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5.8.11. Effective Tax Administration

5.8.11 Effective Tax Administration

Manual Transmittal

October 04, 2019

Purpose

(1) This transmits revised IRM 5.8.11, Offer in Compromise, Effective Tax Administration.

Material Changes

(1)

IRM Section

Material Change

5.8.11.1

New subsection added to include program scope and objectives.

5.8.11.2(1)

Updated reference to 26 CFR §301.7122-1(b)(3).

5.8.11.3(1)

Clarified taxpayer full payment ability can be a combination of both equity and installment agreement amount.

5.8.11.3.2.1(4)(c)

Was added to incorporate guidance provided in Interim Guidance Memorandum (IGM) number SBSE-05-0618-0025, titled Offers Involving Professional Employer Organization and Reporting Agents.

5.8.11.4(3)

Updated information on processability requirements.

5.8.11.4(4)

Updated citation referencing perfection of offers.

5.8.11.5(4)

Updated to include additional guidance on information required in the rejection recommendation when special circumstances are identified.

5.8.11.5.1(6)

Provided additional guidance on information to be included in rejection narrative when NEH-ETA group determines offer does not meet criteria for consideration under public policy/equity.

5.8.11.5.1(7)

A note was added as guidance for the OE/OS to resolve any outstanding issues relative to RCP prior to forwarding to the NEH-ETA group.

5.8.11.5.1(8)

Added paragraph to discuss requirement to always have NEH-ETA group review any offer submitted requesting consideration under public policy/equity prior to rejection determination.

5.8.11.5.3(1) Example

Provided additional guidance in the example relative to documentation when accepting an offer under hardship criteria.

5.8.11.6(4)

Additional note added to discuss removal of equity in taxpayer residence from an acceptable offer amount.

5.8.11.7(2) table

Added additional information relative to rejections when taxpayer does not offer the amount determined as acceptable.

5.8.11.7.1 (4)

Updated reference to IRM 1.2.2.6, Delegations of Authority for the Collecting Process

5.8.11.7.2 (3)

Corrected form number which requires manager signature when offer accepted.

Exhibit 5.8.11-1

Removed Exhibit and revised IRM to direct employees to the OIC SharePoint site for most current revision.

(2) Sections were renumbered throughout the document based on inclusion of new section, IRM 5.8.1, Program Scope and Objectives.

(3) Interim Guidance Memorandum number SBSE-05-0618-0025, titled Offers Involving Professional Employer Organization and Reporting Agents was incorporated into this IRM.

(4) Editorial changes were made throughout this IRM to update terminology, website addresses, legal references, IRM references, and revised forms.

Effect on Other Documents

This material supersedes IRM 5.8.11 dated August 5, 2015.

Audience

SB/SE Compliance employees

Effective Date

(10-04-2019)


Nikki C. Johnson
Director, Collection Policy

Program Scope and Objectives

(1) Purpose: This chapter provides:

  • Instructions for conducting offer investigations involving Effective Tax Administration (ETA) criteria.

  • Definitions for considering basis involving ETA.

(2) Audience: These procedures apply to Internal Revenue Service (IRS) employees who are responsible for investigating and considering offers submitted under the basis of ETA:

  • Offer Examiners (OE) in Centralized Offer in Compromise (COIC).

  • Offer Specialists (OS) in the Field Offer Territories.

  • Additional IRS employees assigned to the offer program and employees who conduct offer in compromise investigations and consider offer in compromise appeals.

(3) Policy Owner: Director, Collection Policy

(4) Program Owner: SBSE Collection Policy, Offer in Compromise (OIC) Program

(5) Primary Stakeholders: The primary stakeholders are COIC and Field offer employees assigned to Specialty Collection Offer in Compromise.

(6) Program Goals: Policy Statement P-5-100 explains the objective of the OIC as a collection tool. This Internal Revenue Manual (IRM) section provides the fundamental knowledge and procedural guidance for offer examiners and offer specialists engaged in the investigation of offers. The procedures in this IRM include guidance so employees will be able to complete offer investigations and initiate taxpayer contact, when appropriate.

Background

(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 Section 7122 of the Internal Revenue Code. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) also provided additional requirements for submission of an offer.

(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 offer submission. During the offer investigation, the taxpayer’s individual circumstances are evaluated and the IRS will make a determination for disposition to either Return, Reject, Terminate, Accept, or Acknowledge Withdrawal of the offer. This IRM section provides guidance on how an offer investigation should be completed and the impact other functions or activities may have on the offer 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.

Authority

(1) Authorities relating to this section include:

  • Internal Revenue Code (IRC) 7122 - Compromises

  • Treasury Regulations § 301.7122-1 - Compromises

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

  • Policy Statement P-5-100

  • Policy Statement P-5-89

  • Policy Statement P-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

Responsibilities

(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.

Program Management and Review

(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 offer amount accurately reflects the reasonable collection potential (RCP) as defined in Policy Statement P-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.

Program Controls

(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 offer 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.

Terms/Definitions/Acronyms

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

Acronym

Definition

ACS

Automated Collection System

AET

Asset Equity Table

AOIC

Automated Offer in Compromise

ATAT

Abusive Tax Avoidance Transaction

APS

Account and Processing Support

CAU

Caution Indicator

CDP

Collection Due Process

CFFC

Collection Functional Fraud Coordinator

COIC

Centralized Offer in Compromise

CSED

Collection Statute Expiration Date

DATC

Doubt as to Collectibility

DATCSC

Doubt as to Collectibility with Special Circumstances

DATL

Doubt as to Liability

DPC

Designated Payment Code

DVDP

Domestic Voluntary Disclosure Program

EFTPS

Electronic Funds Tax Payment System

EH

Equivalency Hearing

ES

Estimated Tax Payment

ETA

Effective Tax Administration

FTA

Fraud Technical Analyst

FTD

Federal Tax Deposit

ICS

Integrated Collection System

IDT

Identity Theft

IRC

Internal Revenue Code

IRM

Internal Revenue Manual

MFT

Master File Tax

NEH-ETA

Non-Economic Hardship - Effective Tax Administration

NFTL

Notice of Federal Tax Lien

OE

Offer Examiner

OI

Other Investigation

OIC

Offer in Compromise

OS

Offer Specialist

OVDP

Offshore Voluntary Disclosure Program

PDT

Potentially Dangerous Taxpayer

PPIA

Partial Pay Installment Agreement

PSP

Payroll Service Provider

RCP

Reasonable Collection Potential

RO

Revenue Officer

SCOIC

Specialty Collection Offer in Compromise

TIPRA

Tax Increase Prevention and Reconciliation Act of 2005

TFRP

Trust Fund Recovery Penalty

Related Resources

(1) Additional resources can be found in IRM 5.8, Offer in Compromise.

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

Overview

(1) Section 7122(d)(1) directs the Secretary of the Treasury to prescribe guidelines for the IRS to determine whether an OIC is adequate and should be accepted. Congress explained that these guidelines should allow the Service to consider:

  • Hardship,

  • Public policy, and

  • Equity

26 CFR § 301.7122-1(b)(3) authorizes the Service to consider OIC's raising these issues. These offers are called Effective Tax Administration (ETA) offers.

(2) The availability of an ETA offer encourages taxpayers to comply with the tax laws because taxpayers will believe the tax laws are fair and equitable. The ETA offer allows for situations where tax liabilities should not be collected even though:

  • The tax is legally owed, and

  • The taxpayer has the ability to pay it in full

(3) No compromise to promote ETA may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

(4) If a taxpayer submits an ETA offer, first investigate the offer for:

  • Doubt as to Liability (DATL), and/or

  • Doubt as to Collectibility (DATC)

(5) An ETA offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under DATL and/or DATC.

(6) The taxpayer must include the Collection Information Statement (CIS) (Form 433-A (OIC) and/or Form 433-B (OIC)) when submitting an offer requesting consideration under ETA.

Exception: Refer to IRM 5.8.11.5.2, Financial Statement Analysis, relative to when complete financial information may not be required on certain offers involving the fraudulent acts of a Payroll Service Provider (PSP).

(7) Economic hardship standard of CFR § 301.6343-1 specifically applies only to individuals. Refer to IRM 5.8.11.3.1, Economic Hardship.

Legal Basis for Effective Tax Administration Offer

(1) Compared to Doubt as to Collectibility (DATC)

  • In a DATC offer, the tax liability equals or exceeds the taxpayer's reasonable collection potential (RCP) which is:

  • Net equity, plus

  • Future income, and

  • Other components of collectibility

  • In an ETA offer the tax liability is less than the taxpayer's RCP. The RCP shows the taxes owed can be collected in full either:

  • In a lump sum,

  • Through an installment agreement (IA)

  • Or a combination of both

  • A DATC offer does not convert to an ETA offer if the Offer Examiner/Offer Specialists(OE/OS) and the taxpayer cannot agree on an acceptable offer amount.

(2) Compared to Doubt as to Collectibility with Special Circumstances (DATCSC)

  • Taxpayers may qualify for an ETA offer when their RCP is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

  • Taxpayers may qualify for a DATCSC offer when they cannot fully pay the tax due but have proven special circumstances that warrant acceptance for less than RCP. Factors establishing special circumstances under DATC are the same as those considered under ETA. Refer to IRM 5.8.4.2, Effective Tax Administration (ETA) and Doubt as to Collectibility with Special Circumstances (DATCSC) which discusses issues to consider when evaluating an offer under ETA or DATCSC.

  • Example: The taxpayer owes $ 20,000. The RCP is $ 25,000. The taxpayer could have an offer accepted for less than the total liability of $ 20,000, even though the RCP is $25,000, under the ETA provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.

    Example: The taxpayer owes $20,000 and his RCP is $15,000. The offer does not meet the legal basis for an ETA because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under DATCSC provisions.

(3) Compared to Doubt as to Liability (DATL)

An offer can be considered under ETA provisions only when there are no DATL issues.

(4) When reaching these determinations:

If…

Then…

During the offer investigation, the Service determines that there is doubt as to the amount of the liability the taxpayer owes

Taxpayer is not eligible for ETA consideration. The taxpayer should withdraw the offer submitted under ETA and submit the appropriate documents, i.e. amended return, etc, so the correct tax may be determined. If appropriate, an OIC may be considered on the DATL issue by submitting a Form 656-L. If after any adjustments or consideration of a DATL offer are completed, a balance due remains, the taxpayer may submit a DATC or ETA offer.

The Service determines that the taxpayer's equity in assets plus future income (RCP) does not exceed the amount of the tax liability

Taxpayer is not eligible for an ETA offer. The OIC is considered based on DATC. However, hardship or public policy/equity may be present in the case to allow consideration under DATCSC.

The Service determines the taxpayer is not eligible for compromise based on DATL or DATC and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise

The taxpayer would be eligible for ETA consideration.

(5) Before we can consider any ETA OIC based on economic hardship or public policy/equity considerations, three factors must exist:

  1. A liability has been or will be assessed against taxpayer(s) before acceptance of the OIC.

  2. The sum of net equity in assets, future income, and the other components of collectibility making up the RCP must be greater than the amount owed.

  3. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.

Economic Hardship

(1) When a taxpayer's liability can be collected in full but collection would create an economic hardship, an ETA offer based on economic hardship can be considered.

(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 Commissioner 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.

Note: Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, estates, or other non-individual entities.

(3) The taxpayer's financial information and special circumstances must be examined to determine if they qualify for an ETA offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.

(4) The taxpayer’s income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. 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, other factors to consider that impact upon the taxpayer's financial condition 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.

Note: This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.

(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.

Note: These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.

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

Example: The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayer's overall compliance history does not weigh against compromise.

Example: The taxpayer is retired and the only income is from a pension which does not meet his necessary living expenses. The 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 adequate means to provide for basic living expenses. The taxpayer's overall compliance history does not weigh against compromise.

Example: The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate the disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayer's overall compliance history does not weigh against compromise.

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

Example: The taxpayer submitted an ETA offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. The taxpayer does not provide any information or documentation to demonstrate the transfer of property was an arms length transaction, so it appears the transfer was to avoid the payment of the tax liability; therefore, the offer should not be accepted.

(9) In economic hardship cases, an acceptable offer 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.

Example: The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and will use personal funds for basic living expenses. The taxpayer owes $ 100,000 and has an RCP of $150,000. An offer was submitted for $ 35,000. Through the investigation, it is determined that collecting more than $ 50,000 would cause an economic hardship for the taxpayer. A determination on economic hardship was made due to the fact the taxpayer’s reasonable living expenses, including ongoing medical costs will exceed their income once the taxpayer is unemployed. The taxpayer is advised to raise the offer to $ 50,000 since it is the amount the Service can collect without creating an economic hardship.

(10) The existence of economic hardship criteria does not dictate that an OIC must be accepted. An acceptable offer 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.

Public Policy or Equity Grounds

(1) 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 in Austin, TX for consideration. Generally, the circumstances should be such that acceptance of the offer is fair and equitable and promotes ETA.

(2) Where there is no DATL, no DATC, and the liability could be collected in full without causing economic hardship, the Service 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.

(3) The Service recognizes that compromise on these grounds will often 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.

(4) 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

  • The circumstances of the case must be such that the result of the compromise does not place the taxpayer in a better position than they would occupy had they timely and fully met their obligations, unless special circumstances justifying the compromise are present.

Note: Generally, tax liabilities associated with the taxpayer’s participation in abusive tax avoidance transactions will not be compromised under these procedures.

Public Policy or Equity Compelling Factors

(1) Compromise may promote ETA where a taxpayer’s liability was directly caused by a processing error on the part of the Service and would otherwise have been avoided. Compromise to remedy the mistake may be appropriate to the extent correction of the mistake (such as through abatements, reversal of credits, etc.) does not put the taxpayer back in the same position that he or she would have occupied if the error had not been made.

Example: The taxpayer is a closely-held corporation. The IRS audited the taxpayer’s tax returns for 2014, 2015, and 2016 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.

Note: The fact that the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.

(2) Compromise may promote ETA where the taxpayer incurred the liability because of having followed erroneous advice or instructions from the Service. The advice or instructions caused the taxpayer to incur a tax liability that would not otherwise have been incurred. In these instances, the taxpayer must be able to show through some form of documentation when the advice was provided and the IRS employee involved. Refer to IRM 20.1.1.3.3.4.1, Written Advice from the IRS, and IRM 20.1.1.3.3.4.2, Oral Advice from the IRS. Prior to acceptance of an offer under these provisions, there must be no other method for the taxpayer to have the liability corrected via penalty and/or interest abatement and the taxpayer’s overall compliance history does not weight against compromise.

Note: Because the tax liability in these instances is caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. If there is no other method to adjust the taxpayer’s account so it reflects the amount which would have been owed had the Service not made an error, accepting a compromise under ETA provisions is appropriate.

(3) If actions or inaction of the Service unreasonably delayed resolution of the taxpayer’s case and interest or penalty abatement is not available, compromise may still be warranted if the circumstances are sufficiently compelling. An OIC should not be accepted under ETA provisions, in lieu of abatement under IRC 6404 (e), when appropriate.

(4) Compromise may promote ETA and allow for relief if the taxpayer demonstrates that the criminal or fraudulent act of a third party is directly responsible for the tax liability.

  1. In any case involving a fraudulent act of a third party, the taxpayer should be able to provide supporting documentation that the act occurred and was the direct cause of the delinquency. The taxpayer should also be able to show that the nature of the crime was such that despite prudent and responsible business actions the taxpayer was misled to believe the tax obligations were properly addressed. There should be evidence that the funds required for the payment of the taxes were segregated or otherwise identified and were available to pay the taxes in a timely manner. Compromise would promote ETA in such situations only where the failure to comply is directly attributable to intervention by a third party and where the taxpayer has made reasonable efforts to comply and taken reasonable precautions to prevent the criminal or fraudulent acts at issue. If appropriate, the taxpayer’s efforts to mitigate the damages by pursuing collection from the third party should also be considered. Compromise for this reason would only promote ETA where there is a very close nexus between the actions at issue and the failure to comply.

  2. In situations where the actions of a payroll service provider (PSP) contributed to the delinquency, once the OS has determined sufficient supporting information or documents are available to verify the PSP was the cause of the delinquency and the taxpayer acted in a reasonable manner, the OS may proceed with minimal additional documentation, refer to IRM 5.8.11.6, Documentation and Verification.

  3. Factors which demonstrate the taxpayer was acting reasonably may include, but are not limited to:
    • the manner and frequency of monitoring federal tax deposits via Electronic Federal Tax Payment System (EFTPS) or other means,
    • verifying references prior to entering into the arrangement with the PSP, determining if the PSP was bonded or licensed as required by state laws and regulations and if any corporate filings and licenses required by the state were up to date;
    • the fact immediate steps to remedy the problem after learning of the PSP’s misconduct were taken and,
    • whether mitigating factors were involved that may have hampered the ability to identify and correct the problem, e.g. serious illness, natural disaster, etc., as well as a determination as to whether consideration of the taxpayer's offer under ETA Hardship is a more appropriate resolution.

    Example: A taxpayer contracted with a PSP to handle all the payroll tax matters of the business. The taxpayer utilized a PSP that had been in business for several years and contacted references of other businesses using the PSP who stated the PSP had acted appropriately. The taxpayer monitored the federal tax deposits via their bank account withdrawals and EFTPS. When it was determined the PSP may have missed deposits, the business immediately started verifying federal tax deposits on their due date. No other factors weigh against acceptance of an offer. Since the taxpayer acted in a reasonable manner, an acceptance of an offer under ETA Public Policy is appropriate

    Example: A taxpayer contracted with a PSP from outside the community and took no action to verify whether the PSP had clients who were satisfied with their manner of business. The taxpayer never monitored their deposits and when they received a notice from the IRS it was provided to the PSP. The PSP stated they would resolve the issue and the taxpayer never took any follow-up actions to determine if the delinquency issues had been resolved. In this situation the taxpayer is not deemed to have acted in a reasonable manner, so an offer should not be accepted.

  4. In addition to agreements with Payroll Service Providers (PSP), taxpayers also have third party payer arrangements with Professional Employer Organizations (PEO) and Reporting Agents (RA). Offers submitted on behalf of clients impacted by the fraudulent acts of these entities may require review of the arrangement, including the terms of the contractual arrangement, when it was entered into, whether the terms of the contractual arrangement were ever implemented, and enforced, and how and when the arrangement was revoked or terminated by the taxpayer.

    Prior to completing the offer investigation, the OS must verify who had the responsibility for filing of information and employment tax returns and making federal employment tax deposits. The OS must also verify the steps taken by the client to act in a prudent and responsible business manner with respect to the employment tax liabilities for which the client has submitted an offer to compromise.

    Additional information relative to these arrangements is provided in IRM 5.1.24-1, Third-Party Arrangement Chart. The OS may also refer to IRM 5.1.24.6.1, Certified Professional Employer Organization and IRM 5.1.24.4.3, Reporting Agent.

    Also, in instances involving a PEO or RA, the OS may proceed in a similar manner as investigations involving a PSP and only require minimal additional documentation as discussed in IRM 5.8.11.6, Documentation and Verification, when appropriate.

    (1) Under the Tax Increase Prevention Act of 2014 (TIPA) signed by the president on December 19, 2014, the IRS established a voluntary certification program for a professional employer organization to become recognized as a Certified Professional Employer Organization (CPEO). Once recognized as a CPEO, the CPEO is generally treated as the employer of any individual performing services for a client of the CPEO.
    Since a PEO is not required to be a CPEO or the liabilities may have been incurred prior to December 19, 2014, there will be instances in which a client of a PEO submits an offer to compromise liabilities which involve the fraudulent acts of a PEO. In addition to requesting relief based on the fraudulent acts of the PEO, the client may also claim that the contract between the parties relieved them of liability for federal employment tax obligations. However, IRC 3401 (d)and IRC 3403 determines which party is liable for employment taxes, and the Service is not bound by any agreement between an employer and a third party. Refer to IRM 5.1.24.6.3, Impact of a PEO Arrangement on Client, which provides information relative to these types of arrangements. The taxpayer cannot contractually assign its tax liability to the PEO in this situation.
    (2) A taxpayer may have entered into an agreement with a RA to perform certain acts which relate to the filing of employment tax returns and/or making federal tax deposits on the employer’s behalf. The RA subsequently committed fraudulent acts involving the depositing of the tax due. Since an employer’s use of a reporting agent does not relieve the employer of its employment tax obligations or liability for employment tax, an offer in compromise may also be submitted from a client of a RA.

    Note: The authority of the RA is granted by the submission of a Form 8655, Reporting Agent Authorization, to the Reporting Agents File unit in Ogden. Refer to IRM 21.3.9, Processing Reporting Agents File Authorizations, for more information on Form 8655 and RFINK. In some instances, it may be necessary to secure information from the RAF unit to determine when/if the authorization was revoked once the taxpayer determined the RA was acting in an improper manner. Failure to revoke the RA agreement after determining the RA had acted in a fraudulent manner does not preclude the acceptance of an offer, yet the taxpayer must have been acting responsibly and taken the appropriate actions to make sure certain taxes were paid appropriately.


Note: The Service will not compromise on public policy or equity grounds solely on the argument that the acts of a third party caused the unpaid tax liability. Third parties include: Representatives, Partners, Agents, or Employees.


The actions of the third party may be part of a fact pattern that, viewed as a whole, present compelling public policy or equity concerns justifying compromise.

Note: This section does not apply to TEFRA liabilities. Refer to Example 2 under paragraph (7) in this subsection for discussion of TEFRA cases.

(5) Compromise under ETA may be appropriate where there is clear and convincing evidence that rejecting the OIC, and pursuing other collection alternatives, would have a significantly negative impact on the community in which the taxpayer lives or does business, i.e. The taxpayer provides essential services to the community that would be lost if the tax liability was collected in full. The taxpayer should be asked to provide documentation that full payment of the tax liabilities would likely result in the inability of the business to provide these essential services. The businesses that would typically qualify under this provision are not for profit, charitable, or exempt organizations.

Example: A non-profit organization provides quality health and human services to indigent, low-income and under-served residents in two counties. Rejecting the offer and pursuing collection action for full payment would result in forcing the center to choose between paying the delinquent taxes or providing competent medical care.

(6) Compromise may promote ETA where the taxpayer was incapacitated and thus unable to comply with the tax laws.

In these situations, the taxpayer should be provided the opportunity to withdraw the offer, so the Service can first work with the taxpayer and attempt to prepare accurate returns for the tax years in question and adjust the taxpayer's account accordingly. The Service should also work with the taxpayer to secure the filing of any missing returns and complete any allowable abatement(s). Following that if the taxpayer is unable to obtain a result which approximates the amount the taxpayer would have been assessed had he been able to comply with his filing and paying requirements, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had he been able to comply in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws

Note: It would not promote ETA to compromise with the taxpayer, if the investigation revealed that the taxpayer was able to attend to financial matters during the time of the illness. For example, assume the taxpayer, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, accepting an offer would not promote ETA, and could serve to undermine compliance by other taxpayers.

(7) Compromise on public policy or equity grounds is not authorized based solely on a taxpayer’s belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.

Example: The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote ETA to compromise on these grounds. See IRC 61(a)(12) .

Example: In 2015, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. Immediately upon investing, the taxpayer claimed investment tax credits that significantly reduced or eliminated the tax liabilities for the years 2012 through 2015. In 2017, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). After issuance of the Final Partnership Administrative Adjustment (FPAA), but prior to any proceedings in Tax Court, the IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS's determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership's activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. Neither the operation of the TEFRA rules nor the TMP's actions on behalf of the taxpayer provide grounds to compromise under the equity provision of 5.8.11.3.2. Compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of TEFRA. Furthermore, reducing the risks of participating in tax shelters would encourage more taxpayers to run those risks, which would undermine compliance. Depending on the taxpayer's particular facts and circumstances, however, compromise may be authorized on the grounds of DATC, or because collection of the full liability would cause an economic hardship within the meaning of IRM 5.8.11.3.1, Economic Hardship.

Note: In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statutes based on a perception of unfairness. Compromise for that reason would not promote ETA. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.

(8) There may be other circumstances involved in a case that would lead a reasonable third party to conclude that acceptance of the OIC would be fair, equitable, and promote effective tax administration. Other factors not discussed above or in the IRM, may be present to support the conclusion that the case presents compelling public policy or equity considerations sufficient to justify compromise. Documentation of the presence of those factors which weigh in favor of compromise to promote effective tax administration must be thoroughly documented in the case file. Because these cases have the potential to establish new policy for the IRS in this area, offers recommended for acceptance under this paragraph should be routed for review through the National OIC Program Manager in order to obtain concurrence of the Director of Collection. The review by the National OIC Program Manager and Director of Collection should be processed in an expedited manner (no longer than 15 days) to ensure timely processing of the acceptance documents. If the offer acceptance is processed by Collection, the concurrence of Director of Collection should be included in the offer file. The acceptance letter should be signed in accordance with Delegation Order No. 5-1 by the Collection official authorized to approve ETA public policy or equity acceptances.

(9) As is the case with all compromise determinations, referrals, and acceptance/rejection decisions, employees need to exercise good judgment. This good judgment needs to be clearly evident and articulated in the case file documentation and should be supported by the known case facts, circumstances, and supporting documents. There is no clearly defined formula to follow in ultimately making these decisions, and each case needs to be evaluated on its own unique set of facts and circumstances. Particularly in regard to acceptance/rejection decisions, the recommendation report must clearly explain the reasoning behind our actions.

(10) Once it has been determined that a case raises compelling public policy or equity considerations, Refer to IRM 5.8.11.5.3, Determining Acceptable Offer Amount.

Compromise Would Not Undermine Compliance With Tax Laws

(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 offer 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.

Initial Processing of Effective Tax Administration Offers

(1) Offers submitted on the grounds of ETA will be worked either by the COIC units or field offer specialists.

(2) Taxpayers seeking a compromise under ETA will submit the Form 656 selecting ETA along with the CIS (Form 433-A (OIC) and/or Form 433-B (OIC)). Taxpayers must complete Section 3 (or attach a separate statement) and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, current contact procedures should be followed to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since ETA criteria cannot be considered until all other bases have been addressed.

(3) Like all other offers, the Service will only consider an ETA offer when taxpayers have met the processability criteria (e.g. paid the application fee or checked the low-income waiver box on the Form 656), submitted the required initial TIPRA payment with the offer or qualified for a waiver, have filed all required tax returns, and are not a debtor in bankruptcy. Refer to IRM 5.8.2, Centralized Offer in Compromise Initial Processing and Processability, for initial processing of offers.

(4) Elements necessary to perfect an OIC also apply to ETA offers. The requirement to submit complete financial statements for ETA offers is the same as for DATC offers, unless the taxpayer meets an exception listed for offers impacted by fraudulent acts of a PSP discussed in IRM 5.8.11.5.2, Financial Statement Analysis. Refer to IRM 5.8.3.6, Perfecting Offers, for procedures on perfecting offers when financial statements are not provided.

(5) ETA offers are initially added to AOIC as DATC offers. Once the offer investigation reveals that the taxpayer's assets and future income exceed the tax liability thereby indicating no basis for a DATC, the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA) and the OE/OS must secure an amended offer or an addendum if the offer is being accepted under a basis other than that/the one listed on the original Form 656. Refer to IRM 5.8.11.7, Final Processing, for a full discussion of requirements to update AOIC prior to final processing of ETA and DATCSC offers.

Evaluation of Offers

(1) ETA offers cannot be considered if the taxpayer qualifies for DATC or DATL. Refer to IRM 5.8.4, Investigation, for DATC issues and determining reasonable collection potential (RCP).

(2) If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayer's offer must be considered under DATCSC. The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for ETA consideration. The offer must be considered under DATCSC.

(3) If the taxpayer submits an offer based on DATC but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of ETA. The employee that investigates the OIC is required to address any potential special circumstances during first contact with the taxpayer or POA. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the OIC case history. This requirement does not apply where the only taxpayer contact is through correspondence.

(4)

Determination

Actions

Comments

Acceptance based on ETA.

  • Form 656 must reflect ETA as basis for offer.

  • AOIC must reflect offer type as “A”, ETA offer.

If original Form 656 was not submitted with ETA as the basis, an amended offer or addendum must be secured to update the basis to ETA.

Acceptance based on Doubt as to Collectibility with Special Circumstances.

  • Form 656 must reflect DATC as basis for offer.

  • AOIC must reflect offer type as “C”, Doubt as to collectibility offer.

If original Form 656 was submitted with ETA as the basis, an amended offer or addendum must be secured to update the basis to Doubt as to Collectibility.

Rejection when offer submitted under ETA.

  • Rejection narrative and rejection letter must describe the consideration of both the ETA issues identified and taxpayer’s ability to pay.

  • AOIC must reflect offer type as “A”, ETA offer.

If Form 656 was submitted with ETA, refer to delegation of authorities for appropriate approving official.

Rejection when ETA/Special Circumstances identified during the offer investigation.

  • Rejection narrative and rejection letter must include consideration of both DATC and the ETA/Special Circumstances identified during the offer investigation.

  • AOIC must reflect offer type as “C”, Doubt as to collectibility offer.

If original Form 656 was submitted with under DATC as the basis, an amended offer or addendum should not be secured to update the basis to ETA.

Public Policy/Equity Processing

(1) OIC's submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances.

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

(3) Only after consideration has been given to all other potential bases for acceptance (e.g. DATL, DATC, DATCSC, and/or ETA based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group, unless the taxpayer meets the exception provided to taxpayers who may have been impacted by the fraudulent acts of a PSP as discussed in IRM 5.8.11.5.2., Financial Statement Analysis.

(4) After all other potential bases have been considered, which include a discussion with the taxpayer relative to their ability to fully pay the liability for ETA offers or the RCP computation if the offer is being considered under DATCSC; complete the "Non-Economic Hardship Effective Tax Administration (NEH-ETA) OIC Check Sheet" which is located on the OIC SharePoint site. The check sheet must be completed and sent to the Austin 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 ETA factors present.

(5) The completed check sheet and a copy of the entire Form 656 should be faxed to the offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayer's offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.

(6) If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered. The rejection recommendation narrative completed in accordance with IRM 5.8.7.7.3, Recommending Rejection of an Offer, must include a statement the taxpayer’s request for consideration under public policy/equity was reviewed by the NEH-ETA group and determined not to meet acceptance criteria.

Note: An offer submitted under the basis of ETA requesting public policy or equity (non-economic hardship) consideration must be approved by the Field Territory Manager or COIC Operations Manager. Refer to IRM 1.2.2.6, Delegations of Authority for the Collecting Process

.

(7) If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to the Austin group. Referrals of cases to the ETA group should include the OE/OS recommendation as to what would constitute an acceptable compromise amount under Doubt as to Collectibility or ETA/DATCSC hardship criteria.

  • The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent. The taxpayer should be advised during this discussion that the transfer is for consideration of the public policy or equity issues, any additional documents or information relative to hardship or collectibility should be provided prior to the transfer so the OE/OS can thoroughly consider the taxpayer's situation.

    Note: Whenever possible, the OE/OS should resolve any outstanding issues involving the calculated reasonable collection potential amount prior to forwarding the offer to the NEH-ETA group. This would include allowing a reasonable timeframe for the taxpayer 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.


  • The file should be sent by overnight mail on a Form 3210 to the Austin group.

  • At the time of mailing, the case should be transferred on AOIC to Area 05 (OIC Territory 2).

  • A history item should be added to AOIC to show the case is being sent to the Austin group, Area 05 (OIC Territory 2).

  • The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.

Note: In situations in which the taxpayer is requesting consideration under public policy/equity, the OE/OS should request the Austin group review the taxpayer's request, if the offer cannot be accepted under DATC or hardship criteria and the offer is not being returned, withdrawn, or terminated. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case.

(8) A taxpayer who has submitted an offer under NEH-ETA or has requested consideration of any public policy or equity issues during the offer investigation must have those issues reviewed by the NEH-ETA group prior to rejection of the taxpayer’s offer 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 offer should not be accepted under NEH-ETA and the offer is under Appeal’s jurisdiction, a recommendation will be provided to Appeals who will make the final decision on the case.

Financial Statement Analysis

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

Exception: Once a determination is made that the fraudulent activity of a PSP was the reason for the delinquency, if the offer amount is equal to the full amount of tax, exclusive of penalty and interest, no financial analysis is required including review of financial statements, Forms 433-A (OIC), Collection Information Statement for Individuals and 433-B (OIC), Collection Information Statement for Business. A statement from the taxpayer that they have the ability to fully pay the liability should be secured.

(2) A determination whether the OIC qualifies for consideration under ETA or DATC will be made after the calculation of RCP.

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

Determining an Acceptable Offer Amount

(1) An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

Example: The taxpayer has a $100,000 liability and a RCP of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000 of the determined RCP to meet their necessary living expenses which include substantial medical expenses over the foreseeable future. The OE/OS should document the AOIC/ICS history with how the determination was made that $75,000 was the appropriate allowable amount. The remaining $50,000 should be considered the acceptable offer amount.

(2) In OIC's based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances. The Service does not anticipate accepting compromises offering only nominal or token funds. Rather, the amount accepted should be determined by reference to the factors giving rise to the decision that compromise is appropriate. For example:

  1. In cases compromised under IRM 5.8.11.3.2.1, Public Policy or Equity Compelling Factors, above, paragraphs 1, 2, and 3, an acceptable offer would be expected to result in the taxpayer being placed in the same position as if the error or delay on the part of the Service had not occurred.

  2. In cases compromised under IRM 5.8.11.3.2.1, Public Policy or Equity Compelling Factors, above, paragraphs 4 and 5, the taxpayer’s financial condition may be a relevant consideration, after considering all other facts and circumstances. The justification for a particular amount to be accepted should be clearly documented.

  3. When compromising based on IRM 5.8.11.3.2.1, Public Policy or Equity Compelling Factors, paragraphs 4, 5, and 8, in business cases in particular, the offer amount should be for an amount deemed reasonable based on the specific facts of the case, generally the Service will insist that a compromise with an operating business provide for payment of the full amount of the remaining tax balance, exclusive of interest and penalties. If the taxpayer is an operating business impacted by the fraudulent act of a PSP, the full amount of the remaining tax balance, exclusive of interest and penalties, may not be required based on the taxpayer’s situation. Refer to IRM 5.8.11.5.3.1, Determining an Acceptable Offer Amount (Fraudulent Acts of a PSP).

(3) Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer 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 offer amount for an ETA offer based on economic hardship.

Determining an Acceptable Offer Amount (Fraudulent Acts of a PSP)

(1) In offers involving the fraudulent acts of a PSP, it is in the best interests of the taxpayer and the United States to determine an acceptable offer amount that will not jeopardize the financial viability of an otherwise compliant taxpayer business. Facts to consider in making this determination include, but are not limited to:

Will payment of the calculated RCP or the remaining tax balance, exclusive of penalty and interest:
  • Negatively impact the ability of the taxpayer to pay current and future expenses in a timely manner?

  • Negatively impact the ability of the taxpayer to meet other tax obligations?

  • Potentially result in the need for the taxpayer to lay-off employees?

  • Result in the reduction of goods and/or services provided to the community?

  • Impair the ability of the taxpayer business to remain operational?

  • Negatively impact the local economy if the taxpayer business fails?

(2) If the taxpayer has been reimbursed or if it is certain they will be reimbursed through a civil action, bonding company, insurance, or restitution payment from the court, then the taxpayer’s liability up to the amount reimbursed or the amount they will be reimbursed should be taken into consideration.

IF

THEN

Taxpayer has received reimbursement from a third party and the amount received has not been paid toward the liability.

The amount received must be included in the acceptable offer amount.

Taxpayer is expected to receive reimbursement from a third party, i.e. bonding company, within 30 days of acceptance of the offer.

The amount the taxpayer is certain to receive should be included in the acceptable offer amount.

Taxpayer may receive reimbursement from a third party, i.e. civil suit, in the future.

A collateral agreement should be secured for payment from any future recovery. The OE/OS will coordinate with Area Counsel to use an existing collateral agreement form or draft language to be included as an attachment which addresses the reimbursement issue. Refer to IRM 5.8.5, Collateral Agreements.

Documentation and Verification

(1) To verify the taxpayer's special circumstances and support a basis of ETA, the OE/OS should exercise sound judgment in determining the degree of verification which is necessary and should only request supporting documentation based on the taxpayer's situation.

Note: Verification of a health problem or hardship issue could be a doctor’s letter, copies of medical expenses, or proof the taxpayer has qualified for disability and/or supplemental security income (SSI).

(2) An offer requesting consideration under ETA must include: Form 656, a statement discussing the specific issue(s) which would allow for acceptance of the offer, and financial statements, Forms 433-A (OIC), Collection Information Statement for Individuals and 433-B (OIC), Collection Information Statement for Business, along with appropriate documentation and verification. Refer to (3) of this section relative to documentation required when the taxpayer was impacted by the fraudulent actions of a PSP.

(3) The documentation required with the submission of the Form 656, when fraudulent activity of a PSP is involved, should include:

  • Form 656, along with a statement which discusses the specific fraudulent activity of the PSP and the cause(s) of the delinquency.

  • If the offer amount is equal to the full amount of the remaining tax, exclusive of penalty and interest, financial statements, Forms 433-A (OIC), Collection Information Statement for Individuals and 433-B (OIC), Collection Information Statement for Business are not required. Yet, additional information may be requested by the investigating employee, if deemed necessary. If no financial statements are submitted, the taxpayer should provide a statement that they have the ability to fully pay the outstanding tax liability and the source of the funds.

  • If the offer amount is for less than the full amount of remaining tax, exclusive of penalty and interest, the taxpayer must include complete financial statements, including Forms 433-A (OIC), Collection Information Statement for Individuals and 433-B (OIC), Collection Information Statement for Business with the appropriate documentation.

Note: The TFRP investigation and recommendation against the PSP or individuals within the PSP must be considered during the OIC investigation. While an Other Investigation (OI) should be issued to Field Collection for a TFRP investigation for the PSP or individuals within the PSP, the issuance of the OI will not delay investigation of the offer or acceptance processing. If the TFRP investigation is not completed prior to the acceptance of the offer, AOIC remarks should be noted with the name and phone number of the RO conducting the investigation, so MOIC may contact the RO prior to input of the TC 788 and TC 604 to discuss the impact completing the adjustment will have on any ATFR calculation.

Example: A taxpayer, who is the victim of a PSP that embezzled the tax deposits of the business, submits a Form 656 requesting consideration of an OIC in the amount of the remaining tax, exclusive of penalty and interest. In addition to the Form 656, a statement providing details on the embezzlement demonstrating the taxpayer acted in a responsible manner and a statement the taxpayer has the ability to fully pay the outstanding liability, from available equity in the assets and/or income of the business, are included with the offer submission. If it is determined the taxpayer meets the criteria for an offer acceptance under public policy, the offer may be accepted without any additional documentation.

Example: A taxpayer, who is the victim of a PSP that embezzled the tax deposits of the business, submits a Form 656 requesting consideration of an OIC in the amount of the remaining tax, exclusive of penalty and interest. In addition to the Form 656, a statement providing details on the embezzlement demonstrating the taxpayer acted in a responsible manner and a statement the taxpayer has the ability to fully pay the outstanding liability, from available equity in the assets and/or income of the business, are included with the offer submission. It appears from IDRS research the amount reported on the Forms 941 are not in agreement with the wages and withholding reported on the Forms W-2 submitted by the taxpayer. The OS may need to request additional documents or information from the taxpayer to resolve the discrepancy prior to offer acceptance. If any adjustments or abatements are required, federal tax deposits should be moved to the correct tax periods prior to the adjustments or abatements being processed to allow for the appropriate determination on which tax periods should be included in the offer.

Example: A taxpayer, who is the victim of a PSP that embezzled the tax deposits of the business, submits a Form 656 for an amount that is less than the remaining tax, exclusive of penalty and interest. The offer is first evaluated to determine if acceptance of the taxpayer's offer under Doubt as Collectibility (DATC) is appropriate. If the offer cannot be accepted under DATC, the facts and circumstances should be analyzed to determine if acceptance of an offer for less than the remaining tax balance is appropriate under hardship or public policy criteria.

(4) When special circumstances are found to exist, the amount offered will be less than RCP. For an ETA offer, the RCP is always greater than the full liability. In the report narrative, clearly explain the special circumstances and the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being included in the offer amount, how the offer amount is being funded, and any other pertinent information that describes how the amount offered was determined to be acceptable

Exception: When third party PSP involvement is the basis for the offer, documentation relative to equity in assets and how the offer is being funded may not be required, if the taxpayer’s offer is equal to the remaining tax balance, exclusive of penalty and interest. The following statement may be used in lieu of the recommendation report discussed in IRM 5.8.8.7 (10), Required Actions Prior to Closing Offer as an Acceptance, when unique issues are not involved, "This offer is being recommended for acceptance under Effective Tax Administration (ETA). The taxpayer meets 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 offer amount is equal to the full amount of remaining tax, exclusive of penalty and interest, for each of the tax periods listed on the offer."

(5) When equity in real property is not being included in the acceptable offer amount, the asset/equity table must still reflect the asset value and remaining equity after valid prior encumbrances. The acceptance recommendation must then provide information as to the reason for not including some or all of the equity in the offer amount. While the taxpayer’s ability to borrow against their residence may be a factor to consider in determining whether to include the equity in the offer amount, it should not be the sole reason to remove the equity. Other factors should be documented as to whether the equity is necessary to meet living expenses and/or medical bills. Consideration should also be given to pursuing other options including reporting the account currently not collectible, so the notice of federal tax lien remains on the property.

(6) In addition to the verification of the actions of the third party and the receipt of appropriate verification, the offer specialist should make a determination that the tax assessments are correct prior to acceptance of the offer. This would include verifying the correct wages were reported by matching the W-2s and 941 tax returns for the tax periods included on the offer. If there are discrepancies, the OS should advise the taxpayer they must submit amended 941 returns and/or corrected W-2s. Any amended returns must be processed and the account adjusted prior to offer acceptance. This verification may be accomplished by utilizing IDRS information.

Note: A determination needs to be made by the OS whether the adjustment will take place in a timely manner or whether the taxpayer should withdraw the offer or the offer must be returned until all adjustments post.

Prior to acceptance, the OS should also determine if any future abatement of penalties for tax periods not on the offer 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 offer, if it appears a future abatement may cause a refund to be issued after the offer acceptance.

Example: A FTD penalty in the amount of $ 2,000 was assessed on the 941 tax period ended March 31, 2017. The PSP clearly used funds designated by the same taxpayer for taxpayer’s liability for the quarter ended June 30, 2017 to pay the penalty. The June 30, 2017 tax period is included on the OIC. If the abatement of the penalty is appropriate, the abatement should take place and the payment applied to the appropriate quarter prior to the offer acceptance.

Final Processing

(1) Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.

(2) The following is a guide to these determinations:

If…

And…

Then…

The offer was submitted under ETA

An economic hardship has been determined to exist, but the RCP is less than the liability balance due

  1. Update the AOIC offer screen to indicate a "C" under the offer type.

  2. Generate all closing reports with the proper approving official for DATCSC.

Note: If basis on Form 656 is ETA, an amended offer or addendum to update basis to DATC is required.

The offer was submitted under DATCSC

An economic hardship has been determined to exist, and the RCP is greater than the liability balance due

  1. Update AOIC offer screen to indicate "A" under offer type.

  2. Generate closing reports with the proper approving official for ETA offers.

Note: If basis on Form 656 is DATC, an amended offer or addendum to update basis to ETA is required.

The offer was submitted under ETA

The offer is being recommended for acceptance under DATC with the offer exceeding the RCP

  1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for DATC.

  2. Generate closing reports with the proper approving official for DATC without special circumstances.

Note: If basis on Form 656 is ETA, an amended offer or addendum to update basis to DATC is required.

The offer was submitted under Doubt as to Collectibility with item 3 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria

The offer cannot be recommended for acceptance under DATC.

  1. Generate closing reports with the proper approving official for DATC without special circumstances.

  2. Address in the history, why the circumstances described in item 3 do not meet defined economic hardship, or Public Policy/Equity criteria.

The offer was submitted under ETA with item 3 of Form 656 completed with circumstances that do not meet ETA criteria

The taxpayer does not qualify for ETA because the RCP is less than the liability and the offer cannot be recommended for acceptance under DATCSC.

  1. Update AOIC offer screen to indicate a "C" under special circumstances.

  2. Generate closing reports with the proper approving official for DATCSC.

The offer was submitted under ETA with item 3 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria

The offer cannot be recommended for acceptance and the RCP exceeds the liability

  1. Update AOIC offer screen to indicate "A" under offer type.

  2. Generate closing reports with the proper approving official for ETA offers.

The offer was submitted under ETA

The special circumstances meet economic hardship, or Public Policy/Equity criteria and the RCP exceeds the tax liability. However, the offer cannot be recommended for acceptance, since the amount offered is less than the determined acceptable offer amount.

  1. Update AOIC offer screen to indicate "A" under offer type.

  2. Generate closing reports with the proper approving official for ETA offers.

The offer was submitted under DATCSC

The special circumstances meet economic hardship, or Public Policy/Equity criteria and the RCP is less than the tax liability, however, the offer cannot be recommended for acceptance, since the amount offered is less than the determined acceptable offer amount.

Generate closing reports with the proper approving official for DATCSC.

Rejection/Return/Withdrawal Processing

(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, Investigation, 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, Delegations of Authority for the Collecting Process – Delegation Order No. 5-1 for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 1271 and the closing letter

Acceptance Processing

(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, Delegations of Authority for the Collecting Process, – Delegation Order No. 5-1 for the official with delegated authority based on ETA. The delegated official’s signature is required on the Form 7249 and the closing letter

This data was captured by Tax Analysts from the IRS website on December 03, 2023.
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