last update 9-01-03
IRS OFFERS IN COMPROMISE
In late August, 2003, the IRS issued new rules on the procedures for
submitting and processing offers in compromise under Code Section 7122.
Rev. Proc. 2003-71 applies to all civil or criminal offers in compromise,
except for those offers submitted directly to the IRS''s Office of Appeals.
The new rules do not apply, however, to offers in compromise arising after
a case involving a civil or criminal liability has been referred to the U.S.
Department of Justice for prosecution or defense.
An offer in compromise must be submitted in writing on Form 656, Offer
in Compromise, and be signed under penalty of perjury. The offer must
include all liabilities to be covered by the compromise, the legal grounds
for compromise, the amount the taxpayer proposes to pay, and the
OBSERVATION: The $150 application fee for the processing of certain
offers in compromise will begin November 1, 2003.
Internal Revenue Code Section 7122 requires that the offer in
compromise must set forth the legal grounds for compromise and provide
enough information for the IRS to determine whether the offer fits within
its acceptance policies. The three legal grounds are: (1) doubt as to
liability; (2) doubt as to collectibility; and (3) promotion of effective tax
DOUBT AS TO LIABILITY exists when there is a genuine dispute as to
the existence or amount of the correct tax liability under the law. An
offer in compromise based on doubt as to liability generally will be
acceptable if it reasonably reflects the amount the IRS would expect to
collect through litigation.
DOUBT AS TO COLLECTIBILITY exists in any case in which the
taxpayer''s assets and income cannot satisfy the full amount of the
liability. An offer in compromise based on doubt as to collectibility
generally will be acceptable if it is unlikely that the tax can be collected
in full and the offer reasonably reflects the amount the IRS could collect
through other means, including administrative and judicial collection
The IRS may compromise to PROMOTE EFFECTIVE TAX
ADMINISTRATION when it determines that, although collection in full
could be achieved, collection of the full liability would cause the taxpayer
economic hardship -- the inability to pay reasonable basic living expenses.
The IRS may also compromise to promote effective tax administration
when compelling public policy or equity considerations provide a
sufficient basis for compromising the liability.
The offer must include all information necessary to verify the grounds for
compromise. Thus, individual or self-employed taxpayers must submit a
Form 433-A, Collection Information Statement for Wage Earners and
Self-Employed Individuals. Corporate or other business taxpayers must
submit a Form 433-B, Collection Information Statement for Businesses.
The IRS may require the corporate officers or individual partners of a
business taxpayer to complete a Form 433-A.
PENDING OFFERS IN COMPROMISE
Generally, the IRS is prevented from levying on a taxpayer''s property
or rights to property while an offer in compromise is pending, for 30
days after the rejection of an offer to compromise, or while an appeal of
a rejection is pending (IRC Section 6331(k)(1). In addition, the statute of
limitations on collection is suspended while levy is prohibited. An offer
in compromise becomes pending when it is accepted for processing. If the
IRS determines that an offer in compromise does not meet its minimum
requirements, the offer in compromise is not processable and may be
returned to the taxpayer. However, the application fee submitted with the
offer will not be refunded unless the offer was accepted for processing in
REJECTING AN OFFER
In the decision whether and when to accept an offer in compromise is
within the discretion of the IRS. The IRS will verify all of the taxpayer's
income and assets, except for offers based solely on doubt as to liability.
The IRS accepts an offer to compromise by sending a written notification
to the taxpayer. Acceptance is effective as of the date on the acceptance
letter and conclusively settles the liability of the taxpayer.
The IRS maintains a schedule of national and local allowances on its
Website and in the Financial Analysis Handbook of the International
Revenue Manual 5.15 to account for the basic living expenses of
taxpayers seeking to compromise. To determine whether an offer is
adequate, the IRS uses these schedules to analyze the income and
expenses of the taxpayer to determine the monthly income available to
pay the liability.
WITHDRAWING AN OFFER
A taxpayer may withdraw an offer in compromise anytime before
acceptance of the offer; however, the IRS will not refund the application
fee submitted with the offer. The IRS also will not refund the application
fee if the offer is rejected.
The taxpayer must file an appeal within 30 days from the date of the
letter of rejection with the IRS office that rejected the offer in
Rev. Proc. 2003-71 is effective August 21, 2003.
======================== WARNING =======================
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed. Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a
attorney to discuss the specific facts of your case
and the law of your state.
If you live in Louisiana and want to talk about your situation, please
call me at:
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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