[Federal Register Volume 64, Number 139 (Wednesday, July 21, 1999)]
[Rules and Regulations]
[Pages 39020-39027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18456]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 8829]
RIN 1545-AW87
Compromises
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations that provide
additional guidance regarding the compromise of internal revenue taxes.
The temporary regulations reflect changes to the law made by the
Internal Revenue Service Restructuring and
[[Page 39021]]
Reform Act of 1998 and the Taxpayer Bill of Rights II. The text of
these temporary regulations serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register.
DATES: Effective date. These temporary regulations are effective July
21, 1999.
Applicability date. For dates of applicability, see Sec. 301.7122-
1T(j) of these regulations.
FOR FURTHER INFORMATION CONTACT: Carol A. Campbell, (202) 622-3620 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary regulations amending the Procedure
and Administration Regulations (26 CFR part 301) under section 7122 of
the Internal Revenue Code (Code). The regulations reflect the amendment
of section 7122 by section 3462 of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``RRA 1998'') Public Law 105-206,
(112 Stat. 685, 764) and by section 503 of the Taxpayer Bill of Rights
II Public Law 104-168, (110 Stat. 1452, 1461).
As amended by RRA 1998, section 7122 provides that the Secretary
will develop guidelines to determine when an offer to compromise is
adequate and should be accepted to resolve a dispute. The legislative
history accompanying RRA 1998 explains that Congress intended that
factors such as equity, hardship, and public policy be evaluated in the
compromise of individual tax liabilities, in certain circumstances, if
such consideration would promote effective tax administration. H. Conf.
Rep. 599, 105th Cong., 2d Sess. 289 (1998).
The current regulations under Treasury regulation Sec. 301.7122-1
permit the compromise of cases on only the grounds of doubt as to
collectibility, doubt as to liability, or both. These regulations are
being removed. Like the current regulations, the temporary regulations
provide for compromise based on doubt as to liability and doubt as to
collectibility; however, they also provide for compromise based upon
specific hardship and/or equitable criteria if such a compromise would
promote effective tax administration. The inclusion in these
regulations of a standard that will allow compromise on grounds other
than doubt as to liability or doubt as to collectibility represents a
significant change in the IRS' exercise of compromise authority.
Section 7122 of the Code provides broad authority to the Secretary
to compromise any case arising under the internal revenue laws, as long
as the case has not been referred to the Department of Justice for
prosecution or defense. Although the statutory language of Section 7122
does not explicitly place limits on the Secretary's authority to
compromise, opinions of the Attorney General and the regulations issued
under section 7122 prior to RRA 1998 authorized the Secretary to
compromise a liability under the revenue laws only when there was doubt
as to liability (uncertainty as to the existence or amount of the tax
obligation) or doubt as to collectibility (uncertainty as to the
taxpayer's ability to pay). The opinion of the Attorney General most
often cited as the principal source of these limitations is the 1933
opinion of Attorney General Cummings that was issued in response to an
inquiry from then Acting Secretary of the Treasury Acheson.
In requesting an opinion from the Attorney General, Acting
Secretary of the Treasury Acheson expressed concern that the country
was trying to recover from the depression. He suggested that the public
interest required compromise of tax claims where collection of the tax
would ``destroy a business, ruin a tax producer, throw men out of
employment, or result in the impoverishment of widows or minor children
of a deceased taxpayer.'' The Secretary expressed the belief that in
ordinary times, compromise of cases on public policy grounds should be
rare but that, in light of the current state of the country, public
policy should play a significantly greater role. Expressing the belief
that it was more important that ``the business of the taxpayer be
preserved and not destroyed,'' Acting Secretary Acheson suggested that
cases should be compromised where the taxpayer is insolvent, even
though the tax is fully collectible, and that penalties and certain
interest charges should be ``compromisable wherever justice, equity, or
public policy seems to justify the compromise * * *.'' Letter from
Treasury Department, XIII-47-7137 (July 31, 1933).
Attorney General Cummings replied that ``[t]here is much to be said
for the proposition that a liberal rule should exist, but my opinion is
that if such a course is to be taken it should be at the instance of
Congress. I conclude that where liability has been established by a
valid judgment or is certain, and there is no doubt as to the ability
of the Government to collect, there is no room for `mutual
concessions,' and therefore no basis for a `compromise.' '' Op. Atty.
Gen. 6, XIII-47-7138 (October 24, 1933). See also Op. Atty. Gen. 7,
XIII-47-7140 (October 2, 1934), wherein Attorney General Cummings
stated that ``[t]here appears to be no statutory authority to
compromise solely upon the ground that a hard case is presented, which
excites sympathy or is merely appealing from the standpoint of equity,
but the power to compromise clearly authorizes the settlement of any
case about which uncertainty exists as to liability or collection.''
Although the 1933 opinion of Attorney General Cummings is the most
often cited opinion regarding the limits of the IRS' compromise
authority (prior to RRA 1998), the conclusion he reached mirrored
conclusions reached by a number of his predecessors. Thus, since 1868,
a number of Attorneys General opined that when liability is not at
issue, the Secretary's compromise authority permitted compromise only
when ``the full amount of the debt'' could not be collected. See, e.g.,
12 Op. Atty. Gen. 543 (1868); 16 Op. Atty. Gen. 617 (1879) (the
Secretary's authority to compromise does not permit the ``voluntary
relinquishment'' of any part of a lawfully assessed tax from a solvent
person or corporation).
Following the issuance of Attorney General Cummings' 1933 opinion,
Commissioner Helvering established a policy that IRS tax collectors
should make every endeavor to secure offers that represent the
taxpayer's ``maximum capacity to pay.'' Commissioner's Statement of
Policy with Respect to the Compromise of Taxes, Interest, and
Penalties, July 2, 1934. Commissioner Helvering recognized that the
Attorney General's opinion did not specify or quantify the amount of
doubt necessary to compromise, but concluded that ``* * * the Treasury
Department does not propose to compromise when there is merely the
possibility of doubt. The doubt as to liability or collectibility must
be supported by evidence and must be substantial in character, and when
such doubt exists, the amount acceptable will depend upon the degree of
doubt found in the particular case.'' Id. Implementing the policy
established by Commissioner Helvering, the IRS concluded that an offer
premised upon doubt as to collectibility should be accepted only when
the amount offered represented the maximum amount the taxpayer could
pay, taking into account net equity in assets and both current and
future income.
The interpretation of section 7122 adopted by Attorney General
Cummings (and reflected in Treasury reg. Sec. 301.7122-1(a)), together
with the ``maximum capacity to pay'' policy
[[Page 39022]]
established by Commissioner Helvering, have been the fundamental
guiding principles for IRS offer in compromise programs for the past 65
years. From the 1930's to the early 1990's, offers to compromise were
not widely used to resolve tax cases. In the early 1990s, however, the
IRS determined that expanded use of offers to compromise could
contribute to more effective tax administration in two important
respects. First, the IRS determined that compromise could be used as a
technique to enhance overall compliance by providing taxpayers with a
reasonable avenue to resolve past difficulties. Second, the IRS
determined that it should make more effective use of offers to
compromise to help manage the inventory of delinquent tax accounts.
Accordingly, while still operating within the basic legal and policy
guidelines established in the 1930's, the IRS initiated two significant
changes intended to enhance the compromise program.
In 1992, the IRS adopted a new compromise policy and issued revised
compromise procedures. The policy provides that an offer to compromise
will be accepted when it is unlikely that the tax liability can be
collected in full and the amount offered reasonably reflects collection
potential. As set forth in the new policy statement, the goal of the
compromise program is to achieve collection of what is potentially
collectible at the earliest possible time and at the least cost to the
government while providing taxpayers with a fresh start toward future
voluntary compliance. Policy Statement, P-5-100. In administering its
policies under the offer program, the threshold question of ``doubt as
to liability or doubt as to collectibility'' set forth in the
regulations constituted a legal requirement that must be followed; once
that threshold was met, however, the IRS could legally accept less than
the taxpayer's maximum capacity to pay. References in the offer
procedures to ``maximizing collection'' and ``maximum capacity to pay''
were replaced with ``reasonably reflects collection potential.'' Id.
In determining whether an offer reasonably reflects collection
potential, the IRS takes into consideration amounts that might be
collected from (1) The taxpayer's assets, (2) the taxpayer's present
and projected future income, and (3) third parties (e.g., persons to
whom the taxpayer had transferred assets). Although most doubt as to
collectibility offers only involve consideration of the taxpayer's
equity in assets and future disposable income over a fixed period of
time, the IRS on occasion also will consider whether the taxpayer
should be expected to raise additional amounts from assets in which the
taxpayer's interest is beyond the reach of enforced collection (e.g.,
interests in property located in foreign jurisdictions or held in
tenancies by the entirety). IRM 57(10)(10).1.
The compromise program was also affected by a 1995 IRS initiative
designed to ensure uniform treatment of similarly situated taxpayers.
In administering its collection operations, including both the
installment agreement program and the compromise program, the IRS has
always permitted taxpayers to retain sufficient funds to pay reasonable
living expenses. Certain commentators had asserted that there were wide
variances in the type and amount of such reasonable expense allowances
within and between districts. In September of 1995, the IRS adopted and
published national and local standards for determining allowable
expenses, designed to apply to all collection actions, including offers
to compromise. National expense standards derived from the Bureau of
Labor Statistics Consumer Expenditure Survey were promulgated for
expense categories such as food, clothing, personal care items, and
housekeeping supplies. Local expense standards derived from Census
Bureau data were promulgated for housing, utilities, and
transportation.
The IRS allowable expense criteria play an important role in
determining whether taxpayers are candidates for compromise or
installment agreements. Although offers to compromise and installment
agreements are separate mechanisms for resolving outstanding tax
liabilities, there often is a significant interplay between the two
programs, because a taxpayer's income available to satisfy the tax
liability is determined after the deduction of allowable expenses. In
some cases, the allowable expense criteria may be the determining
factor in whether the taxpayer receives an installment agreement or a
compromise. An installment agreement must provide for payment in full
of the amount of the outstanding liability through regular, periodic
payments (generally monthly). I.R.C. Sec. 6159. An offer to compromise,
by contrast, reflects the fact that the taxpayer has no ability to pay
the liability in full. Accordingly, taxpayers entering into compromise
agreements can pay an amount less than the full amount due in
satisfaction of the liability.
Congress now has directed the Secretary to consider factors other
than doubt as to collectibility and doubt as to liability in
determining whether to accept an offer to compromise. Under
Sec. 7122(c), added by RRA 1998, factors such as equity, hardship, and
public policy will be considered in certain circumstances where such
consideration will promote effective tax administration. The
legislative history of this provision (H. Conf. Rep. 599, 105th Cong.,
2d Sess. 289 (1998)) states that--
* * * the conferees expect that the present regulations will be
expanded so as to permit the IRS, in certain circumstances, to
consider additional factors (i.e., factors other than doubt as to
liability or collectibility) in determining whether to compromise
the income tax liabilities of individual taxpayers. For example, the
conferees anticipate that the IRS will take into account factors
such as equity, hardship, and public policy where a compromise of an
individual taxpayer's income tax liability would promote effective
tax administration. The conferees anticipate that, among other
situations, the IRS may utilize this new authority, to resolve
longstanding cases by forgoing penalties and interest which have
accumulated as a result of delay in determining the taxpayer's
liability. The conferees believe that the ability to compromise tax
liability and to make payments of tax liability by installment
enhances taxpayer compliance. In addition, the conferees believe
that the IRS should be flexible in finding ways to work with
taxpayers who are sincerely trying to meet their obligations and
remain in the tax system. Accordingly, the conferees believe that
the IRS should make it easier for taxpayers to enter into offer-in-
compromise agreements, and should do more to educate the taxpaying
public about the availability of such agreements.
Another consideration for compromise cases is Chief Counsel review.
Since its enactment in section 102 of the Act of July 20, 1868 (15
Stat. 166), the statute authorizing the Secretary to compromise
liabilities has contained a requirement that Counsel issue opinions
regarding certain of those compromises. Section 7122(b) of the Code
requires that the opinion of Counsel, with the reasons therefor, be
placed on file whenever a compromise is made by the IRS. Chief Counsel
opinions assess both whether the offer meets the legal requirements for
compromise and whether the offer conforms to IRS policy and procedure.
The opinion provided by Chief Counsel, however, does not have to be in
favor of compromise. Pursuant to delegated authority, district
directors, service center directors, and regional directors of Appeals
have the authority to accept an offer that Counsel has opined does not
conform to IRS policy.
Until passage of the Taxpayer Bill of Rights II (TBOR 2), Chief
Counsel review was required in all cases in which the liability
compromised was
[[Page 39023]]
$500 or more. Under TBOR 2, such an opinion is required only in cases
where the compromised liability is $50,000 or more.
Explanation of Provisions
The temporary regulations continue the traditional grounds for
compromise based on doubt as to liability or doubt as to
collectibility. In addition, to reflect the changes made in RRA 1998,
the temporary regulations allow a compromise where there is no doubt as
to liability or as to collectibility, but where either: (1) Collection
of the liability would create economic hardship, or (2) exceptional
circumstances exist such that collection of the liability would be
detrimental to voluntary compliance. Compromise based on these hardship
and equity bases may not, however, be authorized if it would undermine
compliance. Although the temporary regulations set forth the conditions
that must be satisfied to accept an offer to compromise liabilities
arising under the internal revenue laws, they do not prescribe the
terms or conditions that should be contained in such offers. Thus, the
amount to be paid, future compliance or other conditions precedent to
satisfaction of a liability for less than the full amount due are
matters left to the discretion of the Secretary.
The temporary regulations also add provisions relating to the
promulgation of requirements for providing for basic living expenses,
evaluating offers from low income taxpayers, and reviewing rejected
offers, as required by RRA 1998. The temporary regulations also add
provisions relating to staying collection, modifying the dollar
criteria for requiring the opinion of Chief Counsel in accepted offers,
and setting forth the requirements regarding waivers and suspensions of
the statute of limitations. Except for the provision related to dollar
criteria for Chief Counsel review, all of the additional provisions of
Sec. 301.7122-1T are authorized by RRA 1998. The modification of dollar
criteria for Chief Counsel review is authorized by section 503(a) of
the Taxpayer Bill of Rights II.
As required by Sec. 7122(c)(2)(A) and (B), added by RRA 1998, the
temporary regulations provide for the development and publication of
national and local living allowances that permit taxpayers entering
into offers to compromise to have an adequate means to provide for
their basic living expenses. The determination whether the published
standards should be applied in any particular case must be based upon
an evaluation of the individual facts and circumstances presented. The
Secretary will determine the appropriate means to publish these
national and local living allowances.
In accordance with Sec. 7122(c)(3)(A), the temporary regulations
also require the development of supplemental guidelines for the
evaluation of offers from ``low income'' taxpayers. The temporary
regulations permit the Secretary to determine which taxpayers qualify
as ``low income'' taxpayers based upon current dollar criteria applied
by the U.S. Department of Health and Human Services under authority of
section 673(2) of the Omnibus Budget Reconciliation Act of 1981, or any
other measure reasonably designed to identify such taxpayers.
In accordance with Sec. 7122(d)(1), the temporary regulations
provide that all proposed rejections of offers to compromise will
receive independent administrative review prior to final rejection.
Section 7122(d)(2) requires and the temporary regulations also provide
that the taxpayer has the right to appeal any rejection of an offer to
compromise to the IRS Office of Appeals. The temporary regulations
provide, however, that when the IRS returns an offer to compromise
because it was not processable under IRS procedures, because the offer
was submitted solely to delay collection or because the taxpayer failed
to provide requested information required by the IRS to evaluate the
offer, such a return of the offer does not constitute a rejection and
thus, does not entitle the taxpayer to appeal rights under this
provision. In the event that an offer to compromise is returned under
these circumstances and the IRS institutes collection action, the
taxpayer may have the right to consideration of the whole of his or her
collection case under other provisions of the Code.
Pursuant to section 6331(k) of the Code, as amended by section 3462
of RRA 1998, the temporary regulations also provide that for offers
pending on or submitted on or after January 1, 2000, no enforced
collection activity may be taken by the IRS to collect a liability
while an offer to compromise is pending, or for the 30 days following
any rejection of an offer to compromise, or during any period that an
appeal of any rejection, when such appeal is instituted within the 30
days following rejection, is being considered. Collection activity will
not, however, be precluded in any case where collection is in jeopardy
or the offer to compromise was submitted solely to delay collection.
Effective through December 31, 1999, the temporary regulations
continue to require the taxpayer to waive the running of the statutory
period of limitations on collection as a condition of acceptance of an
offer to compromise. Effective January 1, 2000, waivers of the statute
of limitations on collection will no longer be required for the
acceptance of an offer to compromise. Instead, the statute of
limitations for collection will be suspended during the period the
offer to compromise is under consideration by the IRS. This provision
of the temporary regulations implements section 3461 of RRA 1998.
The temporary regulations also implement section 503(a) of the
Taxpayer Bill of Rights II by specifying that Chief Counsel review of
an accepted offer to compromise is required only for offers in
compromise involving $50,000 or more in unpaid liabilities.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
sections 553(b) and (d) of the Administrative Procedure Act (5 U.S.C.
chapter 5) do not apply to these regulations. Please refer to the
cross-referenced notice of proposed rulemaking published elsewhere in
this issue of the Federal Register for the applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section
7805(f) of the Internal Revenue Code, these temporary regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information: The principal author of these temporary
regulations is Carol A. Campbell of the Office of Assistant Chief
Counsel (General Litigation). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
[[Page 39024]]
Sec. 301.7122-1-- [Removed]
Par. 2. Section 301.7122-1 is removed.
Par. 3. Section Sec. 301.7122-0T and 301.7211-1T are added to read
as follows:
Sec. 301.7122-0T-2 Table of contents.
This section list the captions that appear in the temporary
regulations under Sec. 301.7122-1T.
Sec. 301.7122-1T Compromises (temporary).
(a) In general.
(b) Grounds for compromise.
(c) Procedures for submission and consideration of offers.
(d) Acceptance of an offer to compromise a tax liability.
(e) Rejection of an offer to compromise.
(f) Effect of offer to compromise on collection activity
(g) Deposits.
(h) Statute of limitations.
(i) Inspection with respect to accepted offers to compromise.
(j) Effective date.
Sec. 301.7122-1T Compromises (temporary).
(a) In general. (1) The Secretary may exercise his discretion to
compromise any civil or criminal liability arising under the internal
revenue laws prior to reference of a case involving such a liability to
the Department of Justice for prosecution or defense.
(2) An agreement to compromise may relate to a civil or criminal
liability for taxes, interest, or penalties. Unless the terms of the
offer and acceptance expressly provide otherwise, acceptance of an
offer to compromise a civil liability does not remit a criminal
liability, nor does acceptance of an offer to compromise a criminal
liability remit a civil liability.
(b) Grounds for compromise. (1) In general. The Secretary may
compromise a liability on any of the following three grounds.
(2) Doubt as to liability. 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 or judgment
concerning the existence or amount of the liability. See
Sec. 301.7122(e)(4) for special rules applicable to rejection of offers
in cases where the IRS is unable to locate the taxpayer's return or
return information to verify the liability.
(3) Doubt as to collectibility. (i) In general. 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.
(ii) Allowable expenses. A determination of doubt as to
collectibility will include a determination of ability to pay. In
determining ability to pay, the Secretary will permit taxpayers to
retain sufficient funds to pay basic living expenses. The determination
of the amount of such basic living expenses will be founded upon an
evaluation of the individual facts and circumstances presented by the
taxpayer's case. To guide this determination, guidelines published by
the Secretary on national and local living expense standards will be
taken into account.
(iii) Nonliable spouses. (A) In general. Where a taxpayer is
offering to compromise a liability for which the taxpayer's spouse has
no liability, the assets and income of the nonliable spouse will not be
considered in determining the amount of an adequate offer, except to
the extent property has been transferred by the taxpayer to the
nonliable spouse under circumstances that would permit the IRS to
effect collection of the taxpayer's liability from such property, e.g.,
property that was conveyed in fraud of creditors, or as provided in
paragraph (b)(3)(iii) (B) of this section. The IRS may, however,
request information regarding the assets and/or income of the nonliable
spouse for the sole purpose of verifying the amount of and
responsibility for expenses claimed by the taxpayer.
(B) Exception. Where collection of the taxpayer's liability from
the assets and/or income of the nonliable spouse is permitted by
applicable state law (e.g., under state community property laws), the
assets and income of the nonliable spouse will be considered in
determining the amount of an adequate offer except to the extent that
the taxpayer and the nonliable spouse demonstrate that collection of
such assets and income would have a material and adverse impact on the
standard of living of the taxpayer, the nonliable spouse, and their
dependents.
(4) Promote effective tax administration. If there are no grounds
for compromise under paragraphs (b)(2) and (3) of this temporary
regulation, a compromise may be entered into to promote effective tax
administration when--
(i) Collection of the full liability will create economic hardship
within the meaning of Sec. 301.6343-1; or
(ii) Regardless of the taxpayer's financial circumstances,
exceptional circumstances exist such that collection of the full
liability will be detrimental to voluntary compliance by taxpayers; and
(iii) Compromise of the liability will not undermine compliance by
taxpayers with the tax laws.
(iv) Special rules for evaluating offers to promote effective tax
administration. (A) The determination to accept or reject an offer to
compromise made on the ground that acceptance would promote effective
tax administration within the meaning of this section will be based
upon consideration of all the facts and circumstances, including the
taxpayer's record of overall compliance with the tax laws.
(B) Factors supporting (but not conclusive of) a determination of
economic hardship under paragraph (b)(4)(i) include--
(1) Taxpayer is incapable of earning a living because of a long
term illness, medical condition, or disability and it is reasonably
foreseeable that taxpayer's financial resources will be exhausted
providing for care and support during the course of the condition;
(2) Although taxpayer has certain assets, liquidation of those
assets to pay outstanding tax liabilities would render the taxpayer
unable to meet basic living expenses; and
(3) Although taxpayer has certain assets, the taxpayer is unable to
borrow against the equity in those assets and disposition by seizure or
sale of the assets would have sufficient adverse consequences such that
enforced collection is unlikely.
(C) Factors supporting (but not conclusive of) a determination that
compromise would not undermine compliance by taxpayers with the tax
laws include--
(1) Taxpayer does not have a history of noncompliance with the
filing and payment requirements of the Internal Revenue Code;
(2) Taxpayer has not taken deliberate actions to avoid the payment
of taxes; and
(3) Taxpayer has not encouraged others to refuse to comply with the
tax laws.
(D) Examples. The following examples illustrate cases that may be
compromised under the provisions of paragraph (b)(4)(i):
Example 1. Taxpayer has assets sufficient to satisfy the tax
liability. Taxpayer provides full time care and assistance to her
dependent child, who has a serious long-term illness. It is expected
that the taxpayer will need to use the equity in her assets to
provide for adequate basic living expenses and medical care for her
child. Taxpayer's overall compliance history does not weigh against
compromise.
Example 2. Taxpayer is retired and his only income is from a
pension. The taxpayer's 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 an adequate means to provide for
[[Page 39025]]
basic living expenses. Taxpayer's overall compliance history does
not weigh against compromise.
Example 3. Taxpayer is disabled and lives on a fixed income that
will not, after allowance of adequate basic living expenses, permit
full payment of his liability under an installment agreement.
Taxpayer also owns a modest house that has been specially equipped
to accommodate his disability. Taxpayer's equity in the house is
sufficient to permit payment of the liability he owes. However,
because of his disability and limited earning potential, taxpayer is
unable to obtain a mortgage or otherwise borrow against this equity.
In addition, because the taxpayer's home has been specially equipped
to accommodate his disability, forced sale of the taxpayer's
residence would create severe adverse consequences for the taxpayer,
making such a sale unlikely. Taxpayer's overall compliance history
does not weigh against compromise.
Example 4. Taxpayer is a business that despite the adoption of a
wide array of precautions, including the employment of outside
auditors, suffered an embezzlement loss. Although the taxpayer
reviewed and signed employment tax returns and signed checks for
payment of all employment tax liabilities, the embezzling employee
successfully intercepted these checks and diverted the funds. At the
time taxpayer discovers the diversions, taxpayer promptly contacts
the IRS and begins proceedings to obtain recovery from the employee
and the auditor. Taxpayer is unsuccessful in obtaining any recovery
from either the employee or the auditor. While taxpayer has accounts
receivable that will satisfy the tax delinquencies, taxpayer would
be unable to remain in business if those receivables were seized by
the IRS. Further, while taxpayer will continue to generate some
profit if permitted to remain in business, those profits would not
be sufficient to pay the accrued liabilities prior to the time
collection of the liabilities became barred by the statute of
limitations. Taxpayer's overall compliance history does not weigh
against compromise.
(E) The following examples illustrate cases that may be compromised
under paragraph (b)(4)(ii):
Example 1. In October of 1986, taxpayer developed a serious
illness that resulted in almost continuous hospitalizations for a
number of years. The taxpayer's 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 he has promptly
begun to attend to his tax affairs. He discovers that the IRS
prepared a substitute for return for the 1986 tax year on the basis
of information returns it had received and had assessed a tax
deficiency. When the taxpayer discovered the liability, with
penalties and interest, the tax bill is more than three times the
original tax liability. Taxpayer's overall compliance history does
not weigh against compromise.
Example 2. 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. Taxpayer learns that he can
earn a higher rate of interest on his IRA savings by moving those
savings from a money management account to a certificate of deposit
at a different financial institution. Prior to transferring his
savings, taxpayer submits an E-Mail inquiry to the IRS at its Web
Page, requesting information about the steps he must take to
preserve the tax benefits he has enjoyed and to avoid penalties. The
IRS responds in an answering E-Mail that the taxpayer may withdraw
his IRA savings from his neighborhood bank, but he must redeposit
those savings in a new IRA account within 90 days. Taxpayer
withdraws the funds and redeposits them in a new IRA account 63 days
later. Upon audit, taxpayer learns that he has been misinformed
about the required rollover period and that he is liable for
additional taxes, penalties and additions to tax for not having
redeposited the amount within 60 days. Had it not been for the
erroneous advice that is reflected in the taxpayer's retained copy
of the IRS E-Mail response to his inquiry, taxpayer would have
redeposited the amount within the required 60-day period. Taxpayer's
overall compliance history does not weigh against compromise.
(c) Procedures for submission and consideration of offers. (1) In
general. An offer to compromise a tax liability pursuant to section
7122 must be submitted according to the procedures, and in the form and
manner, prescribed by the Secretary. An offer to compromise a tax
liability must be signed by the taxpayer under penalty of perjury and
must contain the information prescribed or requested by the Secretary.
However, taxpayers submitting offers to compromise liabilities solely
on the basis of doubt as to liability will not be required to provide
financial statements.
(2) When offers become pending and return of offers. An offer to
compromise becomes pending when it is accepted for processing. If an
offer accepted for processing does not contain sufficient information
to permit the IRS to evaluate whether the offer should be accepted, the
IRS will request the taxpayer to provide the needed additional
information. If the taxpayer does not submit the additional information
that the IRS has requested within a reasonable time period after such a
request, the IRS may return the offer to the taxpayer. The IRS may also
return an offer to compromise a tax liability if it determines that the
offer was submitted solely to delay collection or was otherwise
nonprocessable. An offer returned following acceptance for processing
is deemed pending only for the period between the date the offer is
accepted for processing and the date the IRS returns the offer to the
taxpayer. See paragraphs (e)(5)(ii) and (f)(2)(iv) of this temporary
regulation for rules regarding the effect of such returns of offers.
(3) Withdrawal. An offer to compromise a tax liability may be
withdrawn by the taxpayer or the taxpayer's representative at any time
prior to the IRS' acceptance of the offer to compromise. An offer will
be considered withdrawn upon the IRS' receipt of written notification
of the withdrawal of the offer by personal delivery, or by certified
mail, or upon issuance of a letter by the IRS confirming the taxpayer's
intent to withdraw the offer.
(d) Acceptance of an offer to compromise a tax liability. (1) An
offer to compromise has not been accepted until the IRS issues a
written notification of acceptance to the taxpayer or the taxpayer's
representative.
(2) As additional consideration for the acceptance of an offer to
compromise, the IRS may request that taxpayer enter into any collateral
agreement or post any security which is deemed necessary for the
protection of the interests of the United States.
(3) Offers may be accepted when they provide for payment of
compromised amounts in one or more equal or unequal installments.
(4) If the final payment on an accepted offer to compromise is
contingent upon the immediate and simultaneous release of a tax lien in
whole or in part, such payment must be made in accordance with the
forms, instructions, or procedures prescribed by the Secretary.
(5) Acceptance of an offer to compromise will conclusively settle
the liability of the taxpayer specified in the offer. Neither the
taxpayer nor the Government will, following acceptance of an offer to
compromise, be permitted to reopen the case except in instances where--
(i) False information or documents are supplied in conjunction with
the offer;
(ii) The ability to pay and/or the assets of the taxpayer are
concealed; or
(iii) A mutual mistake of material fact sufficient to cause the
offer agreement to be reformed or set aside is discovered.
(6) Opinion of Chief Counsel. Except as otherwise provided in this
paragraph (d)(6), if an offer to compromise is accepted, there will be
placed on file the opinion of the Chief Counsel for the IRS with
respect to such compromise, along with the reasons therefor. However,
no such opinion will be required with respect to the compromise of any
civil case in which the unpaid amount of tax assessed (including any
interest, additional amount, addition to the tax, or assessable
penalty) is less than
[[Page 39026]]
$50,000. Also placed on file will be a statement of--
(i) The amount of tax assessed;
(ii) The amount of interest, additional amount, addition to the
tax, or assessable penalty, imposed by law on the person against whom
the tax is assessed; and
(iii) The amount actually paid in accordance with the terms of the
compromise.
(e) Rejection of an offer to compromise. (1) An offer to compromise
has not been rejected until the IRS issues a written notice to the
taxpayer or his representative, advising of the rejection, the
reason(s) for rejection, and the right to an appeal.
(2) The IRS may not notify a taxpayer or taxpayer's representative
of the rejection of an offer to compromise until an independent
administrative review of the proposed rejection is completed.
(3) Low income taxpayers. No offer to compromise received from a
low income taxpayer may be rejected solely on the basis of the amount
of the offer without evaluating whether that offer meets the criteria
in paragraph (b) of this section. For purposes of this paragraph
(e)(3), a low income taxpayer is a taxpayer who falls at or below the
dollar criteria established by the poverty guidelines updated annually
in the Federal Register by the U.S. Department of Health and Human
Services under authority of section 673(2) of the Omnibus Budget
Reconciliation Act of 1981 or such other measure that is adopted by the
Secretary.
(4) Offers based upon doubt as to liability. Offers submitted on
the basis of doubt as to liability cannot be rejected solely because
the IRS is unable to locate the taxpayer's return or return information
for verification of the liability.
(5) Appeal of rejection of an offer in compromise. (i) In general.
The taxpayer may administratively appeal a rejection of an offer to
compromise to the IRS Office of Appeals (Appeals) if, within the 30-day
period commencing the day after the date on the letter of rejection,
the taxpayer requests such an administrative review in the manner
provided by the Secretary.
(ii) Offer to compromise returned following a determination that
the offer was nonprocessable, a failure by the taxpayer to provide
requested information, or a determination that the offer was submitted
for purposes of delay. Where a determination is made to return offer
documents because the offer to compromise was nonprocessable, because
the taxpayer failed to provide requested information, or because the
IRS determined that the offer to compromise was submitted solely for
purposes of delay under paragraph (c)(2) of this section, the return of
the offer does not constitute a rejection of the offer for purposes of
this provision and does not entitle the taxpayer to appeal the matter
to Appeals under the provisions of this paragraph (e)(5). However, if
the offer is returned because the taxpayer failed to provide requested
financial information, the offer will not be returned until an
independent administrative review of the proposed return is completed.
(f) Effect of offer to compromise on collection activity. (1)
Offers submitted prior to and not pending on or after December 31,
1999. For offers to compromise submitted prior to and not pending on or
after December 31, 1999, the submission of an offer to compromise will
not automatically operate to stay the collection of any liability.
Enforcement of collection may, however, be deferred if the interests of
the United States will not be jeopardized thereby.
(2) Offers pending on or made on or after December 31, 1999. (i) In
general. For offers pending on or made on or after December 31, 1999,
the IRS will not make any levies to collect the liability that is the
subject of the compromise during the period the IRS is evaluating
whether such offer will be accepted or rejected, for 30 days
immediately following the rejection of the offer, and for any period
when a timely filed appeal from the rejection is being considered by
Appeals.
(ii) Revised offers submitted following rejection. If, following
the rejection of an offer to compromise pending on or made on or after
December 31, 1999, the taxpayer makes a good faith revision of that
offer and submits the revised offer within 30 days after the date of
rejection, the IRS will not levy to collect the liability that is the
subject of the revised offer to compromise while the IRS is evaluating
whether to accept or reject the revised offer.
(iii) Jeopardy. The IRS may levy to collect the liability that is
the subject of an offer to compromise during the period the IRS is
evaluating whether that offer will be accepted if it determines that
collection of the liability is in jeopardy.
(iv) Offers to compromise determined by IRS to be nonprocessable or
submitted solely for purposes of delay. The IRS may levy to collect the
liability that is the subject of an offer to compromise at any time
after it determines, under paragraph (c)(2) of this section, that a
pending offer did not contain sufficient information to permit
evaluation of whether the offer should be accepted, that the offer was
submitted solely to delay collection, or that the offer was otherwise
nonprocessable.
(v) Offsets under section 6402. Notwithstanding the evaluation and
processing of an offer to compromise, the IRS may, in accordance with
section 6402, credit any overpayments made by the taxpayer against a
liability that is the subject of an offer to compromise and may offset
such overpayments against other liabilities owed by the taxpayer to the
extent authorized by section 6402.
(g) Deposits. Sums submitted with an offer to compromise a
liability or during the pendency of an offer to compromise are
considered deposits and will not be applied to the liability until the
offer is accepted unless the taxpayer provides written authorization
for application of the payments. If an offer to compromise is
withdrawn, is determined to be nonprocessable, or is submitted solely
for purposes of delay and returned to the taxpayer, any amount tendered
with the offer, including all installments paid on the offer, will be
refunded without interest. If an offer is rejected, any amount tendered
with the offer, including all installments paid on the offer, will be
refunded, without interest, after the conclusion of any review sought
by the taxpayer with Appeals. Refund will not be required if the
taxpayer has agreed in writing that amounts tendered pursuant to the
offer may be applied to the liability for which the offer was
submitted.
(h) Statute of limitations. (1) Offers submitted prior to and not
pending on or after December 31, 1999. For offers to compromise
submitted prior to and not pending on or after December 31, 1999--
(i) If the 10-year period specified in section 6502(a) will expire
prior to December 31, 2002, and
(ii) Payments due under the agreement are scheduled to be made
after the date upon which the 10-year period specified in section
6502(a) will expire--
no offer will be accepted unless the taxpayer executes a consent to
extend the statutory period of limitations on the collection of the
liability involved until the date one year subsequent to the date of
the last scheduled payment or until December 31, 2002, whichever is
earlier.
(2) Offers pending on or made on or after December 31, 1999. For
offers pending on or made on or after December 31, 1999, the statute of
limitations on collection will be suspended while collection is
prohibited under paragraph (f)(2) of this section.
[[Page 39027]]
(3) For any offer to compromise, the IRS may continue to require,
where appropriate, the extension of the statute of limitations on
assessment. However, in any case where waiver of the running of the
statutory period of limitations on assessment is sought, the taxpayer
must be notified of the right to refuse to extend the period of
limitations or to limit the extension to particular issues or
particular periods of time.
(i) Inspection with respect to accepted offers to compromise. For
provisions relating to the inspection of returns and accepted offers to
compromise, see section 6103(k)(1).
(j) Effective date. Except as otherwise provided, this section
applies to offers to compromise submitted on or after July 21, 1999,
through July 19, 2002.
Charles O. Rossotti,
Commissioner of Internal Revenue.
Approved: July 14, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-18456 Filed 7-19-99; 8:45 am]
BILLING CODE 4830-01-U