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Collateral Agreements |
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Collateral Agreements |
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| If… | Then… |
|---|---|
| The taxpayer lives in a state where acceptance of an offer in compromise from one party to a joint assessment also releases the other party | Secure the common law co-obligor agreement. (See Exhibit 5.8.6–1) |
| The taxpayer lives in a state where the right is expressly reserved to proceed against the other taxpayer who is not a party to the compromise | Secure the non-common law co-obligor agreement. (See Exhibit 5.8.6–2) |
| The taxpayer lives in a state where acceptance of an offer in compromise from one party to a joint assessment also releases the other party up to the amount of their proportionate share of the liability | There is no co-obligor agreement available for this case. An acceptable offer should include the reasonable collection potential (RCP) of all the obligors. When it is impossible to investigate all the obligors, there is a risk that the full collection potential will not be collected. Such an offer must meet the criteria for acceptance on the basis of Doubt as to Collectibility with Special Circumstances (DCSC) or Effective Tax Administration (ETA). |
| Both parties have submitted separate offers which are recommended for acceptance | If appropriate, the parties may submit a joint offer to eliminate the need for co-obligor agreements. Otherwise, secure a co-obligor agreement from each taxpayer. |
- In a proportionate liability state, when the offer amount is equal to or exceeds the not compromising taxpayer's proportionate liability.
- No possibility exists for collecting from the other obligors.
- Under state law, no specific reservation of collection rights is required to protect the ability to collect from co-obligors.
5.8.6.3
(05-15-2004)
Other Collateral Agreements
- Other collateral agreements may be appropriate in certain circumstances. Because all other collateral agreements must be monitored for compliance, they should only be secured when a significant recovery is anticipated. Securing a collateral agreement should be the exception and not the rule.
- Do not use a collateral agreements to accept an offer amount less than the taxpayer's financial condition indicates.
- In lieu of a collateral agreement, the taxpayer may increase the amount of the offer equivalent to what the government could reasonably expect to recover from the collateral agreement.
-
A collateral
agreement may be appropriate in the
following situations:
If the taxpayer… Then consider securing a… Anticipates a substantial increase in future income Future income collateral agreement. Is compromising the income tax liability of a defunct professional corporation Future income collateral agreement from the professional to collect from future individual income. Has real or personal property that is being depreciated Collateral agreement to reduce the basis of the asset. Has net operating losses or capital losses arising from prior years available for deduction in future years A collateral agreement to waive the loss. Is seeking to compromise a Trust Fund Recovery Penalty (TFRP) and qualifies to take a capital loss benefit from the defunct corporation on the Form 1040 A collateral agreement from the individual taxpayer to waive the capital loss.
5.8.6.3.1
(05-15-2004)
Future Income
- It is appropriate to consider future collateral agreements for both individuals and corporations when the investigation reveals that a substantial increase in the taxpayer's future income is expected.
-
The use of
a future income collateral agreement
may be an option when attempting to
determine a taxpayer's future income
for reasonable collection potential
(RCP) purposes. When investigating
an offer where the taxpayer's past
income does not provide an accurate
analysis for what may be earned in
the future then the use of a FICA
may be a better option.
Example:
1) The taxpayer is an engineer, but is currently employed as a salesman earning less than half of his prior salary due to difficulty he has had in obtaining a job in the engineering field at the present time, or
2) The taxpayer is a student and is expected to graduate soon and begin earning a significant annual income. -
The period
of time a future income collateral
agreements should cover will be
determined by the circumstances
identified in the offer
investigation based on the
taxpayer's financial situation.
Generally the period of time the
agreement covers should coincide
with the future compliance
provision.
Example:
•If the offer terms are for cash payment (paid within 90 days of acceptance) the future income collateral agreement should generally run for a five year period,
•If the offer terms are based on deferred payments calculated through the collection statute periods, the future income collateral should generally run through the last full year before the statutory period for collection expires.
•The offer file should document the basis for the time frame used for each collateral agreement. - Use the Form 2261 for individual taxpayers or the Form 2261–A for corporate taxpayers. The beginning year is defined as the year following acceptance of the offer. The ending year is defined as the last year for which the collateral agreement will remain in effect. The beginning dollar amount is negotiable but generally should be the amount determined necessary to meet living expenses during the term of the offer. In determining the beginning dollar amount the expected rate of inflation during the term of the agreement should be considered, as well as any additional expenses such as those for an expected additional child or a replacement auto.
- Offers with future income collateral agreements must be approved by a second level manager. The Territory manager for the field and Department manager for COIC will indicate approval by signing the Form 7249 and the acceptance letter. The Form 2261 may be signed by the authorized official in Delegation Order 42.
-
Do not
secure a future income collateral
agreement:
- To collect future income that should be included in the offer amount.
- Merely on unfounded speculation about an increase in income.
- To cover statistically improbable events, such as lottery winnings.
-
To
attempt collection from a
potential inheritance.
Example:
Do not secure a future income collateral agreement when the investigation reveals that the taxpayer is the only child of wealthy parents, and the surviving parent is well advanced in years and in poor health.
- Future income collateral agreements must be monitored annually for the life of the agreement. The cost of monitoring and the difficulty in tracing income structured through other entities should be considered when deciding whether such an agreement is warranted.
5.8.6.3.2
(05-15-2004)
Adjusted Basis of Specific
Assets
- The initial basis of an asset is equal to the cost of acquiring it. Adjustments to the basis are made each year for the cost of improvements and accumulated depreciation. When an asset is sold, the basis is used to determine the amount of capital gain to be taxed.
- A collateral agreement may be used to reduce the basis after accumulated depreciation, or book value, of a specific asset to a lesser amount or zero. This will have two effects. It will limit or eliminate the amount of deprecation deduction allowed in future years and it will cause a higher capital gain tax to be paid if the asset is later sold for an amount more than the adjusted basis.
- Use the Form 2261–B. The beginning year is defined as the year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Specifically describe each asset. Set the amount of the basis at the reduced or zero value.
- Adjusted basis collateral agreements must be monitored annually until the asset is ultimately disposed of all value. Consider the cost to monitor the agreement and the difficulty in tracing the sale or exchange of the property when deciding whether such an agreement is warranted.
5.8.6.3.3
(05-15-2004)
Waiver of Losses
- Use the Form 2261–C. The beginning year is defined as the next year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after " . Waive net operating losses and capital losses arising from all years prior to and including the last filed tax return.
- Do not prohibit the deduction of losses that arise in years after the offer is accepted.
- The waiver of investment credits is obsolete.
- Waiver of losses collateral agreements must be monitored annually until all the losses are extinguished, potentially for decades. Consider the cost to monitor the agreement and potential for recovery of future tax liabilities when deciding whether such an agreement is warranted.
- A waiver of losses collateral agreement may be secured to partially waive a loss, if the facts of the case support this determination.
5.8.6.3.3.1 (05-15-2004)
Net Operating Loss
-
Net
Operating Loss (NOL) is a loss
incurred when expenses exceed
the income of a business.
- The taxpayer must declare the loss on their tax return the year in which the loss is incurred.
-
The loss will be
declared on a Schedule E
and may be offset
against any "other
income" on the tax
return.
Note:
Not all income qualifies to be offset.
- Generally, losses may be carried back no more than three years and forward no more than twelve years or until all the loss is offset against taxable income.
- If the taxpayer wishes to carry the loss forward the taxpayer must elect to do so in the tax year the loss was incurred.
- If the taxpayer has not taken the loss on the tax return for the year in which the loss occurred and the statute of limitations for assessment has passed for that tax year, the taxpayer is no longer entitled to the loss.
-
When
the taxpayer has claimed a Net
Operating Loss (NOL), determine
and verify the exact origin and
amount of the loss. If a
taxpayer has been associated
with more than one business
there may be multiple losses.
When… Then… Calculating the remainder of the NOL The loss can be located on the "other income" line on the Form 1040 and should be labeled as Net Operating Loss. 1. Determine the original loss amount claimed on the tax return. 2. Subtract any carry backs (Up to three years back from the tax year the NOL was established.) 3. Subtract the amounts claimed on subsequent tax returns from the year the NOL was established.
5.8.6.3.3.2 (05-15-2004)
Capital Loss
-
Capital Loss is one in which the
taxpayer experiences a loss
associated with such investments
as land, stock, paid in capital,
or loans from shareholders. This
loss is:
- Found on a Schedule D.
- Only offset against income or capital gain in the year in which it is incurred and the remainder carried forward at a limit of $3,000 per year against other income or;
-
Offset against a capital
gain in total
Example:
A taxpayer has a $100,000 loss and a $40,000 gain. The taxpayer may offset $40,000 against the gain and an additional $3,000 loss against other income leaving a $57,000 loss that may be carried forward in future years.
- Individuals may deduct $3,000 each year until the loss is extinguished with no limit on the number of years. Corporations are limited to 10 years.
-
When
the taxpayer claims a capital
loss, determine and verify the
exact origin and amount of the
loss.
If… Then… The loss is derived from personal investment The investment can be either loans to the corporation or the individual's capital investment in the corporation.•Verify loans through copies of checks or general journal entries that establish the loan and track repayment.•Verify capital investment through canceled checks or other documents which support the amount of the original loan. Determining the remaining amount of the loss once you have determined the origin Trace the loss forward through the tax return copy or RTVUE.
5.8.6.3.3.3 (05-15-2004)
Passive Loss
-
Passive Activity Loss is one
that involves the conduct of any
trade or business in which the
taxpayer does not materially
participate.
This loss should not be
confused with net operating
loss.
- Any rental activity is a passive activity even if the taxpayer does materially participate.
- Losses from a passive activity generally cannot be deducted from other types of income (e.g., wages, interest, or dividends).
-
The amount of the
taxpayer's allowable
loss is subject to the
"at-risk" rules.
Generally losses are
limited to the amount of
the taxpayer's cash
contribution, adjusted
basis of other property
which contributes to the
activity, and amounts
borrowed for use in the
activity if the taxpayer
has personal liability
for the borrowed
amounts.
Note:
Refer to the current Master Tax Guide for additional information.
- Because passive losses are not deducted from earned income, waiving them may have little or no effect. One option is to reduce the basis of the property to zero so that the taxpayer cannot carry the loss over to the tax year in which the property is sold and receive benefit of the loss against a capital gain at that time.
5.8.6.4
(05-15-2004)
Multiple Agreements
- When related taxpayers submit more than one offer to compromise different tax liabilities secure only one collateral agreement. Describe on the collateral agreement all the offers to which it relates.
-
When more than
one type of collateral agreement is
secured for the same offer, the terms of
all the agreements may be incorporated
into one Form 2261 or Form 2261–A. The
appropriate language may be found on the
Forms 2261–B or 2261–C.
Type of Agreement… Statement… Adjusted Basis of Assets ″For the purpose of computing income taxes of the taxpayer for all years beginning after ___, the basis for certain assets, under existing law for computing depreciation and the gain or loss upon sale, exchange or other disposition shall be as follows:
Name of asset _____
Dollar amount ______
That in no event shall the basis set forth above be in excess of the basis that would otherwise be allowable for tax purposes, except for this agreement.″Waiver of Net Operating Loss ″For the purpose of computing income taxes of the taxpayer for all years beginning after ___, Any net operating losses sustained for the years before __shall not be claimed as net operating loss deductions under the provisions of Section 172 of the Internal Revenue Code.″ Waiver of Capital Losses ″For the purpose of computing income taxes of the taxpayer for all years beginning after ___, Any net capital losses sustained for the years before __shall not be claimed as carryovers or carrybacks under the provisions of Section 172 of the Internal Revenue Code.″ - If there is insufficient space on the form to insert all the necessary paragraphs simply type the paragraph numbers followed by "See Attached" and fasten a separate sheet containing the added provisions.
5.8.6.5
(11-30-2001)
Waiver of Refunds
- Form 656 contains a term which waives refunds and overpayments for all tax years through the year the offer in compromise is accepted. This waiver is a standard term, which cannot be altered.
- When accepting an offer based on doubt as to liability or under the basis of Effective Tax Administration (ETA) based on public policy/equity considerations, the waiver of refunds is not applicable.
- In order to remove the waiver of refund provision for these type of offers, both the taxpayer and the investigating employee must sign an agreement and include it with the accepted offer in compromise. See Exhibit 5.8.6-3.
Exhibit 5.8.6-1 (02-04-2000)
Co-obligor Agreement Common Law
States Pattern Letter P–229 (Rev.
6-90)
| Collateral Agreement—Taxpayer Involved in Joint Assessment | |
| (For Use in States Where Common Law Rule Applies) | |
| To: Commissioner of Internal Revenue: | |
| I submitted an offer dated (date) in the amount of $(amount) to compromise unpaid (Kind of tax) tax, plus statutory additions, for the tax period(s) (date(s)). | |
| The purpose of this letter is to amend that offer by adding the following provisions: | |
| The (a) liability, which is the subject of this proposed agreement, is the joint and individual responsibility of myself and my co-obligor(s). I agree to pay the United States $(amount). The United States agrees, in turn, not to: | |
| (1) sue the undersigned for the difference between the amount of the offer in compromise and the amount of the Iiability, or | |
|
(2)
collect the difference from
assets of the undersigned by
levy or any other means. If this proposal is accepted, it does not mean that the liability or any part of the liability is settled for myself or the co-obligor(s). The United States still reserves all its rights to collect the liability from the co-obligors. |
|
| ________________ | |
| Taxpayer's Signature | |
| ________________ | |
| Date | |
Exhibit 5.8.6-2 (02-04-2000)
Co-obligor Agreement Other States
Pattern Letter P–230 (Rev. 6-90)
| Collateral Agreement — Taxpayer Involved in Joint Assessment | |
| (For Use in States Where Statutes Expressly Reserve Right to Proceed Against Co-obligor) | |
| To: Commissioner of Internal Revenue | |
| I submitted an offer dated (date) in the amount of $(amount), to compromise unpaid (kind of tax) tax, plus statutory additions, for the tax periods (dates). | |
| The purpose of this letter is to amend and clarify that offer by adding the following provision: | |
| Although the liability sought to be compromised is the joint and individual liability of myself and my co-obligors, I am submitting this offer to compromise my individual liability only. If this offer is accepted, it does not release or discharge my co-obligor(s) from liability. The United States still reserves all rights of collection against co-obligors. | |
| ________________ | |
| Taxpayer's Signature | |
| ________________ | |
| Date | |
Exhibit 5.8.6-3 (11-30-2001)
Collateral Agreement – Modification
of Waiver Provisions of Compromise
Agreement
| Collateral Agreement — Modification of Waiver Provisions of Compromise Agreement | |
| (For Use when offer is being accepted under Detriment to Voluntary Compliance only) | |
| To: Commissioner of Internal Revenue | |
| I submitted an offer dated (date) in the amount of $(amount), to compromise unpaid (kind of tax) tax, plus statutory additions, for the tax periods (dates). | |
| The purpose of this letter is to modify that offer by stating that Items 8(g) and (h) of the agreement, Form 656, governing refunds and overpayments, will not apply to this offer. Acceptance of this offer will in no way alter my rights to refunds of overpayment or my ability to designate an overpayment to estimated tax payments for the following year: | |
| ________________ | |
| Taxpayer's Signature | |
| ________________ | |
| Date | |
| I accept this modification on behalf of the Internal Revenue Service: | |
| Signature of delegated official — Date | |
| ________________ | |
Exhibit 5.8.6-4 (05-15-2004)
From 2261-C, Collateral Agreement
Waiver of Net Operating Losses,
Capital Losses and Unused Investment
Credits
This is to help you with the completion of Form 2261-C.
|
1 — Name
and Address of Taxpayer : This must be the same as the name on address that show on the Offer Form 656 |
7 — line
item 1-first space Earliest loss years which could be carried forward to the year of acceptance |
|
2 — Social
Security and Employer
Identification Number: Both need to be shown |
8 — line
item 1-second space Year offer is to be accepted |
|
3 — In the
body of the form- an offer
dated: Date the taxpayer signed the offer. If Amended then the date the taxpayer signed the offer being accepted. |
9 — line
item 2-space Year following acceptance of the offer |
|
4 — In the
body of the form-$ amount This is the amount of the offer in Item 7. If Amended then the amount of the offer being accepted. |
10 — line
item 3-first space Earliest year of unused investment credit which could be carried forward to the year of acceptance |
|
5 — In the
body of the form-Type of tax and
taxable periods Liability identified as to the kind of tax with each year or period involved exactly stated. |
11 — line
item 3-second space Year offer is to be accepted |
|
6 — In the
body of the form-beginning after
___ Ending date of taxable year preceding the year of acceptance |
12 —
Signature and Title line Waiver of statute of limitations should be signed at the earliest possible date by the investigation employee |