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Appeals Manual | |||||||||
Part 8. Appeals
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Chapter 13. Closing
Agreements and Offers in Compromise
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Section 2. Offers
in Compromise
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8.13.2.1 (01-01-2005)
Offers in Compromise (OIC) Overview
1.
This
2.
An offer in
compromise (OIC) is a proposal to pay a lesser sum
of money to satisfy an outstanding tax liability,
including penalty and interest. There are three
legal bases for an OIC:
A.
doubt as to
liability,
B.
doubt as to
collectibility,
C.
to promote
effective tax administration.
3.
) Appeals
has jurisdiction to make decisions on offers in
compromise in the following categories:
A.
Offers
appealed after Field Collection or the Centralized
Offer in Compromise (COIC) sites rejected them.
(This includes rejections of offers originally
submitted directly to Appeals.) Following
B.
Offers
based in whole or in part on doubt as to liability
where the liability to be compromised is pending or
was determined by Appeals. As in cases of rejected
doubt as to liability offers, evaluate these offers
in the same manner as in a proposed deficiency case.
C.
Offers
submitted to Appeals as an alternative during a
Collection Due Process (CDP) or Equivalent Hearing
(EH) case.
D.
Appeals
does not have jurisdiction over pending deficiency
cases. See
E.
Appeals has
no authority to compromise a liability in cases
where the Department of Justice (DOJ) has previously
reduced a liability to judgment. Only DOJ can settle
such a case. TC 550 with definer code 04 indicates
this situation. In addition, a TC 520 cc 80
indicates that a judgment was obtained and TC 520 cc
70 indicates litigation is pending. More information
is in the Offer in Compromise Handbook,
8.13.2.1.1 (01-01-2005)
Authority
1.
Internal
Revenue Code section 7122(a) authorizes the
Secretary of the Treasury to "compromise any
civil or criminal case arising under the internal
revenue laws prior to reference to the Department of
Justice for prosecution or defense" . If the
tax to be compromised (including penalties and
interest) is $50,000 or more, IRC section 7122(b)
requires that we place the opinion of Counsel on
file in the office of the Secretary. The opinion of
Counsel verifies that there is a legal basis for
compromise. If Counsel finds a legal basis for
compromise, but disagrees with the decision to
accept the offer or the amount of the offer, Counsel
may approve the offer but indicate its concerns in a
side memo. When requested, Counsel attorneys also
provide assistance on legal matters arising in the
investigation of the offer.
2.
Regulations
written under section 7122 are binding authority for
the Service when working offers in compromise. 26
3.
)
Delegation Order No. 11 (as revised) (see
A.
To accept
offers based upon effective tax administration or
involving special circumstances criteria regardless
of the amount of the liability sought to be
compromised is delegated to Appeals Area Directors.
B.
To accept
offers in compromise regardless of the dollar
amount, excluding effective tax administration, and
special circumstance offers is delegated to Team
Managers and Team Case Leaders in Appeals.
C.
To reject
offers in compromise for public policy reasons is
delegated to Appeals Team Manager and Appeals Team
Case Leaders.
D.
To reject
offers in compromise excluding public policy offers
regardless of the amount of the liability sought to
be compromised is delegated to Appeals Team Managers
and Appeals Team Case Leaders.
E.
To
acknowledge withdrawal of all offers in compromise
is delegated to Appeals Team Managers and Appeals
Team Case Leaders.
4.
Although
not explicitly stated in Delegation Order 11 (as
revised), the approval of the Appeals Team Manager
will be required to accept any offer when Counsel
renders a negative opinion on regular offers. The
Area Director is required to approve an Effective
Tax Administration or Doubt as to Collectibility
with Special Circumstances offer when Counsel
renders a negative opinion.
5.
The
Secretary of the Treasury is not authorized to
compromise liabilities assessed for certain child
support obligations on behalf of the Secretary of
Health and Human Services. See
8.13.2.1.2 (01-01-2005)
Policy Regarding Offers in Compromise
1.
Policy
Statement P-5-100 (see
2.
IRC
6331(k)(1) prohibits levy action while an offer is
pending (except in jeopardy or delay situations).
See also Policy Statement P-5-97 and 26
A.
During any
period the offer for that liability is pending. (An
offer is pending beginning on the date the Secretary
accepts such offer for processing and remains
pending until the offer is returned, rejected,
withdrawn, or accepted);
B.
During the
30 days following rejection of the offer, and
C.
During any
period in which an appeal of the rejection of an OIC
is being considered.
8.13.2.2 (01-01-2005)
Offer in Compromise (OIC) Requirements
1.
To be
accepted , an OIC must be filed on the current
revision of Form 656. Form 656 provides specific
instructions for completion of the offer.
2.
Taxpayers
must complete the appropriate line item stating the
basis for the OIC. The basis should be doubt as to
liability, doubt as to collectibility, or the
promotion of effective tax administration. The
taxpayer may indicate multiple bases for compromise,
though the offer may be accepted on only one.
A.
If the
offer is being used to raise doubt about the
validity and legality of the liability, the taxpayer
must include a written statement that describes in
detail why they do not owe the liability.
B.
If the
offer is filed based on doubt as to collectibility,
and if the taxpayer cannot offer an amount greater
than or equal to the reasonable collection potential
(RCP), they must complete the written statement (
Explanation of Circumstances ) in Item 9
of Form 656, Offer in Compromise, explaining their
special circumstances.
3.
For offers
based upon effective tax administration, the
taxpayer must also complete the "Explanation of
Circumstance" portion of Form 656 and describe
why payment of the tax liability in full would
either create an economic hardship or would be
unfair and inequitable.
4.
Each
taxpayer that is party to an offer should personally
sign Form 656. When unusual circumstances prevent
this, an authorized representative may sign if
he/she has a valid power of attorney.
8.13.2.2.1 (01-01-2005)
Terms of the Offer
1.
There are
three (3) options to pay the offered amount:
A.
Cash Offer
(must be paid in 90 days or less)
B.
Short Term
Deferred Offer (paid in more than 90 days, but
within 2 years)
C.
Deferred
Payment Offer (paid over the remaining life of the
collection statute).
2.
Appeals
employees working offers must be familiar with the
terms of offers and the information necessary to
compute offer amounts. See
3.
For all
offers in compromise accepted after
8.13.2.2.2 (01-01-2005)
Application Fee
1.
Starting
2.
Form 656
explains:
A.
The
application fee,
B.
Who must
pay the application fee,
C.
How to
claim qualification for an exception,
D.
When the
application fee might be refunded, and
E.
What phone
number to call if there are questions.
3.
An OIC that
is received without the application fee or a signed
certification will be returned as not processable
without further consideration. It is the
responsibility of the Appeals Officer or Settlement
Officer to determine that the taxpayer’s income
and family unit size support the 656A. See
Note:
The exception for poverty is applicable
only to individual taxpayers. It does not apply to
entities such as corporations or partnerships.
Reminder: Amended offers are not considered a new receipt and will not be charged the
OIC Application Fee.
4.
Generally,
the situation in which Appeals would receive an
offer that has not gone through the Centralized
Offer in Compromise (COIC) sites apply to CDP and EH
offers.
5.
If the
appropriate collection resolution to a CDP/EH case
is an OIC, the following questions and answers
should provide guidance for application fee purposes
when securing offers in CDP/EH. Information is also
found in
Question: Two taxpayers have joint
liabilities only. They submit one Form 656. Should
they submit one application fee?
Answer: Yes. Treasury Regulations
requires taxpayers to submit one fee for each Form
656 taken in for processing. 26
Question: Two taxpayers have joint
liabilities only. They submit two Forms 656 without
Form 656-A. Since the liabilities are joint, should
they submit one $150?
Answer: No. Treasury Regulations
requires taxpayers to submit one fee for each offer,
i.e., each Form 656 accepted for processing. Since
two offers have been submitted, two fees are
required. If you can determine which taxpayer paid
the application fee (personal check drawn on the
account of one of the taxpayers), the offer from the
taxpayer who paid the fee should be sent to COIC for
processing. You should contact the taxpayer to
re-confirm the taxpayer’s intention to file two
offers and obtain the fee for the second offer or
return the second offer as nonprocessable.
Question: Two taxpayers have joint
liabilities and either or both have separate
liabilities also. They submit one Form 656 listing
both the joint and separate liabilities and only one
$150 application fee. Is this offer processable?
Answer: Yes. Treasury Regulations
require taxpayers to submit one fee for each offer,
i.e. each Form 656. Although it is the Service’s
policy to require separate offers when taxpayers
have both joint and separate liabilities, the offer
submitted is processable. The Service can require
the taxpayer to perfect the original offer by
submitting a new offer to separate the liabilities.
The new offer will require a second fee. When
Appeals communicates with the taxpayers to perfect
the offer, send the taxpayers two Forms 656, one for
each
6.
If the
taxpayer’s application fee was dishonored after
Collection rejected the offer with appeal rights,
the offer will be returned and the appeal dismissed.
See
8.13.2.2.3 (01-01-2005)
Pending Deficiency Cases in Appeals
1.
Appeals
employees should always explain to taxpayers the
legal and administrative remedies available to them.
A.
If
taxpayers indicate that they are unable to pay a
proposed deficiency, appeals officers will advise
them of the OIC program. Taxpayers are responsible
for initiating the first proposal for compromise.
Advise taxpayers that their proposal should reflect
their maximum ability to pay. Appeals officers will
document discussions about offers in compromise in
the administrative file.
B.
Offers to
compromise must be submitted on Form 656. The
taxpayer must provide Form 656-A (if applicable),
Form 433-A, (Collection Information Statement for
Individuals) and/or Form 433-B, (Collection
Information Statement for Businesses) with
supporting documentation. The taxpayer should be
advised that an OIC Specialist will investigate
their offer and may require additional financial
information during the investigation.
Note:
An offer in compromise becomes pending
once it has been accepted for processing. An offer
is accepted for processing when a Service employee
with the delegated authority signs the Form 656.
Appeals Officers or Settlement Officers do not sign
Form 656, as the processability determination has to
be made by Collection. All offer receipts must be
forwarded to the appropriate Collections Centralized
Offer in Compromise (COIC) site.
2.
By signing
Form 656, the taxpayer waives the statutory period
for assessment for periods included in the offer (
Form 656, Item 8(e)) beginning on the date the offer
is deemed "pending" . The Collection
Statute Expiration date (CSED) is suspended by
statute during the period the offer is considered
pending by
3.
Point out
the provision in Form 656, Item 8(d), which states
that acceptance will require the taxpayer to fully
comply with all filing and paying requirements of
the law for five years or until the offered amount
is paid in full—whichever is longer. If the
taxpayer does not comply, the offer will be
considered in default.
4.
Inform
taxpayers that they agree to give up certain refunds
and credits, Form 656, Item 8(g), to which they may
otherwise be entitled.
5.
Advise
taxpayers that acceptance of an OIC for a particular
tax period closes that tax period for all purposes
including assessment or abatement of tax,
collection, and suits for refund. (Form 656, Item
8(l).)
6.
Deposits
are not necessary for consideration of offers.
Advise taxpayers that:
A.
Funds
deposited with an offer may be withdrawn at any time
at the taxpayer’s request.
B.
Interest is
not paid on funds on deposit regardless of whether
the offer is accepted, rejected, or withdrawn.
C.
When
necessary, assist taxpayers by answering their
questions relative to completing the Form 656 and
financial statement(s).
D.
If an offer
is rejected or withdrawn, the deposit will be
returned unless the taxpayer authorizes in writing
that the deposit should be applied to the tax
liability. Use Form 3040, Authorization to Apply
Offer in Compromise Deposit to Liability, for this
purpose. The deposit will be credited to the
liability as of the date the offer deposit was
received by the Service.
7.
If
Collection determined the offer to be processable,
the application fee is not returned. If however, the
offer is accepted under effective tax
administration, or doubt as to collectibility with
special circumstances, the taxpayer will have the
option to have the application fee refunded or
applied to the accepted offer amount.
8.13.2.2.3.1 (01-01-2005)
Offers Filed With Appeals on Pending Deficiency
Cases
1.
) If an OIC
based on doubt as to collectibility is filed with
the appeals officer while a case is under
consideration to determine the liability other than
in Collection Due Process or Equivalent Hearings,
the Appeals Officer should take the following
actions.
2.
Examine the
Form 656.
A.
Check for
the taxpayer(s) signature.
B.
Be sure the
Form 433-A and/or Form 433-B are included along with
the application fee. If a taxpayer submits an offer
that does not include all outstanding liabilities,
it is still processable.
C.
Attach a
statement to Form 656 that "the liability is
currently not assessed and is under Appeals
consideration" . Provide your name, telephone
and fax number for contact by the Offer Specialist
when they complete the offer investigation.
3.
Send the
original Form 656, Form 656-A if applicable, a copy
of Form 433-A /B along with the application fee, to
Centralized Offer in Compromise (COIC) at the Campus
for the taxpayer’s location on Form 3210,
Transmittal Document. Field Offer in Compromise
groups may no longer load new offers to the
Automated Offer in Compromise (AOIC) system. Retain
a copy of Form 656 in the file.
Reminder: Appeals employees do not sign
Form 656.
A.
COIC is
responsible for determining processability and
processing of the application fee and for all other
initial case processing, including the mailing of
processability letters and input of necessary
transaction codes to Integrated Data Retrieval
System (IDRS).
B.
If the
offer is processable, COIC will send the processable
letter to the taxpayer and proceed to work the offer
investigation. If the offer is not processable, COIC
sends the not processable package back to the
taxpayer.
4.
Continue
the settlement negotiations to determine the tax
liability and secure the appropriate agreement
forms.
A.
If the
taxpayers do not wish to negotiate further regarding
the tax liability, they may be willing to execute an
agreement whereby they agree to the assessment of
the liability as determined by the Service
conditioned upon the Service’s acceptance of the
offer in compromise. (Send a copy of this agreement
with the initial Form 656 package to COIC.)
B.
If the
offer is ultimately rejected, the agreement will be
returned to the taxpayer.
5.
Form 870 is
the only agreement form that will be used on these
agreements. Add the following language to the Form
870 on these agreements:
This document shall be effective as a
waiver of the restrictions on assessment and
collection of the deficiency (deficiencies) on the
date the Service mails notification to the taxpayer
that the OIC submitted for (insert type of tax and
the taxable periods) and signed by the taxpayer on
(insert date) is accepted. Until such notification
is mailed, the waiver shall not be "
filed" for the purpose of computing the period
during which interest shall not be imposed under the
provisions of IRC 6601(c).
6.
If the
appeals officer is holding an agreement contingent
upon acceptance of the offer, he/she will maintain
informal contact with the Collection Specialist.
A.
If
Collection is willing to accept the OIC, the appeals
officer should take the steps necessary to have the
tax assessed (telephonically if necessary). Appeals
should notify Collection that the tax has been
assessed and Collection can then process the
acceptance. The tax must be assessed before the
offer can be accepted.
B.
If
Collection determines that rejection of the offer is
appropriate and the Independent Administrative
Reviewer (IAR) has agreed, the taxpayer may appeal
the rejection through normal offer procedures. The
appeal of Collection’s decision to reject the OIC
will not be heard by the Appeals Officer handling
the pending deficiency case.
7.
If Appeals
reaches an agreement with the taxpayer on the tax
liability and the appropriate agreement form signed,
we may close the deficiency case provided the
agreement is not contingent upon acceptance of the
offer. At local option, the deficiency case may be
held open if this will facilitate the processing of
the OIC.
8.
Cases that
are docketed before the United States Tax Court will
require close monitoring and coordination between
Counsel, Collection, and Appeals.
8.13.2.3 (01-01-2005)
Receipt and Control of Offers in Compromise
1.
Field
Collection, Field Examination and the Centralized
Offer in Compromise (COIC) sites forward appeals of
rejected offers to the Appeals Office that covers
the taxpayer’s location. See
2.
RRA ’98
established that the Collection Statute Expiration
Date (CSED) will be suspended while the offer is
pending (the time the offer is being processed and
considered), plus for 30 days following rejection
and during any appeal. An offer becomes pending once
the Service employee with delegated authority
accepts the offer for processing by signing the Form
656. This suspension of the CSED was repealed by the
Community Renewal Tax Relief Act effective
3.
Treasury
Regulation
Note:
I.R.C. 7508 and 7508A postpones certain time-sensitive acts when a person is serving in the armed forces in a combat zone, or there is a Presidentially declared disaster. Rev. Proc. 2004-13, 2004-4 IRB 335, includes the 30-day period for appealing a rejection of an offer in compromise as an act that