/or evident.
Example:
The taxpayer had an offer accepted for $10,000 paid within 90 days of acceptance. Subsequent to the acceptance the taxpayer incurred 2 additional years of income tax liabilities. The offer was defaulted because the taxpayer did not resolve the two additional liabilities. A new offer has been submitted for $5,000, that includes the prior offer periods and the two new periods. There are no special circumstances.
The following are examples of offers considered "solely to delay collection" based on a prior collection analysis and determination of ability to pay:
Example:
Taxpayer owes $500,000. An offer is submitted for $15,000. The Collection Information Statement (CIS), as submitted by the taxpayer, indicates the taxpayer has recently been fired from his job where he had been earning $200,000 a year. The CIS also reflects a personal residence with a Fair Market Value (FMV) of $1.5 million and outstanding mortgage of $750,000 leaving equity of $750,000; a piece of property owned free and clear valued at $60,000, a large boat with a value of $140,000 which is unencumbered. Final demand has been made and a collection employee has indicated to the taxpayer that a Notice of Federal Tax Lien (NFTL) will be filed and possible enforcement action if the taxpayer does not full pay the liability. The investigation has shown that there are no special circumstances to be considered.
Example:
Taxpayers owe a joint 1040 liability for 1997 of $139,854 and submitted an offer for $250. Both taxpayers are self-employed: The husband is a painter and the wife is a real estate sales person. They have no future income potential. They own an unimproved lot valued at $14,700, a personal residence valued at $177,500, six automobiles and two horse trailers valued at $20,775. Their total reasonable collection potential (RCP) is $127,191 based on the equity in the assets. The balance due period was in active collection inventory prior to the offer submission. The collection employee advised the taxpayer to secure a loan on their equity or levy action would be initiated. The taxpayer refused to pay more than the proposed $250 and submitted the offer instead of making any payment to their tax liability. The investigation has shown that there are no special circumstances to be considered.
Example:
Taxpayer owes $32,000 and submits an offer for $100. The reasonable collection potential (RCP) is based on an ability to pay $400 per month. The earliest CSED's will expire within 5 months of the receipt of the offer , which is where the majority of the liability is assessed. The taxpayer has been advised of the CIS analysis and monthly ability to pay, but submitted an offer for $100. The reason given was that he wanted the tax liability "forgiven" and all he wants to pay is the $100 offer amount. No special circumstances were indicated.
5.8.3.19.3 (09-01-2005)
Procedures for Return of Offers Submitted Solely to Delay Collection
The determination that an offer was submitted "solely to delay collection" may be made immediately after the offer is deemed processable or at any time during the offer investigation when the facts support the decision.
The determination that an offer was submitted after a prior reject or default can be supported by reviewing records on AOIC and IDRS transactions:
If… Then…
AOIC indicates that prior offer records exist Determine the type of disposition used to close the prior offer submissions.
AOIC indicates the prior offer submission was rejected with appeal rights The re-submission requires review to determine if it was submitted "solely to delay collection" .
AOIC indicates the prior offer record was accepted Review the AOIC history screen and IDRS transactions to determine if the prior offer was defaulted within the past year.
The prior offer was defaulted within the past year The re-submission requires review to determine if it was submitted "solely to delay collection" .
To determine if the re-submission is materially different from the prior rejected or defaulted offer:
Request the prior closed offer file, if available, from the appropriate office. Previously rejected closed offer files are located in the office that concluded the offer. Previously defaulted offer files are maintained in the Campus OIC Unit servicing the office that closed the offer.
Note:
The Centralized Offer in Compromise (COIC) Examiners will not be required to secure and review closed files as long as there is sufficient information in the AOIC/ICS history to establish that an offer is a re-submission "solely to delay collection" .
Compare the information contained in the original offer file with the resubmitted offer package to determine if the offer was submitted " solely to delay collection" .
When an Offer Specialist (OS) identifies that an offer was submitted "solely to delay collection" , Form 657, Revenue Officer Report, must be completed and submitted to the group manager for approval. If the group manager concurs, the case will be closed immediately as a return. A copy of the Form 657 should be forwarded to the appropriate revenue officer group manager to explain why the offer was not investigated and to refer the balance due accounts for appropriate collection activity.
Note:
Coordination should occur to ensure no levy is issued until after the return letter is sent.
Centralized Offers in Compromise (COIC) Examiners will not be required to complete a Form 657, but will be required to document the AOIC history that the offer was determined to be a re-submission solely to delay collection. If the COIC Unit manager concurs, the offer will be closed immediately as a return.
When revenue officers (RO) determine an offer is submitted " solely to delay collection" , they will complete a Form 657, Revenue Officer Report, and submit it to their group manager for approval. If the revenue officer group manager concurs, the Form 657 will be forwarded to the offer group manager or the COIC manager. If the offer group or COIC manager concurs, the offer will be closed as a return.
Note:
Coordination should occur to ensure no levy is issued until after the return letter is sent.
If an offer was forwarded by a Revenue Officer (RO) and the Centralized Offers in Compromise (COIC) unit deems it to be processable, but the RO has determined that the offer was submitted to "solely delay collection " , the case must include the Form 657, Revenue Officer Report, detailing the reason(s) supporting the decision and approved by the field manager.
If the COIC unit manager agrees with the determination, the COIC employee will contact the originating RO to advise that the return letter has been issued.
If the COIC manager disagrees with the determination, discussions should be initiated with the field manager to reach an agreeable solution.
When the investigating employee determines an offer was submitted "solely to delay collection" , regardless of the status of the balance due periods prior to the offer submission, the periods should be placed into the appropriate collection status to ensure that necessary collection actions are initiated. If the accounts were in Status 26 prior to the offer submission, the case should be reassigned to the field. If the balance due periods were not in Status 26 prior to the offer submission, discuss the case with the field group manager to determine if assignment to the field is appropriate. If the field group manager does not assign the case into inventory, the periods should be placed into ACS status.
Note:
These accounts should not be allowed to systemically proceed to notice status.
The Form 657, Revenue Officer Report, serves to establish coordination between the field group, the offer group, and the Centralized Offers in Compromise (COIC) site to provide case documentation regarding these determinations, and to ensure collection action is not pursued until the return is approved.
Labels: Offer in Compromise - Financial Analysis IRM
