Compromises

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8829]

RIN 1545-AW87

Compromises

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide

additional guidance regarding the compromise of internal revenue taxes.

The temporary regulations reflect changes to the law made by the

Internal Revenue Service Restructuring and

[[Page 39021]]

Reform Act of 1998 and the Taxpayer Bill of Rights II. The text of

these temporary regulations serves as the text of the proposed

regulations set forth in the notice of proposed rulemaking on this

subject in the Proposed Rules section of this issue of the Federal

Register.

DATES: Effective date. These temporary regulations are effective July

21, 1999.

Applicability date. For dates of applicability, see Sec. 301.7122-

1T(j) of these regulations.

FOR FURTHER INFORMATION CONTACT: Carol A. Campbell, (202) 622-3620 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains temporary regulations amending the Procedure

and Administration Regulations (26 CFR part 301) under section 7122 of

the Internal Revenue Code (Code). The regulations reflect the amendment

of section 7122 by section 3462 of the Internal Revenue Service

Restructuring and Reform Act of 1998 (``RRA 1998'') Public Law 105-206,

(112 Stat. 685, 764) and by section 503 of the Taxpayer Bill of Rights

II Public Law 104-168, (110 Stat. 1452, 1461).

As amended by RRA 1998, section 7122 provides that the Secretary

will develop guidelines to determine when an offer to compromise is

adequate and should be accepted to resolve a dispute. The legislative

history accompanying RRA 1998 explains that Congress intended that

factors such as equity, hardship, and public policy be evaluated in the

compromise of individual tax liabilities, in certain circumstances, if

such consideration would promote effective tax administration. H. Conf.

Rep. 599, 105th Cong., 2d Sess. 289 (1998).

The current regulations under Treasury regulation Sec. 301.7122-1

permit the compromise of cases on only the grounds of doubt as to

collectibility, doubt as to liability, or both. These regulations are

being removed. Like the current regulations, the temporary regulations

provide for compromise based on doubt as to liability and doubt as to

collectibility; however, they also provide for compromise based upon

specific hardship and/or equitable criteria if such a compromise would

promote effective tax administration. The inclusion in these

regulations of a standard that will allow compromise on grounds other

than doubt as to liability or doubt as to collectibility represents a

significant change in the IRS' exercise of compromise authority.

Section 7122 of the Code provides broad authority to the Secretary

to compromise any case arising under the internal revenue laws, as long

as the case has not been referred to the Department of Justice for

prosecution or defense. Although the statutory language of Section 7122

does not explicitly place limits on the Secretary's authority to

compromise, opinions of the Attorney General and the regulations issued

under section 7122 prior to RRA 1998 authorized the Secretary to

compromise a liability under the revenue laws only when there was doubt

as to liability (uncertainty as to the existence or amount of the tax

obligation) or doubt as to collectibility (uncertainty as to the

taxpayer's ability to pay). The opinion of the Attorney General most

often cited as the principal source of these limitations is the 1933

opinion of Attorney General Cummings that was issued in response to an

inquiry from then Acting Secretary of the Treasury Acheson.

In requesting an opinion from the Attorney General, Acting

Secretary of the Treasury Acheson expressed concern that the country

was trying to recover from the depression. He suggested that the public

interest required compromise of tax claims where collection of the tax

would ``destroy a business, ruin a tax producer, throw men out of

employment, or result in the impoverishment of widows or minor children

of a deceased taxpayer.'' The Secretary expressed the belief that in

ordinary times, compromise of cases on public policy grounds should be

rare but that, in light of the current state of the country, public

policy should play a significantly greater role. Expressing the belief

that it was more important that ``the business of the taxpayer be

preserved and not destroyed,'' Acting Secretary Acheson suggested that

cases should be compromised where the taxpayer is insolvent, even

though the tax is fully collectible, and that penalties and certain

interest charges should be ``compromisable wherever justice, equity, or

public policy seems to justify the compromise * * *.'' Letter from

Treasury Department, XIII-47-7137 (July 31, 1933).

Attorney General Cummings replied that ``[t]here is much to be said

for the proposition that a liberal rule should exist, but my opinion is

that if such a course is to be taken it should be at the instance of

Congress. I conclude that where liability has been established by a

valid judgment or is certain, and there is no doubt as to the ability

of the Government to collect, there is no room for `mutual

concessions,' and therefore no basis for a `compromise.' '' Op. Atty.

Gen. 6, XIII-47-7138 (October 24, 1933). See also Op. Atty. Gen. 7,

XIII-47-7140 (October 2, 1934), wherein Attorney General Cummings

stated that ``[t]here appears to be no statutory authority to

compromise solely upon the ground that a hard case is presented, which

excites sympathy or is merely appealing from the standpoint of equity,

but the power to compromise clearly authorizes the settlement of any

case about which uncertainty exists as to liability or collection.''

Although the 1933 opinion of Attorney General Cummings is the most

often cited opinion regarding the limits of the IRS' compromise

authority (prior to RRA 1998), the conclusion he reached mirrored

conclusions reached by a number of his predecessors. Thus, since 1868,

a number of Attorneys General opined that when liability is not at

issue, the Secretary's compromise authority permitted compromise only

when ``the full amount of the debt'' could not be collected. See, e.g.,

12 Op. Atty. Gen. 543 (1868); 16 Op. Atty. Gen. 617 (1879) (the

Secretary's authority to compromise does not permit the ``voluntary

relinquishment'' of any part of a lawfully assessed tax from a solvent

person or corporation).

Following the issuance of Attorney General Cummings' 1933 opinion,

Commissioner Helvering established a policy that IRS tax collectors

should make every endeavor to secure offers that represent the

taxpayer's ``maximum capacity to pay.'' Commissioner's Statement of

Policy with Respect to the Compromise of Taxes, Interest, and

Penalties, July 2, 1934. Commissioner Helvering recognized that the

Attorney General's opinion did not specify or quantify the amount of

doubt necessary to compromise, but concluded that ``* * * the Treasury

Department does not propose to compromise when there is merely the

possibility of doubt. The doubt as to liability or collectibility must

be supported by evidence and must be substantial in character, and when

such doubt exists, the amount acceptable will depend upon the degree of

doubt found in the particular case.'' Id. Implementing the policy

established by Commissioner Helvering, the IRS concluded that an offer

premised upon doubt as to collectibility should be accepted only when

the amount offered represented the maximum amount the taxpayer could

pay, taking into account net equity in assets and both current and

future income.

The interpretation of section 7122 adopted by Attorney General

Cummings (and reflected in Treasury reg. Sec. 301.7122-1(a)), together

with the ``maximum capacity to pay'' policy

[[Page 39022]]

established by Commissioner Helvering, have been the fundamental

guiding principles for IRS offer in compromise programs for the past 65

years. From the 1930's to the early 1990's, offers to compromise were

not widely used to resolve tax cases. In the early 1990s, however, the

IRS determined that expanded use of offers to compromise could

contribute to more effective tax administration in two important

respects. First, the IRS determined that compromise could be used as a

technique to enhance overall compliance by providing taxpayers with a

reasonable avenue to resolve past difficulties. Second, the IRS

determined that it should make more effective use of offers to

compromise to help manage the inventory of delinquent tax accounts.

Accordingly, while still operating within the basic legal and policy

guidelines established in the 1930's, the IRS initiated two significant

changes intended to enhance the compromise program.

In 1992, the IRS adopted a new compromise policy and issued revised

compromise procedures. The policy provides that an offer to compromise

will be accepted when it is unlikely that the tax liability can be

collected in full and the amount offered reasonably reflects collection

potential. As set forth in the new policy statement, the goal of the

compromise program is to achieve collection of what is potentially

collectible at the earliest possible time and at the least cost to the

government while providing taxpayers with a fresh start toward future

voluntary compliance. Policy Statement, P-5-100. In administering its

policies under the offer program, the threshold question of ``doubt as

to liability or doubt as to collectibility'' set forth in the

regulations constituted a legal requirement that must be followed; once

that threshold was met, however, the IRS could legally accept less than

the taxpayer's maximum capacity to pay. References in the offer

procedures to ``maximizing collection'' and ``maximum capacity to pay''

were replaced with ``reasonably reflects collection potential.'' Id.

In determining whether an offer reasonably reflects collection

potential, the IRS takes into consideration amounts that might be

collected from (1) The taxpayer's assets, (2) the taxpayer's present

and projected future income, and (3) third parties (e.g., persons to

whom the taxpayer had transferred assets). Although most doubt as to

collectibility offers only involve consideration of the taxpayer's

equity in assets and future disposable income over a fixed period of

time, the IRS on occasion also will consider whether the taxpayer

should be expected to raise additional amounts from assets in which the

taxpayer's interest is beyond the reach of enforced collection (e.g.,

interests in property located in foreign jurisdictions or held in

tenancies by the entirety). IRM 57(10)(10).1.

The compromise program was also affected by a 1995 IRS initiative

designed to ensure uniform treatment of similarly situated taxpayers.

In administering its collection operations, including both the

installment agreement program and the compromise program, the IRS has

always permitted taxpayers to retain sufficient funds to pay reasonable

living expenses. Certain commentators had asserted that there were wide

variances in the type and amount of such reasonable expense allowances

within and between districts. In September of 1995, the IRS adopted and

published national and local standards for determining allowable

expenses, designed to apply to all collection actions, including offers

to compromise. National expense standards derived from the Bureau of

Labor Statistics Consumer Expenditure Survey were promulgated for

expense categories such as food, clothing, personal care items, and

housekeeping supplies. Local expense standards derived from Census

Bureau data were promulgated for housing, utilities, and

transportation.

The IRS allowable expense criteria play an important role in

determining whether taxpayers are candidates for compromise or

installment agreements. Although offers to compromise and installment

agreements are separate mechanisms for resolving outstanding tax

liabilities, there often is a significant interplay between the two

programs, because a taxpayer's income available to satisfy the tax

liability is determined after the deduction of allowable expenses. In

some cases, the allowable expense criteria may be the determining

factor in whether the taxpayer receives an installment agreement or a

compromise. An installment agreement must provide for payment in full

of the amount of the outstanding liability through regular, periodic

payments (generally monthly). I.R.C. Sec. 6159. An offer to compromise,

by contrast, reflects the fact that the taxpayer has no ability to pay

the liability in full. Accordingly, taxpayers entering into compromise

agreements can pay an amount less than the full amount due in

satisfaction of the liability.

Congress now has directed the Secretary to consider factors other

than doubt as to collectibility and doubt as to liability in

determining whether to accept an offer to compromise. Under

Sec. 7122(c), added by RRA 1998, factors such as equity, hardship, and

public policy will be considered in certain circumstances where such

consideration will promote effective tax administration. The

legislative history of this provision (H. Conf. Rep. 599, 105th Cong.,

2d Sess. 289 (1998)) states that--

* * * the conferees expect that the present regulations will be

expanded so as to permit the IRS, in certain circumstances, to

consider additional factors (i.e., factors other than doubt as to

liability or collectibility) in determining whether to compromise

the income tax liabilities of individual taxpayers. For example, the

conferees anticipate that the IRS will take into account factors

such as equity, hardship, and public policy where a compromise of an

individual taxpayer's income tax liability would promote effective

tax administration. The conferees anticipate that, among other

situations, the IRS may utilize this new authority, to resolve

longstanding cases by forgoing penalties and interest which have

accumulated as a result of delay in determining the taxpayer's

liability. The conferees believe that the ability to compromise tax

liability and to make payments of tax liability by installment

enhances taxpayer compliance. In addition, the conferees believe

that the IRS should be flexible in finding ways to work with

taxpayers who are sincerely trying to meet their obligations and

remain in the tax system. Accordingly, the conferees believe that

the IRS should make it easier for taxpayers to enter into offer-in-

compromise agreements, and should do more to educate the taxpaying

public about the availability of such agreements.

Another consideration for compromise cases is Chief Counsel review.

Since its enactment in section 102 of the Act of July 20, 1868 (15

Stat. 166), the statute authorizing the Secretary to compromise

liabilities has contained a requirement that Counsel issue opinions

regarding certain of those compromises. Section 7122(b) of the Code

requires that the opinion of Counsel, with the reasons therefor, be

placed on file whenever a compromise is made by the IRS. Chief Counsel

opinions assess both whether the offer meets the legal requirements for

compromise and whether the offer conforms to IRS policy and procedure.

The opinion provided by Chief Counsel, however, does not have to be in

favor of compromise. Pursuant to delegated authority, district

directors, service center directors, and regional directors of Appeals

have the authority to accept an offer that Counsel has opined does not

conform to IRS policy.

Until passage of the Taxpayer Bill of Rights II (TBOR 2), Chief

Counsel review was required in all cases in which the liability

compromised was

[[Page 39023]]

$500 or more. Under TBOR 2, such an opinion is required only in cases

where the compromised liability is $50,000 or more.

Explanation of Provisions

The temporary regulations continue the traditional grounds for

compromise based on doubt as to liability or doubt as to

collectibility. In addition, to reflect the changes made in RRA 1998,

the temporary regulations allow a compromise where there is no doubt as

to liability or as to collectibility, but where either: (1) Collection

of the liability would create economic hardship, or (2) exceptional

circumstances exist such that collection of the liability would be

detrimental to voluntary compliance. Compromise based on these hardship

and equity bases may not, however, be authorized if it would undermine

compliance. Although the temporary regulations set forth the conditions

that must be satisfied to accept an offer to compromise liabilities

arising under the internal revenue laws, they do not prescribe the

terms or conditions that should be contained in such offers. Thus, the

amount to be paid, future compliance or other conditions precedent to

satisfaction of a liability for less than the full amount due are

matters left to the discretion of the Secretary.

The temporary regulations also add provisions relating to the

promulgation of requirements for providing for basic living expenses,

evaluating offers from low income taxpayers, and reviewing rejected

offers, as required by RRA 1998. The temporary regulations also add

provisions relating to staying collection, modifying the dollar

criteria for requiring the opinion of Chief Counsel in accepted offers,

and setting forth the requirements regarding waivers and suspensions of

the statute of limitations. Except for the provision related to dollar

criteria for Chief Counsel review, all of the additional provisions of

Sec. 301.7122-1T are authorized by RRA 1998. The modification of dollar

criteria for Chief Counsel review is authorized by section 503(a) of

the Taxpayer Bill of Rights II.

As required by Sec. 7122(c)(2)(A) and (B), added by RRA 1998, the

temporary regulations provide for the development and publication of

national and local living allowances that permit taxpayers entering

into offers to compromise to have an adequate means to provide for

their basic living expenses. The determination whether the published

standards should be applied in any particular case must be based upon

an evaluation of the individual facts and circumstances presented. The

Secretary will determine the appropriate means to publish these

national and local living allowances.

In accordance with Sec. 7122(c)(3)(A), the temporary regulations

also require the development of supplemental guidelines for the

evaluation of offers from ``low income'' taxpayers. The temporary

regulations permit the Secretary to determine which taxpayers qualify

as ``low income'' taxpayers based upon current dollar criteria applied

by the U.S. Department of Health and Human Services under authority of

section 673(2) of the Omnibus Budget Reconciliation Act of 1981, or any

other measure reasonably designed to identify such taxpayers.

In accordance with Sec. 7122(d)(1), the temporary regulations

provide that all proposed rejections of offers to compromise will

receive independent administrative review prior to final rejection.

Section 7122(d)(2) requires and the temporary regulations also provide

that the taxpayer has the right to appeal any rejection of an offer to

compromise to the IRS Office of Appeals. The temporary regulations

provide, however, that when the IRS returns an offer to compromise

because it was not processable under IRS procedures, because the offer

was submitted solely to delay collection or because the taxpayer failed

to provide requested information required by the IRS to evaluate the

offer, such a return of the offer does not constitute a rejection and

thus, does not entitle the taxpayer to appeal rights under this

provision. In the event that an offer to compromise is returned under

these circumstances and the IRS institutes collection action, the

taxpayer may have the right to consideration of the whole of his or her

collection case under other provisions of the Code.

Pursuant to section 6331(k) of the Code, as amended by section 3462

of RRA 1998, the temporary regulations also provide that for offers

pending on or submitted on or after January 1, 2000, no enforced

collection activity may be taken by the IRS to collect a liability

while an offer to compromise is pending, or for the 30 days following

any rejection of an offer to compromise, or during any period that an

appeal of any rejection, when such appeal is instituted within the 30

days following rejection, is being considered. Collection activity will

not, however, be precluded in any case where collection is in jeopardy

or the offer to compromise was submitted solely to delay collection.

Effective through December 31, 1999, the temporary regulations

continue to require the taxpayer to waive the running of the statutory

period of limitations on collection as a condition of acceptance of an

offer to compromise. Effective January 1, 2000, waivers of the statute

of limitations on collection will no longer be required for the

acceptance of an offer to compromise. Instead, the statute of

limitations for collection will be suspended during the period the

offer to compromise is under consideration by the IRS. This provision

of the temporary regulations implements section 3461 of RRA 1998.

The temporary regulations also implement section 503(a) of the

Taxpayer Bill of Rights II by specifying that Chief Counsel review of

an accepted offer to compromise is required only for offers in

compromise involving $50,000 or more in unpaid liabilities.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

sections 553(b) and (d) of the Administrative Procedure Act (5 U.S.C.

chapter 5) do not apply to these regulations. Please refer to the

cross-referenced notice of proposed rulemaking published elsewhere in

this issue of the Federal Register for the applicability of the

Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section

7805(f) of the Internal Revenue Code, these temporary regulations will

be submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information: The principal author of these temporary

regulations is Carol A. Campbell of the Office of Assistant Chief

Counsel (General Litigation). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

[[Page 39024]]

Sec. 301.7122-1-- [Removed]

Par. 2. Section 301.7122-1 is removed.

Par. 3. Section Sec. 301.7122-0T and 301.7211-1T are added to read

as follows:

Sec. 301.7122-0T-2 Table of contents.

This section list the captions that appear in the temporary

regulations under Sec. 301.7122-1T.

Sec. 301.7122-1T Compromises (temporary).

(a) In general.

(b) Grounds for compromise.

(c) Procedures for submission and consideration of offers.

(d) Acceptance of an offer to compromise a tax liability.

(e) Rejection of an offer to compromise.

(f) Effect of offer to compromise on collection activity

(g) Deposits.

(h) Statute of limitations.

(i) Inspection with respect to accepted offers to compromise.

(j) Effective date.

Sec. 301.7122-1T Compromises (temporary).

(a) In general. (1) The Secretary may exercise his discretion to

compromise any civil or criminal liability arising under the internal

revenue laws prior to reference of a case involving such a liability to

the Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal

liability for taxes, interest, or penalties. Unless the terms of the

offer and acceptance expressly provide otherwise, acceptance of an

offer to compromise a civil liability does not remit a criminal

liability, nor does acceptance of an offer to compromise a criminal

liability remit a civil liability.

(b) Grounds for compromise. (1) In general. The Secretary may

compromise a liability on any of the following three grounds.

(2) Doubt as to liability. Doubt as to liability exists where there

is a genuine dispute as to the existence or amount of the correct tax

liability under the law. Doubt as to liability does not exist where the

liability has been established by a final court decision or judgment

concerning the existence or amount of the liability. See

Sec. 301.7122(e)(4) for special rules applicable to rejection of offers

in cases where the IRS is unable to locate the taxpayer's return or

return information to verify the liability.

(3) Doubt as to collectibility. (i) In general. Doubt as to

collectibility exists in any case where the taxpayer's assets and

income are less than the full amount of the assessed liability.

(ii) Allowable expenses. A determination of doubt as to

collectibility will include a determination of ability to pay. In

determining ability to pay, the Secretary will permit taxpayers to

retain sufficient funds to pay basic living expenses. The determination

of the amount of such basic living expenses will be founded upon an

evaluation of the individual facts and circumstances presented by the

taxpayer's case. To guide this determination, guidelines published by

the Secretary on national and local living expense standards will be

taken into account.

(iii) Nonliable spouses. (A) In general. Where a taxpayer is

offering to compromise a liability for which the taxpayer's spouse has

no liability, the assets and income of the nonliable spouse will not be

considered in determining the amount of an adequate offer, except to

the extent property has been transferred by the taxpayer to the

nonliable spouse under circumstances that would permit the IRS to

effect collection of the taxpayer's liability from such property, e.g.,

property that was conveyed in fraud of creditors, or as provided in

paragraph (b)(3)(iii) (B) of this section. The IRS may, however,

request information regarding the assets and/or income of the nonliable

spouse for the sole purpose of verifying the amount of and

responsibility for expenses claimed by the taxpayer.

(B) Exception. Where collection of the taxpayer's liability from

the assets and/or income of the nonliable spouse is permitted by

applicable state law (e.g., under state community property laws), the

assets and income of the nonliable spouse will be considered in

determining the amount of an adequate offer except to the extent that

the taxpayer and the nonliable spouse demonstrate that collection of

such assets and income would have a material and adverse impact on the

standard of living of the taxpayer, the nonliable spouse, and their

dependents.

(4) Promote effective tax administration. If there are no grounds

for compromise under paragraphs (b)(2) and (3) of this temporary

regulation, a compromise may be entered into to promote effective tax

administration when--

(i) Collection of the full liability will create economic hardship

within the meaning of Sec. 301.6343-1; or

(ii) Regardless of the taxpayer's financial circumstances,

exceptional circumstances exist such that collection of the full

liability will be detrimental to voluntary compliance by taxpayers; and

(iii) Compromise of the liability will not undermine compliance by

taxpayers with the tax laws.

(iv) Special rules for evaluating offers to promote effective tax

administration. (A) The determination to accept or reject an offer to

compromise made on the ground that acceptance would promote effective

tax administration within the meaning of this section will be based

upon consideration of all the facts and circumstances, including the

taxpayer's record of overall compliance with the tax laws.

(B) Factors supporting (but not conclusive of) a determination of

economic hardship under paragraph (b)(4)(i) include--

(1) Taxpayer is incapable of earning a living because of a long

term illness, medical condition, or disability and it is reasonably

foreseeable that taxpayer's financial resources will be exhausted

providing for care and support during the course of the condition;

(2) Although taxpayer has certain assets, liquidation of those

assets to pay outstanding tax liabilities would render the taxpayer

unable to meet basic living expenses; and

(3) Although taxpayer has certain assets, the taxpayer is unable to

borrow against the equity in those assets and disposition by seizure or

sale of the assets would have sufficient adverse consequences such that

enforced collection is unlikely.

(C) Factors supporting (but not conclusive of) a determination that

compromise would not undermine compliance by taxpayers with the tax

laws include--

(1) Taxpayer does not have a history of noncompliance with the

filing and payment requirements of the Internal Revenue Code;

(2) Taxpayer has not taken deliberate actions to avoid the payment

of taxes; and

(3) Taxpayer has not encouraged others to refuse to comply with the

tax laws.

(D) Examples. The following examples illustrate cases that may be

compromised under the provisions of paragraph (b)(4)(i):

Example 1. Taxpayer has assets sufficient to satisfy the tax

liability. Taxpayer provides full time care and assistance to her

dependent child, who has a serious long-term illness. It is expected

that the taxpayer will need to use the equity in her assets to

provide for adequate basic living expenses and medical care for her

child. Taxpayer's overall compliance history does not weigh against

compromise.

Example 2. Taxpayer is retired and his only income is from a

pension. The taxpayer's only asset is a retirement account, and the

funds in the account are sufficient to satisfy the liability.

Liquidation of the retirement account would leave the taxpayer

without an adequate means to provide for

[[Page 39025]]

basic living expenses. Taxpayer's overall compliance history does

not weigh against compromise.

Example 3. Taxpayer is disabled and lives on a fixed income that

will not, after allowance of adequate basic living expenses, permit

full payment of his liability under an installment agreement.

Taxpayer also owns a modest house that has been specially equipped

to accommodate his disability. Taxpayer's equity in the house is

sufficient to permit payment of the liability he owes. However,

because of his disability and limited earning potential, taxpayer is

unable to obtain a mortgage or otherwise borrow against this equity.

In addition, because the taxpayer's home has been specially equipped

to accommodate his disability, forced sale of the taxpayer's

residence would create severe adverse consequences for the taxpayer,

making such a sale unlikely. Taxpayer's overall compliance history

does not weigh against compromise.

Example 4. Taxpayer is a business that despite the adoption of a

wide array of precautions, including the employment of outside

auditors, suffered an embezzlement loss. Although the taxpayer

reviewed and signed employment tax returns and signed checks for

payment of all employment tax liabilities, the embezzling employee

successfully intercepted these checks and diverted the funds. At the

time taxpayer discovers the diversions, taxpayer promptly contacts

the IRS and begins proceedings to obtain recovery from the employee

and the auditor. Taxpayer is unsuccessful in obtaining any recovery

from either the employee or the auditor. While taxpayer has accounts

receivable that will satisfy the tax delinquencies, taxpayer would

be unable to remain in business if those receivables were seized by

the IRS. Further, while taxpayer will continue to generate some

profit if permitted to remain in business, those profits would not

be sufficient to pay the accrued liabilities prior to the time

collection of the liabilities became barred by the statute of

limitations. Taxpayer's overall compliance history does not weigh

against compromise.

(E) The following examples illustrate cases that may be compromised

under paragraph (b)(4)(ii):

Example 1. In October of 1986, taxpayer developed a serious

illness that resulted in almost continuous hospitalizations for a

number of years. The taxpayer's medical condition was such that

during this period the taxpayer was unable to manage any of his

financial affairs. The taxpayer has not filed tax returns since that

time. The taxpayer's health has now improved and he has promptly

begun to attend to his tax affairs. He discovers that the IRS

prepared a substitute for return for the 1986 tax year on the basis

of information returns it had received and had assessed a tax

deficiency. When the taxpayer discovered the liability, with

penalties and interest, the tax bill is more than three times the

original tax liability. Taxpayer's overall compliance history does

not weigh against compromise.

Example 2. Taxpayer is a salaried sales manager at a department

store who has been able to place $2,000 in a tax-deductible IRA

account for each of the last two years. Taxpayer learns that he can

earn a higher rate of interest on his IRA savings by moving those

savings from a money management account to a certificate of deposit

at a different financial institution. Prior to transferring his

savings, taxpayer submits an E-Mail inquiry to the IRS at its Web

Page, requesting information about the steps he must take to

preserve the tax benefits he has enjoyed and to avoid penalties. The

IRS responds in an answering E-Mail that the taxpayer may withdraw

his IRA savings from his neighborhood bank, but he must redeposit

those savings in a new IRA account within 90 days. Taxpayer

withdraws the funds and redeposits them in a new IRA account 63 days

later. Upon audit, taxpayer learns that he has been misinformed

about the required rollover period and that he is liable for

additional taxes, penalties and additions to tax for not having

redeposited the amount within 60 days. Had it not been for the

erroneous advice that is reflected in the taxpayer's retained copy

of the IRS E-Mail response to his inquiry, taxpayer would have

redeposited the amount within the required 60-day period. Taxpayer's

overall compliance history does not weigh against compromise.

(c) Procedures for submission and consideration of offers. (1) In

general. An offer to compromise a tax liability pursuant to section

7122 must be submitted according to the procedures, and in the form and

manner, prescribed by the Secretary. An offer to compromise a tax

liability must be signed by the taxpayer under penalty of perjury and

must contain the information prescribed or requested by the Secretary.

However, taxpayers submitting offers to compromise liabilities solely

on the basis of doubt as to liability will not be required to provide

financial statements.

(2) When offers become pending and return of offers. An offer to

compromise becomes pending when it is accepted for processing. If an

offer accepted for processing does not contain sufficient information

to permit the IRS to evaluate whether the offer should be accepted, the

IRS will request the taxpayer to provide the needed additional

information. If the taxpayer does not submit the additional information

that the IRS has requested within a reasonable time period after such a

request, the IRS may return the offer to the taxpayer. The IRS may also

return an offer to compromise a tax liability if it determines that the

offer was submitted solely to delay collection or was otherwise

nonprocessable. An offer returned following acceptance for processing

is deemed pending only for the period between the date the offer is

accepted for processing and the date the IRS returns the offer to the

taxpayer. See paragraphs (e)(5)(ii) and (f)(2)(iv) of this temporary

regulation for rules regarding the effect of such returns of offers.

(3) Withdrawal. An offer to compromise a tax liability may be

withdrawn by the taxpayer or the taxpayer's representative at any time

prior to the IRS' acceptance of the offer to compromise. An offer will

be considered withdrawn upon the IRS' receipt of written notification

of the withdrawal of the offer by personal delivery, or by certified

mail, or upon issuance of a letter by the IRS confirming the taxpayer's

intent to withdraw the offer.

(d) Acceptance of an offer to compromise a tax liability. (1) An

offer to compromise has not been accepted until the IRS issues a

written notification of acceptance to the taxpayer or the taxpayer's

representative.

(2) As additional consideration for the acceptance of an offer to

compromise, the IRS may request that taxpayer enter into any collateral

agreement or post any security which is deemed necessary for the

protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of

compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is

contingent upon the immediate and simultaneous release of a tax lien in

whole or in part, such payment must be made in accordance with the

forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle

the liability of the taxpayer specified in the offer. Neither the

taxpayer nor the Government will, following acceptance of an offer to

compromise, be permitted to reopen the case except in instances where--

(i) False information or documents are supplied in conjunction with

the offer;

(ii) The ability to pay and/or the assets of the taxpayer are

concealed; or

(iii) A mutual mistake of material fact sufficient to cause the

offer agreement to be reformed or set aside is discovered.

(6) Opinion of Chief Counsel. Except as otherwise provided in this

paragraph (d)(6), if an offer to compromise is accepted, there will be

placed on file the opinion of the Chief Counsel for the IRS with

respect to such compromise, along with the reasons therefor. However,

no such opinion will be required with respect to the compromise of any

civil case in which the unpaid amount of tax assessed (including any

interest, additional amount, addition to the tax, or assessable

penalty) is less than

[[Page 39026]]

$50,000. Also placed on file will be a statement of--

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the

tax, or assessable penalty, imposed by law on the person against whom

the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the

compromise.

(e) Rejection of an offer to compromise. (1) An offer to compromise

has not been rejected until the IRS issues a written notice to the

taxpayer or his representative, advising of the rejection, the

reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative

of the rejection of an offer to compromise until an independent

administrative review of the proposed rejection is completed.

(3) Low income taxpayers. No offer to compromise received from a

low income taxpayer may be rejected solely on the basis of the amount

of the offer without evaluating whether that offer meets the criteria

in paragraph (b) of this section. For purposes of this paragraph

(e)(3), a low income taxpayer is a taxpayer who falls at or below the

dollar criteria established by the poverty guidelines updated annually

in the Federal Register by the U.S. Department of Health and Human

Services under authority of section 673(2) of the Omnibus Budget

Reconciliation Act of 1981 or such other measure that is adopted by the

Secretary.

(4) Offers based upon doubt as to liability. Offers submitted on

the basis of doubt as to liability cannot be rejected solely because

the IRS is unable to locate the taxpayer's return or return information

for verification of the liability.

(5) Appeal of rejection of an offer in compromise. (i) In general.

The taxpayer may administratively appeal a rejection of an offer to

compromise to the IRS Office of Appeals (Appeals) if, within the 30-day

period commencing the day after the date on the letter of rejection,

the taxpayer requests such an administrative review in the manner

provided by the Secretary.

(ii) Offer to compromise returned following a determination that

the offer was nonprocessable, a failure by the taxpayer to provide

requested information, or a determination that the offer was submitted

for purposes of delay. Where a determination is made to return offer

documents because the offer to compromise was nonprocessable, because

the taxpayer failed to provide requested information, or because the

IRS determined that the offer to compromise was submitted solely for

purposes of delay under paragraph (c)(2) of this section, the return of

the offer does not constitute a rejection of the offer for purposes of

this provision and does not entitle the taxpayer to appeal the matter

to Appeals under the provisions of this paragraph (e)(5). However, if

the offer is returned because the taxpayer failed to provide requested

financial information, the offer will not be returned until an

independent administrative review of the proposed return is completed.

(f) Effect of offer to compromise on collection activity. (1)

Offers submitted prior to and not pending on or after December 31,

1999. For offers to compromise submitted prior to and not pending on or

after December 31, 1999, the submission of an offer to compromise will

not automatically operate to stay the collection of any liability.

Enforcement of collection may, however, be deferred if the interests of

the United States will not be jeopardized thereby.

(2) Offers pending on or made on or after December 31, 1999. (i) In

general. For offers pending on or made on or after December 31, 1999,

the IRS will not make any levies to collect the liability that is the

subject of the compromise during the period the IRS is evaluating

whether such offer will be accepted or rejected, for 30 days

immediately following the rejection of the offer, and for any period

when a timely filed appeal from the rejection is being considered by

Appeals.

(ii) Revised offers submitted following rejection. If, following

the rejection of an offer to compromise pending on or made on or after

December 31, 1999, the taxpayer makes a good faith revision of that

offer and submits the revised offer within 30 days after the date of

rejection, the IRS will not levy to collect the liability that is the

subject of the revised offer to compromise while the IRS is evaluating

whether to accept or reject the revised offer.

(iii) Jeopardy. The IRS may levy to collect the liability that is

the subject of an offer to compromise during the period the IRS is

evaluating whether that offer will be accepted if it determines that

collection of the liability is in jeopardy.

(iv) Offers to compromise determined by IRS to be nonprocessable or

submitted solely for purposes of delay. The IRS may levy to collect the

liability that is the subject of an offer to compromise at any time

after it determines, under paragraph (c)(2) of this section, that a

pending offer did not contain sufficient information to permit

evaluation of whether the offer should be accepted, that the offer was

submitted solely to delay collection, or that the offer was otherwise

nonprocessable.

(v) Offsets under section 6402. Notwithstanding the evaluation and

processing of an offer to compromise, the IRS may, in accordance with

section 6402, credit any overpayments made by the taxpayer against a

liability that is the subject of an offer to compromise and may offset

such overpayments against other liabilities owed by the taxpayer to the

extent authorized by section 6402.

(g) Deposits. Sums submitted with an offer to compromise a

liability or during the pendency of an offer to compromise are

considered deposits and will not be applied to the liability until the

offer is accepted unless the taxpayer provides written authorization

for application of the payments. If an offer to compromise is

withdrawn, is determined to be nonprocessable, or is submitted solely

for purposes of delay and returned to the taxpayer, any amount tendered

with the offer, including all installments paid on the offer, will be

refunded without interest. If an offer is rejected, any amount tendered

with the offer, including all installments paid on the offer, will be

refunded, without interest, after the conclusion of any review sought

by the taxpayer with Appeals. Refund will not be required if the

taxpayer has agreed in writing that amounts tendered pursuant to the

offer may be applied to the liability for which the offer was

submitted.

(h) Statute of limitations. (1) Offers submitted prior to and not

pending on or after December 31, 1999. For offers to compromise

submitted prior to and not pending on or after December 31, 1999--

(i) If the 10-year period specified in section 6502(a) will expire

prior to December 31, 2002, and

(ii) Payments due under the agreement are scheduled to be made

after the date upon which the 10-year period specified in section

6502(a) will expire--

no offer will be accepted unless the taxpayer executes a consent to

extend the statutory period of limitations on the collection of the

liability involved until the date one year subsequent to the date of

the last scheduled payment or until December 31, 2002, whichever is

earlier.

(2) Offers pending on or made on or after December 31, 1999. For

offers pending on or made on or after December 31, 1999, the statute of

limitations on collection will be suspended while collection is

prohibited under paragraph (f)(2) of this section.

[[Page 39027]]

(3) For any offer to compromise, the IRS may continue to require,

where appropriate, the extension of the statute of limitations on

assessment. However, in any case where waiver of the running of the

statutory period of limitations on assessment is sought, the taxpayer

must be notified of the right to refuse to extend the period of

limitations or to limit the extension to particular issues or

particular periods of time.

(i) Inspection with respect to accepted offers to compromise. For

provisions relating to the inspection of returns and accepted offers to

compromise, see section 6103(k)(1).

(j) Effective date. Except as otherwise provided, this section

applies to offers to compromise submitted on or after July 21, 1999,

through July 19, 2002.

Charles O. Rossotti,

Commissioner of Internal Revenue.

Approved: July 14, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 99-18456 Filed 7-19-99; 8:45 am]

BILLING CODE 4830-01-U