5.8.11. Effective Tax Administration

(1) An offer in compromise (referred to as an offer or OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. Revenue Procedure 2003-71 explains the procedures applicable to the submission and processing of offers to compromise a tax liability under IRC 7122. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) also provided additional requirements for submission of an OIC.

(2) Offers are submitted to one of the IRS locations for consideration and evaluated on the basis of its processability, the taxpayer's ability to pay, and the taxpayer's foreseeable future earnings. 26 CFR 300.3, Offer to compromise fee, and Notice 2006-68 also provide information on the submission of payments and fees associated with an OIC submission. During the OIC investigation, the IRS will evaluate the taxpayer’s individual circumstances and make a determination to either return, reject, terminate, accept, or close the OIC as a withdrawal. This IRM section provides guidance on how an OIC investigation should be completed and the impact other functions or activities may have on the OIC investigation.

(3) Treasury Regulations 301.7122-1, Compromises, provides additional guidance under paragraph (b) (3) Promote effective tax administration allowing for a compromise to be entered into to promote effective tax administration.

(1) Authorities relating to this section include:

• IRC 7122 - Compromises

• Treasury Regulations 301.7122-1 - Compromises

• IRC 6702(b) - Civil penalty for specified frivolous submissions

• Policy Statement 5-100

• Policy Statement 5-89

• Policy Statement 5-97

• 26 CFR 300.3 , Offer to compromise fee

• Revenue Procedure 2003-71

• Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

• Notice 2006-68

• IRM 1.2.2.6, Delegations of Authority for the Collecting Process

(1) The Director, Collection Policy is responsible for all policies and procedures within the Offer in Compromise program.

(2) The National Program Manager, Offer in Compromise, is responsible for development and delivery of policies and procedures within the program.

(3) Managers of employees investigating offers are responsible for ensuring these procedures are followed and employee actions are timely and accurate.

(4) Offer examiners, offer specialists, and other employees investigating offers are responsible for following the procedures in this IRM.

(1) Operational and program reviews are conducted on a yearly basis by the Director Specialty Collection Offer in Compromise (SCOIC) and Collection Policy, with the use of data and reports from the Automated Offer In Compromise (AOIC) system and ENTITY case management system. In addition, ad hoc reports providing information on inventory levels, hours per case, and age of offers in inventory or at time of closure, may also be completed from AOIC and the Integrated Collection System (ICS). See IRM 1.4.52, Offer in Compromise Manager’s Resource Guide.

(2) Managerial case reviews are also completed as defined in IRM 1.4.52, Offer in Compromise Manager’s Resource Guide. These reviews are a method to determine if the OIC amount accurately reflects the reasonable collection potential (RCP) as defined in Policy Statement 5-100.

(3) National quality reviews and consistency reviews are routinely conducted to ensure program consistency and effectiveness in case processing. As a result of these reviews, procedural changes may be required to improve the quality and effectiveness of the program.

(1) AOIC is used to track offers submitted by taxpayers and record case actions and history. Ability to take action on AOIC is limited to specific OIC employees. Additional permissions are provided based on an employee’s duties and responsibilities.

(2) ICS is used by field employees as a method for inventory control and history documentation.

(3) Managers are required to follow program management procedures and controls addressed in IRM 1.4.52, Offer in Compromise Manager’s Resource Guide.

(4) Managerial Requirements for case approval are defined in Del. Order 5-1.

(5) The review conducted by the Office of Chief Counsel on certain offers is in accordance with Treasury Regulations 301.7122-1 - Compromises.

(1) The following table is a list of common abbreviations, definitions and acronyms used throughout this IRM.

(1) Additional resources can be found in:

(2) Employees can find helpful information on these websites:

• SERP

• Internal Management Documents

(1) When a taxpayer's liability can be collected in full but collection would create an economic hardship, they may qualify for an ETA OIC based on economic hardship.

(2) The definition of economic hardship as it applies to ETA offers is derived from 26 CFR 301.6343-1(b)(4). Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the director and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

(3) Review the taxpayer's financial information and special circumstances to determine if they may qualify for an ETA OIC based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations. When evaluating hardship circumstances, keep in mind the taxpayer must provide verification of medical conditions or other hardships.

(4) Determine if the taxpayer’s income provides for payment of basic living expenses. Basic living expenses are those expenses that provide for health, welfare, and production of income of the taxpayer and the taxpayer’s family. National and local standard expense amounts are designed to provide accuracy and consistency in determining taxpayer’s basic living expenses for domestic taxpayers. These standards are guidelines and if it is determined that a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Request the taxpayer provide reasonable substantiation to support the deviation and document the case file.

(5) In addition to the basic living expenses, consider other factors that impact the taxpayer's financial condition which may include:

• The taxpayer's age and employment status,

• Number, age, and health of the taxpayer's dependents,

• Cost of living in the area the taxpayer resides, and

• Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.

(6) Factors that support an economic hardship determination may include:

• The taxpayer is incapable of earning a living because of a long term illness, medical condition or disability, and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.

• The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.

• The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

(7) The following examples illustrate the types of cases that may be compromised under the economic hardship standard.

(8) The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.

(9) In economic hardship cases, an acceptable OIC amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

(10) The existence of economic hardship criteria does not dictate that an OIC must be accepted. An acceptable OIC amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the OIC should not be recommended for acceptance.

(1) Per 26 CFR 301.7122-1(b)(3), 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 their liability in full.

(2) If you determine that a taxpayer is requesting consideration of the amount offered based on equity reasons vs. reasonable collection potential or economic hardship, see IRM 5.8.11.5.1 , Public Policy/Equity Processing. Acceptance of an OIC based on considerations of equity and public policy will generally be based on a combination of facts and circumstances. It is important that appropriate cases are identified and forwarded to the non-economic hardship - effective tax administration (NEH-ETA) group for consideration. Generally, the circumstances should be such that acceptance of the OIC is fair and equitable and promotes ETA.

(3) Where there is no DATL, no DATC, and the liability could be collected in full without causing economic hardship, the IRS may compromise to promote ETA where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. See IRM 5.8.11.3.2.1, Public Policy or Equity Compelling Factors, for the types of situations which may apply.

(4) The IRS recognizes that compromise on these grounds may raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.

(5) All non-hardship ETA offers should meet the following requirements:

• The taxpayer has remained in compliance since incurring the liability and overall their compliance history does not weigh against compromise;

  Note: A taxpayer is deemed to meet the compliance requirement, if they incurred a related liability caused by the fraudulent acts of a PSP.

• The taxpayer must have acted reasonably and responsibly in the situation giving rise to the liabilities; and

• An OIC acceptance should not place the taxpayer in a better position than they would occupy if they had timely and fully met their obligations, unless special circumstances exist to justify the compromise.

(1) Compromise under the ETA economic hardship or non-economic hardship provisions are permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose OIC is accepted benefited by not complying with the tax laws.

(2) Factors supporting (but not conclusive of), a determination that compromise would undermine compliance includes; but is not limited to:

• The taxpayer has an overall history of noncompliance with the filing and payment requirements of the Internal Revenue Code.

• The taxpayer has taken deliberate actions to avoid the payment of taxes.

• The taxpayer has encouraged others to refuse to comply with the tax laws.

  Note: There may be other situations where compromise would undermine compliance.

(1) A taxpayer seeking an OIC on the Public Policy/Equity Effective Tax Administration provisions must establish they have exceptional circumstances that warrant acceptance of an OIC, even though similarly situated taxpayers may have paid in full.

(2) In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group was established to work these offers.

(3) Offers submitted on the basis of NEH-ETA are assigned to the specialty group. For all offers initially submitted on any other basis, the OE/OS must conduct a full investigation and determine if the taxpayer may qualify for acceptance under another basis (e.g. DATL, DATC, DATCSC, and/or ETA based on economic hardship).

(4) Before proposing a referral to the NEH-ETA group, you must review the RCP with the taxpayer or POA to determine if they have information that may change the determination, and document that discussion. Resolve any outstanding issues involving the calculated reasonable collection potential amount prior to referring the OIC to the NEH-ETA group. If the taxpayer disagrees with RCP, allow a reasonable time to provide any additional documents they wish considered in the calculation of RCP. Any issue which remains in dispute should be identified in the memorandum provided to the NEH-ETA group, including the OE/OS position and how the disputed issue alters the taxpayer’s ability to fully pay the liability.

(5) There may be instances where the taxpayer did not check the NEH-ETA box on Form 656 because they cannot pay in full, yet also requested consideration of their equitable circumstances in the Explanation of Circumstances or during contact with SCOIC. Although ineligible on the specific basis of NEH-ETA, a checksheet is generally required if the taxpayer is basing the OIC amount on extraordinary circumstances, vs. their finances, ability to pay and/or economic hardship for their household. Referral to the NEH-ETA group establishes that the IRS properly considered the taxpayer’s request for their offer amount, which was based solely on equity/fairness. In each of the examples below, the tax liability is $50,000 and the taxpayer acknowledges their RCP is $40,000. The taxpayer cannot be considered for an OIC based on ETA because they cannot pay in full. In each instance, the OE/OS will fully investigate the RCP and try to negotiate amended terms for a justifiable amount before considering a checksheet to the NEH-ETA group. If the case involves trust fund taxes, address any TFRP per IRM 5.8.4.22.1 before submitting the checksheet.

(6) If the OIC cannot be accepted under another basis, and the taxpayer is requesting their unique and exceptional circumstances be considered in the determination, prepare the "Non-Economic Hardship Effective Tax Administration (NEH-ETA) OIC Check Sheet" which is located on OIC SharePoint. The check sheet must be completed and sent to the NEH-ETA group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic equity factors present.

(7) Send the completed check sheet with all requested attachments to the NEH-ETA OIC group manager. Include copies of any letters or documents presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. The group will either provide a memorandum to explain why further investigation by the group is not necessary or they will send instructions to transfer the OIC to the group.

(8) If the NEH-ETA group determines that the OIC does not require transfer, they will provide information regarding their analysis of the non-economic issues to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer. The rejection letter will include the paragraph that advises the taxpayer special circumstances were considered. The rejection recommendation closing narrative in AOIC remarks/ICS history, per IRM 5.8.7.7.3, Recommending Rejection of an Offer, must address any special circumstances raised. Include a statement the NEH-ETA group reviewed the taxpayer’s request for consideration under public policy/equity and determined it did not meet acceptance criteria.

(9) If the NEH-ETA group determines that the information presented requires further analysis, they will request you transfer the case.

• Advise the taxpayer by telephone that the NEH-ETA group will contact them after the case is assigned. If you cannot reach the taxpayer by phone, send a standard transfer letter.

• Send by overnight mail on a Form 3210 to the NEH-ETA group.

• At the time of mailing, transfer on AOIC to Area 05 (OIC Territory 2).

• Enter a history item in AOIC Remarks to show the case is being sent to the NEH-ETA group, Area 05.

• The NEH-ETA group will maintain copies of all check sheets received and appropriate documentation on all offers accepted for transfer.

(10) A taxpayer who has submitted an OIC under NEH-ETA or has requested consideration of any public policy or equity issues during the OIC investigation must have those issues reviewed by the NEH-ETA group prior to rejection of the taxpayer’s OIC or before a rejection is sustained. The review is initiated by providing a NEH-ETA checksheet as discussed in paragraph (5) above to the NEH-ETA group. This review should also occur on offers which are under appeals jurisdiction when NEH-ETA issues are identified by Appeals in CDP and non-CDP offers. If the NEH-ETA group determines the OIC should not be accepted under NEH-ETA and the OIC is under Appeal’s jurisdiction, a recommendation will be provided to Appeals who will make the final decision on the case.

(1) Offers submitted under ETA require the same full financial analysis as DATC offers in order to determine RCP and to determine an acceptable OIC amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.

(2) The OE/OS will calculate RCP and determine whether the OIC qualifies for consideration under ETA or DATC.

(3) If the taxpayer's assets and future income exceed the tax liability, the taxpayer's OIC can be considered under the ETA basis.

(1) To determine an acceptable OIC amount based on economic hardship, analyze the financial information to determine if a hardship would be created if certain assets, or a portion of certain assets, were used to pay the liability. The acceptable OIC amount must include all RCP that is not reasonably established to be essential for health and welfare. Because factors other than RCP dictate the OIC amount, judgment and documentation are required to support the decision.

(2) Do not reduce the FMV of an asset or show an encumbrance to reduce the RCP to reflect the OIC amount that is being recommended for acceptance. Document the closing remarks to support acceptance of the amount determined.

(3) Generally, it is the taxpayer’s responsibility to make decisions and take the appropriate actions needed to fund the acceptable OIC amount. However, due consideration of these funding options is often needed for the IRS to arrive at an acceptable OIC amount. For example, based on the taxpayer’s situation and geographic location, funding options may allow the taxpayer to tap into available equity without creating economic hardship. When appropriate, these options should be taken into consideration in determining an acceptable OIC amount for an ETA OIC based on economic hardship.

(1) NEH-ETA OICs are based on exceptional, unique circumstances as discussed in prior sections of IRM 5.8.11. Documentation should be sufficient to explain the basis of the NEH-ETA request, provide verification of the special circumstances and support the IRS’s determination to accept or reject the OIC.

(2) Except for the exception provided in (3) below, the IRS requires the same basic documents to be supplied with all Forms 656, including financial statements. If the financial statements clearly support an ability to pay in full and the taxpayer is not requesting an OIC on the basis of collectibility, it is likely not necessary to conduct the full analysis in IRM 5.8.5 to establish an exact RCP. The NEH-ETA group will exercise judgment and if the case facts warrant, utilize the CIS figures when it is necessary to prepare an AET/IET.

(3) An additional exception may be available if the taxpayer is a victim of embezzlement. If all of the following criteria are met, the taxpayer does not need to submit Forms 433-B (OIC), Collection Information Statement for Businesses with the Form 656:

• the liability is directly attributable to acts of third parties such as a payroll service provider (PSP), professional employer organization (PEO), or reporting agent (RA),

• the taxpayer’s OIC is equal to the remaining tax balance, exclusive of penalty and interest, and

• the taxpayer does not contest the ability to pay the liability in full, and provides a statement to that effect.

(4) If the taxpayer does not meet all of the criteria in (3), they must complete financial statements, including Forms 433-B (OIC), Collection Information Statement for Businesses with the appropriate documentation. Additional information may be requested by the investigating employee, if deemed necessary.

(5) Any TFRP considerations must be addressed and documented. If the investigation establishes the employment tax resulted entirely from the fraudulent acts of a payroll service company but the OIC amount does not represent the full balance of the taxes [i.e. is being recommended for acceptance based on the factors in (2) of IRM 5.8.11.5.3.2, Determining an Acceptable Amount (Fraudulent Acts of a PSP)], follow IRM 5.8.4.21, Responsibility of Offer Examiners, Offer Specialists, and Field Revenue Officers. If the TFRP investigation for the PSP or individuals within the PSP is not completed, do not delay acceptance processing. Note the closing AOIC remarks so MOIC is aware of the pending TFRP investigation. Include the name and phone number of the RO conducting the investigation so MOIC may contact them prior to input of the TC 788 and TC 604 to discuss the impact completing the adjustment will have on any ATFR calculation.

(6) If the investigation establishes the employment tax resulted entirely from the acts of third parties and the OIC amount is based on the full underlying tax, take the following actions:

1. Provide instruction to the taxpayer to designate the OIC payments specifically to the underlying tax. To designate payments, the taxpayer must specify the amount and the tax period. Provide the taxpayer the breakdown by quarter - if there is more than one period, it is recommended to include an attachment in the acceptance letter so it is associated with the acceptance file to MOIC.

   Example: The remaining underlying tax balance for the two quarters totals $55,000. Provide the taxpayer instruction to designate the payment as follows: $25,000 to 941-12/2021 and $30,000 to 941-3/2022.

2. Provide instruction to MOIC. Document the AOIC closing remarks that the payments are to be applied to specific periods and provide the breakdown. Advise the taxpayer has been instructed to submit the payments as designated. Notate the AOIC closing remarks that if the taxpayer defaults the OIC due to nonpayment, MOIC must issue an OI to notify the originating group of the default. Upon receipt of the OI, the group will open an ICS case assignment and initiate an OI to a revenue officer group to request a TFRP investigation.

(7) When third party PSP involvement is the basis for the OIC, and the taxpayer’s OIC is equal to the remaining tax balance, exclusive of penalty and interest, the following statement may be used in lieu of the Acceptance Recommendation Report discussed in IRM 5.8.8.7, Required Actions Prior to Closing an Offer as an Acceptance: This OIC is being recommended for acceptance under the non-economic hardship provisions of Effective Tax Administration (NEH-ETA). The taxpayer meets NEH-ETA criteria since they have submitted information to demonstrate they have the ability to fully pay the liability, they acted in a reasonable manner, have shown they were a victim of a fraudulent act of a payroll service provider, and the OIC amount is equal to the full amount of remaining tax, exclusive of penalty and interest, for each of the tax periods listed on the OIC.

(8) In addition to the verification of the actions of the third party and the receipt of appropriate verification, the offer specialist must verify the tax assessments are correct prior to acceptance of the OIC. This includes utilizing IDRS information to verify the correct wages were reported (the total wages reported on Forms W-2 are consistent with the annual Forms 941 tax periods included on the OIC). If there are discrepancies, advise the taxpayer they must reconcile the discrepancy by submitting amended 941 returns and/or corrected Forms W-2. Any amended returns must be processed and the account adjusted prior to OIC acceptance. Ensure federal tax deposits are posted to the correct tax periods prior to the adjustments or abatements being processed. The tax modules must reflect the correct data before the IRS can proceed with a determination. If the assessments are not expected to post in a timely manner, see IRM 5.8.4.17.1, Pending Assessments - Filed Returns, to determine if it is necessary to secure a withdrawal.

(9) Prior to acceptance, determine if any future abatement of penalties for tax periods not on the OIC might cause an overpayment. If abatement of penalties is appropriate, the OS should process any abatement in accordance with current procedures prior to acceptance of the OIC, if it appears a future abatement may cause a refund to be issued after the OIC acceptance.

(1) The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, should be followed when processing ETA rejected, withdrawn or returned offers.

(2) The procedures in IRM 5.8.4.15 , Investigation of Offers under Appeals Jurisdiction, should be followed when processing ETA offers secured during a Collection Due Process hearing.

(3) IRM 5.8.12, Independent Administrative Review, provides instructions for IAR review of rejected offers.

(4) See IRM 1.2.2.6.1, Delegation Order No. 5-1 (Rev. 5), To Accept, Reject, Return, Terminate or Acknowledge Withdrawals of Offers in Compromise for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 1271 and the closing letter.

(1) The procedures in IRM 5.8.8, Acceptance Processing, should be followed when processing accepted ETA offers.

(2) Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.

(3) See IRM 1.2.2.6.1, Delegation Order No. 5-1 (Rev. 5), To Accept, Reject, Return, Terminate or Acknowledge Withdrawals of Offers in Compromise for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 7249 and the closing letter.