5.8.11  Effective Tax Administration

Manual Transmittal

November 26, 2013

Purpose

(1) This transmits revised IRM 5.8.11, Offer in Compromise, Effective Tax Administration.

Material Changes

(1) Exhibit 5.8.11–1 — Updated the NEH-ETA check sheet to reflect the correct phone number and mailing address.

Effect on Other Documents

This material supersedes IRM 5.8.11, dated 09/23/2008.

Audience

SB/SE Compliance employees

Effective Date

(11-26-2013)


Dretha Barham
Director, Collection Policy

5.8.11.1  (09-23-2008)
Overview

  1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. 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

    Treasury Regulation § 301.7122-1 authorizes the Service to consider OIC's raising these issues. These offers are called Effective Tax Administration (ETA) offers.

  2. The availability of an ETA offer encourages taxpayers to comply with the tax laws because taxpayers will believe the tax laws are fair and equitable. The ETA offer allows for situations where tax liabilities should not be collected even though:

    • The tax is legally owed, and

    • The taxpayer has the ability to pay it in full

  3. No compromise to promote ETA may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

  4. If a taxpayer submits an ETA offer, first investigate the offer for:

    • DATL, and/or

    • DATC

  5. An ETA offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under DATL and/or DATC.

  6. The taxpayer must include the CIS (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under ETA.

  7. Economic hardship standard of § 301.6343-1 specifically applies only to individuals.

5.8.11.2  (09-23-2008)
Legal Basis for Effective Tax Administration Offer

  1. Compared to Doubt as to Collectibility (DATC)

    1. In a DATC offer, the tax liability equals or exceeds the taxpayers RCP which is:

      • Net equity, plus

      • Future income, and

      • Other components of collectibility

    2. In an ETA offer the tax liability is less than the taxpayers RCP. The RCP shows the taxes owed can be collected in full either:

      • In a lump sum, or

      • Through an installment agreement (IA)

    3. A DATC offer does not convert to an ETA offer if the OI and the taxpayer cannot agree on an acceptable offer amount.

  2. Compared to Doubt as to Collectibility with Special Circumstances (DCSC)

    1. Taxpayers may qualify for an ETA offer when their RCP is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

    2. Taxpayers may qualify for a DCSC offer when they cannot fully pay the tax due but have proven special circumstances that warrant acceptance for less than RCP. Factors establishing special circumstances under DATC are the same as those considered under ETA. Refer to IRM 5.8.4.3.

    Example:

    The taxpayer owes $ 20,000. The RCP is $ 25,000. The taxpayer could have an offer accepted for less than the total liability of $ 20,000 under the ETA provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.

    Example:

    The taxpayer owes $20,000. However his RCP is $15,000. The offer does not meet the legal basis for an ETA because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under DCSC provisions.

  3. Compared to Doubt as to Liability

    An offer can be considered under ETA provisions only when there are no DATL issues.

  4. In reaching these determinations:

    If… Then…
    The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for ETA consideration. The OIC is considered based on the DATL issue.
    The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an ETA offer. The OIC is considered based on DATC. However, hardship or public policy/equity may be present in the case to allow consideration under DCSC.
    The Service determines the taxpayer is not eligible for compromise based on DATL or DATC and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for ETA consideration.

  5. Before we can consider an OIC based on economic hardship or public policy/equity considerations, three factors must exist:

    1. A liability has been or will be assessed against taxpayer(s) before acceptance of the OIC

    2. The sum of net equity in assets, future income, and the other components of collectibility making up RCP must be greater than the amount owed.

    3. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.

5.8.11.2.1  (09-23-2008)
Economic Hardship

  1. When a taxpayers liability can be collected in full but collection would create an economic hardship, an ETA offer based on economic hardship can be considered.

  2. The definition of economic hardship as it applies to ETA offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

    Note:

    Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.

  3. The taxpayers financial information and special circumstances must be examined to determine if they qualify for an ETA offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.

  4. The taxpayer’s income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health, welfare, and production of income of the taxpayer and the taxpayer’s family. National and local standard expense amounts are designed to provide accuracy and consistency in determining taxpayer’s basic living expenses. These standards are guidelines and if it is determined that a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

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

    • The taxpayers age and employment status,

    • Number, age, and health of the taxpayers dependents,

    • Cost of living in the area the taxpayer resides, and

    • Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.

    Note:

    This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.

  6. Factors that support an economic hardship determination may include:

    1. 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.

    2. 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.

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

    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.

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

    Example:

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

    Example:

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

    Example:

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

  8. The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.

    Example:

    The taxpayer submitted an ETA offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.

  9. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

    Example:

    The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and will use personal funds for basic living expenses. The taxpayer owes $ 100,000 and has a reasonable collection potential of $ 150,000. An offer was submitted for $ 35,000. Through the investigation, it is determined that collecting more than $ 50,000 would cause an economic hardship for the taxpayer. A determination on economic hardship was made due to the fact the taxpayer’s reasonable living expenses, including ongoing medical costs will exceed their income once the taxpayer is unemployed. The taxpayer is advised to raise the offer to $ 50,000 since it is the amount the Service can collect without creating an economic hardship.

  10. The existence of economic hardship criteria does not dictate that an OIC must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the OIC should not be recommended for acceptance.

5.8.11.2.2  (09-23-2008)
Public Policy or Equity Grounds

  1. Acceptance of an OIC based on considerations of equity and public policy will generally be based on a combination of facts and circumstances. It is important that appropriate cases are identified and forwarded to the NEH-ETA group in Austin, TX for consideration. Generally, the circumstances should be such that acceptance of the offer is fair and equitable and promotes ETA.

  2. Where there is no DATL, no DATC, and the liability could be collected in full without causing economic hardship, the Service may compromise to promote ETA where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.

  3. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.

  4. All non-hardship ETA offers should meet the following requirements:

    • The taxpayer has remained in compliance since incurring the liability and overall their compliance history does not weigh against compromise;

    • The taxpayer must have acted reasonably and responsibly in the situation giving rise to the liabilities; and

    • The circumstances of the case must be such that other taxpayers would view the compromise as a fair and equitable result. For example, it should not appear to other taxpayers that the result of the compromise places the taxpayer in a better position than they would occupy had they timely and fully met their obligations.

    Note:

    Generally, tax liabilities associated with the taxpayer’s participation in abusive tax avoidance transactions will not be compromised under these procedures.

5.8.11.2.2.1  (09-23-2008)
Public Policy or Equity Compelling Factors

  1. Compromise may promote ETA where a taxpayer’s liability was directly caused by a processing error on the part of the Service and would otherwise have been avoided. Compromise to remedy the mistake may be appropriate to the extent correction of the mistake (such as through abatements, reversal of credits, etc) does not put the taxpayer back in the same position that he or she would have occupied if the error had not been made.

    Example:

    The taxpayer is a closely-held corporation. The IRS audited the taxpayer’s tax returns for 2000, 2001, and 2002 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.

    Note:

    The fact that the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.

  2. Compromise may promote ETA where the taxpayer incurred the liability because of having followed erroneous advice or instructions from the Service. The advice or instructions caused the taxpayer to incur a tax liability that would not otherwise have been incurred.

    Example:

    The taxpayer is a salaried sales manager at a department store who has been able to place $ 2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds in an answering E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must be redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds in a timely manner. The taxpayer is able to provide documentation that demonstrates the taxpayer was provided incorrect information. . The taxpayers overall compliance history does not weigh against compromise.

    Note:

    Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.

  3. If actions or inaction of the Service unreasonably delayed resolution of the taxpayer’s case and interest or penalty abatement is not available, compromise may still be warranted if the circumstances are sufficiently compelling. An OIC should not be accepted under ETA provisions, in lieu of abatement under IRC Section 6404(e), when appropriate.

  4. These provisions may allow for relief if the taxpayer alleges that the criminal or fraudulent act of a third party is directly responsible for the tax liability. The taxpayer should be able to provide supporting documentation that the act occurred and was the direct cause of the delinquency. The taxpayer should also be able to show that the nature of the crime was such that even a prudent, responsible business owner would have been misled to believe the tax obligations were properly addressed. There should be evidence that the funds required for the payment of the taxes were segregated or otherwise identified and were available to pay the taxes in a timely manner. Compromise would promote ETA in such situations only where the failure to comply is directly attributable to intervention by a third party and where the taxpayer has made every effort to comply and taken reasonable precautions to prevent the criminal or fraudulent acts at issue. The taxpayer’s efforts to mitigate the damages by pursuing collection from the third party should also be considered. Compromise for this reason would only promote ETA where there is a very close nexus between the actions at issue and the failure to comply.

    Example:

    The taxpayer was using a payroll service provider (PSP) who deducted all tax payments from the taxpayer’s bank account, yet did not remit them to the Service. The taxpayer took all reasonable precautions to prevent this from occurring. The PSP also falsified documents to conceal the embezzlement. Since the abatement of interest is not available under 6404(e) on employment taxes, an offer in the amount of the tax balance may be accepted. The taxpayer’s overall compliance history does not weigh against acceptance of the offer.

    Note:

    The Service will not compromise on public policy or equity grounds solely on the argument that the acts of a third party caused the unpaid tax liability. Third parties include: Representatives, Partners, Agent, or Employee.

    The actions of the third party may be part of a fact pattern that, viewed as a whole, present compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayer’s situations must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.

    This section does not apply to TEFRA liabilities. Refer to Example 2 under paragraph (7) in this subsection for discussion of TEFRA cases.

  5. Compromise may be appropriate where there is clear and convincing evidence that rejecting the OIC, and pursuing other collection alternatives, would have a significantly negative impact on the community in which the taxpayer lives or does business, i.e. does the taxpayer provide essential services to the community that would be lost if the tax liability was collected in full? The taxpayer should be asked to provide documentation that full payment of the tax liabilities would likely result in the inability of the business to provide these essential services. The businesses that would typically qualify under this provision are not for profit, charitable, or exempt organizations.

    Example:

    A non-profit organization provides quality health and human services to indigent, low-income and under-served residents in two counties. Rejecting the offer and pursuing collection action for full payment would result in forcing the center to choose between paying the delinquent taxes or providing competent medical care.

    After conducting a thorough review of the facts; it was determined that services would not be provided to the community if the taxpayer was no longer able to operate.

    Since the taxpayer took all reasonable actions to prevent the delinquency from occurring and the taxpayer’s overall compliance history does not weigh against acceptance of the offer, an offer amount for less than the remaining tax balance may be considered.

  6. Compromise may promote ETA where the taxpayer was incapacitated and thus unable to comply with the tax laws.

    Example:

    In October 2003, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The 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 has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 2003 tax year based on information documents it had received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayer’s overall compliance history does not weigh against compromise.

    Note:

    In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 2003 tax year and adjust the taxpayers account accordingly. The Service should also work with the taxpayer to secure the filing of any missing returns. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had he been able to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.

    Note:

    It would not promote ETA to compromise with the taxpayer, if the investigation revealed that the taxpayer was able to attend to financial matters during the time of the illness. For example, assume the taxpayer, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote ETA, and could serve to undermine compliance by other taxpayers.

  7. Compromise on public policy or equity grounds is not authorized based solely on a taxpayer’s belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.

    Example:

    The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote ETA to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).

    Example:

    In 2000, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. Immediately upon investing, the taxpayer claimed investment tax credits that significantly reduced or eliminated the tax liabilities for the years 1997 through 2000. In 2001, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). After issuance of the Final Partnership Administrative Adjustment (FPAA), but prior to any proceedings in Tax Court, the IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS's determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership's activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. Neither the operation of the TEFRA rules nor the TMP's actions on behalf of the taxpayer provide grounds to compromise under the equity provision of 5.8.11.2.2. Compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of TEFRA. Furthermore, reducing the risks of participating in tax shelters would encourage more taxpayers to run those risks, which would undermine compliance. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of section 5.8.11.2.1.

    Note:

    In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statutes based on a perception of unfairness. Compromise for that reason would not promote ETA. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.

  8. There may be other circumstances involved in a case that would lead a reasonable third party to conclude that acceptance of the OIC would be fair, equitable, and promote effective tax administration. Other factors not discussed above or in the IRM, may be present to support the conclusion that the case presents compelling public policy or equity considerations sufficient to justify compromise. Documentation of the presence of those factors which weigh in favor of compromise to promote effective tax administration must be thoroughly documented in the case file. Because these cases have the potential to establish new policy for the IRS in this area, offers recommended for acceptance under this paragraph should be routed through the National OIC Program Manager in order to obtain concurrence of the Director, Collection. The Office of Appeals should establish within their IRM a level of concurrence commensurate with the Director of Collection so the issue of establishing new policy is addressed.

  9. Once it has been determined that a case raises compelling public policy or equity considerations, Refer to IRM 5.8.11.4.3, Determining Acceptable Offer Amount.

5.8.11.2.3  (09-23-2008)
Compromise Would Not Undermine Compliance With Tax Laws

  1. Compromise under the ETA economic hardship or non-economic hardship provisions are permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws.

  2. Factors supporting (but not conclusive of), a determination that compromise would undermine compliance includes; but is not limited to:

    • The taxpayer has an overall history of noncompliance with the filing and payment requirements of the Internal Revenue Code

    • The taxpayer has taken deliberate actions to avoid the payment of taxes.

    • The taxpayer has encouraged others to refuse to comply with the tax laws.

      Note:

      There may be other situations where compromise would be undermined.

5.8.11.3  (09-23-2008)
Initial Processing of Effective Tax Administration Offers

  1. Offers submitted on the grounds of ETA will be worked either by the COIC units or field specialists.

  2. Taxpayers seeking a compromise under ETA will submit the Form 656 selecting ETA along with the CIS (Form 433-A and/or Form 433-B). Taxpayers must complete Section 9 (or attach a separate statement) and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since ETA criteria can not be considered until all other bases have been addressed.

  3. Like all other offers, the Service will only consider an ETA offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A, submitted the required initial TIPRA payment with the offer or filed Form 656-A, and are not a debtor in bankruptcy.

    Note:

    Follow IRM 5.8.3 for initial processing of offers.

  4. Elements necessary to perfect an OIC also apply to ETA offers. The requirement to submit complete financial statements for ETA offers is the same as for DATC offers.

    Note:

    Follow IRM 5.8.3.11 for procedures on perfecting offers.

  5. ETA offers are initially added to AOIC as DATC offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a DATC, the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.6 below for a full discussion of requirements to update AOIC prior to final processing of ETA and DCSC offers.

5.8.11.4  (09-23-2008)
Evaluation of Offers

  1. ETA offers cannot be considered if the taxpayer qualifies for DATC or DATL.

    Note:

    Follow IRM 5.8.4, Evaluation of Offers, for DATC issues and determining RCP.

  2. If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under DCSC. The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for ETA consideration. The offer must be considered under DCSC.

  3. If the taxpayer submits an offer based on DATC but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of ETA. The employee that investigates the OIC is required to address any potential special circumstances during first contact with the taxpayer or POA. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the OIC case history. This requirement does not apply where the only taxpayer contact is through correspondence.

  4. If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.

5.8.11.4.1  (09-23-2008)
Public Policy/Equity Processing

  1. OIC's submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.

  2. In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been established in Austin, TX to work these offers.

  3. Only after consideration has been given to all other potential bases for acceptance (e.g. DATL, DATC, DCSC, and/or ETA based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.

  4. After all other potential bases have been considered; complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (NEH-ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.

  5. The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.

  6. If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.

  7. If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to the Austin group. Referrals of cases to the ETA group should include the OI’s recommendation as to what would constitute an acceptable compromise amount.

    • The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.

    • The file should be sent by overnight mail on a Form 3210 to the Austin group.

    • At the time of mailing, the case should be transferred on AOIC to Area 05 (Gulf States).

    • A history item should be added to AOIC to show the case is being sent to the Austin group, Area 05 (Gulf States).

    • The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.

    Note:

    The OI may also seek guidance from the Austin group on a DCSC offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.

5.8.11.4.2  (09-23-2008)
Financial Statement Analysis

  1. Offers submitted under ETA require the same full financial analysis as DATC offers in order to determine RCP and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.

  2. Once the RCP is completed, a determination can be made as to whether the OIC qualifies for consideration under ETA or DATC.

  3. If the taxpayers assets and future income exceed the tax liability, the taxpayers OIC can be considered under the ETA basis.

5.8.11.4.3  (09-23-2008)
Determining an Acceptable Offer Amount

  1. An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

    Example:

    The taxpayer has a $100,000 liability and a RCP of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.

  2. In OIC's based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances. The Service does not anticipate accepting compromises offering only nominal or token funds. Rather, the amount accepted should be determined by reference to the factors giving rise to the decision that compromise is appropriate. For example:

    1. In cases compromised under IRM 5.8.11.2.2.1 above, paragraphs 1, 2, and 3, an acceptable offer would be expected to result in the taxpayer being placed in the same position as if the error or delay on the part of the Service had not occurred.

    2. In cases compromised under IRM 5.8.11.2.2.1 above. paragraphs 4 and 5, the taxpayer’s financial condition may be a relevant consideration, after considering all other facts and circumstances. The justification for a particular amount to be accepted should be clearly documented.

    3. When compromising based on IRM 5.8.11.2.2.1 paragraphs 4, 5, and 8, in business cases in particular, the Service must be cautious to avoid providing financial advantages through the forgiveness of tax debt. This may create the appearance that the delinquent business has been able to profit from its failure to pay, giving it a competitive advantage over other, fully compliant businesses. For this reason, the Service will generally insist that a compromise with an operating business provide for payment of the full amount of tax, exclusive of interest and penalties.

  3. Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, based on the taxpayer’s situation and geographic location, funding options may allow the taxpayer to tap into available equity without creating economic hardship. When appropriate, these options should be taken into consideration in determining an acceptable offer amount for an ETA offer based on economic hardship.

5.8.11.5  (09-23-2008)
Documentation and Verification

  1. To verify the taxpayers special circumstances and support a basis of ETA:

    1. Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.

    2. When special circumstances are found to exist, the amount offered will be less than RCP. For ETA, the RCP is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.

  2. As is the case with all compromise determinations, referrals, and acceptance/rejection decisions, employees need to exercise good judgment. This good judgment needs to be clearly evident and articulated in the case file documentation and should be supported by the known case facts, circumstances, and supporting documents. There is no clearly defined formula to follow in ultimately making these decisions, and each case needs to be evaluated on its own particular set of facts and circumstances. Particularly in regard to acceptance/rejection decisions, the recommendation report must clearly explain the reasoning behind our actions.

5.8.11.6  (09-23-2008)
Final Processing

  1. Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.

  2. The following is a guide to these determinations:

    If… And… Then…
    The offer was submitted under ETA An economic hardship has been determined to exist, but the RCP is less than the liability balance due
    1. Update the AOIC offer screen to indicate a "C" under the offer type.

    2. Generate all closing reports with the proper approving official for DCSC.

    The offer was submitted under DCSC An economic hardship has been determined to exist, and the RCP is greater than the liability balance due
    1. Update AOIC offer screen to indicate "A" under offer type.

    2. Generate closing reports with the proper approving official for ETA offers.

    The offer was submitted under ETA The offer is being recommended for acceptance under DATC with the offer exceeding the RCP
    1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for DATC.

    2. Generate closing reports with the proper approving official for DATC without special circumstances.

    The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under DATC.
    1. Generate closing reports with the proper approving official for DATC without special circumstances.

    2. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.

    The offer was submitted under ETA with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the RCP is less than the liability and the offer cannot be recommended for acceptance under DCSC.
    1. Update AOIC offer screen to indicate a "C" under special circumstances.

    2. Generate closing reports with the proper approving official for DCSC.

    The offer was submitted under ETA with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the RCP exceeds the liability
    1. Update AOIC offer screen to indicate "A" under offer type.

    2. Generate closing reports with the proper approving official for ETA offers.

    The offer was submitted under ETA The special circumstances meet economic hardship, or Public Policy/Equity criteria and the RCP exceeds the tax liability. However, the offer cannot be recommended for acceptance.
    1. Update AOIC offer screen to indicate "A" under offer type.

    2. Generate closing reports with the proper approving official for ETA offers.

    The offer was submitted under DCSC The special circumstances meet economic hardship, or Public Policy/Equity criteria and the RCP is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for DCSC.

5.8.11.6.1  (09-23-2008)
Rejection/Return/Withdrawal Processing

  1. The procedures in IRM 5.8.7 should be followed when processing ETA rejected, withdrawn or returned offers.

  2. IRM 5.8.12 provides instructions for IAR review of rejected offers.

  3. See IRM 1.2.44.2 – Delegation Order No. 5-1 for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 1271 and the closing letter

5.8.11.6.2  (09-23-2008)
Acceptance Processing

  1. The procedures in IRM 5.8.8, Acceptance Processing, should be followed when processing accepted ETA offers.

  2. Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.

  3. See IRM 1.2.44.2 – Delegation Order No. 5-1 for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 1271 and the closing letter

Exhibit 5.8.11-1 
Effective Tax Administration Non-Hardship OIC Check Sheet

This is a two-page check sheet used for ETA Non-hardship OIC's.

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