last update 9-01-03

IRS OFFERS IN COMPROMISE

In late August, 2003, the IRS issued new rules on the procedures for submitting and processing offers in compromise under Code Section 7122. Rev. Proc. 2003-71 applies to all civil or criminal offers in compromise, except for those offers submitted directly to the IRS''s Office of Appeals. The new rules do not apply, however, to offers in compromise arising after a case involving a civil or criminal liability has been referred to the U.S. Department of Justice for prosecution or defense.

An offer in compromise must be submitted in writing on Form 656, Offer in Compromise, and be signed under penalty of perjury. The offer must include all liabilities to be covered by the compromise, the legal grounds for compromise, the amount the taxpayer proposes to pay, and the payment terms.

OBSERVATION: The $150 application fee for the processing of certain offers in compromise will begin November 1, 2003.

Internal Revenue Code Section 7122 requires that the offer in compromise must set forth the legal grounds for compromise and provide enough information for the IRS to determine whether the offer fits within its acceptance policies. The three legal grounds are: (1) doubt as to liability; (2) doubt as to collectibility; and (3) promotion of effective tax administration.

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. An offer in compromise based on doubt as to liability generally will be acceptable if it reasonably reflects the amount the IRS would expect to collect through litigation.

DOUBT AS TO COLLECTIBILITY exists in any case in which the taxpayer''s assets and income cannot satisfy the full amount of the liability. An offer in compromise based on doubt as to collectibility generally will be acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the IRS could collect through other means, including administrative and judicial collection remedies.

The IRS may compromise to PROMOTE EFFECTIVE TAX ADMINISTRATION when it determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship -- the inability to pay reasonable basic living expenses. The IRS may also compromise to promote effective tax administration when compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

COMPLIANCE TIP

The offer must include all information necessary to verify the grounds for compromise. Thus, individual or self-employed taxpayers must submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Corporate or other business taxpayers must submit a Form 433-B, Collection Information Statement for Businesses. The IRS may require the corporate officers or individual partners of a business taxpayer to complete a Form 433-A.

PENDING OFFERS IN COMPROMISE

Generally, the IRS is prevented from levying on a taxpayer''s property or rights to property while an offer in compromise is pending, for 30 days after the rejection of an offer to compromise, or while an appeal of a rejection is pending (IRC Section 6331(k)(1). In addition, the statute of limitations on collection is suspended while levy is prohibited. An offer in compromise becomes pending when it is accepted for processing. If the IRS determines that an offer in compromise does not meet its minimum requirements, the offer in compromise is not processable and may be returned to the taxpayer. However, the application fee submitted with the offer will not be refunded unless the offer was accepted for processing in error.

REJECTING AN OFFER

In the decision whether and when to accept an offer in compromise is within the discretion of the IRS. The IRS will verify all of the taxpayer's income and assets, except for offers based solely on doubt as to liability. The IRS accepts an offer to compromise by sending a written notification to the taxpayer. Acceptance is effective as of the date on the acceptance letter and conclusively settles the liability of the taxpayer.

OBSERVATION

The IRS maintains a schedule of national and local allowances on its Website and in the Financial Analysis Handbook of the International Revenue Manual 5.15 to account for the basic living expenses of taxpayers seeking to compromise. To determine whether an offer is adequate, the IRS uses these schedules to analyze the income and expenses of the taxpayer to determine the monthly income available to pay the liability.

WITHDRAWING AN OFFER

A taxpayer may withdraw an offer in compromise anytime before acceptance of the offer; however, the IRS will not refund the application fee submitted with the offer. The IRS also will not refund the application fee if the offer is rejected.

COMPLIANCE TIP

The taxpayer must file an appeal within 30 days from the date of the letter of rejection with the IRS office that rejected the offer in compromise.

Rev. Proc. 2003-71 is effective August 21, 2003.


========================  WARNING  =======================
                      AND DISCLAIMER
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed.  Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a 
attorney to discuss the specific facts of your case
and the law of your state.
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last update 9-01-03

IRS OFFERS IN COMPROMISE

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