1-1 REDUCING TAX LIABILITIES

1-1.10 The compromise provision of the code [IRC § 7122 provides the hope of possible relief for financially strapped taxpayers. This section grants the authority to the Internal Revenue Service, via the Commissioner or his delegate, to actually reduce the amount of taxes which a taxpayer owes. In order to secure a compromise, the taxpayer must establish to the satisfaction of the Commissioner or his delegate, either:

       (1) An inability to pay the tax; or

  (2) Doubt as to the actual underlying liability.

       (3) Promote effective tax administration. If there are no grounds for compromise under 1 or 2 above, a                           `compromise may be entered into to promote effective tax administration when :

              (i) Collection of the full liability will create economic hardship ; 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.[Temp Reg                    301.7122-1T(b)(4)]

1-1.20 In the past the Internal Revenue Service has been very reluctant to compromise taxes. On February 26, 1992, the Service announced new procedures for compromise of taxes. Those procedures greatly liberalized the Offer in Compromise process and greatly increased the chances that a troubled taxpayer might be able to make a partial payment in settlement of his tax liability. The Service has adopted the following policy statement:

"The Service will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectible, or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government.

"In cases where an Offer in Compromise appears to be a viable solution to a tax delinquency, the Service employee assigned to the case will discuss the compromise alternative with the taxpayer and, when necessary. assist in preparing the required forms. The taxpayer will be responsible for initiating the first specific proposal for compromise

"The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of the taxpayer and the Service. Acceptance of an adequate offer will also result in creating. for the taxpayer, an expectation of and a fresh start toward compliance with all future filing and payment requirements." [Policy Statement P-5-100
 

 
 

New Offer Environment

1-1.30 Although initially the new manual provisions and the new policy statement of the Internal Revenue Service created an entirely different environment for Offers in Compromise, within the last 2 years that environment has dramatically changed. The Service initially enthusiastically solicited Offers in Compromise where in the past no compromise would be available. As the program became more popular, the IRS appeared to be overwhelmed by it, and as of August, 1995, it adopted its extremely stringent allowable expense standards- Those allowable expense standards have made it very difficult for upper middle class and upper income individuals to secure an Offer in Compromise. Only the very poorest individuals find it easier to secure an Offer in Compromise. Others must have the assistance of an experienced qualified tax practitioner
 

 
 

Huge Increase in Accepted Offers

1-1.35 In fiscal year 1991 the IRS accepted 25% of all offers submitted. In fiscal year 1992, that figure had risen to 45% of all offers submitted. In fiscal year 1993 the Internal Revenue Service was accepting 53% of offers. During fiscal year 1992 the Internal Revenue Service received 17,749 offers. It accepted 4,356, rejected 3,209, and 2,208 were withdrawn. During fiscal 1993, the IRS received 51,220 offers. It accepted 18,020 offers, rejected 8,247 and 7,745 were withdrawn. In the nine months (of fiscal 1994) to June 1994, the Service accepted fifty percent (50%) of all offers (accepted, rejected and withdrawn), for $208 million out of $1.2 billion of liability. This compares with the fifty-three percent (53%) acceptance rate for 1993 and $209 million out of 1.3 billion compromised.-⁴⁰ In other words, the number of offers accepted has more than tripled in less than a year.
 

 
 

Variance Among Districts

1-1.36 There is a great deal of variance in standards among districts. Although the Internal Revenue Service denies there is a variance, the statistics speak for themselves. The highest level of acceptance was in the Fargo district which accepted 80% of all offers during fiscal year 1993. The lowest acceptance rate was Laguna Niguel which accepted only 15.2% of all offers. The second lowest acceptance rate was in the Newark, New Jersey district, accepting 27.8%. Brooklyn, New York, and Los Angeles districts accepted about 30% of all offers. There has been a great deal of pressure brought upon Laguna Niguel by the local practitioner community and the author believes that at some point it may adopt the more reasonable standards being applied in other parts of the country. .60 One statistic which may account for the variance among Districts is the number cf nonprocessable Offers. The Internal Revenue Service will not process for consideration an Offer which is submitted in a format it considers improper. Therefore, some Districts impose very stringent standards on the processability of

Offers which are not processed are not counted as rejected Offers Nonprocessable Offers have run as high as 60%. In fiscal 1993, when the IRS accepted 18,020 Offers, it also refused to process l7,2O8 Offers because it found them nonprocessable.
 

 
 

Submission of Offer

1-1.40 An Offer is initiated by submitting a Form 656, Offer in Compromise [Apps 6-A,6-H], to the Service Center which assessed the tax liability. The taxpayer should also submit a Form 433-A if the proponent is an individuated and a 433-B if the proponent is a business, setting forth the taxpayer's financial condition. Only a small deposit need be made with the Offer. The taxpayer submits a statement with the Offer setting forth facts and reasons which he or she believes would support the contention that a compromise is appropriate. When making the Offer, the taxpayer expressly agrees that all payments and credits already made to the account for the period under consideration shall be retained by the United States and, further expressly waives any claims to the money to which he or she may be entitled under the Internal Revenue laws due to overpayment of any tax or other liability accrued prior to the date of the compromise. The taxpayer also waives benefit of the running of the statute of limitation for collection during the pendency of the Offer and for a period of one year thereafter. Normally the IRS will withhold collection action during the pendency of an Offer [IRS 56(10)9.2].
 

 
 

Amount of the Offer

1-1.50 The IRS utilizes a methodology which combines a determination of the taxpayers net worth on a quick sale basis with a determination of the taxpayers future ability to pay. The revenue officers first make a determination of the value of the taxpayers assets on a discounted basis, known as Quick Sale Value. Once a determination is made of the taxpayer's net worth on a quick sale basis, Service employees then determine the taxpayer's ability to make future payment. A cash value is assigned to that future ability to pay and that value is aggregated with the value of the taxpayer's assets- The aggregate number becomes the minimum amount which the taxpayer may pay in compromise of her tax liabilities.
 

 
 
 
 
 
 

1-2 PROCESSING OF AN OFFER

1-2.10 Upon receipt of an offer of compromise, it will be sent to an offer coordinator for the IRS district where it is reviewed. The offersare reviewed to determine if the taxpayer's offer is a sufficient amount and if sufficient information has been provided by the taxpayer. Once the IRS determines the offer is process able, it will be sent to the service center where a thorough search of the taxpayer's computerized tax records is conducted to determine the exact amount and nature of all tax owed by him or her. If the IRS believes that the offer is insufficient or not process able, it will be returned to the taxpayer without further processing.

For an example of the methods used by the Illinois District see App 6-H..
 

 
 

Transmittal to a Revenue Officer

1-2.20 Once the offer has been reviewed by the service center, it will be transmitted to a revenue officer for further investigation. Some districts utilize offer in compromise specialists to do the investigation. The Revenue Officer will investigate the taxpayers current financial condition as disclosed on Form 433-A and/or Form 433-B. The taxpayer may be required to submit appraisals of property if its value is not readily determinable. The taxpayer may be required to submit all of her financial records for review by the Revenue Officer including but not limited to, bank statements, cancelled checks and receipts.

1-3 ADEQUACY OF OFFER
 

 
 

Computation of Offer Amount

1-3.05 The Internal Revenue Service's method of determining the adequacy of an offer could be best expressed by:

Quick Sale Value Plus Present Value of Income Equals Offer In Compromise. (OSV + PVI = OIC)

In applying this formula, the IRS determines the Quick Sale Value of all of the client's assets and then adds the amount of the present value of the taxpayer's ability to pay- It aggregates the two numbers to arrive at an Offer in Compromise amount. The following paragraphs will discuss the Internal Revenue Service's methodology for determining quick sale value and the present value of income.

1-3.10 The IRS is very stringent in its consideration of the adequacy of an Offer. An offer is adequate if it reasonably reflects collection potential. This would include amounts that can be collected from other parties, assertion of transferee liability or suit, trust fund recovery penalty assessments and other actions. Additional consideration will be given to assets and income that are available to the taxpayer, but beyond the reach of the government.

Amount of the Offer 1-3.20 The starting point for consideration of any Offers will be based on the value of the taxpayer's assets, less any encumbrances which have priority over the Federal Tax Lien. Ordinarily, the liquidating or quick sale value of assets should be used. The Service also takes into consideration the amount that can be collected from the taxpayer's future income.. In evaluating those future income prospects, the taxpayer's education, profession or trade, age and experience, health, and past and present income will be considered by the Service. In evaluating future income potential an evaluation will be made of the likelihood that any increase in real income will be available to pay the delinquent taxes. The IRS also will take into consideration the increasing cost of living as a factor in determining an amount potentially collectible from future income.

Quick Sale Value of Assets as Basis of Considering Offer 1-3.30 The starting point in the consideration of an Offer submitted on the basis of inability to pay is ordinarily the liquidating or quick sale value of the taxpayer's assets. The quick sale value is the amount which would be realized from the sale of an asset in a situation where financial pressures cause the taxpayer to sell in a short period of time. For Offer purposes, the taxpayers equity in assets is defined as the quick sale value less any encumbrances against the assets which have priority over the Federal Tax Lien. Quick sale value is a valuation unique to the Offer process. It is employed because of the nature of the Offer investigation and the fact that the taxpayer and the Service are in a position to negotiate, to make mutual concessions. The author has noted a range of discounts from fair market value from 20% to 30%, although in unusual situations one might argue for a greater discount. Since the offer program was first revised in February 1992, the discount allowed by the IRS has gradually been reduced. The most prevalent discount now available is 20% of fair market value.

Forced Sale Value vs. Fair Market Value 1-3.40 The two values normally considered in the collection of accounts are forced sale value and fair market value. The former represents the amount the Service can collect from a distraint sale of the taxpayers assets. The latter represents the value arrived at between a willing buyer and willing seller and normally indicates the maximum valuation for the taxpayer's assets. Between these two values there exists a wide range of possible asset valuations (i.e., quick sale value) and any asset valuation in this range can be acceptable if negotiated and agreed upon by the taxpayer and Offer examiner. If the Service is in a position to gain more revenue at less cost than can be secured through the enforced collection of all the taxpayers assets, then the Offer might be accepted. The negotiation process involves reaching agreement on asset valuations (including determination of forced sale. quick sale and fair market value). An offers should not be rejected based on a narrow criterion of asset values. Argue your position aggressively and support valuations with appraisals by a reputable appraiser. It would not be unreasonable in a given case to use forced sale value in determining collection potential. The forced sale might be considered when there is a very limited market for the assets in questions. Revenue Officers are also instructed that since valuations of property, except cash or cash equivalents are not scientifically exact, care should be exercised to avoid inflexible non-negotiable values [lRM 57(10)(l0).1(2)].

Calculation of Quick Sale Value 1-3.50 Although no specific guidelines can be formulated to compute quick sale value, certain general guidelines can be presented to indicate how quick sale values can vary depending on local conditions and the type of property involved. Local factors affecting quick sale value may include availability of mortgage money, appropriateness of the assets to local conditions (e.g., farm equipment in a mostly urban area), health of the local economy, etc. Also, the type of asset will in general affect the quick sale value. Unusual items are hard to sell. Quick sale value should be a reasonable reflection of the value of the property. However. even within this range, a Revenue Officer will have considerable discretion in negotiating asset valuations with the taxpayer to arrive at an acceptable Offer. The basis used to calculate quick sale value will depend on the facts and circumstances of the individual case.

1-3.60 Although assets will normally be valued at their quick sale value, an Offer can be considered based on the forced sale value of assets if it can be shown that accepting this valuation for Offer purposes would be in the best interest of the Government. The reasons for such a valuation must be extensively documented by the proponent and the IRS will rarely accept forced sale value. Revenue Officers are instructed to avoid inflexible non-negotiable valuations for property other than cash [IRM 57(10)(10).1].
 

 
 

Other Considerations

1-3.70 In addition to the taxpayer's equity in assets the taxpayer's earning capacity will be evaluated- Information about the taxpayer's education profession or trade, age and experience health past and present income and future prospects will be considered by the Service- The practitioner should aggressively present negative factors about any of the above listed factors [IRM 57(10)(10).1].

PRACTICE TIP

Emphasize negative factors and minimize positive factors of your client's health, income, education and age.
 

 
 
 
 
 
 

Average Bank Account Balance 1-3.80 During the course of negotiating an inability to pay Offer, the major disputes will center on the value of taxpayer assets. One convention that the IRS uses is to find the average balance in a taxpayers bank account over a period of time to determine cash on hand. The minimum m time frame for averaging is generally three (3) months [IRM 57(10)(13).1].
 
 
 

Closely Held Companies

1-3.90 Particularly tough valuation disputes arise when valuing securities in closely held companies. The IRS will normally require substantial disclosure of company financial data for the purposes of valuation. It also may require submission of independent appraisals- If the taxpayers interest in such entities is very limited, the investigating Revenue Officer is required by the IRS Manual to be more flexible in his or her disclosure demands-

"Where the taxpayer has a minimal interest which cannot be liquidated such interest will be considered to have no value for compromise purposes" [IRM 57(10)(13).2(4)].
 

 
 

Going Concern Value

1-3.100 The IRS takes the position that in consideration of an Offer it can reflect "going concern value" in its valuation. Therefore., it will not normally accept the liquidation value of tangible company assets to be the sole measure of quick sale value. The policies set forth in the revisions of IRS Policy dated Feb.26, 1992 allow a Revenue Officer great flexibility in determining going concern value- You must aggressively negotiate with the Revenue Officer and point out the negative factors influencing any enhancement based upon going concern value.
 

 
 
 
 
 
 

1-4 PENSION PLANS
 

 
 
 
 
 
 

1-4.10 Pension plans can also pose a problem for valuation purposes. The Internal Revenue Manual sets forth the following guidelines:

Where under the terms of employment, a taxpayer is required to contribute a percentage of his/her gross earnings to a retirement plan and the amount contributed, plus any increments, cannot be withdrawn until separation. retirement, demise, etc., this asset will be considered as having no realizable equity.

(2) Where the taxpayer is not required, as a condition of employment, to participate in a pension plan, but voluntarily elects to do so,. the realizable equity for compromise purposes shall be the gross amount in the taxpayer's plan reduced by the employer's contributions. However, in these situations each case should stand on its own merits.

(3) If the taxpayer is permitted to borrow up to the full amount of his/her equity in a plan, this should be taken into consideration in the computation of realizable equity.

(4) The current value of property deposited in an Individual Retirement Account (IRA) or Keogh Act Plan Account should be considered in the computation of realizable equity. Cash deposits should be included at full value. If assets other than cash are invested (e.g., stock, mutual funds), the IRA should be valued at the quick sale value, less expenses. The penalty for early withdrawal should be subtracted in computing net realizable equity. [IRM 57(10)(13).4].

Negotiations concerning the terms and requirements of pension plans will require extensive information from the employer. Start gathering the information early in the process.
 

 
 
 
 
 
 

1-5 FURNITURE. FIXTURES AND PERSONAL EFFECTS
 

 
 
 
 
 
 

1-5.10 In determining the adequacy of an Offer, the taxpayer's valuation of furniture, figures and personal effects listed on the financial statement is generally sufficient. The examining Officer is instructed to exercise judgment in determining whether the taxpayer's assets warrant personal inspection. If the taxpayer has jewelry, paintings or etchings, silverware, oriental rugs. antique furniture, coin, stamp or gun collections., statuary and the like, the Revenue Officer probably will exercise greater review. Revenue Officers are also allowed to take into consideration the statutory exemptions for furniture and personal effects provided for in IRC § 6334. which is currently $2,500 per person.
 

 
 
 
 
 
 

1-6 BUSINESS ASSETS
 

 
 
 
 
 
 

1-6.10 Revenue Officers are given a great deal of discretion in evaluating machinery and equipment. Some assets may have value only to the taxpayer or someone in the same business as the taxpayer while other assets will have a ready market and a value easily determined from guides pubrished by the industry Revenue Officers are instructed to consider other factors affecting the quick sale value including the difliculty in dismantling and removing equipment the availability and size of the market for such assets and the adoptability of such assets to other uses
 

 
 

Trucks, Automobiles and Delivery Equipment

1-6.20 Automobiles and delivery equipment have a ready market which is easily determined Revenue Officers are instructed to review national guides from national associations such as the Blue Book for automobiles to determine the value of the vehicles. Revenue Officers are instructed that normally they should not inspect the vehicles in question.
 

 
 

Receivables

1-6.30 Revenue Officers are instructed to discount the value of accounts receivable. The older the accounts might be the less value which is assigned to the accounts receivables. Revenue Officers are also instructed to inquire as to the potential of collection of accounts receivable. The author has found that in the past the evacuation of accounts receivable can be a substantial stumbling block to ultimate compromise of tax liabilities
 

 
 
 
 
 
 

1-7 JOINT OWNERSHIP

1-7.10 The Service may grant special relief for taxpayers who own property in tenancy by the entirety with an innocent spouse [IRM 57(10)(13).92]. The IRS may consider such interests to be less than 50% of the total value of the property as long as at least 20% is offered. Tenancy in common and joint tenancy property, however, are normally considered to be valued based upon the taxpayer's entire interest.

1-7.20 In consideration of real estate and other property held by Tenancy in Common or Joint Tenants when the assessment is made against only one of the owners, the taxpayer's proportionate share of the quick sale value will normally be included in total assets. Normally if a husband and wife own real estate issued as tenants in common each is deemed to have fifty (50%) percent share of the property. "The IRS also utilizes a fifty percent (50%) share when considering the value of joint tenancy property."
 

 
 

Greater Flexibility

1-7.30 Provisions to the Internal Revenue Manual revisions of February 26, 1992 allow Revenue Officers greater flexibility in determining joint asset value. Revenue Officers are allowed to consider the possibility that the character of the property may be changed by death, abandonment or alienation. The Service's overall goal to determine whether the amount offered reasonable reflects what can be collected in any other manner and is in the overall best interest of the government. Therefore, the valuation factors set forth above may be ignored in appropriate cases. [IRM 57(10)(13).92(4)].
 

 
 

Joint Liability

1-7.40 If the liability is due from both taxpayers jointly, the total quick sale value of the property should be reflected in their Offer. If an Offer covers the joint liability of a husband and wife as well as the husband's or wife's individual liability, the suggested method of determining the realizable equity would be to apply it first to the joint liability, and if any equity remains, the applicable twenty (20%) percent or fifty (50%) percent computation would be used for the remainder.
 

 
 
 
 
 
 

1-8 DETERMINATION OF INCOME

1-8.10 The Internal Revenue Service looks to the taxpayer's budget as presented on Form 433-A to determine the availability of monies to pay taxes in the future. It also looks at the future prospects of the taxpayer, including the taxpayer's education, profession and/or trade, age and experience, health. and past and present income. The Service will also look to the likelihood of future increases in income.

1-8-20 The Service will utilize a method of determining present value based on the taxpayer's current ability to pay. Attached as App-6-G is the present value table used by the Internal Revenue Service to determine the value of payments over a period of time. The Service uses this table to establish the minimum amount which it will demand in addition to the quick sale value of the taxpayer's assets-
 

 
 
 
 
 
 

EXAMPLE 1. The taxpayer is determined to have the ability to pay $100 per month. The Internal Revenue Service uses the convention of projecting the income over five (5) years. One could therefore refer to Appendix 6-G to determine the proper multiplier to determine the present value of $100 paid over sixty (60) months. As this book is revised the current statutory rate of interest is 9% compounded daily. Reference to Appendix 6-G finds a multiplier of 48.57. A monthly payment of $1-- is multiplied times 48.57 creating a sum of $4,857. That sum represents the -present value of $100 per month paid for sixty (60) months. In cases where it can be shown that five (5) years is unrealistic, then the IRS might accept a letter amount. On occasion, the author has been successful in arguing that since the IRS compounded interest daily, a 10% figure would be appropriate. Most Revenue Officers have rejected the author's argument.
 

 
 

Negotiations Regarding Available Income

1-8.25 Negotiating for an Offer in compromise revolves around the issue of available income. Revenue officers will apply the standards set forth in Chapter 4. paragraph 4-9 for allowable expenses. The taxpayer will he allowed only necessary expenses and will not be allowed any conditional expenses when considering an Offer n Compromise.

The taxpayer will only be allowed the national standard expenses for such things as clothing and cleaning, housekeeping supplies, personal care products and services, food and miscellaneous expenses- The taxpayer also will be subject to local and regional expense limits for transportation and housing. Each additional expense, other than those previously discussed must be proved as being a necessary expense to the Revenue Officer or it will not be allowed for purposes of computing the present value portion of the compromise. Therefore one must anticipate an aggressive IRS approach to your client's budget and be prepared to defend that budget- Even the best practitioner will find that the IRS will eventually force reduction of many items in the client's budget Each reduction will correspondingly increase the amount needed to compromise the tax liability . The author has found that since the implementation of the new allowable expense standards on September 1,1995, it has become much more difficult to reach a reasonable compromise amount. The taxpayer must meet the Necessary Expense Test of the IRS; provide for a taxpayer's and his or her health and welfare and/or the production of income- Therefore, be prepared to relate each expense as to why it meets these stringent standards. Any expense that does not meet the IRS Necessary Expense Test could be subject to disallowance and that would therefore correspondingly increase the amount necessary to compromise a tax liability. Several of the author's clients who could have compromised their taxes under the Internal Revenue Service procedures prior to September 1, 1995 cannot now meet the new more stringent test. Taxpayers with large mortgage costs and/or large automobile lease payments will find it very difficult to reach a compromise with the Internal Revenue Service.
 

 
 

Aggregation of Income with Quick Sale Value

1-8.30 Once the Service has determined the value of the taxpayer's projected ability to pay it will aggregate that number with the quick sale value of the taxpayer's assets. That aggregate number will normally become the minimum amount which the Internal Revenue Service will accept for compromise of tax liabilities. Using the prior example, if the Service determined the quick sale value of the taxpayer's assets to be $5,000, it would demand at least $9,857 to compromise tax liabilities ($4,857 present value of future ability to pay plus $5,000 quick sale value of assets).
 

 
 

Aggressive Negotiations

1-8.40 The author has found that it is easier to reach an agreement as to the quick sale value of your client's assets than it is to reach an agreement with respect to your client's available income. The negotiations regarding budgets become long and tedious. Several of the author's Offers have been rejected because the client could not possibly afford the amount demanded by a Revenue Officer as a result of an inflexible approach to the client's budget. In one particular instance the taxpayer proposed a reasonable Offer of approximately $19,000 to the Service. The Service demanded in excess of $35,000 and refused to allow flexibility in the client's budget. As a result, the Offer was rejected. The taxpayer filed bankruptcy and discharged the tax liability in bankruptcy. Because of its inflexible approach, the Service failed to collect $19,000 in additional revenue. The strictness of this approach will vary from District to District. In Districts which seek to accommodate and reach resolution in Offers in Compromise the author has found much more flexibility. In Districts like Laguna Niguel, which apparently has a policy of trying to thwart Offers in Compromise it is aLmost impossible to convince collection employees to accept a reasonable budget- Because the IRS uses a formula to determine the amount of Offers, an unreasonable demand by a Revenue Officer has apparent validity The tact remains that because of the large discretion given to Revenue Officers with respect to the clients budget the amount of an acceptable Offer vanes widely depending on whether a reasonable or unreasonable IRS collection employee is assigned to negotiate regarding your client's Offer in Compromise.
 

 
 
 
 
 
 
 
 

1-9 EMPLOYMENT AND COLLECTED EXCISE TAX LIABILITIES
 

 
 
 
 
 
 

1-9.10 Prior to the adoption of revised compromise procedures on February 26, 1992, it was very difficult to ever secure a compromise at collected tax liabilities- The revised policies allow Revenue Officers greater flexibility in compromising such liabilities As this book goes to press in March, 1998, the IRS has spent the last 2 years tightening its requirements for offer in compromises.
 

 
 

General Guidelines

1-9.20 The Service normally will not accept an Offer in an amount less than the tax, exclusive of penalties and interest for a going business IRS procedures however allow consideration of other factors in determining if an amount less than the tax would be acceptable. The standard set forth in those guidelines is that the amount offered must reasonably reflect the full collection potential of the tax liability- When the taxpayer's no longer in the same business Revenue Officers are granted greater discretion.
 

 
 

Withholding and Employment Taxes

1-9.30 If an Offer is submitted for a corporation to compromise outstanding employment taxes and it is not equal to at least the Trust Fund portion of taxes. the Internal Revenue Manual requires IRS employees to proceed toward the imposition of the Trust Fund Recovery Penalty against the responsible persons of the company. The waiver provisions contained within the Offer do not extend the statute of limitations for assertion of a Trust Fund Recovery Penalty pursuant to Inc § 6672. It is advisable therefore. that any Offer or Trust Fund taxes should at least equal the amount cf the Trust Fund liability The Revenue Manual allows three options when an Offer is submitted for Trust Fund taxes. They are. (I) assess Trust Fund Recovery penalty against the responsible persons; (2) secure a waiver from all potentially responsible persons; or (a) require the corporation and its responsible pensions to make a joint offer covering the taxes assessed against the corporation and the Trust Fund Recovery Penalty not yet assessed. Utilize the latter alternative if the Officers do not have adequate assets - If the Officers have substantial assets. then the original Offer should always be an amount equal to or greater than the Trust Fund Recovery Penalty Trust Fund portion of taxes This might avoid the assertion of the Trust Fund Recovery Penalty against the responsible persons.
 

 
 
 
 
 
 

1-10 APPROVAL PROCESS
 

 
 
 
 
 
 

1-10.10 If after investigation, the Revenue Officer determines that approval Is appropriate he or she wilt submit reports to his or her superiors recommending approval. TBR2 removed the requirement that District Counsel review each Offer in Compromise In excess of $500 and increased that amount to $50,000. Liabilities in excess of $50,000 are reviewed by District Counsel to determine if the offer meets a 'legal sufficiency" standard. The Act requires that the IRS continue to assure quality review of each Offer in Compromise. If the liability is less than $100,000 the compromise maybe approved by a group manager. If the liability is in excess of $100,000. then it must be approved by the Branch Chief. Very large liability must be approved by the District Director. (The amount of such Offers has not been made public by the Internal Revenue Service.) Any of the various managers in the chain of review may return it to the Revenue Officer for further investigation, if it is determined that there are unresolved issues within the compromise.
 

 
 

Request for Amendment

1-10.20 During his or her investigation the Revenue Officer may also determine that although the Offer is unacceptable, an amended Offer might be appropriate. In such instances the Revenue Officer will request that the taxpayer submit an amended Offer and possibly 'suggest" acceptable terms. Attached is an example of an acceptance letter from the Chief of Collection Division App 6-D and an abstract prepared by the IRS in conjunction with that acceptance [App 6-F). The abstract is a public record.
 

 
 
 
 
 
 
 
 

1-11 APPEALS
 

 
 
 
 
 
 

1-11.10 During the course of an investigation, a proponent of an Offer may request a conference before and/or after the Offer is rejected. If the proponent disagrees with the recommendation of the investigating officer, he or she may appeal the proposed rejection The rejection letter sent to the taxpayer by the Collection Division allows an appeal to the District Appeals Office. The appeal must be prepared in accordance with IRS Publication S The Appeals Office may overrule rejection and accept the Offer.
 

 
 
 
 
 
 

1-12 PUBLIC POLICY
 

 
 
 
 
 
 

1-12.10 All accepted Offers become public record and are maintained in the local District Office for public viewing In the past the Internal Revenue Service was very reticent to accept any Offers which might garner any adverse publicity. Offers in Compromise are public record and therefore, the Internal Revenue Service was very reluctant to accept Offers where the taxpayer's notoriety might embarrass the Service in any way The new provisions of the Internal Revenue Manual adopted February 26, 1992 greatly liberalize public policy consideration The Services new positron is as follows:

"There are rare circumstances where acceptances of an Offer may not be in the best interest of the government. Consequently, an Offer may be rejected even though it can be shown conclusively that the Offer is greater than what can be collected in any other manner This will generally be limited to situations where public knowledge of the accepted Offer would be seriously detrimental to voluntary compliance. A decision to reject an Offer of pubic policy consideration should be rare and should be made only where a clear and convincing case can be made for the detrimental effects of acceptance. The authority to reject Offers in compromise for public policy reasons is restricted to District Directors. 'fan Offer is to be rejected for Public Policy reasons, the specific reasons should be fully documented in the case file.
 

 
 
 
 
 
 

In the interpretation of this new policy it appears that even people who have been convicted of tax crimes. might have the opportunity to compromise tax liability. It you suspect that your client is stilt involved in criminal activity. the submission of an Offer in compromise would be totally inappropriate. Your client might be indicted for fraud and you might also be indicted- The author strongly advises against any Offer on behalf of a party who is involved in continuing illegal activity [IRM 57(10)1.3].

1-13 COLLATERAL AGREEMENTS

1-13.10 Revenue regulations provide that as a condition of accepting an Offer in Compromise, the taxpayer may be required to enter into a collateral agreement or to post security deemed sufficient to protect the interests of the United States.² In the past the Service normally required that a taxpayer submit a future income collateral agreement in order to secure a compromise of tax liability. This future income collateral required the taxpayer to agree to payment of a percentage of his excess earnings over necessary living expenses for a period of several years after the acceptance of the Offer. Collateral agreements will no longer be required as a condition of compromise. The new policy of the Internal Revenue Service is as follows: Collateral Agreements should not be routinely secured, but secured only when a significant recovery can be reasonably expected. For example, a future income collateral would be appropriate where it was reasonably expected that the taxpayer would be receiving a substantial increase in real income. A Collateral Agreement should not be entered merely on unfounded speculation about real increase in income. Collateral Agreement should not be secured to cover statistically improbable events such as lottery winnings. Securing a Collateral Agreement should be the exception and not the rule. Additionally, the expectation is that all collateral agreements except those designed solely to amend or clarify an Offer will be monitored for compliance. Therefore, agreements which require monitoring or which contain terms not in conformance with the outlines of the IRM will not be entered into unless approval is secured from the National office" (IRM 57(10)(15).2].
 

 
 
 
 
 
 

Other Collateral Agreements

1-13.20 The Internal Revenue Manual authorizes requests for other types of Collateral Agreements, including waivers of tax benefits, reduction in basis of assets and pledging of additional physical assets. The new Offer in Compromise provisions appear to discourage many of theseCollateral Agreements.

1-14 DOUBT AS TO LIABILITY
 

 
 
 
 
 
 

1-14.10 Offers which cast doubt as to liability, other than 100% penalties, will be reviewed by the Examination Division of the Service rather than the Collection Division. In reviewing such Offers, the Examination Division will use guidelines similar to those used in making audit determinations. Usually, the proponent must establish a valid question of law or fact which would render the liability in question doubtful. Generally, a more appropriate means of determining such issues would be to seek a determination by the Tax Court or via refund litigation. The author has found that most Districts seldom grant offers on this basis.
 

 
 
 
 
 
 

1-15 FINANCIAL AND HEALTH PROBLEMS
 

 
 
 
 
 
 

1-15.10 It is not inappropriate to point out to the Service the possibilities that your client may subsequently discharge tax liabilities in bankruptcy (see Chapter 7) or that he is in ill heath and may not survive to pay the entire tax liability in question. The more dire your client's financial and personal circumstances. the more likely that the Service will accept the proposed Offer in Compromise. Obviously, as a representative it is your duty to point out all of the negative factors with respect to your client's health, age and financial circumstances when advocating the Offer to the Internal Revenue Service. Submit medical records and other supporting documents buttress such arguments.
 

 
 
 
 
 
 
 
 

1-16 ACCEPTANCE
 

 
 
 
 
 
 

1-16.10 Upon acceptance of an Offer the IRS will send a letter to the taxpayer specifying the terms of acceptance [App-D]. The taxpayer then must pay the amount of the Offer within the period specified in the letter. Upon payment the IRS will release any previously recorded Federal Tax Liens. A taxpayer can propose to pay the amount of the Offer over an extended period of time. Unfortunately. the author has found that the chances of Offer are greatly enhanced if the payment is made within 30-90 days after acceptance of the Offer. The Internal Revenue Service has found that the longer the period from acceptance to payment the greater the chance that the taxpayer might default on the compromise. Obviously the Service wants the balance of the amount offered as rapidly as possible. If the taxpayer is allowed to pay installments, the tax lien will not be released until all installments have been paid. The IRS normally charges interest at the statutory rate on any settlement amount pad by installments.
 

 
 

Public Record

1-16.20 All accepted Offers are kept on public file in the District Office for at least one year Appendix 6-F is an example of the public record available for each accepted Offer.

PRACTICE TIP

Any practitioner considering making an Offer on behalf of a client should go to the District Office and review each of the accepted Offers. The climate for acceptance of Offers varies widely from District to District and such a review will allow a better assessment of your client's chance of compromise. The format for Offers also varies from District to District and one should attempt to structure the proposal in a manner similar to acceptable Offers.
 

 
 
 
 
 
 

Offer In Compromise Statistics-Fiscal Year 1993 Through June

1-16.30 In fiscal year 1993 through June, the IRS accepted the following number of Offers in Compromise in its highest and lowest percentage acceptance districts: THE HIGHEST AND LOWEST ACCEPTANCE RATES

DISTRICT	ACCEPTED	REJECTED	WITHDRAWN	TOTALS
Fargo, ND	80 (80.0%)	7 (7.0%)	13 (13.0%)	100
Albany, NY	109 (77.0%)	23 (16-4%)	8 (5.7%)	140
Jackson, MS	246 (77.8%)	14 (4.4%)	56 (17.7%)	316
Boise, ID	151 (76.6%)	20 (10.2%)	26 (13.2%)	197
Des Moines, IA	148 (76.3%)	22 (11.3%)	24 (12.4%)	194
Salt Lake City, UT	162(73.3%)	33 (14.9%)	26 (11.8%)	221
Burlington, VT	11 (73.3%)	2 (13.3%)	2 (13.3%)	15
Helena, MT	81 (72.3%)	13 (11.6%)	18 (16.1%)	112
St. Paul, MN	504 (72.4%)	76 (10.9%)	116 (16.6%)	696
St. Louis, MO	600 (71.5%)	118 (14.1%)	121 (14.4%)	839

DISTRICT              ACCEPTED     REJECTED     WITHDRAWN  TOTAL

Laguna Niguel, CA    220 (15.2%)    879 (60.7%)   349 (24.1%)     1,448

     Newark, NJ               116 (27.8%)    139 (33.2%)   163 (39.0%)        418

Brooklyn, NY              67 (29.2%)      73 (31.9%)     89 (38.9%)         229

     Los Angeles, CA       145 (30.0%)    225 (46.5%)   114 (23.6%)         484

Pittsburgh, PA             35 (36.4%)      24 (25.0%)     37 (38.5%)           96

     Cheyenne, WY             23 (36.5%)     20 (31.7%)     20 (31.7%)           63

Dallas, TX                   313 (36.7%)   277 (32.5%)    263 (30.8%)        853

     Manhattan, NY           179 (36.8%)   193 (39.6%)    115 (23.6%)        487

Richmond, VA             207 (38.0%)     94 (17.2%)    244 (44.8%)        545

     Austin, TX                   137 (38.l%)     136 (37.7%)     87 (24.2%)        360
 

 
 
 
 
 

In fiscal year 1992, the number of offers submitted to the Internal Revenue Service was 17,749. That represented a 100% increase over fiscal year 1991. Of the offers investigated and pleaded, the Internal Revenue Service accepted 4,356(45%), rejected 3,209 (33%), and 2,208(22%) were withdrawn^3. In fiscal I 993 the number of Offers submitted increased once again to 51,220, almost a 200% increase over 1992.
 

 
 

Statistics 1990-1993

1-6.40 Thousands of taxpayers are settling their old tax liabilities for a fraction of what they owe.'

	1990	1991	1992	1993
Offers Received	8,919	8,711	17,749	51,220
Offers Processed	8,000	8,098	8,098	34,012
Offers Rejected	4,173	4,072	3,209	3,209
Offers Withdrawn	1,855	2,031	2,208	7,745
Offers Accepted	1,972	1,995	4,356	18,020
Acceptance Rate	25%	25%	45%	53%
Amount Owed (millions)	$ 128	$ 140	$ 661	$ 2,021
Amount Accepted (millions)	$ 37	$ 37	$ 106	$ 202
Percent of Debt Satisfied	29%	27%	16%	10%

1-17 FUTURE COMPLIANCE

1-17.10 Form 656 which is utilized by the Internal Revenue Service for compromise of taxes provides a requirement that subsequent to acceptance of an Offer, the taxpayer must remain current on all tax obligations for a period five (5) years. Therefore, if the taxpayer's Offer is accepted and payed in full, but she later fails to pay current income taxes or other taxes, the compromise might be revoked by the Internal Revenue Service. The agreement to remain current subsequent to acceptance creates a condition subsequent to the agreement. The practitioner should be alert to fully brief her client on the effects of this provision.

PRACTICE TIP

The IRS may revoke a compromise if the taxpayer fails to pay all subsequent taxes which become due for five years.
 

 
 
 
 
 
 
 
 

1-18 CHANGES IN THE OFFER CLIMATE
 

 
 
 
 
 
 

1-18.10 During the period from February, 1992 to September, 1995, the IRS engaged

in the most open and fair Offer in Compromise process in its history. Thousands of taxpayers were able to settle overwhelming tax liabilities for amounts which were fair and reasonable for both the government and the taxpayer. With the implementation of the new Allowable Expense Standards in September, 1995, it has become much more difficult to successfully compromise taxes. Because the IRS will not consider any expense other than those that it deems necessary within its very narrow definition, many taxpayers have found that amount of money demanded by the IRS to compromise their tax liabilities is much larger than they could ever possibly borrow. Therefore, those of you who have become comfortable with the open compromise environment over the past two and one-half years will be very disappointed by the changes brought by the allowable expense standards. If you believe that the Internal Revenue Service's new allowable expense standards are not fair, write your congressman to express your dismay. You should also write to the Commissioner of the Internal Revenue Service. In the past congressional pressure has caused the IRS to change its approach to collection matters and once again there is a need for such pressure.
 

 

In March, 1999 the IRS issued its new Form 656 which allows for greater flexibility in paying the offered amount. As this supplement goes to press in August 1999 the IRS has yet to fully comply with the mandates of the IRS Restructuring Act. Although it has issued new temporary regs for equitable offers it has not revised its allowable expense standards.[Temp Reg 301.7122-1T(b)(4)]

6-19 PROMOTE EFFECTIVE TAX ADMINISTRATION

6-19.10 If the taxpayer does not qualify for an offer based upon doubt as to the actual underlying liability or inability to pay the tax a compromise may be entered into to "promote effective tax administration" when --

(i) Collection of the full liability will create economic hardship; 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.[Temp Reg 301.7122-1T(b)(4)]

Special Rules for Evaluating Offers to Promote Effective Tax Administration

6-19.20 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.

Economic Hardship

6-19.30 Factors supporting (but not conclusive of) a determination of economic hardship 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.Temp Reg 301.7122-1T(b)(4)(iv)(B)]

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 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.

Undermine Compliance

6-19.40 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.[Temp Reg 301.7122-1T(b)(4)(iv)(C)]

Exceptional Circumstances

6-19.50 The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws.:

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.

Form 656A

6-19.60 The IRS has announced that it will issue a new form 656A which will be used for offers based on hardship or exceptional circumstances offers. The temporary regulations state that one may only seek such offers if she does not qualify under the traditional grounds for an offer. The author suggests that if you believe a client qualifies under the temporary regs submit both a form 656 and 656A at the same time to avoid undue delay.
 

 
 

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