The tax policy for Offers in Compromise is stated in 57(10)1 of the IRS
Manual. It states that the compromise process is available "to provide delinquent
taxpayers with a fresh start toward future compliance with the tax laws."
Section 57(10)1 IRS Manual states:
Policy Statement P-5-100 sets forth the Service’s position on using compromises.
The Service will accept an Offer in Compromise when it is unlikely that
the tax liability can be collected in full and the amount offered reasonably
reflects collection potential. An offer in compromise is a legitimate alternative
to declaring a case as currently not collectible or to a protracted installment
agreement. The goal is to achieve collection of what is potentially collectible
at the earliest possible time and at the least cost to the government.
The success of the compromise program will be assured only if taxpayers make
adequate compromise proposals consistent with their ability to pay and the
Service makes prompt and reasonable decisions. Taxpayers are expected to provide
reasonable documentation to verify their ability to pay. The ultimate goal is a
compromise which is in the best interest of both the taxpayer and the Service.
Acceptance of an adequate offer will also result in creating, for the taxpayer,
an expectation of and a fresh start toward compliance with all future filing and
payment requirements.
Section 57(1)1.2 of the IRS Manual deals with the IRS Compromise Objectives:
To resolve accounts receivable which cannot be collected in full or on
which there is a legitimate dispute as to what is owed.
To effect collection of what could reasonably be collected at the earliest
time possible at the least cost to the government.
To give taxpayers a fresh start to enable them to voluntarily comply with
the tax law.
To collect funds which may not be collectible through any other means.
Section 7122(a) of the Internal Revenue Code of 1986 authorizes the
Secretary of the Treasury to "compromise any civil or criminal case arising under
the internal revenue laws."
Section 301.7122-1(a) of the regulations states that the IRS may compromise
a civil case only upon one or both of the following two grounds:
Doubt as to liability; or
Doubt as to collectibility.
The regulations authorize a compromise to the extent the Government cannot collect
the amounts owed.
An offer in compromise relates to the entire tax liability of the taxpayer
and all question of that liability will be conclusively settled in that agreement.
H.R. 2676, The Internal Revenue Service Restructuring and Reform Act of 1998,
signed by the President on July 22, 1998, Adds subsection © to section 7122,
as follows:
© STANDARD for EVALUATION of OFFERS
- In General
— The Secretary shall prescribe guidelines for officers and
employees of the Internal Revenue Service to determine whether an offer-in-compromise
is adequate and should be accepted to resolve a dispute.
- Allowances for Basic Living Expenses
- In General
— In prescribing guidelines under paragraph (1), the
Secretary develop and publish schedules of national and local allowances
designed to provide that taxpayers entering into a compromise have an
adequate means to provide for basic living expenses.
- Use of Schedules
— The guidelines shall provide that officers
and employees of the Internal Revenue Service shall determine, on the basis
of the facts and circumstances of each taxpayer, whether the use of the
schedules published under subparagraph (A) is appropriate and shall not use
the schedules to the extent such use would result in the taxpayer not having
adequate means to provide for basic living expenses.
- Special Rules Relating to Treatment of Offers
An officer or employee of the Internal Revenue Service shall not
reject an offer-in-compromise from a low-income taxpayer solely on the basis
of the amount of the offer, and
In the case of an offer-in-compromise which relates only to issues
of liability of the taxpayer—
Such offer shall not be rejected solely because the Secretary
is unable to locate the taxpayer’s return or return information for
verification of such liability and
The taxpayer shall not be required to provide a financial statement."
The Conference Report to H.R. 2676 states:
The Code permits the IRS to compromise a taxpayer’s tax liability. An offer-in-compromise
is an offer by the taxpayer to settle unpaid tax accounts for less than the full amount of
the assessed balance due. An offer-in-compromise may be submitted for all types of taxes,
as well as interest and penalties, arising under the Internal Revenue Code.
There are two bases on which an offer can be made: doubt as to liability for the amount owed
and doubts as to the ability to pay the amount owed.
A compromise agreement based on doubt as to ability to pay requires the taxpayer to file
returns and pay taxes for five years from the date the IRS accepts the offer. Failure to do
so permits the IRS to begin immediate collection actions for the original amount of the liability.
The Internal Revenue Manual provides guidelines for revenue officers to determine whether an
offer-in-compromise is adequate. An offer is adequate if it reasonably reflects collection
potential. Although the revenue office is instructed to consider the taxpayer'’ assets and
future and present income, the IRS advises that rejection of an offer solely based on narrow
assets and income evaluations should be avoided.
Pursuant to the IRS, Collection normally is withheld during the period an offer-in-compromise
is pending, unless it is determined that the offer is a delaying tactic and collection is in
jeopardy.
The Conference Report explanation notes (page 288) that under the Senate amendment
to H.R. 2676 the IRS is:
"required to consider the facts and circumstances of a particular taxpayer’s case in determining
whether the national and local schedules are inadequate for that particular taxpayer. If the facts
indicate that the use of scheduled allowances would be inadequate under the circumstances, the
taxpayer is not limited by the national or local allowances."
The Conference Report also notes (page 288) the following:
Liberal acceptance policy — The Senate amendment provides that the IRS will adopt a liberal
acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to
file tax returns and continue to pay their taxes.
The Conference Agreement also states (page 289) that the Secretary is authorized to prescribe
guidelines for the IRS to determine whether an offer-in-compromise is adequate and "should be
accepted to resolve a dispute." The Conferees expect that the present regulations will be
expanded so as to permit the IRS, in certain circumstances, to consider:
Additional factors (i.e., factors other than doubt as to liability or collectibility) in determining
whether to compromise the income tax liabilities of individual taxpayers. For example, the conferees
anticipate that the IRS will take into account factors such as equity, hardship, and public policy
where a compromise of an individual taxpayer’s income tax liability would promote effective tax
administration. The conferees anticipate that, among other situations, the IRS may utilize this new
authority to resolve long-standing cases by foregoing penalties and interest which have accumulated
as a result of delay in determining the taxpayer’s liability. The conferees believe that the ability
to compromise tax liability and to make payments of tax liability by installment enhances taxpayer
compliance. In addition, the conferees believe that the IRS should be flexible in finding ways to
work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system.
Accordingly, the conferees believe that the IRS should make it easier for taxpayers to enter into
offer-in-compromise agreements, and should do more to educate the taxpaying public about the availability
of such agreements.
The report states that its provisions are generally effective for offers-in-compromise submitted after
the date of enactment. The date of enactment is June 22, 1998.
IRS Restructuring and Reform Act of 1998, the IRS has published its comments on section 3462
as follows:
Section 3462
A. Provision covered: R.R.A. § 3462. Offers-In-Compromise. I.R.C. §§ 6159, 6331, and 7122
B. Background: Section 7122 of the Internal Revenue Code generally provides that the Service
may compromise any case arising under the internal revenue laws, prior to referring that case to the
Department of Justice for defense or prosecution. Current regulations provide two bases for compromise:
doubt as to collectibility and doubt as to liability. The internal revenue manual provides guidance
for determining an adequate doubt as to collectibility offer. Congress believes that the Service should
be more flexible in working with taxpayers who are sincerely trying to satisfy their tax obligations
and, thus, the Service should make it easier for taxpayers to enter into offers-in-compromise. The tax
writing committees have indicated that taxpayer compliance is enhanced by the ability to compromise and
to make payments via an installment agreement.
C. Change(s): The following changes have been made with regard to the offer in compromise procedures:
The applicability of the allowable expense procedures will be determined on the facts and
circumstances of each taxpayer's case.
Offers from low income taxpayers cannot be rejected solely on the basis of the amount of the offer.
Taxpayers will no longer be required to waive the statute of limitations on collection.
Regulations will be expanded to provide additional bases for compromise, other than doubt as to
liability and doubt as to collectibility.
Compromise of a joint liability that is defaulted because of the actions of one spouse, can be
reinstated as to the nondefaulting spouse, upon application.
D. Impact: This provision expands the authority for the Service to accept offers in compromise.
The current offer in compromise program will, thus, be substantially revised with the drafting of the
new regulations. In the interim, however, most of the changes are directed at providing greater
consideration to the taxpayer in resolving collection issues through compromise. For example, all the
facts and circumstances of the taxpayer’s condition must be considered in determining the applicability
of the allowable expense procedures. Because the offer in compromise program will be administered with
more flexibility, offer receipts will likely increase.
E. Necessary Actions:
- Actions/Procedures
Notice/instructions to the field regarding deviations from allowable expense standards.
Determinations of when to deviate will be in the discretion of the offer examiner/RO/group
manager. Procedures will be forthcoming.
Determination of what is a "low income" taxpayer and creation of supplemental procedures
based on that designation.
Define what is a "pending" installment agreement and create procedures/transaction codes
to ensure that levies are not issued while such agreements are pending.
Modify Form 656 to eliminate statutory waiver provisions; to provide for severability
in the event of default by jointly liable taxpayers with joint offers.
Preparation of statement regarding the rights of taxpayers and the obligations of the Service
in the offer in compromise process; and an instruction to taxpayers with offers of the advantage
of notifying the Service of any change in address or marital status.
Define/clarify "independent administrative review" for purposes of proposed offer in compromise
and installment agreement rejections.
Draft regulations providing additional bases for the compromise of individual income tax
liabilities, which include considerations such as equity, hardship, and public policy.
- Things we can do:
The Service can continue to use current Form 656 for offers in compromise until the form can be modified.
However, the waiver provided in the current form will expire as of December 31, 2002. If the ten year
collection statute is still open on that date for the liabilities contained in the offer agreement, the
offer agreement may remain viable. For offers entered into after December 31, 1999, or pending on that
date, the statute will be suspended because of the Service’s inability to collect by levy. [For taxpayers
who submit offers between the date of enactment and December 31, 2002, where the CSED for the periods
contained in the offer expire on or before December 31, 2002, collection action must stop as of that date.]
An addendum to Form 656 should be created that provides for severability of a joint offer after the payments
required under the offer are satisfied, so that in the event of a default relating to the compliance
provisions, the compromise will only default as to the noncompliant party. The addendum will be in use until
Form 656 can be modified. Because the Service can no longer condition the acceptance of an installment
agreement on the taxpayer’s waiver of the right to receive a state income tax refund, any language on an
installment agreement form authorizing the Service to levy on state income tax refunds as a condition of the
agreement should be eliminated.
