Wednesday, October 30, 2013

IRS Pronouncements Make Offers in Compromise Less Available.

The IRS issued memorandum SBSE-05-1013-0076 to its Collection employees who are working Offer in Compromise cases, providing them guidance on when Offers should be rejected under "Not in the Best Interest of the Government" or "Public Policy" basis.

This guidance supplements the procedures found in Internal Revenue Manual (IRM), Rejection; IRM, Not in the Best Interest of the Government Rejection; and IRM, Public Policy Rejection, and will be incorporated into the next revision of the IRM.

While these provisions may be well-intentioned, they most probably will result in a Subjective Exception to an otherwise, long-standing, objective measurable criteria of Doubt as to Collectibility (DATC). 

This may result in allowing Collection employees to reject an Offer based solely on their Subjective Dislike of a particular Taxpayer or of the Taxpayer’s previous lifestyle (including but not limited to, having owned exotic cars, boats, etc.).

Situations that may warrant rejection as
“Not Being in the Best Interest of the Government"

1.      The taxpayer's offer meets processability criteria. However, the taxpayer has an egregious history of past noncompliance, as evidenced by the taxpayer's failure to voluntarily file correct returns. NOTE: Future collection potential and the ability to secure a collateral agreement should be considerations prior to recommending an offer for rejection under NIBIG.   

2.      An in-business taxpayer compromising employment taxes, where financial analysis indicates the business does not have the ability to fund the offer, remain current with future tax obligations, and meet the business’ normal operating expenses.   

3.      Any offer involving deferred payment where financial analysis indicates the taxpayer cannot fund the offer and an acceptable explanation as to where the additional funds may be secured is not provided.  

4.      The taxpayer is the primary responsible party for a related entity, i.e. corporation, partnership, etc., that is not in compliance with its filing and paying requirements.  

5.      The offer is from an ongoing business that appears to be insolvent, will remain insolvent, even if the offer is accepted, and it appears that the government’s position would be better protected through a formal insolvency proceeding. Refer to IRM, Consideration of a Potential Bankruptcy Filing on the Calculation of RCP in an OIC Investigation 

6.      The taxpayer does not have the ability to fully pay the liability via an installment agreement, yet based on the evaluation of the taxpayer's financial situation, the amount potentially received through a PPIA approximates the outstanding balance. Refer to IRM 

In each of the situations listed, a review of the taxpayer's financial situation should be completed prior to a final determination that a rejection under NIBIG is the appropriate course of action.

In circumstances where the potential for a fraud referral exists, the financial evaluation conducted and verified should be based on the facts and circumstances of the case.   

Situations That May Warrant Rejection
Based on a “Public Policy Decision” 

1.      The taxpayer has in the past, and continues to openly encourage30 se30 sec others to refuse to comply with the tax laws.

2.      Indicators exist showing that the financial benefits of a criminal activity are concealed or the criminal activity is continuing.

3.      The taxpayer engaged in a pattern of conduct suggesting intentional dissipation of assets.


The taxpayer, a payroll service provider, has received from its clients payments of employment taxes in the amount of $10 million.
  • The taxpayer remits to the Service an amount equal to the trust fund portion of the employment taxes and designates the payment for application to the trust fund portion of the tax.
  • The taxpayer pays no more of the employment tax. 
  • Meanwhile, the taxpayer dissipates all of its remaining assets, reducing its reasonable collection potential to $0. 
  • The taxpayer then submits an OIC for $10,000. 
  • Because the OIC exceeds reasonable collection potential, the taxpayer would qualify for the OIC on the grounds of doubt as to collectability. 
 Nevertheless, the OIC should be rejected on public policy grounds.

Taxpayers may now have to resort to bankruptcy filings, in order to obtain a discharge based upon Doubt as to Collectibility (DATC).
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