5.8.6 Collateral Agreements

Manual Transmittal

October 04, 2017

Purpose

(1) This transmits revised IRM 5.8.6, Collecting Process, Offer in Compromise, Collateral Agreements.

Material Changes

(1) This IRM was updated to incorporate the following changes.

IRM Section Change
5.8.6.1 Revised to include internal control information.
5.8.6.1(2) This section was moved to 5.8.6.2(7).
5.8.6.2(3) This section was moved to 5.8.6.2(6).
5.8.6.2(5) The approval coincides with the delegation for the Form 656.
5.8.6.2(7) Clarifies a NIBIG rejection is required if an offer is rejected solely because collateral terms are refused.
5.8.6.2.1.1(3) Provides an example of CSED impact on future income collateral.
5.8.6.2.1.1(6) Provides information regarding Form 3439 and MOIC role in monitoring future income collateral.
5.8.6.2.2(4) Adds note regarding homestead.
5.8.6.2.3(3) Removed reference to investment credits and provides location of business credits.
5.8.6.2.3(4) Provides guidance regarding the effective date, with examples.
5.8.6.2.3(6) Provide an example of a partial waiver of NOL.
5.8.6.2.3.1(2) Clarified requirement to determine the NOL origin.
5.8.6.2.3.2(2) Removed requirement to verify capital loss.
5.8.6.3 Provided guidance when combining collateral terms.
5.8.6.4(3) Collateral to waive the refund offset provision is no longer required for Non-economic Hardship Effective Tax Administration Offers.
5.8.6.5 Adds closing actions required.
Exhibit 5.8.6-1 Removed.

(2) Editorial changes were made throughout the document.

Effect on Other Documents

This material supersedes IRM 5.8.6, dated 7/31/14.

Audience

SB/SE Compliance employees.

Effective Date

(10-04-2017)


Kristen Bailey
Director, Collection Policy

Program Scope and Objectives

  1. Purpose: A collateral agreement enables the government to collect funds in addition to the payments offered in Form 656 or to add additional terms not included in the standard Form 656 agreement, thereby recouping part of the difference between the amount of the offer or additional terms of the offer and the liability compromised. This section discusses how to evaluate circumstances that may warrant such an agreement, and how to utilize the various collateral contracts.

  2. Audience: These procedures apply to IRS employees who are responsible for investigating offers.

    • Offer Examiners (OE) in Centralized Offer in Compromise (COIC)

    • Offer Specialists in the Field

    • Additional IRS employees assigned to the offer program and employees who conduct offer in compromise investigations

  3. Policy Owner: Director Collection Policy

  4. Program Owner: SBSE Collection Policy, Offer in Compromise (OIC) Program

  5. Primary Stakeholders: COIC and Field offer employees

  6. Program Goals: Policy Statement P-5-100 explains the objective of the OIC as a collection tool. By following the procedures in this IRM, employees engaged in the investigation of offers will determine when a collateral agreement may be appropriate, and the actions necessary when a collateral agreement is a component of an offer in compromise.

Background

  1. This section provides information regarding the various collateral agreements that may be secured in conjunction with an offer in compromise.

Authority

  1. Authorities relating to this section include:

    • IRC 7122-Compromises

    • Treasury Regulation § 301.7122-1 - Compromises

    • Policy Statement P-5-100

    • Revenue Procedure 2003-71

    • IRM1.2.44, Servicewide Policies and Authorities, Delegations of Authority for the Collecting Process, Delegation Order 5-1 (Rev 4)

Responsibilities

  1. The Director, Collection Policy is responsible for all policies and procedures within the Offer in Compromise program.

  2. The National Program Manager, Offer in Compromise is responsible for development and delivery of policies and procedures within the program.

  3. Managers of employees investigating offers are responsible for ensuring these procedures are followed and employee actions are timely and accurate.

  4. Offer examiners, offer specialists, and other employees investigating offers are responsible for following the procedures in this IRM.

Program Management and Review

  1. Operational and program reviews are conducted on a yearly basis with the use of data and reports from the Automated Offer In Compromise (AOIC) system and Integrated Collection System (ICS). See IRM 1.4.52, Offer in Compromise Manager’s Resource Guide - Field Program and IRM 1.4.54, Offer In Compromise Manager’s – Centralized OIC Program Guide.

  2. National quality reviews and consistency reviews are routinely conducted.

Program Controls

  1. AOIC is used to track offers submitted by taxpayers and record case actions and history. Ability to take action on AOIC is limited to specific offer employees. Additional permissions are provided based on an employee’s duties and responsibilities.

  2. ICS is used by field employees as a method for inventory control and history documentation

  3. Managers are required to follow program management procedures and controls addressed in IRM1.4.50, Resource Guide for Managers - Collection Group Manager, Territory Manager and Area Director Operational Aid; IRM 1.4.52, Offer in Compromise Manager’s Resource Guide - Field Program; and IRM 1.4.54, Offer In Compromise Manager’s – Centralized OIC Program Guide.

  4. Approving officials ensure collateral agreements are secured when appropriate.

  5. Monitoring OIC (MOIC) monitors the collateral agreement provisions through the life of the contract.

Terms/Definitions/Acronyms

  1. Collateral agreement - A contract associated with a Form 656 that provides additional terms to the standard contract.

  2. For a list of common abbreviations, definitions and acronyms used throughout this IRM, see IRM 5.8.1 Exhibit 1, Common Abbreviations Used in the IRM.

  3. Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at http://rnet.web.irs.gov/OldRnet/Other/acronymdb.asp.

Related Resources

  1. Additional resources can be found in:

    IRM Title Guidance On
    5.8.5 Offer in Compromise Financial Analysis Evaluation of assets and income
    5.8.8 Offer in Compromise Acceptance Processing Requirements when submitting an offer for acceptance
    5.8.1.5 Protecting Taxpayer Rights Rights afforded by Internal Revenue Code and Taxpayer Bill of Rights (TBOR)
  2. Employees can find helpful information on these websites:

    • SERP: http://serp.enterprise.irs.gov.

    • Interim Guidance memorandums at http://imdtrack.web.irs.gov/search.asp.

Collateral Agreements

  1. Collateral agreements may be appropriate in situations where a significant recovery is anticipated or securing a collateral agreement will facilitate resolution. The monitoring aspects of the agreement should also be considered when making the decision as to whether a collateral agreement is appropriate. The basis for securing the collateral and reasoning why additional recovery is being sought must be fully documented in the AOIC and/or ICS history.

  2. Do not use a collateral agreement to accept an offer amount less than the taxpayer's reasonable collection potential.

  3. A collateral agreement may be appropriate in the following situations:

    If the taxpayer Then consider securing a
    Anticipates a substantial increase in future income Future income collateral agreement.
    Is compromising the income tax liability of a defunct professional corporation Future income collateral agreement from the majority or sole owner of the professional corporation to collect from their future individual income.
    Has real or personal property that is being depreciated Collateral agreement to reduce the basis of the asset.
    Has net operating losses or capital losses arising from prior years available for deduction in future years A collateral agreement to waive the loss.

    Note:

    Monitoring for this type of collateral is limited to the Collection Statute Expiration Date (CSED) timeframe for the tax periods on the accepted offer.

    Is seeking to compromise a TFRP and qualifies to take a capital loss benefit from the defunct corporation on Form 1040 A collateral agreement from the individual taxpayer to waive the capital loss.

    Note:

    Monitoring for this type of collateral is limited to the CSED timeframe for the tax periods on the accepted offer.

  4. Because a collateral agreement changes the terms of the Form 656, the approval authority in IRM 1.2.44.2, Delegation Order 5-1 (Rev. 4) applies. The delegated official for the offer approval signs the collateral agreement.

  5. It is important to communicate the purpose of the collateral agreement and to review the language to ensure the taxpayer understands the consequences. In lieu of a collateral agreement, the taxpayer may increase the amount of the offer equivalent to what the government could reasonably expect to recover through the collateral agreement.

  6. After consideration of all the facts and circumstances, the refusal to enter into an appropriate collateral agreement may be a reason to reject the taxpayer's offer. The offer file must be clearly documented with the basis for the rejection. If the offer amount would otherwise be acceptable, the basis for the rejection is Not in the Best Interest of the Government. See IRM 5.8.6.5.1.

Future Income

  1. It is appropriate to consider future income collateral agreements for individuals, limited liability companies, and corporations when the investigation reveals that a substantial increase in the taxpayer's future income is expected.

  2. The use of a future income collateral agreement may be an option when current income is lower than the taxpayer's earnings potential. Scenarios where the taxpayer's future income may be substantially higher include the following:

    1. The taxpayer's past income does not provide an accurate analysis for what may be earned in the future based on their earnings potential due to their training or education.

      Example:

      The taxpayer is a student and is expected to graduate soon and begin earning a significant annual income.

    2. The taxpayer's current income is minimal or considerably less than what the taxpayer has earned in the past and a reasonable expectation exists that the taxpayer's earnings will be increasing substantially prior to the expiration of the CSED.

      Example:

      The taxpayer is an engineer, but is currently employed as a salesman earning less than half of his prior salary due to difficulty he has had in obtaining a job in the engineering field at the present time.

    Note:

    Judgment should be used in determining the appropriate time to apply income averaging on a case by case basis. All circumstances of the taxpayer should be considered when determining the appropriate application of income averaging, including special circumstances and ETA considerations. See IRM 5.8.5.20, Future Income.

  3. Do not secure a future income collateral agreement:

    • To collect future income that should be included in the offer amount.

    • Merely on unfounded speculation about an increase in income.

    • To cover statistically improbable events, such as lottery winnings.

    • To attempt collection from a potential inheritance.

  4. Future income collateral agreements must be monitored annually for the life of the agreement. The cost of monitoring and the difficulty in tracing income structured through other entities should be considered when deciding whether such an agreement is warranted. When necessary, include instructions to MOIC regarding when it is appropriate to issue an other investigation to follow up on the receipt of potential funds.

    Note:

    Consult Area Counsel relative to the wording of unique collateral agreement situations.

  5. If amounts accrue under Form 2261, Collateral Agreement - Future Income (Individual) , or Form 2261-A, Collateral Agreement - Future Income Corporation, but are not paid to the Service on or before the CSED, amounts received thereafter are statutory overpayments under IRC §6401(a). See Rev. Rul. 74-580. Absent written permission from the taxpayer to apply the payment to excess collections, it must be refunded. See IRM 5.19.7.2.13.2, Payments on Expired Liabilities. Collection of amounts paid under a collateral agreement relating to an OIC is based on an assessment and is subject to the period of limitations for collection under IRC 6502 for that assessment just like the amounts paid under the OIC. Just as there can be no agreement between the taxpayer and IRS to extend the period for collection in the terms of the OIC, a collateral agreement cannot extend that period.

Form 2261/2261-A Completion
  1. Use Form 2261, Collateral Agreement — Future Income (Individual), for individual taxpayers or Form 2261-A , Collateral Agreement — Future Income (Corporation) for corporate taxpayers.

  2. The beginning year is defined as the year following acceptance of the offer. The ending year is defined as the last year for which the collateral agreement will remain in effect.

  3. The period of time a future income collateral agreement should cover will be determined by the circumstances identified in the offer investigation based on the taxpayer's financial situation. The offer file should document the basis for the time frame used for each collateral agreement. Generally the period of time the agreement covers should coincide with the 5 year future compliance provision.

    Example:

    The offer is accepted February 1, 2017. The future income collateral agreement will cover tax years 2017 - 2021.

    Example:

    The offer is accepted November 1, 2017. Because near the end of 2017, the future income collateral agreement is extended to cover tax years 2017 - 2022.

    Note:

    Payments cannot be applied after the CSED expires.

    Example:

    A taxpayer currently serving in the military is eligible for separation in 9 months. His training in a specialized field will qualify him for a high salary, so he appears to be a good candidate for a future income collateral agreement. However, less than 3 years remains on the CSED. By the time a full year’s higher income would be reported on a tax return and result in payment due to MOIC under the terms of the collateral agreement, little if any time would remain on the CSED.

  4. The beginning dollar amount should allow for the taxpayer to meet reasonable and necessary living expenses during the term of the offer. The offer specialist (OS) or offer examiner (OE) should be flexible allowing for the expected rate of inflation, as well as any additional expenses such as those for an expected additional child or a replacement auto which may occur while the collateral agreement is being monitored. Generally, the initial dollar amount should approximate one and one-half times the taxpayer's current necessary and reasonable living expenses, less federal income tax (including self-employment tax, if applicable). If another figure is used, document the reason in the history.

    Note:

    A future income collateral agreement should not be used to recover minimal amounts the taxpayer may receive from future cost of living or other longevity raises. The expected recovery should be based on a reasonable assumption of a substantial increase in the taxpayer's income based on changes in their situation.

  5. The percentages and amounts determined appropriate in Item 1 of Form 2261 or Form 2261-A are negotiable and should be based on the taxpayer's situation and reflect appropriate anticipated increases in reasonable and necessary expenses. The beginning percentage should be determined based on the facts and circumstances of the case. Increases in the percentage amounts may also be included, when appropriate. The OE/OS should use judgment in determining the amounts used when completing Form 2261.

    Example:

    The taxpayer has submitted an offer which is greater than reasonable collection potential (RCP) and is deemed acceptable. There is also a reasonable basis that the taxpayer's income will increase substantially over the next two years to over $100,000 per year. The total current reasonable expenses from the income/expense table (IET) used in the offer evaluation is $ 4000 per month ($750 per month is the federal tax liability). The amount used on Form 2261 is 40% of any amount over $58,500 per year (4000 - 750 = 3250 x 1.5 x 12 = 58500).

    Example:

    Taxpayers have submitted an offer which is greater than RCP and is deemed acceptable. The taxpayer has been involved in multi-million dollar developments and there is a reasonable basis to determine the taxpayer may receive a substantial payment from a future development within the next 24 to 48 months. The current reasonable expenses for the household from the IET used in the offer evaluation is $5000 per month ($1000 per month is the federal tax liability). Amounts used on Form 2261 are 40% of any amount between $72,000 (5000 - 1000 = 4000 x 1.5 x 12 = 72000) and $150,000, plus 50% of any amount over $150,000.

    Note:

    These examples are not meant to be all inclusive; judgment must be used to determine the appropriate percentages and dollar amounts. Because the starting threshold allows one and a half times expenses, an initial percentage of 40% is usually appropriate. To gauge the impact, it is recommended to run calculations using various income scenarios. A set percentage as in the first example will be appropriate in most instances, but you may consider graduated payments if the anticipated income range is higher.

  6. For each year of the collateral agreement, the Monitoring OIC unit (MOIC) prepares and sends a 279C letter, with a “collateral package” to the AOIC address of record. The package includes applicable Form 3439 (individual) or Form 3439-A (business), Statement of Annual Income. The taxpayer is instructed to complete the form and return it to MOIC with a copy of the tax return by the due date of the return, along with any applicable payment.

    Note:

    When negotiating a future income collateral, it may be helpful to review the Form 3439 with the taxpayer. It provides additional information and a better understanding of the obligations imposed by the collateral.

Adjusted Basis of Specific Assets

  1. The initial basis of an asset is equal to the cost of acquiring it. Adjustments to the basis are made each year for the cost of improvements and accumulated depreciation. When an asset is sold, the basis is used to determine the amount of capital gain to be taxed.

  2. A collateral agreement may be used to reduce the basis of a specific asset, after accumulated depreciation (book value), to a lesser amount or zero. The effect of reducing the basis of a specific asset include limiting or eliminating the amount of depreciation deduction allowed in future years, potentially having the taxpayer incur a higher capital gain tax to be paid if the asset is later sold for an amount more than the adjusted basis or reducing the amount of the loss the taxpayer can claim.

    Note:

    If the taxpayer has been depreciating the property to offset taxable income, reduction of basis could result in an increase in tax the year it is effective.

  3. Use Form 2261-B, Collateral Agreement — Adjusted Basis of Specific Assets. The beginning year is defined as the year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Specifically describe each asset. Set the amount of the basis at the reduced or zero value.

    Note:

    A specific description of the asset must be included in the collateral agreement in order for MOIC to monitor the agreement. When possible, document AOIC Remarks where the sale of the asset would be expected to be reported on the tax return: e.g. Form 1040 Schedule D, or Line 14 Other gains or losses with Form 4797 . If uncertain, ask the taxpayer’s representative.

  4. While the taxpayer’s basis in an asset is permanently reduced by this agreement, adjusted basis collateral agreements are not monitored by MOIC indefinitely. See IRM 5.19.7.2.16.5 , Processing Other Collateral Agreements, for monitoring actions on these offers. Consider the cost to monitor the agreement and the difficulty in tracing the sale or exchange of the property when deciding whether such an agreement is warranted.

    Note:

    Because $250,000 gain from the sale of a homestead can be excluded from taxation for each taxpayer (up to $500,000 for joint), it should be rare to reduce the basis of homestead real estate. Keep in mind real estate currently used as rental property may qualify for this exclusion if the owner later occupies it and meets the required ownership and use tests.

Waiver of Losses

  1. Use Form 2261–C, Collateral Agreement —Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits. The beginning year is defined as the next year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Waive net operating losses and capital losses arising from all years prior to and including the last filed tax return.

  2. Do not prohibit the deduction of losses that arise in years after the offer is accepted.

  3. Certain business credits claimed on Form 3800 may be carried forward. These may be located on page 2 of Form 1040 (Tax and Credits section);Form 1120 Schedule J; or Form 1041 Schedule G.

  4. When completing the forms, consider when you want the agreement to be effective. The waiver of these losses could impact the current year’s liability, so the anticipated date of acceptance is a factor. If the collateral is secured relatively early in the year, the agreements should generally be effective after December 31 of the prior year (so the taxpayer cannot claim the loss when he files this year’s return). If the collateral is secured toward the end of the year, you may want to have it effective after December 31 of the current year.

    Example:

    The taxpayer has made estimated tax payments for 2017 based on 2016. He agreed to a collateral that would waive his net carry forward loss, but this will result in additional tax due in 2017. The offer is being submitted for acceptance in October 2017. If the taxpayer does not have the ability to pay the extra tax resulting from the loss waiver, document your reasoning for setting the effective date of the offer after December 31, 2017.

    Example:

    You are accepting an offer in January 2018, with offer payment terms that extend through December 2018. Disallowance of the net operating loss will increase the taxpayer’s tax obligation by $1,000/month. If the higher tax obligation for 2018 will interfere with the taxpayer’s ability to pay the offer payments, document the basis for starting the waiver of the net operating loss after December 31, 2018.

  5. Waiver of losses collateral agreements must be monitored annually until all the losses are extinguished or the expiration of the CSED(s) on all tax periods included in the offer. Consider the cost to monitor the agreement and potential for recovery of future tax liabilities when deciding whether such an agreement is warranted.

  6. A waiver of losses collateral agreement may be secured to partially waive a loss, if the facts of the case support this determination.

    Example:

    You are preparing to accept a $20,000 offer from a taxpayer who has no monthly payment ability due to $5,000/month court-ordered payments required through the remainder of the CSED. The taxpayer owes $60,000 in taxes, and has $900,000 in carry-forward net operating losses. When asked to waive the loss via a collateral, the taxpayer’s CPA provides calculations that show the carry-forward loss is expected to result in tax savings greater than the $40,000 balance being compromised. You may consider a collateral that provides for partial retention of the carry-forward loss. If the taxpayer does not agree to a collateral, see IRM 5.8.6.2(6).

  7. When a Form 2261-C, Collateral Agreement – Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits is being secured, the collateral section of the terms screen must be completed on AOIC in accordance with IRM 5.8.8, Acceptance Processing.

Net Operating Loss
  1. Net Operating Loss (NOL) may be incurred when expenses exceed the income of a business.

    • The taxpayer must be able to prove the amount of the loss.

    • Generally, losses may be carried back no more than two years and forward no more than twenty years or until all the loss is offset against taxable income.

    • If the taxpayer only wishes to carry the loss forward, the taxpayer must elect to do so on a timely filed return for the year of the loss, or if the original return is filed timely but no election is made on an amended return by the close of the period 6 months after the due date of the return excluding extensions.

  2. When the taxpayer has claimed a NOL, determine and verify the amount of the loss and the year(s) the loss was incurred. If a taxpayer has been associated with more than one business there may be multiple losses. Often, the tax return will contain an attachment or other information to explain the NOL balance being carried forward.

    When Then
    Calculating the remainder of the NOL The loss can be located on the "other income" line or the "business loss" line on Form 1040 and should be labeled as Net Operating Loss.
      1. Determine the original loss amount claimed on the tax return.
      2. Subtract any carry backs.
      3. Subtract the amounts claimed on subsequent tax returns from the year the NOL was established.
Capital Loss
  1. A capital loss is one in which the taxpayer experiences a loss associated with such investments as land, stock, paid in capital, or loans from shareholders. This loss is:

    • Found on a Schedule D.

    • Must be offset against only capital gain in the year it is incurred with the remainder carried forward for offset of only capital gain in future years. However, individuals are allowed to offset $3,000 against ordinary income in the year the capital loss is incurred and each succeeding year thereafter.

      Example:

      A taxpayer has a $100,000 carry-forward loss from prior years. This year, the taxpayer has a $40,000 capital gain as well as other income. The taxpayer may offset $40,000 against the capital gain and an additional $3,000 loss may be offset against other income, leaving a $57,000 loss that may be carried forward in future years.

    • Individuals must carry capital losses forward. Individuals may carry the capital loss forward until it is exhausted. There is no limit on the number of years individuals may carry capital losses forward.

    • Corporations are generally limited to carry capital losses back three years and forward five taxable years.

  2. When the taxpayer claims a capital loss, determine the origin and amount of the loss.

    If Then
    The loss is derived from personal investment The investment can be either loans to the corporation or the individual's capital investment in the corporation.
    Determining the remaining amount of the loss once you have determined the origin Trace the loss forward through the tax return copy or RTVUE.
Passive Loss
  1. Passive Activity Loss is one that involves the conduct of any trade or business in which the taxpayer does not materially participate. This loss should not be confused with net operating loss.

    • Generally, rental activity is a passive activity, even if the taxpayer does materially participate.

      Note:

      There are certain exceptions, including for real estate professionals.

    • Losses from a passive activity generally cannot be deducted from other types of income (e.g., wages, interest, or dividends).

    • The amount of the taxpayer's allowable loss is subject to the "at-risk" rules. Generally losses are limited to the amount of the taxpayer's cash contribution, adjusted basis of other property which contributes to the activity, and amounts borrowed for use in the activity if the taxpayer has personal liability for the borrowed amounts.

  2. Because passive losses are not deducted from earned income, waiving them may have little or no effect. One option is to reduce the basis of the property to zero so that the taxpayer cannot carry the loss over to the tax year in which the property is sold and receive benefit of the loss against a capital gain at that time. Form 2261-B Collateral Agreement - Adjusted Basis of Specific Assets should be used in these situations.

Multiple Agreements

  1. When related taxpayers submit more than one offer to compromise different tax liabilities, secure only one collateral agreement. Describe on the collateral agreement all the offers to which it relates.

    Note:

    Future income collateral agreements may be an exception. Be certain the collateral agreement correctly identifies the taxpayer.

  2. When more than one type of collateral agreement is secured for the same offer, separate collateral agreements may be secured or the terms of all the agreements may be incorporated into one form. If you combine collateral agreements, remove duplicate paragraphs.

    Type of Agreement Statement
    Adjusted Basis of Assets "For the purpose of computing income taxes of the taxpayer for all taxable years beginning after ___, the basis for certain assets, under existing law for computing depreciation and the gain or loss upon sale, exchange or other disposition shall be as follows:
    Name of asset _____Other Identification _____
    Dollar amount ______
    That in no event shall the basis set forth above be in excess of the basis that would otherwise be allowable for tax purposes, except for this agreement."
    Waiver of Net Operating Loss "For the purpose of computing income taxes of the taxpayer for all taxable years beginning after ___, Any net operating losses sustained for the years before __shall not be claimed as net operating loss deductions under the provisions of Section 172 of the Internal Revenue Code."
    Waiver of Capital Losses "For the purpose of computing income taxes of the taxpayer for all taxable years beginning after ___, Any net capital losses sustained for the years before __shall not be claimed as carryovers or carrybacks under the provisions of Section 1212 of the Internal Revenue Code."
  3. If there is insufficient space on the form to insert all the necessary paragraphs simply type the paragraph numbers followed by "See Attached" and fasten a separate sheet containing the added provisions.

  4. When a Form 2261-C, Collateral Agreement – Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits is being secured or the collateral agreement terms are being incorporated into another collateral form, the collateral agreement section of the terms screen must be completed in accordance with IRM 5.8.8, Acceptance Processing.

Waiver of Refunds

  1. Form 656 contains a term which waives refunds and overpayments for all tax years through the year the offer in compromise is accepted. This waiver is a standard term, which cannot be altered.

  2. The waiver of refunds does not apply to Doubt as to Liability (DATL) offers or offers involving public policy/equity considerations which were accepted under the basis of Effective Tax Administration (ETA) or Doubt as to Collectibility with special circumstances (DCSC). . Form 656 Section 7(c) stipulates the refund offset does not apply to offers accepted under the provisions of ETA or DSCS based on public policy / equity considerations.

Closing Actions Required

  1. If the taxpayer’s refusal to agree to a collateral agreement impacted the determination to reject the offer, or if a collateral agreement is secured in conjunction with an acceptance recommendation, additional closing actions are required.

Closing Actions in Rejection Recommendations

  1. Document the reasons a collateral agreement was considered and the impact on the case decision. Because Policy Statement 1.2.17.3 prohibits Appeals from raising a new issue, support for a collateral must be established in the rejection narrative.

  2. In the narrative, provide an estimate of value.

    Example:

    Under the taxpayer’s current top tax rate of 28%, the $150,000 net operating loss has a potential value of $42,000.

    Example:

    If the taxpayer’s earnings return to the 2014 level, the future income collateral would attach to $6,000 / year.

  3. Use the open paragraph option in AOIC to include in the rejection letter that a collateral was requested and refused.

    Example:

    “The refusal to agree to collateral agreement terms to waive the right to carry-forward losses was a factor in our determination not to accept an offer.”

  4. If the offer amount would otherwise be acceptable, the basis for the rejection must be Not in the Best Interest of the Government.

Closing Actions in Acceptance Recommendations

  1. When accepting an offer with a collateral, update the collateral section in AOIC Terms Screen. Because this information is populated on the Form 7249 and becomes part of the public inspection file, provide a brief summary vs. detailed collateral language. MOIC will receive the entire file, so additional detail is not necessary. The collateral term section is added to the end of the Form 656 terms, and should be followed with a period.

    Example:

    Form 2261-C, Collateral agreement to waive carry-forward losses.

    Example:

    Form 2261-B, Collateral to reduce basis in asset.

    Example:

    Form 2261-A, Future income collateral.

  2. When composing the acceptance letter, include Paragraph option 673-A. You will be prompted for the Form/Letter number and name of the collateral agreement, but are limited to 50 characters. The entire title may not fit. Type the name of the form, comma, followed by the title.

    Example:

    Form 2261-C, Waiver of Losses and Credits vs. the full title, Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits

  3. Do not include a period or comma at the end of the 673-A field. The form number and name will be populated in the letter and will read "The acceptance date is the date of this letter and acceptance is subject to the terms and condition on the enclosed Form 656, Offer in Compromise and Form 2261-C, Waiver of Losses and Credits."

  4. Enclose a copy of the collateral and the Form 656 with the acceptance letter.

  5. Document AOIC with information that may assist MOIC with the monitoring of the collateral; e.g. the approximate amount of the NOL that is being surrendered; or what items on the tax return should be reviewed to monitor the adjusted basis of an asset (depreciation; where the asset sale will be reflected).

  6. Consult Counsel if you have questions regarding the correct language or structuring of a collateral agreement. If proceeding with acceptance of an offer that does not have concurrence of Counsel, the offer documents must be approved by the Area Director. See IRM 5.8.8.13.2.