4.18.3  Effective Tax Administration Offers

4.18.3.1  (12-23-2010)
Overview

  1. This section provides guidance for examiners in considering effective tax administration Offer in Compromise (OIC) requests.

  2. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added IRC 7122(c). That section provides that the Service shall set forth guidelines for determining when an OIC should be accepted. Congress explained that these guidelines should allow the Service to consider:

    • Hardship;

    • Public policy; and

    • Equity



    Treas. Regs. 301.7122-1 authorizes the Service to consider OIC’s raising these issues. These offers are called Effective Tax Administration (ETA) offers.

  3. Taxpayers requesting consideration of an offer to compromise based on effective tax administration should complete the following:

    • Form 656, Offer in Compromise, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Business.

    • Application Fee or Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), is used by low income taxpayers who are requesting a waiver of the OIC application fee.

4.18.3.2  (12-23-2010)
Considering the Effective Tax Administration Issue

  1. If there are no grounds for compromise under the doubt as to collectibility or doubt as to liability provisions, a compromise may be entered into to promote effective tax administration when compromise of the liability will not undermine compliance with the tax laws, and:

    1. Collection of the full liability will create economic hardship within the meaning of Treasury Regulation 301.6343-1; or,

    2. Regardless of the taxpayer's financial circumstances, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance (DVC).

  2. Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance with the tax laws include:

    1. Taxpayer does not have a history of noncompliance with the filing and payment requirements of the IRC;

    2. Taxpayer has not taken deliberate actions to avoid the payment of taxes; and

    3. Taxpayer has not encouraged others to refuse to comply with the tax laws.

      Note:

      These factors as well as any other relevant factors should be considered but no minimum compliance requirement has been established.

  3. Collection has jurisdiction over effective tax administration offers based on economic hardship. Factors supporting a determination of economic hardship include:

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

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

      Note:

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

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

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

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

      Note:

      These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.

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

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

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

    3. Taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the tax liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. Taxpayer's overall compliance history does not weigh against compromise.

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

    1. In October of 2007, taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 2007 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. Taxpayer's overall compliance history does not weigh against compromise.

    2. Taxpayer is a salaried sales manager at a department store who has been able to place $4,000 in a tax-deductible IRA account for each of the last two years (2006 and 2007). Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, taxpayer submits an e-mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering e-mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS e-mail response to his inquiry, taxpayer would have redeposited the amount within the required 60-day period. Taxpayer's overall compliance history does not weigh against compromise.

4.18.3.3  (12-23-2010)
Jurisdiction-Effective Tax Administration

  1. Collection has jurisdiction over offers based on Effective Tax Administration. Collection will retain offers based on economic hardship. Offers where determinations of Detriment to Voluntary Compliance (DVC) need to be made will generally be referred to Examination for consideration.

    Note:

    These cases may also fall under the jurisdiction of Appeals if the taxpayer raises the issue during a Collection Due Process (CDP) or equivalent proceeding. See IRM 4.18.7.4, Offers Under Office of Appeals Jurisdiction.

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

  3. In instances where Examination consideration is warranted (paragraph 1 or 2 above), Collection will forward a copy of the Offer in Compromise (and/or a written referral) to Examination using Form 3210, Document Transmittal, and retain the original. Examination will subsequently provide a written disposal recommendation to Collection. See IRM 4.18.2, Doubt as to Liability Offers, which provides guidance in considering doubt as to liability offers.

  4. Examination action/offer consideration should be initiated within 30 days and monthly contact should be maintained with Collection, by the examiner through the PSP OIC Coordinator, to inform Collection of the status and projected closure date. A determination should be reached and the recommendation/file is to be returned to Collection within 90 days by the PSP OIC Coordinator using Form 3210, Document Transmittal.

4.18.3.4  (12-23-2010)
Examination Considerations

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

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

  3. Examiners should be careful not to confuse DVC with economic hardship offers. Economic hardship offers will always be considered by Collection. Where the examiner believes that there is a DVC issue that warrants consideration, the examiner should clearly address the issues and why it is believed that compromise may be warranted before forwarding the case to Collection.

  4. The examiner should consider equity already established in the tax law in assessing/analyzing the taxpayer's DVC offer. See Treas. Reg. 301.7122-1.

4.18.3.5  (12-23-2010)
Offer Accepted

  1. See procedures as outlined under "doubt as to liability" provisions in IRM 4.18.2.6, Doubt as to Liability Offer Accepted.

  2. Approval authority to accept effective tax administration offers are delegated in IRM 1.2.44.2, Delegation Order No. 5-1, To Accept, Reject, Return, Terminate or Acknowledge Withdrawals of Offers in Compromise. Form 7249, Offer Acceptance Report, will be annotated "effective tax administration" as the reason for acceptance.

  3. The acceptance recommendation is routed through the field territory manager, the OIC technical services manager and submitted to Collection using Form 3210, at the Brookhaven Campus, Collection Offer in Compromise (COIC) Unit where the OIC came from.

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

4.18.3.6  (12-23-2010)
Offer Withdrawn

  1. See procedures as outlined under "doubt as to liability" provisions in IRM 4.18.2.7, Doubt as to Liability Offer Withdrawn.

  2. The Planning and Special Programs OIC coordinator will forward the OIC file to Collection for final processing if no case assignment has been made to an examination group.

4.18.3.7  (01-01-2000)
Offer Rejected

  1. See procedures as outlined under "doubt as to liability" provisions in IRM 4.18.2.8, Doubt as to liability Offer Rejected.

  2. Rejection authority for rejected effective tax administration offers is delegated to the field territory manager and technical services territory manager.

  3. After Independent Administrative Review is completed within Examination (on the Examination issues), the rejection recommendation and correspondence is routed through the field territory manager and technical services territory manager, depending upon if the field or Technical Services addressed the offer, and submitted to Collection.

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


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