4.18.2 Doubt as to Liability Offers

Manual Transmittal

February 28, 2017

Purpose

(1) This transmits a complete revision of IRM 4.18.2, Exam Offer-in Compromise, Doubt as to Liability Offers.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary.

IRM Reference Description of Change
4.18.2.1 Added reference to Form 656-L, Offer in Compromise (Doubt as to Liability).
4.18.2.4 Deleted obsolete guidance and added additional guidance.
4.18.2.5 Added procedural clarification to discuss the adjustments with the taxpayer and that a report should not be issued. Deleted obsolete guidance.
4.18.2.6 Information in this subsection was rearranged for better flow of information. Additional information was added to clarify procedures.
4.18.2.7 Deleted requirement for a partial assessment.
4.18.2.8 Deleted obsolete guidance and added new additional guidance.
Exhibits:
4.18.2-1
4.18.2-2
4.18.2-3
Removed obsolete exhibits.

Effect on Other Documents

This material supersedes IRM 4.18.2, Exam Offer-in Compromise, Doubt as to Liability Offers dated December 9, 2008.

Audience

SBSE Examination

Effective Date

(02-28-2017)

John Caggiano
Acting Director, Exam Field and Campus Policy
SE:S:E:HQ:EFCP
Small Business/Self Employed

Overview

  1. This section provides guidance for examiners in considering an offer in compromise, doubt as to liability (OIC-DATL) request which is filed on Form 656-L, Offer in Compromise (Doubt as to Liability).

Considering the Liability Issue

  1. Doubt as to liability exists when 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 or judgment concerning the existence or amount of the tax liability.

  2. Grounds for compromise may exist when there is legitimate doubt from both the viewpoint of the taxpayer and the IRS. Validity of the OIC-DATL is determined by evaluating the supporting evidence and circumstances. The taxpayer is required to submit documentation and/or other evidence to support his/her OIC-DATL. The evidence available for both parties must be weighed in order to determine the extent of any "doubt " .

    Note:

    The extent of any determination of "doubt" , should be consistent with Policy Statement 4–117. See IRM 1.2.13.1.34, Policy Statement 4-117.

  3. An OIC-DATL may not be rejected solely because the Service is unable to locate the taxpayer's return or return information. The taxpayer cannot be required to submit a financial statement for a doubt as to liability offer. Also, there is no application fee for a doubt as to liability offer.

Jurisdiction—Doubt as to Liability

  1. SBSE Examination has jurisdiction over OIC-DATL except as noted in following paragraph. Examination employees are responsible for preparation of the necessary documents and letters to effect the disposition of the OIC-DATL filed by the taxpayer.

  2. Collection Division has jurisdiction of doubt as to liability offers involving the Trust Fund Recovery Penalty and Personal Liability for Excise Tax. Unless the prior assessment was made by Examination, liability offers concerning assessments made during bankruptcy proceedings may also fall under the jurisdiction of SBSE Collection.

Examination Considerations

  1. An OIC-DATL examination should be conducted in a manner similar to an audit reconsideration examination.

  2. The OIC-DATL file is maintained separate from any previous examination file. Any previous file is used for reference only.

  3. The OIC-DATL should be examined and additional documents requested from the taxpayer, if necessary. All conclusions should be documented and all arguments raised by the taxpayer addressed in the workpapers. Form 4318, Examination Workpaper Index, or Form 4318-OA, Examination Workpapers Index - Office Audit, is used to index the workpapers.

  4. Taxpayer contact should generally be made within 30 days from receipt of the OIC-DATL. Offers in process over six months are considered overaged. IRC 7122, Compromises, was amended by section 509 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), PL 109–222, effective for offers filed after July 16, 2006. IRC 7122(f), Deemed Acceptance of Offer Not Rejected Within Certain Period, provides, "Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary, if such offer is not rejected by the Secretary, before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period" . Consequently, priority treatment of offers is critical. Notice 2006-68, Down payments for offers in Compromise, provides interim guidance under IRC 7122, as amended for offers filed after July 16, 2006. Taxpayers can rely on guidance in this notice until regulations or other guidance is issued.

    Note:

    Taxpayers should use Form 656–L, Offer in Compromise (Doubt as to Liability), to submit an OIC-DATL.

  5. When considering an OIC-DATL where the assessment was based on substitute for return (SFR) assessments, any return filed must be reviewed to determine if all the taxpayer's income was included in the assessment if the statute is open. If the OIC-DATL investigation reveals additional income not included in the SFR assessment, or a subsequent return, and the statute is open, the taxpayer will be required to file an amended return to include the additional income.

  6. When the Service is notified of the death of a taxpayer who submitted an OIC-DATL that is currently under consideration, the Service can no longer consider the OIC-DATL. If the OIC-DATL under consideration was submitted jointly by a husband and wife, contact with the surviving spouse should be made to determine whether there is a probate proceeding pending. See IRM 5.8.10.4, Death of Taxpayer.

Determination of Liability

  1. If the taxpayer's liability changes as a result of the examination determination, a revised examination report must be prepared. The line for taxable income per return or previously adjusted should be the corrected taxable income from the previous report. This should be verified from a transcript of account.

  2. The adjustment(s) should be discussed with the taxpayer. An examination report will be prepared to reflect the corrected tax liability.

    Note:

    This report should not be shared with the taxpayer or POA since all OIC-DATL determinations are subject to review by Technical Services.

  3. The taxpayer will be requested to withdraw the OIC-DATL (See IRM 4.18.2.7 for more information).

Doubt as to Liability Offer Accepted

  1. An offer to compromise a tax liability should set forth the legal grounds for compromise and should provide enough information for the Service to determine where the offer fits within its acceptance policies. Doubt as to liability exists when 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 when the liability has been established by a final court decision or judgment concerning the existence of the liability.

  2. While acceptance of an offer is a possibility, an accepted offer will be very rare. This is because there will rarely be an instance when a liability cannot be determined.

  3. Typically the only time an offer would be accepted is when there is no way to determine the liability, e.g. no books and records exist. In that event, the taxpayer will be requested to withdraw the OIC-DATL. Closure as acceptance will be the last resort. See IRM 4.18.2.7, for additional information.

  4. Closing an offer as a withdrawal or rejection are the preferred methods of resolution. If the examiner determines a correct tax liability, and the taxpayer agrees, we will ask taxpayer to withdraw the offer. If the taxpayer does not agree, the offer will be rejected. See IRM 4.18.2.7, and IRM 4.18.2.8.

  5. Acceptance of an OIC-DATL requires special processing procedures. IRM 1.2.44.2, Delegation Order 5 -1 (Rev. 4), outlines the level of authority needed to approve an OIC. Under IRC 7122(b), Record, if the total liability for an offer is $50,000 or more Counsel must provide an opinion to ensure that the OIC meets the legal requirements for compromise and conforms to the Service’s policy and procedure. See IRM 5.8.8.12, 24-Month Mandatory Acceptance under IRC § 7122(f).

  6. An acceptance must be reviewed by Exam HQ OIC-DATL analyst prior to closing to Technical Services. The file will be forwarded to Area PSP OIC-DATL coordinator (or WSD Reviewer ET) and then to HQ OIC-DATL analyst.

  7. Once a determination is made, the case file is routed via Form 3198, Special Handling Notice for Examination Case Processing, to the attention of the Technical Services OIC Reviewer. The reviewer will review the case and secure approval to issue the acceptance letter.

    Note:

    The offer acceptance report, is completed by Technical Services for accepted offers. See IRM 4.8.8.8.4, Accepted Offers.

Doubt as to Liability Offer Withdrawn

  1. When the examiner and taxpayer reach an agreement on the correct tax liability, a "compromise" , is not required. In order to process the case as agreed it is necessary for the taxpayer to withdraw the offer.

  2. Any adjustments required to correct the outstanding tax liability are accomplished through abatement of the erroneously assessed tax. The following procedures are completed by the examiner:

    1. Prepare an audit report using Form 4549, Income Tax Examination Changes, if the case is established on Audit Information Management System/Examination Returns Control System (AIMS/ERCS), but do not issue the report to the taxpayer. If the case is not established on AIMS/ERCS use Form 3870, Request for Adjustment, to abate the tax. The report must start with tax as previously determined. Verify this from a transcript of account. Explain the recommendation to the taxpayer, with the caveat that it is subject to review.

    2. Request that the taxpayer withdraw the OIC-DATL by submitting a written request. An example:

      Example:

      I hereby withdraw my offer for the tax year (insert year(s)), subject to the processing of a reduction of ($ amount) in previously assessed tax and penalties, respectively, plus interest.

      Example:

      I authorize you to apply the ($ if applicable) deposited with the offer against any outstanding account or and request that the amount of ($ amount) deposited with the offer be refunded to me.

      Example:

      In another example, in the case where there is no adjustment to the tax liability and the taxpayer agrees, the written request would state: I have been advised that my offer cannot be recommended for acceptance, so I hereby withdraw the offer (and complete the deposit statement as indicated above).

      The written statement provided to the examiner should generally be an original, and not a copy or facsimile.

    3. The taxpayer's signature is always required on the letter of withdrawal. If the offer was filed jointly, signatures of both spouses are required. The taxpayer's representative (per the power of attorney) may authorize withdrawal of the OIC on the taxpayer's behalf.

    4. If the taxpayer submitted a deposit when they filed the OIC-DATL, see IRM 4.18.6.2, Payments Made with Form 656, for procedures.

    5. Prepare Form 1271, Rejection or Withdrawal Memorandum. Check the box indicating offer withdrawn. Do not complete the "date of rejection/withdrawal letter" , at the top of the form. Attach to Form 1271, a Form 886-A, Explanation of Items, that provides a brief (1) Summary, (2) Facts as to Liability, and (3) Conclusion. See IRM 4.18.2.8.

      Note:

      Form 4549, Income Tax Examination Changes, Form 886-A, and any other supporting workpapers and schedules will be enclosed in the case file. There is no need to attach this detail to Form 1271.

    6. Inform the taxpayer that when the OIC-DATL is withdrawn, this action forfeits any appeal rights and also resumes the running of the statutory period for collection.

    7. The completed case is routed via Form 3198, Special Handling Notice for Examination Case Processing, to the Technical Services OIC Coordinator.

Doubt as to Liability Offer Rejected

  1. If the taxpayer does not agree with the examiner's conclusions and will not or does not withdraw the offer, the following procedures are completed by the examiner:

    1. Prepare a report on Form 4549, Income Tax Examination Changes, to reflect any decrease in tax and penalties (based on the correct tax liability determined by the examiner). Do not issue the report to the taxpayer or solicit a signature. A report is not required if no abatement of tax is recommended. If requested, explain the recommendation to the taxpayer with the caveat that it is subject to review. See IRM 4.18.6.2, Payments Made with Form 656, regarding refund or application of payment made with Form 656-L, Offer in Compromise (Doubt as to Liability).

    2. Prepare Form 1271, Rejection or Withdrawal Memorandum, and check the box indicating rejection. Do not fill in date of rejection letter at the top of the form. Attach to Form 1271, a Form 886-A, Explanation of Items, providing a (1) Summary, (2) Facts as to Liability, and (3) Conclusion.

      Note:

      If a Form 4549, Income Tax Examination Changes is prepared, Form 886-A, and any other supporting workpapers and schedule will be enclosed in the case file. If a Form 4549, is not prepared, Form 1271, will contain sufficient detail to explain why the OIC-DATL is being rejected.

      Category Sample Content
      Summary The taxpayer is seeking to compromise under authority of IRC 7122, an unpaid liability for income taxes plus statutory additions. The amount of the offer is the total sum of ($ amount) to be paid in full within ten days of acceptance of the offer. This is the first offer submitted by the taxpayer. The offer is recommended for rejection on the grounds that no legitimate doubt exists from the viewpoint of both the taxpayer and the IRS that the assessed liability is incorrect.
      Facts as to Liability The liability in this case arose from an examination conducted in 1995. The examination disallowed in full the Sch. A deduction because the deduction does not meet the requirements of IRC section 170. The non-deductible contributions to a fraudulent church has been upheld by a long list of cases (Hall v Comm., T.C. Memo 1981-143; Kalgaard v Comm., T.C. Memo 1984-283).
      Conclusion For the reasons stated above, this offer is recommended for rejection on the grounds that there is no legitimate doubt that the assessed liability is incorrect.
  2. If the taxpayer does not agree with the examiner’s conclusions, the case is processed as a rejection.

  3. The file is routed via Form 3198, Special Handling Notice for Examination Case Processing, to Technical Services for an independent administrative review. If the OIC Independent Administrative Reviewer (IAR) agrees with the examiner's determination, they process the file. If the OIC IAR disagrees, the file is returned to the group via Form 3990, Reviewers Report, to communicate the OIC IAR’s observations.

  4. The OIC-IAR Reviewer in Technical Services issues a rejection letter to the taxpayer. The taxpayer has 30 calendar days from the date of the rejection letter to file an appeal request. If the taxpayer requests an appeal, the file will be forwarded to the Office of Appeals. Any partial abatement is made before the case is forwarded to Appeals.