IRS Restructuring and Reform Act of 1998
3462 - Offers-in-Compromise
A. Provision covered: R.R.A. § 3462. Offers-In-Compromise. I.R.C. §§ 6159, 6331,
B. Background: Section 7122 of the Internal Revenue Code generally provides that
the Service may compromise any case arising under the internal revenue laws, prior to
referring that case to the Department of Justice for defense or prosecution. Current
regulations provide two bases for compromise: doubt as to collectibility and doubt as to
liability. The internal revenue manual provides guidance for determining an adequate doubt
as to collectibility offer. Congress believes that the Service should be more flexible in
working with taxpayers who are sincerely trying to satisfy their tax obligations and,
thus, the Service should make it easier for taxpayers to enter into offers-in-compromise.
The tax writing committees have indicated that taxpayer compliance is enhanced by the
ability to compromise and to make payments via an installment agreement.
C. Change(s): The following changes have been made with regard to the offer in
- The applicability of the allowable expense procedures will be determined on the facts
and circumstances of each taxpayer's case.
- Offers from low income taxpayers cannot be rejected solely on the basis of the amount of
- Taxpayers will no longer be required to waive the statute of limitations on collection.
- Regulations will be expanded to provide additional bases for compromise, other than
doubt as to liability and doubt as to collectibility.
- Compromise of a joint liability that is defaulted because of the actions of one spouse,
can be reinstated as to the nondefaulting spouse, upon application.
- Additional notices/instructions must be provided for taxpayers explaining their rights
and the obligations of the Service with respect to offers in compromise. This section
makes the following changes applicable to installment agreements:
- The Service cannot levy on the property of a taxpayer with a pending installment
agreement, during the 30 days following the rejection of the taxpayers request for
an installment agreement, during any time the rejection of such agreement is being
appealed, during any period for which an installment agreement is in effect, and during
the 30 days after the termination of the agreement and while such termination is being
This provision expands the authority for the Service to accept offers in compromise.
The current offer in compromise program will, thus, be substantially revised with the
drafting of the new regulations. In the interim, however, most of the changes are directed
at providing greater consideration to the taxpayer in resolving collection issues through
compromise. For example, all the facts and circumstances of the taxpayers condition
must be considered in determining the applicability of the allowable expense procedures.
Because the offer in compromise program will be administered with more flexibility, offer
receipts will likely increase.
A more substantial impact of this provision regards installment agreements. The new
prohibition on levy on pending agreements may cause some initial problems until procedures
are developed for early identification of requests for installment agreements and enforced
collection actions regarding those cases which can be frozen until some determination is
made regarding the agreement. Because installment agreements are generated and received in
a number of different ways and number in the millions, it will take a concerted effort on
the part of several different functions to ensure that collection actions are timely
suspended when a request for an installment agreement is received.
E. Necessary Actions
- Notice/instructions to the field regarding deviations from allowable expense standards.
Determinations of when to deviate will be in the discretion of the offer examiner/RO/group
manager. Procedures will be forthcoming.
- Determination of what is a "low income" taxpayer and creation of supplemental
procedures based on that designation.
- Define what is a "pending" installment agreement and create
procedures/transaction codes to ensure that levies are not issued while such agreements
- Modify Form 656 to eliminate statutory waiver provisions; to provide for severability in
the event of default by jointly liable taxpayers with joint offers.
- Preparation of statement regarding the rights of taxpayers and the obligations of the
Service in the offer in compromise process; and an instruction to taxpayers with offers of
the advantage of notifying the Service of any change in address or marital status.
- Define/clarify "independent administrative review" for purposes of proposed
offer in compromise and installment agreement rejections.
- Draft regulations providing additional bases for the compromise of individual income tax
liabilities, which include considerations such as equity, hardship, and public policy.
- Things we CAN do
The Service can continue to use current Form 656 for offers in
compromise until the form can be modified. However, the waiver provided in the current
form will expire as of December 31, 2002. If the ten year collection statute is still open
on that date for the liabilities contained in the offer agreement, the offer agreement may
remain viable. For offers entered into after December 31, 1999, or pending on that date,
the statute will be suspended because of the Services inability to collect by levy.
[For taxpayers who submit offers between the date of enactment and December 31, 2002,
where the CSED for the periods contained in the offer expire on or before December 31,
2002, collection action must stop as of that date.]
An addendum to Form 656 should be created that provides for severability of a joint
offer after the payments required under the offer are satisfied, so that in the event of a
default relating to the compliance provisions, the compromise will only default as to the
noncompliant party. The addendum will be in use until Form 656 can be modified. Because
the Service can no longer condition the acceptance of an installment agreement on the
taxpayers waiver of the right to receive a state income tax refund, any language on
an installment agreement form authorizing the Service to levy on state income tax refunds
as a condition of the agreement should be eliminated.
- Things we CANT do
The Service cannot levy on state income tax refunds while an
installment agreement is pending, for 30 days after rejection, or any time the rejection
is being considered by Appeals or while an accepted agreement is in effect. A taxpayer
requesting an installment agreement may agree to a levy on a state income tax refund, but
the acceptance of the installment agreement cannot be conditioned on the taxpayer agreeing
to a levy on the state tax refund.
F. Other Special Comments: None.