This section provides procedures for consideration and processing of Offers in Compromise (Doubt as to Collectibility) filed during an examination.

While Collection has jurisdictional responsibility for offers based on doubt as to collectibility and effective tax administration, Examiners play a role in the initiation and processing of offers. Policy Statement P–5–100 provides in cases where an OIC appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. This generally does not occur until the examiner has already made a determination of the proper amount of tax liability/deficiency.

Examiners must exercise good judgment in identifying when an offer represents the best means to resolve a deficiency. The primary objective is to secure full payment of the deficiency. However, when the examiner identifies an offer as the best alternative for securing payment, a discussion of collectibility concerns will take place between the examiner and his/her group manager prior to initiating a discussion of the offer alternative with the taxpayer. A comment regarding this discussion and applicability of limited scope procedures will be made in the ARDI section of the workpapers.

The taxpayer may submit an offer to the examiner during the course of the examination or at the conclusion of the examination. Upon receipt of the offer, the examiner will date stamp the back of all copies of Form 656, Offer in Compromise, and will review all forms for completeness prior to forwarding to Collection. The examiner will not sign the Offer in Compromise, Form 656.

The examiner will perform a cursory review to expedite processing of the offer and better service the taxpayer. The examiner should ensure the offer package is complete as required on Form 656, and includes the following:

The offer should be forwarded to Collection within three calendar days of receipt.

If the examination is not complete and the examiner and group manager concur that a legitimate collectibility concern exists, the limited scope procedures may be applied. Otherwise the examination should continue and issues resolved as normal.

If agreement is obtained, the case will be closed following existing procedures. The Collection employee handling the OIC case will be provided a copy of the audit report.

Examiners should not solicit and obtain conditional agreements wherein the taxpayer only agrees to the proposed tax with the condition that an offer in compromise simultaneously submitted (doubt as to collectibility) is accepted.

If agreement is not obtained, the case will be closed following normal unagreed procedures. Such action must clearly be communicated to the Collection employee handling the OIC case. The taxpayer's submission of the offer should be postponed until final resolution of the issues and resulting liability; the taxpayer loses his right to appeal the issues if the offer is accepted by Collection.

If the taxpayer submits the offer directly to Collection during the course of an audit, Collection should determine whether any years are being examined and if so, contact the examiner for further coordination.

If an offer is to be accepted by Collection, an acceptance letter cannot be mailed to the taxpayer until an assessment of the liability has been made. To obtain a quick assessment of the liability, Form 3198, Special Handling Notice, must be annotated in the "other" section, "Prompt Assessment Request—Offer Pending in Collection" .

While the offer is under consideration, the taxpayer will not receive notices requesting payment.

Offers in Compromise submitted by Federal retirees are considered and evaluated through normal offer processing.

Offers submitted by Federal employees will be considered. However, due to the sensitivity associated with the acceptance of an offer in compromise from a Federal employee, public policy implications must be considered in all cases. Local management will make the determination based on the facts and circumstances of each case.

The Area Director is the delegated official for both acceptances and rejections of offers submitted by Federal employees. There will be no redelegation below this level. Rejections must take into consideration the public policy implications in addition to other reject reasons.

In appropriate situations, collateral agreements are used to collect amounts in addition to the amount actually secured by the offer. These agreements may be secured by Collection with Doubt as to Collectibility offers.

Collateral agreements may provide for: payments from future income; reduction in basis of assets for computing depreciation, and gain or loss for tax purposes; waiver of net operating loss or unused investment credit carrybacks or carryovers; and waiver of bad debt loss or other deductions. These are the most common types of collateral agreements secured as additional consideration for the acceptance of an offer.

The service center initiates follow-up action on future income and collateral agreements in force. After receipt of Statement of Annual Income (Individual) or (Corporation), Forms 3439 and 3439–A, respectively, with copy of related income tax return, the Offer in Compromise Clerk sends these to the service center, Examination Branch, for compliance check.

When the Service Center, Examination Branch, compliance check results in any question regarding compliance with the terms of future income or other collateral agreements, the complete files with related returns will be referred to Area Examination for follow-up action.

These cases require consideration to ensure compliance with the terms of the agreements and to determine the correct tax liability for the years affected by the agreements. An appropriate report and Form 3440 (Adjustments to Statement of Annual Income) must be sent to the service center when adjustments affect the "annual income" or where the taxpayer's computation is in error.

A taxpayer may submit an offer to the Appeals function during a Collection Due Process (CDP) or an equivalent proceeding, to exercise their rights granted under IRC Section 6330 and 6320. The Office of Appeals has statutory jurisdiction of such offers, whether submitted on the basis of doubt as to liability, doubt as to collectibility, or effective tax administration.

The Office of Appeals also has jurisdiction over doubt as to liability offers where the assessment was previously determined by Appeals. This includes Trust Fund Recovery Penalty and Personal Liability for Excise Taxes that were determined in Appeals. These offers should be forwarded directly to Appeals for consideration.

A compromise is binding and conclusive on both the government and the taxpayer. In the absence of fraud or mutual mistake, the courts have consistently denied either party recovery of any part of the consideration given when it was properly rendered under a compromise agreement. However, an offer in compromise, which has been accepted under a mutual mistake as to a material fact, or because of the false representations made about a material fact, may be rescinded or set aside.

The appropriate function will prepare a letter to the taxpayer identifying the OIC, advising that the acceptance is rescinded and acceptance letter revoked.

All rescission letters, regardless of the amount of the liability, must be approved by Area Counsel.

If the offer had been accepted by Appeals, the case should be forwarded to Appeals for final determination.