[Federal Register Volume 68, Number 158 (Friday, August 15, 2003)]
[Rules and Regulations]
[Pages 48785-48787]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20933]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 300

[TD 9086]
RIN 1545-BA54


User Fees for Processing Offers To Compromise

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains amendments to the regulations relating 
to user fees to provide for the imposition of user fees for the 
processing of offers to compromise. The charging of user fees 
implements the Independent Offices Appropriations Act.

EFFECTIVE DATE: November 1, 2003.

FOR FURTHER INFORMATION CONTACT: Concerning cost methodology, Eva 
Williams, 301-492-5395; concerning the regulations, G. William Beard, 
202-622-3620 (not toll free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document amends the regulations relating to user fees to 
provide for the imposition of user fees for the processing of offers to 
compromise. The charging of user fees implements the Independent 
Offices Appropriations Act (IOAA), which is codified at 31 U.S.C. 9701. 
On November 6, 2002, a notice of proposed rulemaking (REG-103777-02) 
was published in the Federal Register. Approximately 149 comments were 
received. A public hearing on the regulations was held on February 13, 
2003. The final regulations adopt the rules of the proposed 
regulations.

Offers To Compromise

    Section 7122 of the Internal Revenue Code (Code) gives the IRS the 
authority to compromise any civil or criminal case arising under the 
internal revenue laws, prior to the referral of that case to the 
Department of Justice. Section 7122 also directs the IRS to prescribe 
guidelines for officers and employees of the IRS to determine whether 
an offer to compromise is adequate and should be accepted. Guidelines 
are contained in Sec.  301.7122-1. Pursuant to Sec.  301.7122-1(b), an 
offer may be accepted if there is doubt as to liability, if there is 
doubt as to collectibility, or if acceptance will promote effective tax 
administration. Pursuant to Sec.  301.7122-1(b)(3), offers may be 
accepted to promote effective tax administration if either: (1) The IRS 
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, or (2) there are no 
other grounds for compromise and there are compelling public policy or 
equity considerations.
    When an offer to compromise is received, an initial determination 
is made as to whether the offer is processable. Currently, an offer is 
returned as nonprocessable if the taxpayer is in bankruptcy, has not 
filed required tax returns, or has not submitted the offer to 
compromise on the proper form. Absent these conditions, the offer is 
accepted for processing and cannot be rejected without an independent 
administrative review of the decision to reject and, if the taxpayer 
chooses to appeal the rejection, independent review by the Office of 
Appeals. Even though an offer accepted for processing may later be 
returned to the taxpayer if the taxpayer fails to provide requested 
information or the IRS determines that the offer was submitted solely 
to delay collection, such an offer may not be returned before a 
managerial review of the proposed return is completed pursuant to Sec.  
301.7122-1(f)(5)(ii).

Explanation of Provisions

    The final regulations establish a $150 user fee for the processing 
of certain offers to compromise tax liabilities pursuant to Sec.  
301.7122-1. The user fee will not apply to offers based solely on doubt 
as to liability and offers made by low income taxpayers whose incomes 
are at or below the poverty guidelines set by the Department of Health 
and Human Services (DHHS), or such other measure the IRS may adopt.
    Offers based on doubt as to liability are excepted from the user 
fee based on the inequity of the IRS charging a fee to compromise an 
uncertain liability when a compromise is based upon a redetermination 
or reevaluation of the taxpayer's liability for a tax (and the agreed 
upon amount may, in fact, provide for the full payment of the amount 
actually owed).
    Offers from low income taxpayers are excepted from the fee in light 
of section 7122(c)(3)(A), which prohibits the IRS from rejecting an 
offer from a low income taxpayer solely on the basis of the amount 
offered. Section 7122(c)(3)(A) literally applies to the rejection of an 
offer, rather than the return of an offer for failure to pay a user 
fee. Requiring payment of a user fee from a low income taxpayer would 
undermine section 7122(c)(3)(A) in cases where the taxpayer does not 
have the ability to pay the fee. Offers from low income taxpayers are 
therefore excepted.
    Taxpayers with offers that do not fall within the doubt as to 
liability or low income exceptions will submit the user fee along with 
the offer to compromise. If the offer is accepted to promote effective 
tax administration or is accepted based on doubt as to collectibility 
and a determination that collecting more than the amount offered would 
create economic hardship within the meaning of Sec. Sec.  301.6343-1, 
the fee will be applied to the amount of the offer or, if the taxpayer 
requests, refunded to the taxpayer. In other cases, the payment of the 
fee will be taken into account in determining the acceptable amount of 
the offer and therefore the taxpayer in total will pay no more than the 
taxpayer would have paid without the fee. While the fee will not be 
refunded if an offer is withdrawn, rejected, or returned as 
nonprocessable after acceptance for processing, no additional fee will 
be charged if a taxpayer resubmits an offer the IRS determines to have 
been rejected or returned in error.

Comments on the Proposed Regulation

    Most of the comments on the proposed regulations did not favor the 
fee. The comments focused on three concerns: The fee would create an 
additional financial hardship on taxpayers who are already experiencing 
hardship; the income level for the low income exception to the fee was 
too low; and the fee should not be imposed until the offer to 
compromise is administered more effectively and efficiently. For the 
following reasons, these final regulations follow the proposed 
regulations without change.
    The most frequent concern in the comments was that the fee would 
cause additional financial hardship for taxpayers who are already 
experiencing financial hardship. The exception for low income 
taxpayers, however, excludes those taxpayers most likely to be 
disadvantaged by the user fee.

[[Page 48786]]

Further, the imposition of the fee on other taxpayers will not change 
the net amount paid by the taxpayer to reach a compromise; the fee will 
be taken into account when considering whether the amount offered is 
acceptable. Although taxpayers who must pay the fee will not receive a 
refund if the offer is withdrawn, rejected, or returned after being 
accepted for processing, the IRS will work closely with taxpayers to 
perfect incomplete or inadequate offers before returning or rejecting 
them.
    A number of commentators were concerned that the DHHS poverty 
guidelines used for purposes of the low income exception are too low 
and recommended that the exception for low income taxpayers should be 
extended to 250% of the DHHS guidelines. The 250% level corresponds to 
one of the criteria used for funding low income taxpayer clinics: In 
order to receive funding pursuant to section 7526 of the Code, 90% of a 
clinic's clients must fall below 250% of the DHHS poverty level. The 
commentators pointed to the relationship between section 7526 and 
offers to compromise. Section 7526 was enacted contemporaneously with 
section 7122(c)(3), which prohibits the IRS from rejecting an offer 
from a low income taxpayer based on the amount of the offer. 
Commentators argued that imposing a user fee on taxpayers whose incomes 
are within 250% of the poverty level thwarts the objective of section 
7526 to assist such taxpayers.
    The DHHS poverty guidelines are retained as the measure of the 
exception for the low income taxpayer. The 250% criteria in section 
7526 only applies for purposes of that section; it does not extend to 
offers to compromise under section 7122. Had Congress intended to 
extend the 250% criteria to offers in compromise under section 7122, it 
could have done so. The DHHS poverty guidelines are a reasonable 
standard for offers to compromise in light of the fact that the amount 
of the fee will be reflected in the amount of the offer. Although some 
taxpayers may not be able to pay the fee because the fee exceeds their 
collectible assets and income, the DHHS standard will generally cover 
such taxpayers. Further, the IRS retains the authority under the final 
regulations to adjust the definition of low income taxpayer. The IRS 
could, therefore, change the low income standard if, in practice, there 
are a significant number of taxpayers with incomes above the DHHS 
standard who are experiencing hardship as a result of the fee.
    A number of commentators urged that the fee should not be imposed 
until inefficiencies and errors in the processing of offers to 
compromise are eliminated. In the past year, however, the IRS made 
substantial improvements to its offer in compromise program and is now 
able to process offers to compromise much more accurately, effectively 
and efficiently. The IRS acknowledges that further improvements are 
needed and is taking steps to achieve greater accuracy and efficiency, 
but the user fee is an integral part of that effort. The user fee 
should help reduce the number of frivolous offers and the number of 
offers that are either withdrawn, returned, or rejected because the 
offeror would not provide adequate information for the IRS to process 
the offer or would not offer an amount that reflects the taxpayer's 
ability to pay. Limiting the number of offers that will be withdrawn, 
returned, or rejected will enable the IRS to direct its resources 
towards the timely and efficient processing of acceptable offers. In 
addition, the final regulation was amended to make clear that no 
additional fee will be charged if a taxpayer resubmits an offer the IRS 
determines to have been rejected or returned in error after acceptance 
for processing.

Authority

    The IOAA authorizes agencies to prescribe regulations that 
establish charges for services provided by the agency (user fees). The 
charges must be fair and be based on the costs to the Government, the 
value of the service to the recipient, the public policy or interest 
served, and other relevant facts. The IOAA provides that regulations 
implementing user fees are subject to policies prescribed by the 
President, which are currently set forth in OMB Circular A-25, 58 FR 
38142 (July 15, 1993).
    The OMB Circular encourages user fees for Government-provided 
services that confer benefits on identifiable recipients over and above 
those benefits received by the general public. Under the OMB Circular, 
an agency that seeks to impose a user fee for Government-provided 
services must calculate its full cost of providing those services. In 
general, the amount of a user fee should recover the cost of providing 
the special service, unless the Office of Management and Budget grants 
an exception. Pursuant to the guidelines in the OMB Circular, the IRS 
calculated its cost of providing services under the offer in compromise 
program. The IRS determined that the full cost of investigating doubt 
as to collectibility and effective tax administration offers averages 
$471 when streamlined procedures are used to investigate the financial 
condition of the taxpayer, and $3,983 when more detailed investigations 
are used. The IRS estimates that 70% of offers are processed under 
streamlined procedures. OMB granted an exception to the ``full cost'' 
requirement of the OMB Circular.
    The Treasury, Postal Service, and General Government Appropriations 
Act of 1995, Public Law 103-329 (108 Stat. 2382) (the 1995 
Appropriations Act) provides that the Secretary may establish new fees 
for services provided by the IRS where such fees are authorized by 
another law, such as the IOAA.
    The user fees are implemented under the authority of the IOAA, the 
OMB Circular, and the 1995 Appropriations Act.

Special Analysis

    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 is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. Accordingly, a 
regulatory flexibility analysis is not required. This certification is 
based on the information that follows. The economic impact of these 
regulations on any small entity will result from the entity being 
required to pay a fee prescribed by these regulations in order to 
obtain a particular service. The dollar amount of the fee is not, 
however, substantial enough to have a significant economic impact on 
any entity subject to the fee. Pursuant to section 7805(f) of the Code, 
the preceding notice of proposed rulemaking was 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 regulations is G. William Beard, 
Office of Associate Chief Counsel (Procedure and Administration), 
Collection, Bankruptcy and Summonses Division.

List of Subjects in 26 CFR Part 300

    Estate taxes, Excise taxes, Gift taxes, Income taxes, Reporting and 
recordkeeping requirements, User fees.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 300 is amended as follows:

[[Page 48787]]

PART 300--USER FEES

0
Paragraph 1. The authority citation for part 300 continues to read as 
follows:

    Authority: 31 U.S.C. 9701.

0
Par. 2. Section 300.0 is amended as follows:
0
1. Paragraph (b)(3) is added.
0
2. Paragraph (c) is revised.
    The addition and revision read as follows:


Sec.  300.0  User fees; in general.

* * * * *
    (b) * * *
    (3) Processing an offer to compromise.
    (c) Effective Date. This part 300 is applicable March 16, 1995, 
except that the user fee for processing offers to compromise is 
applicable November 1, 2003.

0
Par. 3. Section 300.3 is added to read as follows:


Sec.  300.3  Offer to compromise fee.

    (a) Applicability. This section applies to the processing of offers 
to compromise tax liabilities pursuant to Sec.  301.7122-1 of this 
chapter. Except as provided in this section, this fee applies to all 
offers to compromise accepted for processing.
    (b) Fee. (1) The fee for processing an offer to compromise is 
$150.00, except that no fee will be charged if an offer is--
    (i) Based solely on doubt as to liability as defined in Sec.  
301.7122-1(b)(1) of this chapter; or
    (ii) Made by a low income taxpayer, that is, an individual 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 (95 Stat. 357, 
511) or such other measure that is adopted by the Secretary.
    (2) The fee will be applied against the amount of the offer, unless 
the taxpayer requests that it be refunded, if the offer is--
    (i) Accepted to promote effective tax administration pursuant to 
Sec.  301.7122-1(b)(3) of this chapter; or
    (ii) Accepted based on doubt as to collectibility and a 
determination that collection of an amount greater than the amount 
offered would create economic hardship within the meaning of Sec.  
301.6343-1 of this chapter.
    (3) Except as otherwise provided in this paragraph (b), the fee 
will not be refunded to the taxpayer if the offer is accepted, 
rejected, withdrawn, or returned as nonprocessable after acceptance for 
processing.
    (4) No additional fee will be charged if a taxpayer resubmits an 
offer the Secretary determines to have been rejected in error or 
returned in error after acceptance for processing.
    (c) Person liable for the fee. The person liable for the processing 
fee is the taxpayer whose tax liabilities are the subject of the offer.

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.

    Approved: July 17, 2003.
Pamela F. Olsen,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-20933 Filed 8-14-03; 8:45 am]
BILLING CODE 4830-01-P