Offers in compromise: economic hardship and equity considerations.

• Author: Savell, Kenneth S.

Temp. Regs. Sec. 301.7122-1T expanded the grounds on which the IRS may accept an offer in compromise of a tax liability to include "economic hardship" cases.

Background

Section 3462 of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) amended Sec. 7122 to require the Service to develop guidelines for determining when an offer in compromise is adequate. The Conference Report to the IRSRRA '98 explains that Congress intended such factors as equity., hardship and public policy to be considered in evaluating a compromise of individual tax liabilities, if such consideration would "promote effective tax administration"

Economic Hardship

Temp. Regs. Sec. 301.7122-1T(b)(4)(i)-(iii) provides that, in addition to compromising a tax liability based on doubt as to liability and/or doubt as to collectibility, the IRS will compromise a liability to "promote effective tax administration" when:

* Collection will create "economic hardship"; or

* Regardless of the taxpayer's financial circumstances, "exceptional circumstances" exist such that collection would be "detrimental to voluntary compliance" by taxpayers; and

* Compromise of the liability "will not undermine compliance" by taxpayers with the tax laws.

Temp. Regs. Sec. 301.7122-1T(b)(4)(iv)(B) also provides that factors supporting (but not conclusive of) an economic hardship determination include:

* The taxpayer is incapable of earning a living because of long-term illness, medical condition or disability, and it is reasonably foreseeable that the taxpayer's financial resources will be exhausted in providing care and support during the course of the condition;

* The taxpayer has assets, but liquidation of those assets to pay the outstanding liabilities would render the taxpayer unable to meet basic living expenses; and

* The taxpayer has assets, but is unable to borrow against the equity in those assets and disposal by the Service by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection action is unlikely.

Temp. Regs. Sec. 301.7122-1T(b)(4)(iv)(C)(1)-(3) also states that factors supporting (but not conclusive of) a determination that a compromise would not undermine compliance by taxpayers include:

* The taxpayer does not have a history of noncompliance with filing and payment requirements;

* The taxpayer has not taken deliberate action to avoid the payment of taxes; and

* The taxpayer has not encouraged others to refuse to...