- 33.3.2 Offers in Compromise
- 18.104.22.168 Authority to Compromise
- 22.214.171.124 Offers in Compromise and the Role of Counsel
- 126.96.36.199 Review of Proposed Offers in Compromise
- 188.8.131.52.1 Review of Doubt as To Liability Offers
- 184.108.40.206.2 Review of Doubt as to Collectibility Offers
- 220.127.116.11.3 Review of Effective Tax Administration Offers
- 18.104.22.168 Offers in Cases Handled by the Department of Justice
- 22.214.171.124 Offers in Docketed Tax Court Cases
- 126.96.36.199 Other Matters for Counsel Assistance
Part 33. Legal Advice
Chapter 3. Other Legal Advice
Section 2. Offers in Compromise
October 05, 2015
(1) This transmits a revision to CCDM 33.3.2, Other Legal Advice, Offers in Compromise.
(1) This section revises CCDM 188.8.131.52 to recommend that Counsel review transcripts for litigation transaction codes when determining whether to accept an OIC and whether the Department of Justice approval of the OIC is necessary.
Associate Chief Counsel
(Procedure & Administration)
IRC § 7122 authorizes the Secretary to compromise any civil or criminal case arising under the internal revenue laws prior to referral to the Department of Justice (DOJ) for prosecution or defense. Internal Revenue Form 656, Offer in Compromise, is the required form for an offer.
Offers proposing to compromise any civil case in which the unpaid amount of tax assessed (including penalties and interest) is $50,000.00 or more, require the legal opinion of Counsel. IRC § 7122(b).
The General Counsel for the Treasury has delegated the functions relative to the legal review of offers in compromise to the Chief Counsel of the Service. General Counsel Order No. 4 (revised). The Chief Counsel has redelegated this authority to Division Counsel (Small Business/Self-Employed) (SB/SE). Associate Area Counsel (SB/SE) offices should consult with either Division Counsel (Large Business and International) (LB&I) or Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) (TEGE) when they receive for review a proposed acceptance of a doubt as to liability or effective tax administration offer submitted by an LB&I or TEGE taxpayer. For more information on coordinating cases or issues, including with Associate offices, see CCDM 31.1.4, Coordination and Reconciliation of Disputes.
As reflected in Policy Statement P-5-100, compromise is a viable collection tool. It is the Service’s policy to encourage the use of this tool where appropriate. Correspondingly, Counsel will support the Commissioner’s offer in compromise policy and will assist the Service by providing the legal opinion required by IRC § 7122(b) and by rendering assistance with legal and policy issues that the Service may encounter in the processing and evaluation of offers.
Counsel’s review of proposed acceptances has two separate and distinct components: (1) certification that all of the legal requirements for compromise have been met, and (2) review of the proposed compromise for consistent application of the Service’s acceptance policies.
Legal Basis for Compromise. Certifying that the legal requirements for compromise have been met is the primary purpose of Counsel review. These requirements have been met if a basis for compromise under the Treasury regulations has been established and the documentation requirements of section 7122(b) have been satisfied.
Policy Regarding Acceptance of Amount Offered. If the legal requirements for compromise have been met, Counsel then reviews the proposed acceptance for consistent application of the Service’s policies regarding whether the proposed compromise amount is acceptable. The views of Counsel should be set forth in a separate memorandum, which will be reviewed by the official with authority to compromise prior to making the acceptance final.
In making each of the foregoing determinations, Counsel must rely upon factual determinations made by the Service. These determinations should ordinarily not be reexamined by Counsel unless patently erroneous. Asset valuations and necessary expense determinations are largely matters of administrative discretion and judgment and should not be questioned by Counsel.
When referring an offer in compromise to Counsel for legal review, the appropriate Service or Appeals personnel will prepare and forward all the necessary documents. These documents include the taxpayer’s offer (Form 656) and financial statements; Form 7249, Offer Acceptance Report; the Offer in Compromise Recommendation Report and supporting documentation, including an account transcript and the acceptance letter. The referral should point out any court activity (e.g. bankruptcy) and any related liabilities (e.g., TFRP assessment against a responsible officer). Counsel should review the transcript to ensure that no litigation code has been posted or is pending. If there is any litigation code posted or pending, Counsel should determine based on the closing code and other information, whether acceptance of the offer is appropriate and whether Department of Justice approval is necessary.
Once Counsel has completed its review, a form transmittal memorandum may be used to return the signed and conformed Offer Acceptance Report and compromise file to the referring office. The initialed copy of the transmittal memorandum and a copy of the Offer Acceptance Report should be retained by Counsel. Division Counsel has the discretion to determine the length of time these documents should be retained.
This subsection describes the standards for review of offers in compromise
Legal Basis for Compromise. Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision concerning the existence or amount of the liability.
Policy Regarding Acceptance of Amount Offered. The determination of the amount accepted to resolve a doubt as to liability case should be made by reference to the expected hazards in litigating the case. The evaluation of litigating hazards is not an exact science. Ordinarily, an amount should be considered acceptable under the Service’s policies if it is within a reasonable range of the predicted result in litigation.
Legal Basis for Compromise. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the assessed liability.
Policy Regarding Acceptance of Amount Offered. Where doubt as to collectibility has been established, an offer is generally considered acceptable if it closely approximates the amount that could reasonably be collected by other means, including the Service’s administrative and judicial collection powers. See Policy Statement P-5-100. No asset should be eliminated from consideration or valued at zero simply because the Service would be unlikely to seize the asset. See IRM 5.8.5, Financial Analysis. In evaluating a proposed acceptance, Counsel’s review should include a determination of:
Whether the four components of collectibility (net equity in assets, present and future income, amounts collectible from third parties, and amounts available to the taxpayer but beyond the reach of the Service) have been considered;
Whether issues with regard to lien priority have been property determined; and
Whether fraudulent conveyances and/or transferee liability issues have been properly resolved.
Financial Analysis. The Service’s policies and procedures establish accepted methods for valuing assets, as well as rules regarding the portion of assets to be included in reasonable collection potential. Counsel should not question asset valuations and future income calculations that fall within the parameters established in these policies and procedures.
Special Circumstances. The Service’s policies and procedures recognize that it may be appropriate in some cases for the Service to accept an offer of less than the total reasonable collection potential of a case. These are known as "special circumstances" cases. The Service anticipates acceptance of less than reasonable collection potential in cases where, despite the proper application of the Service’s allowable expense standards and asset valuation rules, the taxpayer could not pay the full reasonable collection potential without suffering economic hardship. See IRM 5.8.4, Investigation. Economic hardship is defined as the inability to meet reasonable basic living expenses. See Treas. Reg. § 301.6443-1(b)(4). Economic hardship does not include mere inconvenience or the inability to maintain a luxurious or affluent standard of living. Under the Service’s procedures, the amount accepted should reflect what could reasonably be collected less the amount a taxpayer must retain to avoid economic hardship. See IRM 5.8.11, Effective Tax Administration.
In general, where there are no grounds for compromise on collectibility or liability grounds, a compromise may be entered into to promote effective tax administration, where
Collection of the full liability would create economic hardship within the meaning of Treas. Reg. § 301.6343-1; or
Where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Treas. Reg. § 301.7122-1(b)(3).
Review of offers based on effective tax administration where collection of the tax liability in full would create economic hardship—Legal Basis for Compromise. The Service is authorized to compromise with individuals when it determines that a liability could be collected in full, but to do so would cause economic hardship. Economic hardship is defined as the inability to meet reasonable basic living expenses. See Treas. Reg. § 301.6343-1(b)(4). Economic hardship does not include mere inconveniences or the inability to maintain a luxurious or affluent standard of living. If, even after deferring to the Service’s valuation and expense determinations, Counsel concludes that the liability could be collected in full without causing economic hardship, as defined under the regulations, the basis for compromise is not established. In establishing this basis for compromise, the possible effect of compromise on future compliance with the tax laws must be considered.
Policy Regarding Acceptance of Amount Offered. Under the Service’s procedures, the amount accepted should reflect what could reasonably be collected less the amount a taxpayer must retain to avoid the economic hardship. See IRM 5.8.11, Effective Tax Administration. The determination to accept a particular amount must be based on the taxpayer’s particular facts and circumstances, and must be explained and documented clearly. See IRM 5.8.11. The decision to accept a particular amount will necessarily involve judgment on the part of the offer specialist and the official delegated the authority to make the final acceptance decision.
Review of offers based on effective tax administration where there is compelling public policy or equitable considerations—Legal Basis for Compromise. The Service may compromise a case when it is determined that, although there is no doubt as to collectibility or liability, and collection in full would not cause economic hardship, compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are bring administered in a fair and equitable manner. A taxpayer proposing to compromise on this basis will be expected to demonstrate that circumstances justify compromise even though a similarly situated taxpayer may have paid his liability in full. For an example of a case that may be compromised on this basis, see Treas. Reg. § 301.7122-1(c)(3)(iii). This basis is not established if the offer file contains only vague assertions that the imposition of a tax liability, or of interest and penalties, is unfair. The authority to compromise should not be used as a method to disregard or circumvent established limits to relief granted elsewhere in the Code, such as interest abatement. See IRM 5.8.11, Effective Tax Administration. In establishing this basis for compromise, the possible effect of compromise on future compliance with tax laws must be considered.
Policy Regarding Acceptance of Amount Offered. An offer to compromise based on effective tax administration when there is compelling public policy or equity considerations will generally be considered acceptable if it reflects what is fair and equitable under the particular facts and circumstances of the case. The offer acceptance recommendation should contain a detailed explanation as to how the Service determined that the amount offered was adequate and is a fair and equitable resolution of the case. See IRM 5.8.11, Effective Tax Administration.
After a case is referred to the Department of Justice (DOJ), only the Attorney General or his delegate may compromise the case. The Attorney General has the authority to settle the case referred to DOJ, any pending related Tax Court case involving the same or related years of the same taxpayer, or related years of the same taxpayer or of a related taxpayer which may be pending administratively, if the related matters are germane to the DOJ case. See Op. Att’y Gen. 8, XIV-1 C.B. 442. DOJ may propose a settlement based on the taxpayer’s inability to pay. The scope of the Attorney General’s authority and the procedures for settlement of cases being handled by DOJ are more fully explained at CCDM 34.8.2, Settlement Procedures. All compromises are referred to the Service for approval as to nonsuit years or taxpayers not in suit, and to Counsel for matters in suit.
When a taxpayer makes an offer in compromise based on inability to pay in connection with a pending case, DOJ may request that SB/SE Compliance conduct an investigation of the taxpayer’s financial condition, including a recommendation as to whether the offer should be accepted or rejected. Field Counsel will need to coordinate with the appropriate SB/SE personnel, and should advise them if the request is being worked as a courtesy offer or if SB/SE has jurisdiction to process the offer. See IRM 5.8.2, Centralized Offer in Compromise Initial Processing and Processability.
In all cases where a referral has been made to DOJ and the United States has obtained a judgment for the tax liabilities, the authority to compromise the taxes is thereafter with the Attorney General. The Service cannot compromise under section 7122 taxes which have been reduced to judgment. If a taxpayer makes an offer in compromise based on an inability to pay, the final decision as to whether the offer is acceptable must be made by DOJ. In the past, when the Service has compromised taxes not realizing judgment has been entered, the facts have been forwarded to DOJ and a request made that the compromise be affirmed (which usually happens).
If Counsel receives an offer in compromise for review and there is an open criminal investigation pending, the reviewing attorney must coordinate with the appropriate field office of Division Counsel/Associate Chief Counsel (Criminal Tax) to ensure the case has not been referred to DOJ for prosecution. If the case has been referred, Counsel should not approve the offer as SB/SE does not have jurisdiction to process the offer.
If a taxpayer makes an offer in compromise after a Tax Court case has been docketed and Field Counsel decides to consider the offer, the procedures set forth in CCDM 34.5, Settlement Procedures, should be followed.
The Office of Chief Counsel is charged with the responsibility for reviewing and approving proposed rescission letters. The rescission letter will be prepared by the appropriate Service personnel and should be sent to SB/SE Field counsel for review. The rescission letter must be approved by someone with the same approval authority as the person who accepted the offer. Rescission matters received by Counsel should be opened on CASE-GL using POSTF as a category and adding the issue code for offers in compromise from the Uniform Issue List.
In the course of processing any compromise case, the office handling the case may need legal assistance. In such instances, the Associate Area Counsel will furnish the necessary legal assistance. These requests should be opened on CASE-GL using POSTF as category and adding the issue code for offers in compromise from the Uniform Issue List.