What
is the position and procedures if the amount of the compromise is
$50,000 or more?
| DOCUMENT NUMBER: CC-2001-036 |
| |
| SUBJECT: Opinion of Counsel in Offer in Compromise Cases |
| |
| CANCELLATION DATE: Upon Incorporation into the CCDM |
| |
| |
| PURPOSE |
| |
| This Notice sets forth procedures to be
followed by Associate Area |
| Counsel (SB/SE) offices <<ENDNOTE 1>> when reviewing
proposed acceptances |
| of taxpayer offers in compromise. Review by Counsel is performed
pursuant |
| to I.R.C. section 7122(b) and the Service’s policies and
procedures. No |
| opinion of Counsel is required in cases where the total
liability is less |
| than $50,000. This Notice clarifies the role of Counsel in
reviewing |
| offers based on doubt as to collectibility and doubt as to
liability. It |
| also adds procedures and standards for the review of offers
based on the |
| promotion of effective tax administration. This Notice
supercedes any |
| previous communications on this subject and will be incorporated
into the |
| Chief Counsel Directives Manual. |
| |
| |
| OFFERS IN COMPROMISE AND THE ROLE OF COUNSEL |
| |
| As reflected in Policy Statement P-5-100,
compromise is a viable |
| collection alternative. It is the Service's policy to encourage
the use of |
| this tool where appropriate. Correspondingly, Counsel will
support the |
| Commissioner's offer in compromise policy and will assist the
Service by |
| providing the legal opinion required by section 7122(b) and by
rendering |
| assistance with legal and policy issues that the Service may
encounter in |
| the processing and evaluation of offers. |
| |
| |
| REVIEW OF PROPOSED ACCEPTANCES OF OFFERS IN COMPROMISE |
| |
| A. OVERVIEW |
| |
| - Counsel’s review of proposed acceptances
has two separate and |
| distinct components: 1) certification that all of the legal
requirements |
| for compromise have been met, and 2) review of the proposed
compromise for |
| consistent application of the Service’s acceptance policies. |
| |
| Certifying that the legal requirements for
compromise have been met is |
| the primary purpose of Counsel review. These requirements have
been met |
| if: 1) a basis for compromise under the Treasury
regulations–as described |
| in parts B, C, and D, below–has been established, and 2) the
documentation |
| requirements of section 7122(b) have been satisfied. Once it has
been |
| determined that all of the legal requirements for compromise
have been |
| met, Counsel will sign the Form 7249, Offer Acceptance Report.
The signed |
| Form 7249 constitutes the opinion of Counsel required by section
7122(b), |
| and will be placed on file for public inspection. |
| |
| If the legal requirements for compromise have
been met, Counsel then |
| reviews the proposed acceptance for consistent application of
the |
| Service’s policies regarding whether the proposed compromise
amount is |
| acceptable. These acceptance policies are explained in more
detail below. |
| A finding by Counsel that a proposed acceptance is not in
keeping with |
| Service policy is not a justification for withholding an opinion
if all of |
| the legal requirements for compromise have been met. Rather,
Counsel |
| should advise the Service of its concerns by separate
memorandum. If |
| Counsel recognizes that a proposed acceptance deviates from the
policy, |
| but concurs in the Service’s determination that such deviation
is |
| warranted under the facts of the case, those views should also
be conveyed |
| to the Service by separate memorandum. In either event, the
views of |
| Counsel, as set forth in the separate memoranda will be reviewed
by the |
| official with authority to compromise prior to making the
acceptance |
| final. If Counsel is contemplating issuing an opinion that an
offer should |
| not be accepted, the offer group should be contacted on an
informal basis |
| to explore the possibility of reaching a consensus on the issues
causing |
| Counsel to question the propriety of accepting the offer. |
| |
| In making each of the foregoing
determinations, Counsel must rely upon |
| factual determinations made by the Service. These determinations
should |
| ordinarily not be reexamined by Counsel unless patently
erroneous. Asset |
| valuations and necessary expense determinations are largely
matters of |
| administrative discretion and judgment and should not be
questioned by |
| Counsel. |
| |
| |
| B. REVIEW OF DOUBT AS TO LIABILITY OFFERS |
| |
| LEGAL BASIS FOR COMPROMISE: 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
concerning the |
| existence or amount of the liability. |
| |
| POLICY REGARDING ACCEPTANCE OF AMOUNT OFFERED:
The determination of the |
| amount accepted to resolve a doubt as to liability case should
be made by |
| reference to the expected hazards in litigating the case. The
evaluation |
| of litigating hazards is, of course, not an exact science.
Ordinarily, an |
| amount should be considered acceptable under the Service’s
policies if it |
| is within a reasonable range of the predicted result in
litigation. |
| |
| |
| C. REVIEW OF DOUBT AS TO COLLECTIBILITY OFFERS |
| |
| LEGAL BASIS FOR COMPROMISE: Doubt as to
collectibility exists in any |
| case where the taxpayer’s assets and income are less than the
full amount |
| of the assessed liability. |
| |
| POLICY REGARDING ACCEPTANCE OF AMOUNT OFFERED:
Where doubt as to |
| collectibility has been established, an offer is generally
considered |
| acceptable if it closely approximates the amount that could
reasonably be |
| collected by other means, including the Service’s
administrative and |
| judicial collection powers. See Policy Statement P-5-100. No
asset should |
| be eliminated from consideration or valued at zero simply
because the |
| Service would be unlikely to seize the asset. See IRM
5.8.4.1(4); IRM |
| 5.8.5.3(2). In evaluating a proposed acceptance, Counsel’s
review should |
| include a determination of: |
| |
| 1) whether the four components of
collectibility (net equity in |
| assets, present and future income,
amounts collectible from third |
| parties, and amounts available to
the taxpayer but beyond the reach |
| of the Service) have been
considered; |
| |
| 2) whether issues with regard to
lien priority have been properly |
| determined; and |
| |
| 3) whether fraudulent conveyances
and/or transferee liability issues |
| have been properly resolved. |
| |
| The Service’s policies and procedures
establish accepted methods for |
| valuing assets, as well as rules regarding the portion of assets
to be |
| included in reasonable collection potential. Counsel should not
question |
| asset valuations and future income calculations that fall within
the |
| parameters established in these policies and procedures. |
| |
| The Service’s policies and procedures
recognize that it may be |
| appropriate in some cases for the Service to accept an offer of
less than |
| the total reasonable collection potential of a case. These are
known as |
| “special circumstances” cases. The Service anticipates
acceptance of less |
| than reasonable collection potential in cases where, despite the
proper |
| application of the Service’s allowable expense standards and
asset |
| valuation rules, the taxpayer could not pay the full reasonable
collection |
| potential without suffering economic hardship. See IRM
5.8.4.2(4). |
| Economic hardship is defined as the inability to meet reasonable
basic |
| living expenses. See Treas. Reg. section 301.6343-1(b)(4).
Economic |
| hardship does not include mere inconvenience or the inability to
maintain |
| a luxurious or affluent standard of living. Under the
Service’s |
| procedures, the amount accepted should reflect what could
reasonably be |
| collected less the amount a taxpayer must retain to avoid the
economic |
| hardship. See IRM 5.8.11.2.1(5). |
| |
| |
| D. REVIEW OF OFFERS BASED ON PROMOTION OF
EFFECTIVE TAX ADMINISTRATION |
| |
| On July 19, 1999, temporary Treasury
regulations were issued that |
| expanded the Service’s authority to compromise beyond the
traditional |
| bases of doubt as to liability and doubt as to collectibility.
Where there |
| are no grounds for compromise on collectibility or liability
grounds, a |
| compromise may be entered into to promote effective tax
administration, |
| where: (1) collection of the full liability would create
economic hardship |
| within the meaning of section 301.6343-1 of the Treasury
regulations; or |
| (2) exceptional circumstances exist such that collection of the
full |
| liability would be detrimental to voluntary compliance by
taxpayers. Temp. |
| Treas. Reg. section 301.7122-1T(b)(4). No such compromise may be
entered |
| into, however, where it would undermine compliance with the tax
laws. Id. |
| |
| |
| 1. COLLECTION OF THE TAX
LIABILITY IN FULL WOULD CREATE ECONOMIC |
| HARDSHIP |
| |
| LEGAL BASIS FOR COMPROMISE: The Service is now
authorized to compromise |
| when it determines that a liability could be collected in full,
but to do |
| so would cause economic hardship. Economic hardship is defined
as the |
| inability to meet reasonable basic living expenses. See Treas.
Reg. |
| section 301.6343-1(b)(4). Economic hardship does not include
mere |
| inconvenience or the inability to maintain a luxurious or
affluent |
| standard of living. If, even after deferring to the Service’s
valuation |
| and expense determinations, Counsel concludes that the liability
could be |
| collected in full without causing economic hardship, as defined
under the |
| regulations, this basis for compromise is not established. In
establishing |
| this basis for compromise, the possible effect of compromise on
future |
| compliance with the tax laws must be considered. |
| |
| POLICY REGARDING ACCEPTANCE OF AMOUNT OFFERED:
Under the Service’s |
| procedures, the amount accepted should reflect what could
reasonably be |
| collected less the amount a taxpayer must retain to avoid the
economic |
| hardship. See IRM 5.8.11.2.1(5). The determination to accept a
particular |
| amount must be based on the taxpayer’s particular facts and
circumstances, |
| and must be explained and documented clearly. See IRM
5.8.11.9(1). The |
| decision to accept a particular amount will necessarily involve
judgment |
| on the part of the offer specialist and the official delegated
the |
| authority to make the final acceptance decision. |
| |
| |
| 2. COLLECTION OF THE TAX
LIABILITY IN FULL WOULD BE DETRIMENTAL TO |
| VOLUNTARY COMPLIANCE |
| |
| LEGAL BASIS FOR COMPROMISE: The Service may
compromise a case when it |
| is determined that, although there is no doubt as to
collectibility or |
| liability, exceptional circumstances exist such that collection
of the |
| full liability would be detrimental to voluntary compliance.
This basis is |
| established when collection in full would work such an inequity
or |
| unfairness that compliance by other taxpayers would be adversely
affected. |
| This basis is not established if the offer file contains only
vague |
| assertions that the imposition of a tax liability, or of
interest and |
| penalties, is unfair. This authority to compromise should not be
used as a |
| method to disregard or circumvent established limits to relief
granted |
| elsewhere in the Code, such as interest abatement. See IRM
4.3.21.3.4(3). |
| In establishing this basis for compromise, the possible effect
of |
| compromise on future compliance with the tax laws must be
considered. |
| |
| POLICY REGARDING ADEQUATE AMOUNT: An adequate
compromise amount will be |
| determined based on what is considered fair and equitable under
the |
| particular facts and circumstances. The offer acceptance
recommendation |
| should contain a detailed explanation as to how the Service
determined |
| that the amount offered was adequate and is a fair and equitable |
| resolution of the case. See IRM 5.8.11.2.2(3). |
| |
| |
| E. ISSUES NOT RELATED TO BASIS FOR COMPROMISE
OR ACCEPTANCE STANDARDS |
| |
| Occasionally, although a basis for compromise
may be established and a |
| proposed acceptance may be in keeping with the Service’s
acceptance |
| standards, Counsel may have reservations about whether the offer
should be |
| accepted, based on policy or other non-legal concerns. As with
all advice |
| rendered by Counsel, it is proper to raise these concerns with
the |
| appropriate Service official, whether informally or by
memorandum. Such |
| concerns, however, are not grounds for withholding an opinion
that the |
| legal requirements for compromise have been established. |
| |
| |
| F. DOCUMENTATION REQUIREMENTS - I.R.C. SECTION
7122(b) |
| |
| Section 7122(b) requires that the opinion of
Counsel contain the |
| reasons for compromise as well as a statement of the tax,
penalties, and |
| interest assessed and the amount paid in accordance with the
terms of the |
| compromise. Counsel should review the Form 7249 to see that this |
| information has been included. |
| |
| Questions regarding this notice may be
directed to Frederick W. |
| Schindler of the Office of the Assistant Chief Counsel,
Collection, |
| Bankruptcy & Summonses, at (202) 622-3620. |
| |
| /s/ |
| Deborah
A. Butler |
| Associate
Chief Counsel |
| (Procedure
and Administration) |
| |
| |
| <<ENDNOTES>> |
| |
| 1/ Associate Area Counsel (SB/SE) offices
should consult with Counsel |
| from other divisions when appropriate, such as where an LMSB or
TEGE |
| taxpayer raises doubt as to liability issues. |
