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Part 8. Appeals

Chapter 23. Offers in Compromise

Section 3. Evaluation of Offers in Compromise

8.23.3  Evaluation of Offers in Compromise

8.23.3.1  (10-16-2007)
Consideration of Doubt as to Collectibility Offers

  1. The purpose of this section is to provide Appeals personnel with the procedures necessary to properly evaluate a taxpayer's appeal of a rejected offer in compromise (OIC). Appeals does not have its own set of rules or procedures for determining reasonable collection potential (RCP) in an OIC case. For this reason, this section does not reiterate what's already in IRM 5.8, Offers in Compromise. Rather, it discusses some of the more basic elements of the OIC evaluation process and provides guidance unique to Appeals' role in the OIC process.

  2. Collection, under the Commissioner, Small Business/Self Employed, is responsible for processing and analyzing a taxpayer's offer, negotiating with the taxpayer, making an RCP determination and communicating the final determination to the taxpayer. Collection's IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, and Collection's July 26, 2007 Replacement TIPRA Interim Guidance contain OIC guidance concerning:

    • Components of collectibility

    • Procedures for evaluating specific types of taxpayers and tax debts, including trust fund, excise, partnership, and child support liabilities

    • Financial analysis, including determining equity in assets and a taxpayer's future ability to make payments

    • Issues involving the dissipation of assets

    • Financial information documentation and verification requirements

    • Payment terms

  3. If it's determined that the taxpayer cannot pay in full, there is a legal basis for compromise under IRC 7122based on doubt as to collectibility. If the taxpayer has the ability to pay in full, there may still be a legal basis for compromise if it's further determined that such compromise would promote effective tax administration. See IRM 8.23.3.8 for guidance on Effective Tax Administration (ETA) offers.

    Note:

    An offer based upon doubt as to collectibility with "special circumstances" will be evaluated using the same criteria as an ETA offer.

  4. Policy Statement P-5-100 ( IRM 1.2.14.1.17) states, in part:

    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 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.

  5. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.

  6. IRC 7122(d)(2)requires IRS to publish schedules of national and local allowances designed to ensure that taxpayers seeking to compromise their tax debts have an adequate means to provide for basic living expenses. This code section further requires that IRS (including Appeals) "shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph A [of that IRC section] 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."

    1. A taxpayer must be able to substantiate that limiting him/her to the national or local standard allowance(s) would not provide for his or her basic living expenses.

    2. Allowances in excess of national or local standards must be documented in the Appeals Case Memorandum.

  7. If the taxpayer disagrees with the rejection of an offer by Collection, they can request Appeals consideration and review of Collection's determination. The appeal must be in writing. A Form 13711, Request for Appeal of Offer in Compromise, will generally be used but is not required.

  8. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.

8.23.3.1.1  (10-16-2007)
The Tax Increase Prevention and Reconciliation Act of 2005

  1. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was enacted May 17, 2006 and became effective July 16, 2006. TIPRA brought about major changes to the OIC program, most of which do not affect non-CDP offers in Appeals. Notice 2006-68, Downpayments for Offers in Compromise, provides guidance on TIPRA issues until the regulations are updated.

  2. Offers mailed prior to July 16, 2006 are not affected by TIPRA. Amended offers for these cases may be secured using the July 2004 revision of Form 656 and taxpayers are not required to remit TIPRA payments with any subsequent amended offer.

  3. IRS began using a Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The new Form 656 (Rev. 02-2007) does not include doubt as to liability as an option because Notice 2006-68 provides that taxpayers submitting offers based only on doubt as to liability are not required to make TIPRA payments with the offers.

  4. IRM 8.23.1.4.1contains TIPRA information concerning:

    • Changes in OIC payment terms

    • Installment agreement in effect prior to receipt of the OIC

    • Taxpayer's right to designate offer payments

    • Appeals procedures for processing TIPRA payments

8.23.3.1.1.1  (10-16-2007)
General Changes Resulting from TIPRA

  1. As a result of TIPRA, IRS changed the rules for determining the processability of post-TIPRA offers. Now, an offer will be deemed non-processable only if one or more of the following criteria are present:

    1. Taxpayer in Bankruptcy: An offer will not be considered during an open bankruptcy proceeding.

    2. Taxpayer did not submit the application fee with the offer: An application fee of $150 or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee (For Individual Taxpayer Only), must accompany the Form 656. The Form 656-A applies to individual taxpayers only. No application fee or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.

    3. Taxpayer did not submit the required initial payment with the offer: See IRM 8.23.1.4.1 for initial payment requirements. No initial payment or Form 656-A is required if the sole basis of the offer is Doubt as to Liability.

    Note:

    Collection has procedures for handling cases where the determination that a taxpayer qualified for the Form 656-A waiver was later found to be erroneous. Appeals will not get involved in addressing erroneous Form 656-A qualification issues on a non-CDP offer. The issue before Appeals on a non-CDP offer is the overall acceptability of the offer itself ( See IRM 8.23.3.3.). Collection had ample opportunity to make the proper Form 656-A qualification determination before the case was referred to Appeals and such a matter would be considered a "new issue" in that it doesn't pertain to the overall acceptability of the offer.

  2. The IRS will no longer automatically return an offer as not processable if IMF and BMF taxpayers are not in filing compliance or if BMF taxpayers seeking to compromise employment tax debts are not compliant with FTDs prior to submitting the offer. An offer will be returned without appeal rights if the taxpayer does not come into filing compliance within the time the IRS provides after the offer is processed. See section 5.8.3.13 of the Collection's July 26, 2007 Replacement TIPRA Interim Guidance. The new criteria are reflected on the revised processability Letters 3820 and 3821 that are available on APGolf.

  3. Taxpayers are encouraged (but not required) to send separate checks for the application fee and 20% initial payment or initial periodic installment payment. The reason for this is the 20% initial payment and initial periodic installment payment are not refunded if IRS determines that the offer is not processable, but the application fee may be refunded. Page 12 of the February 2007 Form 656 instruction booklet set out the various OIC application fee and initial TIPRA payment scenarios.

  4. The TIPRA requirement for a taxpayer to make periodic installment payments while a Periodic Payment offer is being considered ends when Collection rejects the offer. Taxpayers are not required to continue making periodic installment payments while a rejected offer is being considered by Appeals unless Appeals secures an amended offer. See IRM 8.23.3.1.1.2. for additional TIPRA guidance on amended offers secured by Appeals.

  5. During the course of an offer investigation, if a tax period is fully satisfied by a TIPRA payment(s) that includes the initial payment submitted with the offer and subsequent periodic installment payments, the period must remain part of the offer and must be listed on any subsequent amended Form 656. Even though the tax debt is fully paid, the payment or payments used to satisfy the tax debt are still part of the overall offer amount, so all satisfied periods must remain part of the offer.

  6. Similarly, if a taxpayer’s total liability exceeded $50,000 and TIPRA payments made during the course of an OIC investigation cause the total to fall below $50,000 at the time the case is submitted for approval, the offer still requires an opinion from Counsel. If a non-TIPRA payment such as a refund offset is applied to the taxpayer’s account, you need to see if the non-TIPRA payment or payments alone was sufficient to cause the total liability to fall below $50,000. If so, then no Counsel opinion is needed.

  7. The 24-month mandatory acceptance period provided for in IRC 7122(f) ends when Collection rejects or returns the offer, or the offer is withdrawn. The non-CDP offer will not be deemed accepted if Appeals doesn't render a decision on the appealed offer within 24 months after the date the offer was submitted. Appeals' responsibilities are considerably different with a CDP offer. See IRM 8.23.5, Collection Due Process OIC Procedures.

8.23.3.1.1.2  (10-16-2007)
OIC Payments and Amended TIPRA Offers

  1. IRC 7122(c)(2)allows a taxpayer to designate all payments required under TIPRA while the offer is under consideration. The designation must be made in writing at the time the payment is made. Absent an express designation the payments will be applied in the best interest of the government. The taxpayer loses the right to designate offer payments after the offer is accepted.

  2. If an amended offer is secured by Appeals, the taxpayer is given credit toward the amount of the amended offer for all OIC payments made prior to receipt of such amended offer. The taxpayer may be required to remit an additional offer payment(s) with the amended offer depending on the amount and payment terms of such amended offer relative to the amount and payment terms of the original offer. The following table reflects various amended offer scenarios and the associated TIPRA payment requirements:

    If ... And ... Then ...
    Original was a Lump Sum Cash offer Amended offer is Lump Sum Cash with greater proposed offer amount Taxpayer must pay with the amended offer 20% of the revised amount minus the partial payment made with the original offer
    Original was a Periodic Payment offer Amended offer is Lump Sum Taxpayer must pay with the amended offer 20% of the revised amount minus the total amount of the periodic installment payments already paid toward the original Periodic Payment offer
    Original was a Periodic Payment offer Amended offer is Periodic Payment with a greater proposed offer amount and/or different proposed installment amounts or schedule Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installment payments that come due during the evaluation of the amended offer
    Original was a Lump Sum Cash offer Revised offer is Periodic Payment with greater proposed offer amount Taxpayer must make the initial proposed installment in accordance with the terms of the amended offer and make additional proposed periodic installments payments that come due during the evaluation of the amended offer

  3. IRM 8.23.1.4.1.1 provides guidance for Appeals in how to process OIC payments.

  4. Amended offers secured by Appeals must be signed and dated by the Appeals Officer or Settlement Officer as of the date of receipt. Retain the original (initial) Form 656 and include it as part of the offer file along with the original copy of the amended Form 656.

  5. Taxpayers who do not meet the exemption requirement must include a partial payment with the amended offer. If an amended offer is received without the required partial payment, contact the taxpayer and explain the TIPRA requirement. Collection treats cases where a taxpayer fails to make partial payments on an amended offer as a "processable return," so follow the procedures in IRM 8.23.2.4 concerning other similar processable return-type issues that surface while the offer is pending in Appeals.

8.23.3.2  (10-16-2007)
Rejected Offers

  1. When evaluating offers (other than "Obvious Full Pay" offers - See IRM 8.23.3.9), Collection generally sends a pre-decision letter to the taxpayer telling them why they are proposing to reject the offer. This letter provides the taxpayer with the rationale and financial analysis for Collection’s preliminary conclusion and an opportunity to supply additional information or, if applicable, to amend the offer to reflect the RCP determined by Collection.

    1. Collection is responsible for reviewing any information provided by the taxpayer before the offer is rejected and any new information provided by the taxpayer as part of the appeal of the rejection. Collection should address each disputed item in their narrative or case history.

  2. If the offer must be rejected, copies of Collection's Income/Expense (IET) and Asset/Equity (AET) Tables will be attached to the rejection letter.

  3. As a result of the pre-decision letter and IET and AET information provided with the rejection letter, a taxpayer should be fully aware of why the offer was rejected. The Form 13711, Request for Appeal of Offer in Compromise, though not mandatory, directs the taxpayer to provide in the appeal:

    • the disagreed item,

    • reason(s) for the disagreement, and

    • supporting documentation, as appropriate

    Appeals can then try to narrow the focus of consideration to the specific issues for which the offer was rejected.

8.23.3.3  (10-16-2007)
Appeals OIC Evaluation Procedures

  1. Appeals must exercise independent judgment concerning the RCP determination made by Collection and the issues disputed by the taxpayer on appeal. IRM 5.8 is the primary authority for evaluating offers and should be followed when evaluating an appealed rejection. Appeals does not have the authority to disregard established guidance. However, the Appeals process in an OIC case is not merely an extension of the SBSE Collection process. The role and mission of Appeals is different than that of SBSE Collection and AO/SOs must employ general Appeals settlement and conference practices to appealed offers.

    Note:

    Having found a basis to reject the offer, Collection may cease its evaluation and simply reject the offer. As such, they may not have addressed all the issues necessary for acceptance of a doubt as to collectibility or Effective Tax Administration (ETA) offer. If Appeals agrees with arguments made by the taxpayer, Appeals may need to address the issues not addressed by Collection before accepting the offer.

  2. Appeals and Settlement Officers evaluating appealed OICs must be knowledgeable in the procedures detailed in IRM 5.8 as well as other parts of the IRM such as IRM 8.6.1, Conferencing and Issue Resolution, IRM 8.6.4, Conference and Settlement Practices, IRM 5.15, Financial Analysis, IRM 5.1, General Collecting Procedures, IRM 5.12, Federal Tax Liens, IRM 5.14, Installment Agreements, IRM 5.16, Currently Not Collectible, IRM 5.7, Trust Fund Compliance, IRM 5.17, Legal Reference Guide for Revenue Officers, Collection's July 26, 2007 Replacement TIPRA Interim Guidance, and other legal and administrative guidance.

  3. RCP issues that were previously addressed during the investigation by Collection should not generally be re-examined unless there is convincing evidence that such reinvestigation is necessary. Appeals will generally consider only the items disputed in the taxpayer's appeal, provided the case referred from Collection is fully and adequately developed. However, the overall acceptability of the taxpayer's offer remains the primary issue before Appeals, so if Collection has overlooked or underdeveloped an important issue that will affect whether the offer is accepted or rejected, then the issue must be properly developed and/or addressed. Counsel's opinion is statutorily required for acceptance of a significant number of appealed offers (See IRM 8.23.4.2.2) and Appeals must present an acceptance recommendation that adequately addresses all aspects of the taxpayer's RCP.

  4. If Collection neglected to address or did not fully develop an issue that significantly affects the taxpayer's overall RCP determination and the Appeals employee cannot quickly resolve the issue, the offer should be returned to Collection so that the information can be considered and the issue fully developed and addressed. If Collection continues to believe that the offer should be rejected after considering and addressing the issue, the offer will be returned to Appeals with Collection's views and Appeals will continue to process the appeal.

  5. The financial information in the case file should generally be less than 12 months old. If the financial information becomes older than 12 months, contact the taxpayer to update the necessary information. Updated financial information and/or a new Form 433-A and/or Form 433-B is not necessary unless the taxpayer's financial situation has significantly changed. Appeals also needs to be aware of situations where the financial information became outdated because of delays by Collection (or Appeals) and through no fault of the taxpayer. Pen and ink changes to the existing Form 433-A/B are sufficient for cases where the taxpayer's financial situation has not changed significantly. IRM 5.8.5.2.2 contains additional guidance for cases with old or outdated information.

  6. A taxpayer who had a Periodic Payment offer rejected by Collection is not required to continue making the periodic installment payments while the case is being considered in Appeals. See IRM 8.23.3.1.1.1. The TIPRA requirement to make periodic installment payments ended when Collection rejected the offer. However, if Appeals secures an amended Periodic Payment offer, then the taxpayer must once again start making the periodic installment payments proposed in the amended offer. See IRM 8.23.3.1.1.2. for a table with guidance on TIPRA payment requirements for amended offers.

  7. Document all significant case actions on the case activity record in a timely, accurate and complete manner.

8.23.3.3.1  (10-16-2007)
Preliminary Evaluation Procedures

  1. IRM 8.23.2.3 provides initial case review procedures for making sure the case is ready for Appeals' consideration. This section contains preliminary evaluation procedures for cases that were not prematurely referred by Collection.

  2. Appeals should not "re-work" an offer that was rejected by Collection. Unless there are obvious issues needing additional development and consideration, Appeals should generally restrict the in-depth review to the issues the taxpayer is protesting. If the analysis in other areas appears to be reasonable and the taxpayer is not disagreeing with all items, limit your consideration to the items of protest.

  3. Determine whether and how much additional financial documentation and/or verification is needed. See IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis. In most instances, the required verification and substantiation can be completed in-house without a field investigation. If the case is complex and requires field investigation or verification, then send an Appeals Referral Investigation (ARI) to a Field Revenue Officer group. See IRM 8.23.5.6 and IRM 8.22 for more details about ARIs.

  4. Appeals will:

    1. Review the offer, the rejection narrative and tables prepared by Collection. The review should be documented in the ACDS Case Activity Record.

    2. Verify that the taxpayer is compliant in filing all returns, paying balances due, making estimated payments and, if applicable, federal tax deposits on any related business entities for which the offer taxpayer is responsible (such as a sole proprietorship, single-member LLC, or closely held corporation). See also IRM 8.23.2.4.

    3. Review the taxpayer’s Form 13711 or other written appeal.

    4. Conduct the conference; explain the offer process and how an acceptable amount is computed. Explain how the financial data presented supports an acceptance or rejection of an amended offer. If the taxpayer objects to other issues, or contends that additional documentation will change the RCP determination, set a short but reasonable deadline for the taxpayer to provide all of that information. Explain that failure to provide that information will result in sustention of Collection’s rejection.

    5. Follow up in a timely manner and review any information submitted as soon as possible. Timeliness of case actions is an important component in making the Appeals determination without needing to ask the taxpayer to update previously supplied financial information. Unwarranted inactivity gaps should be avoided.

  5. Within 30 days of case assignment (as opposed to case receipt - see IRM 8.23.2.1), Appeals will send out an initial substantive contact letter which:

    • Explains the Appeals process, including the taxpayer's rights concerning meeting with Appeals in-person. Be sure to further explain that if the taxpayer prefers a face-to-face hearing, he or she should contact the AO/SO as soon as possible and certainly before meaningful negotiations begin. See also IRM 8.23.2.2.1.

    • Identifies the disputed issues

    • Asks the taxpayer to provide any other information that he or she wants Appeals to consider

    • Identifies any supplemental information or verification needed to properly evaluate the offer and lists a clear date when such information is due ( See IRM 8.23.3.3.1.2for addition guidance on requesting supplemental information.)

    • Sets clear expectations and a specific date for providing any requested supplemental information. Generally, this date should be within the next 30 days and before any scheduled conference date

    • Schedules the conference or requests the taxpayer to contact Appeals by a specific date

    • Advises the taxpayer of the consequences of either not providing requested information by the established due date or failing to participate in the conference

    Note:

    Avoid sending blanket requests for supplemental information or documentation that either may not actually be needed in the analysis or that may have been previously provided.

  6. If initial substantive contact is made by telephone, be sure to cover all of the above and document the case activity record accordingly.

8.23.3.3.1.1  (10-16-2007)
Coordination with Other Functions

  1. The AO/SO needs to be alert to issues that may prevent Appeals from making a final determination on an appealed offer. Issues such as an open claim for relief from joint and several liability (also known as an innocent spouse claim) or an open criminal investigation require coordination with other functions before proceeding with considering the appealed offer.

    Caution:

    Carefully review Rev. Proc. 2000-43 before any contact with another function. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.

  2. For procedures concerning an open Examination matter, follow IRM 5.8.4.12.1.

  3. IRM 5.8.4.12.2 contains information regarding a claim for relief from joint and several liability. The following table reflects Appeals procedures for the various scenarios that may occur where a claim for relief from joint and several liability was filed after the offer was rejected by Collection (see IRM 8.23.2.3 for details regarding such claims filed before the offer was rejected):

    If ... And ... Then ...
    The spouse whose appealed offer is being considered is not the spouse who filed the innocent spouse claim The innocent spouse claim is still open Contact the Service employee at the Cincinnati Centralized Innocent Spouse Operations Unit (CCISO) considering the innocent spouse claim to make sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer until the claim is resolved
    The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim The innocent spouse claim is still open Ask the taxpayer to withdraw the offer unless CCISO indicates that the claim will be closed immediately with no change
    The spouse whose appealed offer is being considered is the same spouse who filed the innocent spouse claim CCISO indicates that the innocent spouse claim has merit and the taxpayer won't withdraw the appealed offer Suspend consideration of the appealed offer pending disposition of the innocent spouse claim

    Caution:

    Contacting CCISO is considered an administrative or ministerial contact for ex parte purposes provided such contact is limited to simply making sure there are no reasons to delay Appeals' consideration of the non-requesting spouse's offer or checking on the status of the requesting spouse's claim when the requesting spouse's offer is in Appeals. Be sure to document the case activity record with the purpose of the contact, what was discussed and the information that was received.

  4. For procedures concerning an open criminal investigation, follow IRM 5.8.4.12.4. The AO/SO must exercise caution and good judgment before contacting someone from Criminal Investigation (CI). Discuss the issue with your ATM and Counsel before initiating contact with CI.

8.23.3.3.1.2  (10-16-2007)
Requesting Supplemental Information

  1. Collection may not address or fully develop all of the issues in a case after finding a reasonable basis to reject the offer. Taxpayers and their representatives are often more willing to amend their offers during the Appeals process because they realize Appeals is their last chance. Although Appeals must avoid sending blanket requests and strive to keep supplemental information requests to a minimum, the AO/SO must have the latitude to secure the information believed necessary to properly determine RCP in order to maintain the integrity of the OIC program and our voluntary system of taxation as a whole. It generally takes considerably more effort for both the taxpayer and Appeals to work through, document and resolve all issues while working an offer to eventual acceptance than it does for Appeals to arrive at a decision to reject the offer. Because relevant issues in the offer case file may not always be fully developed, supplemental information is often necessary to:

    • Properly evaluate the offer

    • Verify information per the requirements of IRM 5.8.5

    • Prepare the case file for supervisory and Counsel approvals

  2. When supplemental information is needed, it's important for Appeals to clearly communicate to the taxpayer:

    1. Exactly what information is needed

    2. That such information is necessary to properly evaluate the offer

    3. Exactly when the information must be to Appeals

    4. That Appeals must sustain Collection's rejection of the offer (unless the conference has not yet been held) if all of the requested information is not provided in a timely manner

  3. Set a reasonable deadline for the taxpayer to provide the requested information or documentation. The general rule is 30 days, but the amount of time to give the taxpayer to respond will depend on the amount and type of information requested.

    Example:

    If the taxpayer raised a number of issues in the appeal and a significant amount of supplemental information is needed to adequately analyze such issues, the full 30-day response period is probably appropriate. This is especially true if some of the requested information must come from a third party such as a written statement from a lender, insurance company, physician, etc.

    Example:

    If the taxpayer is asked to provide only a few supplemental information items that are generally readily available such as bank statements, wage/earning statements, utility bills, etc., a shorter period of time to respond is appropriate.

  4. If the supplemental information request is made prior to the hearing, allow a sufficient amount of time between the date by which the taxpayer is to provide the information and the conference date, so you have time to review the information before the hearing. If the supplemental information request is made the hearing and the taxpayer does not provide complete information for all of the requested items by the established due date, the case may be closed by sustaining Collection's rejection of the offer. Document the case activity record as to exactly what was received and when it was received. Follow the procedures in IRM 8.23.4, Acceptance, Rejection Sustention, and Withdrawal Procedures (non-CDP).

  5. IRM 8.23.2.4 contains separate guidance for situations when the taxpayer does not remain in compliance while the offer is being considered by Appeals.

8.23.3.3.2  (10-16-2007)
Financial Analysis and RCP Determination

  1. As previously indicated, IRM 5.8 is the primary authority for evaluating offers in compromise. Appeals does not have its own set of rules or guidelines for evaluating an offer. IRM 5.8.4, Offer in Compromise, Investigation, and IRM 5.8.5, Offer in Compromise, Financial Analysis, contain comprehensive instructions for analyzing a taxpayer's financial situation and for determining RCP.

  2. Depending on the complexity of the issue, a certain amount of documentation may be required to verify the accuracy of the financial information being relied upon to determine RCP. Most of the verification items should be in the administrative file that was received from Collection. Substantiation of issues not fully developed by Collection and/or supplemental information received while the case is in Appeals may require additional verification. IRM 5.8.5.2.1 and IRM 5.8.5.2.2 contain details as to the information needing verification and required level of such verification. Verification efforts and results should be documented in the case activity record.

    1. The Property Appraisal and Liquidation Specialists (PALS) web site at PALS Home Page contains links to a number of property valuation resources.

  3. Most of the required verification can be obtained from either the taxpayer or internal sources. Occasionally, however, issues may require the assistance of a field investigator. IRM 8.23.5.6 and IRM 8.22 contain procedures for sending an Appeals Referral Investigation (ARI) to a Field Revenue Officer group and the ex parte considerations for the ARI process.

  4. The numerical factors used to determine the present value of the taxpayer's future ability to pay were changed to accommodate changes brought about by TIPRA. The following table reflects the present value factors to be used when determining the present value of the taxpayer's future ability to pay:

    Payment Type Payment Terms Number of Months Future Income Required
    Lump Sum Cash Five installments within five months of acceptance 48
    Lump Sum Cash Five installments paid in more than five months but less than 24 months of acceptance 60
    Lumps Sum Cash Five installments paid in more than 24 months of acceptance Number of months remaining on the collection statute
    Short-term Periodic Payment Paid within six to 24 months 60
    Long-term Periodic Payment Paid within the time remaining on the collection statute Number of months remaining on the collection statute

    Note:

    Use the number of months actually remaining on the CSED for Lump Sum Cash and Short-term Periodic Payment offers when there are less than 48 or 60 months remaining. See IRM 5.8.5 for details on how to properly compute the CSED.

  5. A key requirement for accepted offers with a liability of over $100,000 is the need to review a full credit report. This requirement only applies to offers recommended for acceptance. If warranted, Appeals can secure a credit report on any case over $100,000 although this should not be routine.

  6. If it becomes apparent that Appeals must sustain Collection's rejection of the offer, contact the taxpayer and advise him/her of the decision and the reason(s) why the offer cannot be accepted. Provide a copy of the financial analysis reflecting Appeals' determination of RCP (generally IET and/or AET) and allow the taxpayer a reasonable opportunity to provide feedback or amend the offer to the revised RCP amount and then follow the instructions in the following table:

    If ... Then ...
    The taxpayer provides feedback causing a substantive change in the RCP determination Continue to try to negotiate an appropriate settlement
    The taxpayer provides feedback that causes no appreciable change to the RCP determination or is unwilling/unable to amend the offer to the necessary amount, if applicable Contact the taxpayer, explain any legal or administrative remedies and advise that Appeals must sustain rejection of the offer. Follow the procedures in paragraph (10) of this section before proceeding with closing out the case
    The taxpayer contacts Appeals and indicates an inability to amend the offer to the necessary amount, or if amending the offer doesn't apply because RCP exceeds the liability and there is no basis for ETA consideration Advise the taxpayer that Appeals must sustain rejection of the offer and follow the procedures in Paragraph (10) of this section before proceeding with closing out the case
    The taxpayer and Appeals agree to an alternative resolution such as an installment agreement or having the account placed in currently-not collectible status Consider having the taxpayer withdraw the offer and proceed with closing out the case. See IRM 8.23.4 for instructions for closing out the OIC case. If the agreed upon alternative resolution is an installment agreement, prepare the Form 433-D, Installment Agreement.
    The taxpayer and Appeals agree to an alternative resolution and the taxpayer won't withdraw the offer Proceed with processing the applicable alternative resolution as part of closing out the case by sustaining rejection of the offer
    The taxpayer doesn't respond Proceed with closing out the case by sustaining rejection of the offer

    Note:

    Providing the taxpayer with a copy of Appeals' financial analysis is not necessary if there are no substantive changes to the analysis that was completed by Collection. The taxpayer has already had an opportunity to provide relevant feedback to Collection's RCP analysis.

  7. IRM 5.8.4.9 calls for the filing of a Notice of Federal Tax Lien (NFTL) in certain instances even though the offer is accepted. The following table reflects the general NFTL filing criteria for accepted offers when the unpaid balance of assessments exceeds $5,000:

    If ... Then ...
    Lump sum cash offer with five or fewer installments paid in five months or less No NFTL is necessary
    Lump sum cash offer with five or fewer installments paid in six months or more A NFTL will generally be filed
    Short-term periodic payment offer A NFTL will generally be filed
    Deferred periodic payment offer A NFTL will generally be filed

  8. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL.

  9. The circumstances and reasons for not filing a NFTL in the above situations must be clearly documented in the case activity record.

  10. Appeals will sustain Examination's rejection of a Doubt as to Liability offer when the tax is believed to be correct as assessed.

  11. Since Appeals already has detailed financial information and familiarity with the taxpayer's current circumstances with a Doubt as to Collectibility offer, there may be instances when an offer cannot be accepted but both the taxpayer and Appeals believe that an alternative resolution such as an installment payment agreement (IA) or having the account placed in currently non-collectible (CNC) status is appropriate. Document any discussions of alternative resolutions in the case activity record.

    Reminder:

    Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.

  12. See IRM 8.23.3.12 for details on alternative resolutions for a non-CDP offer.

8.23.3.3.2.1  (10-16-2007)
Bankruptcy Considerations

  1. The Service will not consider an offer while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides legal remedies and procedures to resolve the government's claim. If the taxpayer files bankruptcy while the case is being considered by Appeals, the offer must be closed as Appeals sustaining Collection's rejection of the offer. In this instance, the offer has already been rejected (by Collection) and Appeals no longer has a basis to overturn Collection's decision. Follow the procedures in IRM 8.23.4 for closing the offer.

  2. If the taxpayer threatens to file bankruptcy if the offer is not accepted, consider whether the tax liability can be discharged and follow the guidance in IRM 5.8.5.5 and IRM 5.8.10.2.2. Make a general analysis of collectibility if the taxpayer files bankruptcy and the liabilities that would be discharged and attempt to negotiate an agreeable settlement, as appropriate. Keep in mind when making this analysis that it's generally advantageous for the taxpayer to avoid bankruptcy.

    Note:

    Procedures involving ex parte communications must be followed when discussing case information with Insolvency Unit personnel. Clearly document the case activity record concerning exactly what information was requested from Insolvency, why such information was requested, and the results of the contact. See Rev. Proc. 2000-43 for additional guidance.

  3. If the taxpayer files bankruptcy after the offer is accepted, follow the procedures in IRM 5.8.10, Offer in Compromise Special Case Processing. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.

  4. If the taxpayer files an offer as part of a CDP or EH case and subsequently files bankruptcy, return the offer to the taxpayer. The cover letter should simply indicate that Appeals cannot consider the offer while the taxpayer is in bankruptcy. The underlying CDP or EH case, however, must remain open. See IRM 8.22 for CDP and EH case procedures.

  5. See IRM 8.7.6.3, Appeals Bankruptcy Cases, Offer in Compromise Cases, for additional information on bankruptcy issues.

8.23.3.3.2.2  (10-16-2007)
Dissipation of Assets

  1. Dissipation of assets is a frequent issue of dispute in an appealed offer in compromise. If a determination is made that a taxpayer dissipated an asset(s) and such asset is no longer available to pay the tax liability, a secondary determination must be as to whether including the value of the dissipated asset as part of RCP is justified.

  2. Including the value of the dissipated asset as part of the RCP determination is not automatic. Such inclusion must be clearly justified in the case file and documented in the case activity record. If the taxpayer can show that all or a portion of the asset was used to provide for necessary living expenses, the applicable portion of the asset should not be included in the RCP calculation. The taxpayer must be able to provide a reasonable accounting of the dissipated asset.

  3. If the investigation clearly reveals that the asset was dissipated with a disregard of the outstanding tax debt, the value of the asset should generally be considered for inclusion in the RCP calculation. As indicated, however, an exception may be appropriate to the extent of the amount that the taxpayer can establish was used to fund necessary living expenses.

    Caution:

    Avoid "double counting" if a decision is made to include a dissipated asset as part of RCP and all or part of the dissipated asset was used to improve the value of another asset that is also being included as part of RCP.

    Example:

    A taxpayer secured a second mortgage of $60,000 on her residence after accruing a tax liability and before IRS filed a NFTL. She provided documentation to show that she used $40,000 of the loan proceeds to put an addition on to her home and make other necessary repairs and improvements. She paid unsecured credit card debts with the remaining $20,000. With the improvements, the residence is now valued at $300,000. She has a first mortgage with a balance of $100,000, so net realizable equity in the residence is now $80,000 ($300,000 x 0.80 = $240,000 - $100,000 (first mortgage) - $60,000 (second mortgage) = $80,000). If the full $60,000 is going to be treated as a dissipated asset, a concurrent determination must be made as to the increase in value to the residence that is attributable to the amount of the second mortgage (dissipated asset) that went toward improving or increasing its value. To include both the full $60,000 second mortgage loan and the full $80,000 net realizable equity in the residence in the RCP calculation would cause a "double counting" of a portion of the $40,000 that went toward improving and thus increasing the value of the residence. The AO/SO will have to use judgment in deciding how much the residence increased in value because of the $40,000 in improvements.

  4. IRM 5.8.5.4 contains the primary guidance for dissipated asset issues.

8.23.3.4  (10-16-2007)
Amended Offers

  1. Because TIPRA allows the taxpayer to propose not just the amount of the offer, but also the terms of payment, consideration must be given to such terms before deciding to recommend acceptance of the offer. Appeals must now evaluate and negotiate not just an acceptable offer amount, but also agreeable payment terms. Appeals is not required to accept the taxpayer's offer simply because it otherwise meets or exceeds RCP. If the taxpayer's proposed payment terms cause the offer itself to be unacceptable, the terms must be sufficiently renegotiated. If the taxpayer is not willing to propose acceptable terms, the offer may be denied as not being in the best interest of the government.

    Example:

    The taxpayer owes $65,000 and there are 50 months remaining on the CSED. RCP is $24,000. The taxpayer has proposed a Deferred Periodic Payment offer of $24,000 with 49 monthly payments of $100 and a final payment in the 50th month of $19,100. The terms of this offer are not acceptable and must be renegotiated before approval. The CSED is no longer suspended after the offer is accepted and the risk of the taxpayer paying only a small portion of the offered amount is high given the structure of the proposed payment terms. If the taxpayer cannot/will not make the final payment, the CSED will expire before the Monitoring Offer in Compromise unit (MOIC) is able to properly respond.

  2. If an amended offer is secured by Appeals, the AO/SO must sign the Form 656 as the "Authorized Internal Revenue Official" .

    If ... Then ...
    The original Form 656 was received on or before July 21, 2006 You may use the July 2004 revision of Form 656 for the amended offer because the taxpayer is not required to make a TIPRA payment
    The original Form 656 was received on or after July 22, 2006 Use the February 2007 revision of Form 656 for the amended offer because the taxpayer must make an additional required TIPRA payment

  3. See IRM 8.23.3.1.1.2 to determine the required TIPRA payment if the taxpayer is amending a TIPRA offer.

  4. If the amended offer is a Periodic Payment TIPRA offer, the taxpayer must once again start making the proposed periodic installment payments. Appeals is responsible to make sure the taxpayer makes the proposed periodic installment payments while the case is pending in Appeals. The offer may be considered withdrawn under IRC 7122(c)(1)(B)(ii) if the taxpayer fails to make all proposed periodic installment payments. See IRM 8.23.5.3.1 for Appeals mandatory withdrawal procedures.

    Note:

    If a tax period that was part of the original offer is subsequently paid in full via TIPRA payments, the period must still be listed on all amended offer. Even though the tax period is fully paid, the funds used to satisfy it are part of the overall offer amount, so the tax period must remain on the Form 656. If a tax period is paid in full via a non-TIPRA payment, such as a refund offset, there is no need to list such period on the amended Form 656.

8.23.3.5  (10-16-2007)
Collateral Agreements

  1. Follow IRM 5.8.6 with regard to collateral agreements. In addition to the terms specifically stated in the offer, collateral agreements enable the government to either collect funds or restrict a taxpayer's ability to claim future losses or credits. Do not use them to allow the taxpayer to submit an offer for a lower amount than the collection potential of the case dictates. You can also use a collateral agreement to clarify an offer, as in the case of a co-obligor agreement. Usage of collateral agreements should not be routine. Secure them only when you expect significant recovery or the taxpayer has identifiable future losses or credits. It may be appropriate to secure a collateral agreement when a significant increase in income is expected. It would be inappropriate to secure a collateral agreement simply to guard against an unexpected windfall such as a lottery.

  2. Use standard collateral agreements whenever possible to aid in the monitoring of the agreements. The standard agreements are listed below:

    1. Form 2261, Collateral Agreement-Future Income-Individual, and Form 2261-A, Collateral Agreement-Future Income-Corporation

    2. Form 2261-B, Collateral Agreement-Adjusted Basis of Specific Assets

    3. Form 2261-C, Collateral Agreement-Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits

    4. Co-Obligor Agreements, IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2

    Caution:

    These forms need to be modified to delete reference to the Collection statutes.

  3. The collateral agreement is signed by the authorized official in Delegation Order 5-1, which is available on the Appeals website at Appeals OIC Home Page.

8.23.3.5.1  (10-16-2007)
Co-obligor Agreement

  1. When a compromise is accepted from one party to a jointly owed tax liability, the other party is not released from their several liability. Secure a co-obligor agreement from the taxpayer submitting the offer to clarify the effect of the compromise on the obligations of the other parties.

  2. IRM 5.8.6.2 contains details as to the type of co-obligor agreements needed for based on various state laws. Co-obligor agreements are available in IRM Exhibit 5.8.6-1 and IRM Exhibit 5.8.6-2.

  3. Co-obligor agreements will not be solicited from individuals seeking to compromise Trust Fund Recovery Penalty assessments. The Trust Fund Recovery Penalty is not treated as a joint obligation.

8.23.3.6  (10-16-2007)
Offer from an Operating Business

  1. When an offer is accepted to compromise trust fund tax owed by an operating business, the taxpayer is relieved of a significant operating expense. The effect is to grant the delinquent taxpayer an economic advantage over competitors who are in tax compliance. Recovery of the unpaid trust fund tax amount is a significant issue when considering an offer from a business taxpayer. In the interest of "fairness to all taxpayers" the Service must be cautious to avoid providing financial advantages to those taxpayers through the forgiveness of employment tax debt, as this may be detrimental to competitors who are remaining in compliance with their tax obligations. Procedures in IRM 5.8.4.13 must be followed when considering an appealed offer from all In-business Trust Fund (IBTF) taxpayers, including sole proprietorships, partnerships, LLCs and corporations.

  2. If an offer to compromise trust fund tax is being considered for a corporation that is still in business, all of the issues outlined in IRM 5.8.4.13 should be addressed and the ASED(s) for the Trust Fund Recovery Penalty (TFRP) properly protected. IRM 8.23.2.3 provides guidance on returning the case to Collection as a premature referral if the ASED(s) were not adequately protected by Collection when the case was received in Appeals. It is the responsibility of the AO/SO to follow IRM 5.8.4.13 and properly protect the ASED(s) if the offer is being accepted by Appeals. See IRM 8.23.3.6.1..

8.23.3.6.1  (10-16-2007)
Corporate Trust Fund Offer Procedures

  1. It is no longer a requirement for an In-business Trust Fund (IBTF) taxpayer to be compliant with the prior two quarterly tax returns, or to have made timely deposits prior to submitting the offer. However, it is necessary for the IBTF taxpayer to be current with the quarter that the offer was submitted and remain in compliance with all filing and deposit requirements during the offer evaluation and appeal processes. However, per IRM 5.8.4.13.1, an untimely tax deposit during the investigation will result in a return of the offer. To be consistent with Collection's procedures, an untimely tax deposit during the investigation will result in Appeals sustaining rejection of the offer.

  2. If the Service enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person pursuant to Section 6672 of the Internal Revenue Code. See IRM 5.8.4.13.2, Corporate Trust Fund Liabilities, IRM 5.8.3.4, Processability and IRM 5.8.7.6, Rejection.

  3. Per IRM 5.8.4.13.2, it is the Service’s policy that the amount offered to compromise a corporate employment tax liability must include, in addition to what can be collected from the corporation, an amount equal to what can be collected from all responsible persons, up to the amount of the TFRP (plus interest, if the penalty has been assessed). If the offer is accepted, post-acceptance payments will be applied first to non-trust fund components of the corporation's tax liability (see IRM 5.19.7.3 , Application of OIC Payments on Corporate OICs). The Service will pursue collection of the TFRP (unless the trust fund portion has been full paid) assessed against the responsible persons.

    Note:

    Offer payments (other than properly designated pre-acceptance payments made under TIPRA in conjunction with the offer) are applied in the best interest of the government. The corporate taxpayer does not have the right to designate any offer payment made after the offer is formally accepted. By signing the Form 656 , the taxpayer agreed that IRS will apply payments made after acceptance in the best interest of the government. See Paragraph (a) of Section V of the February 2007 revision of Form 656.

  4. The value of the business as a going concern should also be evaluated. See IRM 5.8.5.3.14 .

  5. Follow the procedures in IRM 5.8.4.13.2 for situations where the amount offered by the corporation combined with the payments already made on related assessed TFRP assessments exceed the total employment tax liability of the corporation for the same tax periods.

  6. Carefully review IRM 5.8.4.13.2 and secure the necessary Form 2750, Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty, and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, before proceeding with accepting the corporate trust fund offer.

8.23.3.7  (10-16-2007)
Offers for Other Liabilities

  1. IRM 5.8.4.13 contains additional guidance for offers involving:

    1. Excise tax liabilities,

    2. Partnership liabilities, and

    3. Child support obligations

8.23.3.8  (10-16-2007)
Effective Tax Administration Offers

  1. If it's determined that there is no basis to accept an offer under doubt as to collectibility (DATC) or doubt as to liability (DATL), the offer may still be accepted if it's determined that doing so:

    1. would promote effective tax administration, and

    2. would not undermine other taxpayers' compliance with the tax laws.

  2. IRM 5.8.11 , Offer in Compromise, Effective Tax Administration, contains information about Effective Tax Administration (ETA) offers and doubt as to collectibility offers where the taxpayer presents "special circumstances" (DATC-SC) as a basis to accept the offer, and the procedures for evaluating such offers.

  3. Under ETA, the taxpayer does not dispute being financially capable of paying the liability in full. To accept an ETA offer, the taxpayer must establish that:

    • Paying the full tax liability would cause an undue economic hardship (see below), or

    • Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay in full. These "public policy" or "equity" offers are sometime referred to as "non-hardship" ETA offers.

  4. Under DATC-SC, the taxpayer does not have the ability to pay in full, but does not dispute being financially capable of paying more than the amount being offered. To accept a DATC-SC offer, the taxpayer must establish that:

    • Paying the full RCP amount would cause an undue economic hardship (see below), or

    • Compelling public policy or equity/fairness considerations exist that would undermine public confidence that the tax laws are being administered in a fair and equitable manner if required to pay the full RCP amount

  5. ETA and DATC-SC offers require a more subjective evaluation. Although IRM 5.8.11 is comprehensive, it's simply not practical to try to draft guidance that encompasses every event or situation.

  6. ETA and DATC-SC offers based upon economic hardship are not uncommon. The definition of an undue economic hardship for ETA and DATC-SC offer purposes is found in Treasury Regulation 301.6343-1. Often a taxpayer presents circumstances reflecting one or more of the factors outlined in IRM 5.8.11.2.1 , or closely resembling many aspects of an example cited in the IRM or Treasury Regulation 301.7122-1, but the case for ETA or DATC-SC acceptance falls apart when actual dollars are factored in. A decision in an ETA or DATC-SC hardship offer requires a three-tiered approach:

    1. Does the taxpayer present exceptional circumstances meriting ETA or DATC-SC consideration?

    2. Would payment of more than the offered amount cause the taxpayer to be unable to meet future necessary living expenses?

    3. Would acceptance of the offer undermine other taxpayers' compliance with the tax laws?

    An acceptable offer requires affirmative answers to questions 1 and 2, and a negative answer to question 3.

  7. Offers based upon public policy or equity considerations are rarer.

    1. Any disposition of an ETA or DATC-SC offer based in whole or in part on public policy or equity considerations requires review and approval by the Director, Field Operations (DFO). Coordination at the DFO level allows Appeals to support Service efforts through consistency.

      Note:

      When a case is forwarded for DFO approval, a copy of the Appeals Case Memorandum and Form 5402 should also be e-mailed to the Tax Policy and Procedures OIC Analyst.

  8. See Delegation Order 5-1, which is available on the Appeals web site at Appeals OIC Home Page, for the required levels of approval for accepting or rejecting ETA and DATC-SC offers.

  9. IRM 5.8 does not contain separate ETA offer procedures for when filing a NFTL is generally required. See IRM 8.23.3.3.2 for information regarding lien filing criteria and procedures if the offer is going to be accepted.

8.23.3.9  (10-16-2007)
Centralized Offer in Compromise and "Obvious Full Pay" Offers

  1. All new offers are either received in or forwarded to the Centralized Offer in Compromise (COIC) sites for initial processing. Once the COIC unit has loaded the offer onto the Automated Offer in Compromise (AOIC) system and determined the offer to be processable, a decision is made as where the case will be assigned. Collection's field offer groups work the more complex cases.

  2. Some taxpayers look to compromise their tax debts yet their application ( Form 433-A, Form 433-B) reflects an ability to pay the account in full. COIC will reject such offers unless the taxpayer presents special circumstances warranting consideration under ETA. COIC will not contact the taxpayer to clarify any information or submit any further documentation if it's apparent to COIC that the account can be paid in full based upon the financial information provided by the taxpayer. The formal rejection letter will be the first response the taxpayer receives from COIC.

  3. If the taxpayer submits new information with his or her appeal, COIC is required to consider such information before sending the case to Appeals. If Collection did not consider the information and such information could result in a different determination, the offer may be returned to COIC as a premature referral so that the information can be considered. If COIC still believes the offer should be rejected after considering the information, they will return the offer to Appeals with their response and Appeals will process the appeal.

8.23.3.9.1  (10-16-2007)
Appeals Procedures for "Obvious Full Pay" Offers

  1. Standard Appeals conference and settlement practices require Appeals to afford taxpayers whose offers were rejected by Collection as "obvious full pay" cases the same opportunities for discussion and negotiation as with any other Appeals case. There may very well be settlement opportunities available in these cases because Collection's "obvious full pay" procedures:

    • Assume the taxpayer knew what he/she was doing when completing the Form 433-A/B

    • Do not adjust any asset values or apply necessary national or local expenses standards

    • Call for rejection of the offer without any contact with the taxpayer

    However, depending on the circumstances, there may also be little to discuss and no opportunity for settlement absent information from the taxpayer indicating a basis for compromise.

  2. In order to meet the basic mission of Appeals and adhere to standard conference and settlement practices (see IRM 8.23.1.3), Appeals should take the following actions in a case referred by COIC to Appeals as an"obvious full pay" case:

    1. Send a letter to the taxpayer which explains both the Appeals and OIC processes. Enclose Publication 4227, Overview of the Appeals Process. The letter should clearly explain to the taxpayer that the offer was rejected by Collection because the financial information that the taxpayer provided in the Form 433-A/B reflected an ability to pay in full. Enclose a copy of Collection's Full Pay Worksheet and offer the taxpayer the opportunity to either provide feedback to dispute Collection's findings or pay in full. If the taxpayer qualifies under either a guaranteed or streamlined installment agreement, offer him/her the opportunity to discuss such an alternative resolution. See IRM 5.14.5 for guaranteed and streamlined IA criteria.

    2. Give the taxpayer a reasonable period of time to respond, with a specific response date provided in the letter.

    3. Set a follow-up date allowing for mail time beyond the response date provided in the letter.

    4. Follow the procedures in the following table based upon the taxpayer's response or lack of response.

    If ... Then ...
    The taxpayer does not respond by the response due date Sustain Collection's rejection of the offer by preparing the following closing documents:

    • Closing letter

    • Generate a Customized Form 5402, Appeals Case Transmittal and Case Memorandum, from APGolf and attach a copy of Collection's Full Pay Worksheet. (The Form 5402 will be used in lieu of an ACM, so be sure to document the basis of your decision in the Brief Remarks section of the Form.)

    • A copy of the Form 1271 completed by Collection
    The taxpayer responds to Appeals with new information not previously considered by Collection Review the information and determine whether it could make the offer acceptable
    Appeals determines the new information could make the offer acceptable and is able to sufficiently address and develop all issues on its own Continue working with the taxpayer in accordance with standard Appeals OIC procedures
    The new information requires significant evaluation or development to determine whether it could make the offer acceptable Consider returning the offer to Collection to address the new information
    The offer is sent back to Collection to consider the new information and they determine that the offer should still be rejected. Collection will return the offer to Appeals for us to resume working with the taxpayer in accordance with standard Appeals OIC procedures
    The new information makes the offer acceptable Verify the information in accordance with IRM 5.8.5 and follow the procedures in IRM 8.23.4.2 to close the case as an acceptance
    The taxpayer responds with new information that will not make the offer acceptable Provide the taxpayer with your revised Income/Expense (IET) and Asset/Equity (AET) Tables. Set a reasonable deadline for the taxpayer to respond with feedback to your findings. Be sure to advise the taxpayer that Appeals must sustain rejection of the offer if the taxpayer:

    1. neglects to respond by the established date,

    2. does not provide information that will impact the IET and AET determinations, or

    3. does not amend the offer to the RCP amount reflected on the revised IET and AET, if applicable
    The taxpayer:

    • neglects to provide feedback to the revised IET and AET,

    • responds with additional information that does not make the offer acceptable, or

    • if applicable, neglects to submit an amended offer along with the appropriate TIPRA payment

    .     		Close out the offer by sustaining Collection's rejection of the offer as noted above

  3. Document all significant case actions on the case activity record in a timely, accurate and complete manner.

8.23.3.10  (10-16-2007)
Consideration of Doubt as to Liability Offers

  1. Appeals considers offers based in whole or in part on doubt as to liability (DATL) where

    • the offer was rejected by Exam, or

    • the liability to be compromised was determined by Appeals

  2. IRM 4.18 , Exam Offer in Compromise, contains administrative procedures for working DATL offers.

  3. Appeals should make an independent determination regarding the offer, which should be evaluated in the same manner as in a proposed deficiency case. Consider the facts and law as well as the hazards to litigation in determining the degree of doubt as to the liability. IRC 7122(d)(3) provides that a DATL offer may not be rejected solely because the Service cannot locate the taxpayer’s return or return information. The Service is also prohibited from requesting a financial statement if an offer is based solely on doubt as to liability.

    Note:

    If the DATL offer case came to Appeals after being rejected by Exam, the case file should be fully developed and documented. The case may be returned as a premature referral if the case is materially undeveloped and Appeals is not able to adequately address the issue(s) in dispute.

    Note:

    If the DATL offer case came to Appeals because the liability at issue was previously determined by Appeals, then Appeals has exclusive jurisdiction over the case and Exam is not responsible for either developing the case or securing the closed administrative case file before forwarding the case to Appeals.

  4. The following table reflects general decision and case closing guidelines.

    If ... Then ...
    It's determined that the actual liability is less than or equal to the amount offered The balance of the assessment in excess of the proper liability amount should be abated.

    1. If the proper adjustments have or will be made, ask the taxpayer to withdraw the offer.

    2. If the taxpayer does withdraw the offer, it should be rejected.
    It's determined that the actual liability is greater than the amount offered but less than the amount assessed The excess balance of the assessment should be abated.

    1. Inform the taxpayer of the amount of the re-determined liability and advise him/her to pay the correct amount.

    2. Ask the taxpayer to withdraw the offer

    3. If the taxpayer does not withdraw the offer, it should be rejected.
    If it is determined that there is doubt as to liability based upon hazards of litigation The case should be closed by accepting the offer. The acceptable amount depends on the degree of doubt based upon the hazards relative to the amount assessed.
    It's determined that there is no doubt as to the liability Close the case by sustaining Exam's rejection of the offer.

  5. Bankruptcy filing or non-compliance in filing other required federal tax returns does not preclude Appeals from considering an appealed DATL offer.

8.23.3.10.1  (10-16-2007)
TEFRA Liability Offers

  1. Upon receipt of an offer in compromise case, secure an AMDIS or AMDISA print.

    1. If there is a Partnership Investor Control File (PIFC) Code 5, there is at least one open TEFRA key case linkage. The taxpayer should have been advised by the investigating officer or function that an offer cannot be considered until all TEFRA partnership (or TEFRA S corporation) issues have been resolved. See IRM 5.8.4.12.1. Attempt to secure a withdrawal. If the taxpayer refuses to withdraw the offer, it should be returned to the investigating officer as a premature referral.

    2. If there is a PICF Code 7, there is at least one closed TEFRA key case linkage. Verify that any assessment as a result of the TEFRA key case was made and that the additional liability is included in the offer.

  2. In general, DATL and non-hardship ETA liability offers pertaining to an assessment resulting from a TEFRA proceeding should not be considered. TEFRA assessments are generally final determinations.

  3. Appeals employees considering acceptance of either a DATL or non-hardship ETA liability offer that pertains to an assessment resulting from a TEFRA proceeding must discuss the issue with the Appeals Technical Guidance Coordinator for TEFRA who will coordinate a response with the Appeals Program Analyst responsible for the Offer program.

  4. Similar to an offer based on doubt as to collectibility, consideration can be given to individual circumstances supporting acceptance of an ETA offer based on economic hardship where the liability includes an assessment resulting from a TEFRA proceeding. See IRM 8.23.3.8 for ETA offer guidance.

8.23.3.10.2  (10-16-2007)
Offers Involving TFRP and PLET Liabilities

  1. IRM 8.25 has instructions for working Trust Fund Recovery Penalty (TFRP) cases in Appeals. IRM 5.8.4.2 contains instructions for working doubt as to liability offers involving Trust Fund Recovery Penalty (TFRP) and Personal Liability for Excise Tax assessments. Per IRM 5.8.4.2, resolution of an agreed case can be achieved by:

    • Preparing and submitting a Form 3870, Request for Adjustment, to correct the assessment and securing a withdrawal of the offer from the taxpayer, or

    • Recommending acceptance of the offer for the correct amount

  2. Acceptance of a doubt as to liability offer sufficiently concludes the TFRP or PLET matter for the taxpayer. There are no five-year compliance or refund offset provisions on a doubt as to liability offer.

  3. Collection cannot settle a TFRP or PLET case based upon hazard of litigation considerations, so IRM 5.8.4.2 doesn't address this type of such settlement. For this reason, simply recommending acceptance of the doubt as to liability offer is generally a simpler approach when settling a TFRP or PLET matter based on hazards.

8.23.3.11  (10-16-2007)
Consideration of Combination Offers

  1. Combination offers based upon both doubt as to collectibility (DATC) and doubt as to liability (DATL) must be fully considered by both the Collection and Examination functions prior to being transmitted to Appeals. See IRM 5.8.4.10 and IRM 4.18.4. A combination offer case will be returned to the referring Collection function as a premature referral if both functions have not yet completed their respective reviews. If both functions have completed their reviews and continue to believe that the offer should be rejected, Collection will return the offer to Appeals with each function's recommendation and Appeals will continue to process the appeal.

  2. The DATC aspect of the offer should be reviewed first. Collectibility determinations generally take less time and if the matter can be resolved as a DATC offer, then it saves Appeals time and resources. If a Settlement Officer determines that there is no basis to accept the DATC offer, the DATL aspect of the offer should be reviewed by an Appeals Officer. The Settlement Officer, however, can generally make the DATL determination on the following:

    • TFRP liabilities

    • Liabilities consisting exclusively of basic late filing, late payment, or late deposit penalties

    • Certain civil penalties assessed under IRC 6721 for failure to file correct information returns, such as failure to file Form W-2 and Form W-3

  3. Appeals should see fewer combination offers than in years past. IRS began using a separate Form 656-L, Offer in Compromise (Doubt as to Liability), in January of 2006. The February 2007 revision of Form 656 , Offer in Compromise, no longer lists DATL as an option because taxpayers are not required to pay an OIC application fee or an up-front TIPRA payment when the sole basis for the offer is DATL.

  4. Combination offers may arrive in Appeals after a prolonged period in Collection and/or Exam. See IRM 8.23.3.3 and IRM 5.8.5.2.2 if the financial information is outdated. Appeals should avoid sending these financial statements back to Collection to be reworked whenever possible.

8.23.3.12  (10-16-2007)
Alternative Resolutions for Offers

  1. Taxpayers will occasionally express an interest in alternative resolutions when it's apparent that an offer is not a viable option. If the AO/SO determines that an alternative resolution such as an installment agreement (IA) or having the account placed in currently not collectible (CNC) status is appropriate, Appeals may initiate the alternative resolution using its general authority.

  2. Refer to:

    • IRM 5.14, Installment Agreements

    • IRM 5.15, Financial Analysis

    • IRM 5.16, Currently Not Collectible

    • IRM 8.1, Appeals Program

  3. If the taxpayer wants to enter into an IA and Appeals agrees that such is an appropriate resolution, follow the procedures in IRM 5.14. . Similarly, follow procedures in IRM 5.16 to determine the propriety of placing the account in CNC status.

    Reminder:

    IA and CNC criteria are different than that for an OIC.

    Note:

    Just because the taxpayer can pay in full via installment payments doesn't mean Appeals should automatically attempt to set up an IA. If the taxpayer has equity in assets, IRM 5.14.1.5 requires the taxpayer to either fully or partially pay using the equity in assets before an IA can be recommended for acceptance. If the offer is withdrawn or must be rejected and the AO/SO is not comfortable setting up an IA because of equity in assets or other such issues, Appeals should simply proceed with closing the OIC case and referring the matter back to Collection.

    Note:

    Appeals must rely of the Multi-functional Installment Agreement Authority (see IRM 5.14.6) for non-CDP offers. The Multi-functional Installment Agreement is for cases with an aggregate unpaid balance of assessments of less than $100,000 and is limited to individual taxpayers, out-of-business sole proprietors, and corporations owing income tax only. ATMs should negotiate appropriate local procedures with area Collection management for securing the necessary approvals on installment agreements that don't fit under the multi-functional authority.

  4. Appeals is responsible to input Transaction Code (TC) 971 with Action Code (AC) 043 upon receipt of an installment payment proposal. Use a Form 4844, Request for Terminal Action, to request input of the TC 971 AC 043 to all tax periods. Appeals does not input the TC 971 AC 063.

  5. IRS increased its IA user fees on January 1, 2007. Individual taxpayers meeting a low-income standard may apply to have the user fee reduced, but must do so within 30 days after the Letter 238, is issued. When generating the Letter 238 from APGolf, be sure to use the optional paragraph with details about Form 13844, Application for Reduced User Fee for Installment Agreements, and include a blank form as an attachment. If the financial information secured while the offer was being considered indicates the taxpayer may be eligible for a reduced IA user fee, discuss the reduced fee process with him/her when negotiating the actual IA payment terms.

  6. Appeals is also responsible for making a lien filing determination as part of the alternative resolution. If a NFTL will be filed per standard administrative procedures, advise the taxpayer accordingly. Explain CDP rights under IRC 6320 and document the case activity record. Indicate in the "Brief Remarks" section of the Form 5402 that the IRM calls for a lien to be filed and indicate the tax periods to be listed on the NFTL. The circumstances and reasons for not filing a NFTL if a NFTL is generally required must be clearly documented in the case activity record.

  7. The Appeals Processing Section will input/process the applicable alternative resolution. Be sure to prominently indicate the alternative resolution on the Form 5402 so it's clearly visible to the Appeals technician handling the back-end processing. See IRM 8.23.4 for specific non-CDP OIC case closing procedures.

8.23.3.13  (10-16-2007)
Actions on Defaults Offers

  1. A taxpayer must agree to the terms set forth in the Form 656, and the compromised amount remains a tax liability until the taxpayer meets all the terms and conditions of the offer. See Paragraph (i) of Section V of Form 656.

  2. Taxpayers entering into either a DATC or ETA offer must agree to comply with all filing and paying obligations under the Internal Revenue Code for a period of 5 years after the offer is accepted. See Paragraph (d) of Section V of Form 656.

  3. If a taxpayer fails to meet any of the terms of the offer, the Service has the right to terminate the offer, reinstate the compromised liability, and pursue collection action against the taxpayer. The default provisions apply only to the party failing to comply if the liabilities are jointly owed and the offer was jointly submitted. See Paragraph (d) of Section V of Form 656.

  4. If an offer was originally accepted by Appeals, Monitoring Offer in Compromise (MOIC) will refer the case to the appropriate Appeals office for review and, if necessary, issuance of the default letter. See IRM 5.8.9.3, Possible Actions on Accepted Offers, Potential Default Cases.

  5. The referral from Collection is usually on Form 2209, Courtesy Investigation. The case will be opened as an offer on ACDS in order to place time on a specific case. APS should note it as a pending defaulted offer in compromise.

  6. If the offer in default was accepted as part of a CDP hearing, the taxpayer may be entitled to a retained jurisdiction hearing before Appeals. See IRM 8.22 concerning retained jurisdiction. These defaults will be worked like offers accepted by Appeals upon review of rejected offers. Do not establish a retained jurisdiction case on ACDS. It should be noted on ACDS as a defaulted offer and not a new offer.

  7. The Service may accept a compromise of a compromise. There is no standard form for such a proposal. It should be submitted in letter format and addressed to the Commissioner of the Internal Revenue. IRM Exhibit 5.8.9-1 should be used for this purpose. If Appeals initially accepted the offer, Appeals will consider the taxpayer's compromise of a compromise proposal. Exhibits 5.8.9-2 and 5.8.9-3 should be used to notify the taxpayer of either acceptance or rejection of the compromise of a compromise proposal. See IRM 5.8.9.4 for procedures.

  8. For information on CDP Hearings on terminated OICs refer to IRM 8.22.

8.23.3.14  (10-16-2007)
Mediation and Arbitration

  1. Post-Appeals mediation takes place while the offer is under Appeals' jurisdiction, which means the written request for mediation must be made before the case is closed by Appeals. Post-Appeals mediation procedures are found in Rev. Proc. 2002-44. Arbitration procedures are found in Rev. Proc. 2006-44. Appeals is presently addressing both post-Appeals mediation and arbitration requests on a case-by case basis. If an AO/SO receives a written request for post-Appeals mediation, contact the OIC Program Analyst for Appeals Tax Policy and Procedure.

  2. Fast Track Mediation takes place while the offer is still under either Collection's or Examination's jurisdiction. The goal of Fast Track Mediation (FTM) is to help taxpayers resolve disputes arising in Examination and Collection source work without having to send the case to Appeals.

  3. Currently, mediation is not available for any offers worked in the Centralized Offer in Compromise sites. While FTM will be considered in all other cases, the decision to mediate a particular case remains discretionary for both the Service and the taxpayer.

  4. FTM will be considered only after an offer specialist has fully developed the case facts and made a reasonable attempt to negotiate an acceptable offer. If the case meets the criteria for FTM described below, the offer specialist will inform the taxpayer of the option to mediate, provide a copy of Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and answer any questions. Taxpayers who express an interest in mediating must first request a conference with the Compliance group manager.

  5. When the taxpayer’s request for FTM is granted, the offer specialist will complete Form 13369, Agreement to Mediate, and also provide a summary of the issues. Even though mediation may result in the specialist’s recommendation to accept, the actual decision to accept is still subject to counsel review and approval of the official with delegated authority according to the category of the offer.

  6. The case will remain in the jurisdiction of Compliance. The case will not be reassigned to Appeals on the Automated Offer in Compromise (AOIC) program. Because it may not always be feasible to have a face-to-face conference, it may be necessary to hold the mediation process via conference call.

  7. It is not appropriate to mediate in the following situations:

    1. When the taxpayer has the ability to pay in full, based on the financial data submitted by the taxpayer with the offer,

    2. When the taxpayer declines to increase the amount offered and does not indicate disagreement with the values, figures, or methodology used to arrive at the increased amount,

    3. When the issue is explicitly covered by procedural guidance; i.e., unsecured debt, college expenses, or non-qualifying charitable contributions,

    4. When the proposed rejection is based on public policy.

  8. Examples of matters that generally are appropriate for mediation are the following:

    1. The value of an ongoing business’ good will,

    2. Artwork with collector or sentimental value,

    3. Value of any assets, including real estate,

    4. Projections of future income based on calculations other than current income,

    5. Whether assets are held as nominee or transferee of a taxpayer,

    6. Taxpayer’s proportion of interest in jointly held assets,

    7. Calculation of ability to pay from future income when expenses are shared with a nonliable person.

  9. For additional information on this topic, see Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues, and the Appeals Alternative Dispute Resolution web site.


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