[Federal Register Volume 67, Number 141 (Tuesday, July 23, 2002)]
[Rules and Regulations]
[Pages 48025-48032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18454]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9007]
RIN 1545-AW87


Compromise of Tax Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
compromise of internal revenue taxes. The regulations adopt the rules 
of the temporary regulations and reflect changes to the law made by the 
Internal Revenue Service Restructuring and Reform Act of 1998 and the 
Taxpayer Bill of Rights II.

EFFECTIVE DATE: These regulations are effective July 18, 2002.

FOR FURTHER INFORMATION CONTACT: Frederick W. Schindler, (202) 622-3620 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final 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

[[Page 48026]]

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, in 
certain circumstances, factors such as equity, hardship, and public 
policy be taken into account by the IRS in evaluating whether the 
compromise of individual tax liabilities would promote effective tax 
administration. H. Conf. Rep. 599, 105th Cong., 2d Sess. 289 (1998). On 
July 21, 1999, temporary regulations (TD 8829; 64 FR 39020) and a 
notice of proposed rulemaking (REG-116991-98; 64 FR 39106) reflecting 
these changes were published in the Federal Register. Four written 
comments on the temporary and proposed regulations were received. A 
public hearing on the regulations was requested but that request was 
later withdrawn. No public hearing was scheduled or held. The final 
regulations adopt the rules of the temporary regulations with minor 
changes.

Explanation of Provisions

    A compromise is an agreement between a taxpayer and the Government 
that settles a tax liability for payment of less than the total amount 
determined and assessed. Consistent with its mission of applying the 
tax laws with integrity and fairness to all, the IRS generally expects 
that all taxpayers will pay the total amount due, regardless of amount. 
See Policy Statement P-5-2, Collecting Principles (Approved February 
17, 2000), reprinted at IRM 1.2.1.5.2. When attempting to resolve a tax 
delinquency, the IRS will work with taxpayers to achieve full payment 
of all tax, penalties, and interest imposed by Congress. Where payment 
in full cannot immediately be achieved, the IRS may, at its discretion, 
allow taxpayers to pay over time through installment agreements.
    The IRS recognizes that it is both sound business practice and good 
tax policy to settle some cases for less than the total amount due. 
Prior to issuance of the temporary regulations, the IRS had a 
longstanding practice of compromising where there was doubt as to the 
existence or amount of the tax liability or doubt that the total amount 
due could be collected. The final regulations continue these 
traditional grounds for compromise. In addition, to reflect the changes 
made by RRA 1998, the final regulations allow compromise where there is 
no doubt as to liability or as to collectibility, but where compromise 
would promote effective tax administration because either (1) 
collection of the liability would create economic hardship, or (2) 
compelling public policy or equity considerations provide a sufficient 
basis for compromising the liability. Compromise based on these 
hardship and public policy/equity bases, however, may not be authorized 
if compromise would undermine compliance with the tax laws.

Effective Tax Administration--Economic Hardship

    The final regulations retain the reference in the temporary 
regulations to the economic hardship standard of Sec. 301.6343-1, which 
defines economic hardship as the inability to pay reasonable basic 
living expenses. In determining reasonable basic living expenses, 
Sec. 301.6343-1 directs the IRS to consider relevant information such 
as the taxpayer's age, employment status and history, number of 
dependents, and other ``unique circumstances.'' The final regulations 
supplement this standard by providing a non-exclusive list of factors 
which support a finding of economic hardship, and by providing examples 
to illustrate application of the standard.
    The fourth example of economic hardship in the temporary 
regulations, involving a business taxpayer, has been removed in order 
to eliminate an inconsistency. The economic hardship standard of 
Sec. 301.6343-1 specifically applies only to individuals. The fourth 
example was included in the temporary regulations in the event that a 
standard for evaluating economic hardship with respect to non-
individuals could be developed. After evaluating this issue further, 
the IRS and Treasury Department have concluded that an economic 
hardship standard for non-individuals does not necessarily promote 
effective tax administration. Permitting compromise in non-individual 
cases where there is no doubt as to collectibility, for instance, would 
raise the issue of whether the Government should be foregoing the 
collection of taxes to support a nonviable business.
    Although economic hardship therefore is not a basis for compromise 
for non-individuals under the final regulations, IRS experience has 
shown that the doubt as to collectibility standard often may permit the 
resolution of cases involving businesses and other non-individual 
taxpayers. In addition, even if a business or other non-individual is 
unable to compromise on liability or collectibility grounds, compelling 
public policy or equity considerations (discussed below) may provide 
sufficient grounds to compromise the case.
    A commenting party suggested that the economic hardship standard 
and examples were not inclusive enough, specifically stating that the 
first two examples of economic hardship in the temporary regulations 
were drawn too narrowly. The first example illustrating economic 
hardship described a taxpayer whose assets and income are likely to be 
exhausted caring for a dependent child. The commenting party believed 
that the regulations would better promote effective tax administration 
if the example were expanded to include care of a dependent parent or 
other family member. The second example described a retired taxpayer 
whose only income is from a pension and whose only asset is a 
retirement account. The taxpayer could pay the tax liability in full by 
liquidating his retirement account, but doing so would leave the 
taxpayer without adequate means of support. The commenting party 
suggested that the example should specifically state that the age of 
the taxpayer should be taken into account. Otherwise, a taxpayer close 
to retirement age may feel compelled to retire so as to eliminate other 
sources of income and qualify under this example since retirement funds 
would then be the only source of income. A second commenting party also 
suggested that the moral or legal obligation to support others be 
listed as a factor supporting a finding of economic hardship.
    The final regulations adopt these suggestions, in part, by stating 
that one factor supporting a finding of economic hardship might be that 
all available funds are used for the care of a dependent. Although the 
final regulations include examples to illustrate the application of the 
economic hardship standard, the central inquiry is whether full 
collection of the liability would render the taxpayer unable to provide 
for reasonable basic living expenses. Facts such as the number of 
dependents and the age and health of taxpayers and their dependents are 
factors which Sec. 301.6343-1 provides should be considered when making 
that economic hardship determination. Furthermore, the examples in the 
final regulations are not intended to be exclusive and should not be 
read to suggest that all of the facts discussed in a given example must 
be present in a case in order for compromise to be authorized.

Effective Tax Administration--Public Policy and Equity

    The temporary regulations provided that the IRS may compromise a 
liability

[[Page 48027]]

to promote effective tax administration even if no other basis for 
compromise is available. (As discussed above, compromise on the basis 
of economic hardship is not available to non-individuals under the 
final regulations.) The temporary regulations provided that the IRS may 
compromise under the non-hardship effective tax administration standard 
to promote effective tax administration when, ``[r]egardless of the 
taxpayer's financial circumstances, exceptional circumstances exist 
such that collection of the full liability will be detrimental to 
voluntary compliance by taxpayers.''
    The ``detrimental to voluntary compliance'' standard in the 
temporary regulations was intended to indicate that the IRS may 
compromise in those rare cases where collection of the full liability 
would adversely affect the overall tax system. Based on public comments 
and on IRS experience in implementing the temporary regulations, this 
standard has been restated in the final regulations to clarify the 
types of cases that may qualify for compromise on these grounds. 
Compromise under the non-hardship effective tax administration standard 
in the final regulations, however, still is expected to be appropriate 
only in those rare cases where collection would adversely affect the 
overall tax system.
    Under the final regulations, a taxpayer seeking to compromise a 
liability on this basis must identify compelling public policy or 
equity considerations providing a sufficient basis for compromising the 
liability. The circumstances must be such that compromise is justified 
even though a similarly situated taxpayer may have paid his liability 
in full. Before accepting an offer based on equity and public policy 
considerations, the IRS must conclude that collection of the full 
liability would undermine public confidence that the tax laws are being 
administered in a fair and equitable manner.
    The clarification to the non-hardship effective tax administration 
standard in the final regulations recognizes that compromise on these 
grounds raises the issue of disparate treatment of taxpayers who are 
able to pay the full amount of their liabilities without economic 
hardship. Some taxpayers will pay less than the full amount owed, while 
others must pay in full. (Some taxpayers who pay in full also may be in 
situations similar to that of the taxpayer requesting compromise.) 
Accordingly, the final regulations specify that a taxpayer must 
demonstrate that the circumstances of the taxpayer's liability 
implicate public policy or equity concerns compelling enough to justify 
compromise notwithstanding this inherent inequity. As noted earlier, 
the cases satisfying the equity and public policy standard are expected 
to be rare. In applying this standard, the IRS will presume that the 
correct application of the tax laws produces a fair and equitable 
result, absent exceptional circumstances.
    The notice of proposed rulemaking specifically encouraged the 
public to make comments or provide examples regarding the particular 
types of cases or situations in which the Secretary's authority to 
compromise should be used because: (1) Collection of the full amount of 
tax liability would be detrimental to voluntary compliance (i.e., may 
be appropriate for compromise under the non-hardship effective tax 
administration standard) or (2) IRS delay in determining the tax 
liability has resulted in the accumulation of significant interest and 
penalties. Parties providing comments regarding delay in interest and 
penalty cases were asked to consider the possible interplay between 
cases compromised under this provision and the relief accorded 
taxpayers under section 6404(e).
    Two parties submitted comments in response to this request. Both 
suggested that the regulations be expanded to authorize compromise in 
situations where delay in determining the taxpayer's liability caused 
substantial interest and penalties to accrue. The first suggested that 
compromise on the basis that collection in full would be detrimental to 
voluntary compliance was warranted when any undue delay by the IRS 
resulted in the accumulation of penalties and interest. The commenting 
party suggested that the regulations include delay by the IRS in 
determining the taxpayer's liability, issuing a revenue agent's report 
or notice of deficiency, or litigating the issues as factors and 
examples supporting compromise on these grounds. The commenting party 
did not suggest a standard for determining ``undue delay'' and did not 
discuss whether this kind of expansion of the compromise regulations 
would undermine the interest abatement provisions of section 6404(e).
    The second party to comment on this provision in the regulations 
suggested compromise should be authorized where a liability results 
from factors beyond the taxpayer's control and the accumulation of 
interest and penalties is disproportionately large compared to the 
initial liability. The specific example suggested by the commenting 
party was one in which the Tax Matters Partner (TMP) in a partnership 
subject to the unified audit procedures of the Tax Equity and Fiscal 
Responsibility Act of 1982 (TEFRA) fraudulently sells shares in a sham 
business to other partners and those partners incur substantial 
interest and penalties attributable to partnership items. According to 
the commenting party, the failure of the IRS to remove a TMP being 
investigated for fraud relating to the partnership, and to allow the 
TMP to continue to represent the partnership during the audit, creates 
``exceptional circumstances'' warranting compromise with other 
partners. The commenting party acknowledged that section 6404(e) would 
not usually authorize the abatement of interest under such 
circumstances because the interest does not result from an unreasonable 
error or delay by an IRS official in performing a ministerial or 
managerial act. The commenting party also acknowledged that it would be 
unwise to craft a rule that would make the Government an insurer of 
individual taxpayer liabilities attributable to the misdeeds of a tax 
shelter promoter. However, the commenting party believed that where the 
IRS's failure to remove the TMP contributed to the problem, compromise 
is warranted.
    The IRS and Treasury Department do not believe that it would 
promote effective tax administration to authorize compromise solely on 
the basis of an asserted delay by the IRS, particularly delay that does 
not support relief under section 6404(e) with respect to accrued 
interest, or on the basis that a third party, such as the taxpayer's 
partner, is claimed to have defrauded or otherwise caused financial 
harm to the taxpayer. Nevertheless, cases in which a taxpayer believes 
the liability was caused, in whole or in part, by delay on the part of 
the IRS or by the actions of third parties may be appropriate for 
compromise under the public policy and equity standard. Such cases, 
however, are expected to be rare, as the taxpayer must identify 
compelling public policy or equity concerns that satisfy the standard 
set forth above.
    The IRS and Treasury Department are mindful that the Congressional 
Conference Committee, in adding section 7122(c) as part of RRA 1998, 
anticipated that the IRS may use the authority provided in section 
7122(c) to resolve longstanding cases by foregoing penalties and 
interest resulting from delays in determining a taxpayer's liability. 
See H. Conf. Rep. 599, 105th Cong., 2d Sess. 289 (1998). The IRS' 
experience in applying the temporary regulations is that these 
regulations have given effect to the intent of Congress, as expressed 
in the

[[Page 48028]]

Conference Report, since cases involving substantial interest and 
penalties often can be compromised under the standards of doubt as to 
collectibility and economic hardship. Similarly, although a taxpayer is 
in the best position to anticipate, and protect himself or herself 
from, the risks of business associations and transactions, the misdeeds 
of third parties that may have contributed to a tax liability may be 
taken into account when determining whether to accept a compromise 
based on doubt as to collectibility or on a finding that collection 
would cause economic hardship.

Amount of Compromise if Basis for Compromise Exists

    The final regulations set forth the permissible bases for 
compromise, one of which must be established in order to accept an 
offer to compromise liabilities arising under the internal revenue 
laws. They do not, however, prescribe the amount which must be offered 
in order for an offer to be acceptable. 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. For the sake of clarity, the final 
regulations now expressly state this principle, which was stated only 
in the preamble to the temporary regulations.
    As required by section 7122(c)(2)(A) and (B), added by RRA 1998, 
the final 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 of 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 continue to determine the appropriate means to publish 
these national and local living allowances.
    A commenting party suggested that the national and local living 
allowance standards be eliminated in favor of a rule requiring all 
offer specialists to look only to an individual taxpayer's actual facts 
and circumstances to determine the amount necessary to provide for 
reasonable basic living expenses. According to the commenting party, 
IRS employees rarely depart from the national and local standards, 
which, in practice, serve as a ``cap'' on expenses, rather than as a 
general guide to be applied based on the specific facts of a case.
    Because publication of the national and local standards is required 
by section 7122(c)(2)(A), the suggestion that the standards be 
eliminated has not been adopted. In accordance with section 
7122(c)(2)(B), the final regulations require that the IRS consider the 
facts and circumstances of the case when determining basic living 
expenses. Consistent with this requirement in the statute and 
regulations, the IRS has issued internal guidance requiring that the 
particular facts and circumstance of a taxpayer's case be considered 
whenever the expense standards are applied, and that expense allowances 
beyond the standards be used whenever use of the standards would result 
in a taxpayer not having adequate means to provide for basic living 
expenses.

Other Provisions

    Section 7122(c)(3)(A) prohibits the rejection of an offer to 
compromise by a low income taxpayer based solely on the amount of the 
offer. The final regulations expand this rule to apply to all taxpayers 
regardless of income level. The final regulations state that no offer 
may be rejected based solely on the amount of the offer. Offers will 
only be rejected when the IRS determines that no basis for compromise 
under this section is present or that the offer is unacceptable under 
the Secretary's policies and procedures.
    In accordance with section 7122(d)(1), the final 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 regulations also provide that the 
taxpayer may appeal any rejection of an offer to compromise to the IRS 
Office of Appeals. The final regulations provide, however, that when 
the IRS returns an offer to compromise because the offer was submitted 
solely to delay collection, or because the taxpayer failed to provide 
requested information required by the IRS to evaluate or process the 
offer under IRS procedures, the return of the offer does not constitute 
a rejection and, thus, is not subject to appeal. In the event that the 
IRS institutes collection action following the return of an offer to 
compromise, the taxpayer may have the right to consideration of the 
whole of his collection case under other provisions of the Code.
    Although not required by any provision of the Code, the temporary 
regulations provided that an offer could not be returned to a taxpayer 
for failure to submit requested financial information until an 
independent administrative review of the proposed return was completed. 
The requirement of an independent administrative review of proposed 
returns was the source of significant delays and was redundant because 
an IRS manager must review and approve all returns of offers for 
failure to submit requested financial information. The final 
regulations therefore require review only by an IRS manager in these 
cases.
    Pursuant to section 6331(k), the final regulations also provide 
that the IRS may not levy 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 is being considered, when such appeal is instituted within 
the 30 days following rejection. Levy will not, however, be precluded 
in any case where collection is in jeopardy or the offer to compromise 
was submitted solely to delay collection. The regulations also correct 
for an omission in the temporary regulations by providing that the IRS 
may not refer a case to the Department of Justice to collect an unpaid 
tax through a judicial proceeding while an offer to compromise that tax 
is pending or while a rejection of such an offer is being considered by 
the IRS Office of Appeals. The IRS may, however, authorize the 
Department of Justice to file a counterclaim in any refund proceeding 
commenced by a taxpayer, participate in bankruptcy or insolvency cases 
commenced by or against the taxpayer, or join a taxpayer in any other 
proceeding in which liability for the tax at issue may be established 
or disputed.
    The final 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 Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the preceding temporary 
regulations were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

[[Page 48029]]

Drafting Information

    The principal author of these regulations is Frederick W. Schindler 
of the Office of Associate Chief Counsel (Procedure and 
Administration), Collection, Bankruptcy & Summonses Division.

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

    1. The authority citation for part 301 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *

    2. Sections 301.7122-0 and 301.7122-1 are added to read as follows:


Sec. 301.7122-0  Table of contents.

    This section lists the major captions that appear in the 
regulations under Sec. 301.7122-1.

Sec. 301.7122-1  Compromises.

(a) In general.
(b) Grounds for compromise.
(c) Special rules for the evaluation of offers to compromise.
(d) Procedures for submission and consideration of offers.
(e) Acceptance of an offer to compromise a tax liability.
(f) Rejection of an offer to compromise.
(g) Effect of offer to compromise on collection activity.
(h) Deposits.
(i) Statute of limitations.
(j) Inspection with respect to accepted offers to compromise.
(k) Effective date.

Sec. 301.7122-1  Compromises.

    (a) In general--(1) If the Secretary determines that there are 
grounds for compromise under this section, the Secretary may, at the 
Secretary's discretion, 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) 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 paragraph (f)(4) of this section for special rules 
applicable to rejection of offers in cases where the Internal Revenue 
Service (IRS) is unable to locate the taxpayer's return or return 
information to verify the liability.
    (2) Doubt as to collectibility. Doubt as to collectibility exists 
in any case where the taxpayer's assets and income are less than the 
full amount of the liability.
    (3) Promote effective tax administration. (i) A compromise may be 
entered into to promote effective tax administration when the Secretary 
determines that, although collection in full could be achieved, 
collection of the full liability would cause the taxpayer economic 
hardship within the meaning of Sec. 301.6343-1.
    (ii) If there are no grounds for compromise under paragraphs 
(b)(1), (2), or (3)(i) of this section, the IRS may compromise to 
promote effective tax administration where compelling public policy or 
equity considerations identified by the taxpayer provide a sufficient 
basis for compromising the liability. Compromise will be justified only 
where, due to exceptional circumstances, collection of the full 
liability would undermine public confidence that the tax laws are being 
administered in a fair and equitable manner. A taxpayer proposing 
compromise under this paragraph (b)(3)(ii) will be expected to 
demonstrate circumstances that justify compromise even though a 
similarly situated taxpayer may have paid his liability in full.
    (iii) No compromise to promote effective tax administration may be 
entered into if compromise of the liability would undermine compliance 
by taxpayers with the tax laws.
    (c) Special rules for evaluating offers to compromise--(1) In 
general. Once a basis for compromise under paragraph (b) of this 
section has been identified, the decision to accept or reject an offer 
to compromise, as well as the terms and conditions agreed to, is left 
to the discretion of the Secretary. The determination whether to accept 
or reject an offer to compromise will be based upon consideration of 
all the facts and circumstances, including whether the circumstances of 
a particular case warrant acceptance of an amount that might not 
otherwise be acceptable under the Secretary's policies and procedures.
    (2) Doubt as to collectibility--(i) 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.
    (ii) 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. The assets 
and income of a nonliable spouse may be considered, however, 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), property has been 
transferred by the taxpayer to the nonliable spouse for the purpose of 
removing the property from consideration by the IRS in evaluating the 
compromise, or as provided in paragraph (c)(2)(ii)(B) of this section. 
The IRS also may request information regarding the assets and income of 
the nonliable spouse for the 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 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.
    (3) Compromises to promote effective tax administration--(i) 
Factors supporting (but not conclusive of) a determination that 
collection would cause economic hardship within the meaning of 
paragraph (b)(3)(i) of this section include, but are not limited to--

[[Page 48030]]

    (A) 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;
    (B) Although taxpayer has certain monthly income, that income is 
exhausted each month in providing for the care of dependents with no 
other means of support; and
    (C) Although taxpayer has certain assets, the taxpayer is unable to 
borrow against the equity in those assets and liquidation of those 
assets to pay outstanding tax liabilities would render the taxpayer 
unable to meet basic living expenses.
    (ii) Factors supporting (but not conclusive of) a determination 
that compromise would undermine compliance within the meaning of 
paragraph (b)(3)(iii) of this section include, but are not limited to--
    (A) Taxpayer has a history of noncompliance with the filing and 
payment requirements of the Internal Revenue Code;
    (B) Taxpayer has taken deliberate actions to avoid the payment of 
taxes; and
    (C) Taxpayer has encouraged others to refuse to comply with the tax 
laws.
    (iii) The following examples illustrate the types of cases that may 
be compromised by the Secretary, at the Secretary's discretion, under 
the economic hardship provisions of paragraph (b)(3)(i) of this 
section:

    Example 1. The taxpayer has assets sufficient to satisfy the tax 
liability. The 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 his assets 
to provide for adequate basic living expenses and medical care for 
his child. The taxpayer's overall compliance history does not weigh 
against compromise.
    Example 2. The 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 basic living expenses. The 
taxpayer's overall compliance history does not weigh against 
compromise.
    Example 3. The taxpayer is disabled and lives on a fixed income 
that will not, after allowance of basic living expenses, permit full 
payment of his liability under an installment agreement. The 
taxpayer also owns a modest house that has been specially equipped 
to accommodate his disability. The 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, the 
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. The taxpayer's overall compliance history does not 
weigh against compromise.

    (iv) The following examples illustrate the types of cases that may 
be compromised by the Secretary, at the Secretary's discretion, under 
the public policy and equity provisions of paragraph (b)(3)(ii) of this 
section:

    Example 1. In October of 1986, the 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. The taxpayer's overall compliance history 
does not weigh against compromise.
    Example 2. The 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. The 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, the 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. The taxpayer withdraws the funds and redeposits them in a new 
IRA account 63 days later. Upon audit, the 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, the 
taxpayer would have redeposited the amount within the required 60-
day period. The taxpayer's overall compliance history does not weigh 
against compromise.

    (d) 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 made in writing, must be signed by the taxpayer under 
penalty of perjury, and must contain all of 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. The IRS 
may not accept for processing any offer to compromise a liability 
following reference of a case involving such liability to the Attorney 
General for prosecution or defense. 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 that the 
taxpayer 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 (f)(5)(ii) and (g)(4) of this section 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 either by personal delivery or certified 
mail, or upon issuance of a letter by the IRS confirming the taxpayer's 
intent to withdraw the offer.
    (e) 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.

[[Page 48031]]

    (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. Compromise with 
one taxpayer does not extinguish the liability of, nor prevent the IRS 
from taking action to collect from, any person not named in the offer 
who is also liable for the tax to which the compromise relates. 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 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 (e)(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 $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.
    (f) 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) No offer to compromise may be rejected solely on the basis of 
the amount of the offer without evaluating that offer under the 
provisions of this section and the Secretary's policies and procedures 
regarding the compromise of cases.
    (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 to 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 (d)(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 (f)(5). However, if 
the offer is returned because the taxpayer failed to provide requested 
financial information, the offer will not be returned until a 
managerial review of the proposed return is completed.
    (g) Effect of offer to compromise on collection activity--(1) In 
general. The IRS will not levy against the property or rights to 
property of a taxpayer who submits an offer to compromise, to collect 
the liability that is the subject of the offer, during the period the 
offer is pending, 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.
    (2) Revised offers submitted following rejection. If, following the 
rejection of an offer to compromise, 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 from the 
taxpayer the liability that is the subject of the revised offer to 
compromise while that revised offer is pending.
    (3) 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.
    (4) Offers to compromise determined by IRS to be nonprocessable or 
submitted solely for purposes of delay. If the IRS determines, under 
paragraph (d)(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, then the IRS may levy 
to collect the liability that is the subject of that offer at any time 
after it returns the offer to the taxpayer.
    (5) 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.
    (6) Proceedings in court. Except as otherwise provided in this 
paragraph (g)(6), the IRS will not refer a case to the Department of 
Justice for the commencement of a proceeding in court, against a person 
named in a pending offer to compromise, if levy to collect the 
liability is prohibited by paragraph (g)(1) of this section. Without 
regard to whether a person is named in a pending offer to compromise, 
however, the IRS may authorize the Department of Justice to file a 
counterclaim or third-party complaint in a refund action or to join 
that person in any other proceeding in which liability for the tax that 
is the subject of the pending offer to compromise may be established or 
disputed, including a suit against the United States under 28 U.S.C. 
2410. In addition, the United States may file a claim in any bankruptcy 
proceeding or insolvency action brought by or against such person.
    (h) 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

[[Page 48032]]

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.
    (i) Statute of limitations--(1) Suspension of the statute of 
limitations on collection. The statute of limitations on collection 
will be suspended while levy is prohibited under paragraph (g)(1) of 
this section.
    (2) Extension of the statute of limitations on assessment. For any 
offer to compromise, the IRS may 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.
    (j) 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).
    (k) Effective date. This section applies to offers to compromise 
pending on or submitted on or after July 18, 2002.


Secs. 301.7122-0T and 301.7122-1T  [Removed]

    3. Sections 301.7122-0T and 301.7122-1T, are removed.

    Approved: July 15, 2002.
Charles O. Rossotti,
Commissioner of Internal Revenue.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 02-18454 Filed 7-18-02; 12:32 pm]
BILLING CODE 4830-01-P