Offers in compromise.

• Author: Massey, Donald L.
• Position: To the IRS

The possibility of a taxpayer compromising a tax liability is not a new concept. It first appeared in the Internal Revenue laws in 1868. At present, the Government's authority to enter into offers in compromise is contained in Sec. 7122 and Regs. Sec. 301.7122-1, which authorize the IRS to compromise civil or criminal tax liabilities, (1) provided there is doubt as to liability or collectibility. Offers in compromise based on doubt as to liability are beyond the scope of this article. Accordingly, this article will discuss offers in compromise based on doubt as to collectibility.

The Service will seriously consider an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential[2] The Service's goal is to achieve collection of what is potentially collectible at the earliest possible time, at the least cost to the Government[3] The Service also seeks to give taxpayers a fresh start, enabling them to voluntarily comply with the tax laws[4] Thus, before a taxpayer's offer can be seriously considered, doubt must exist regarding the Government's ability to collect the assessed sum. Absent such doubt, legal consideration based on ' 'mutual concessions" will be lacking and the offer will be rejected.(5) As a result, a form of insolvency is generally required before a tax liability will be compromised. Taxpayers who have filed bankruptcy, are contemplating doing so, or who have substantial tax liabilities arising from tax-sheltered investments, historically constitute appropriate candidates for the submission of offers.

Refection of an offer will not necessarily result in the immediate seizure and sale of the taxpayer's assets. This is particularly so if undue hardship would result from such action. Instead, the matter will be referred back to the Collection Division to be processed pursuant to established collection procedures. However, these procedures provide that if an offer in compromise is rejected or withdrawn due to the inadequacy of the offer, the Service will, consistent with the reasons for refection, commence collection proceedings.[6]

Contractual Aspects

Consummated offers in compromise constitute valid legal contracts with the finality attendant thereto.[7] They require mutual assent with both parties having the capacity, authority and intent to be bound by the agreement[8] Unless otherwise provided, they encompass the entire liability of the taxpayer, including taxes, ad valorem penalties and interest, with all questions of such liability being conclusively settled by the agreement? They are, however, subject to rescission, reformation and other contractual remedies. For example, the Service was permitted to set aside a compromise based on inaccurate representations by the taxpayer's counsel[10] Similarly, the Government was entitled to rescind a compromise agreement negotiated with a decedent's estate because the presence of a life insurance policy unknown to either party had a material effect on the financial condition of the estate.(11)

The offer-in-compromise process is also subject to the following three jurisdictional limitations.

1. The Service's authority to compromise a tax liability is limited to cases that have not been referred to the Justice Department for prosecution or defense. Once such a referral takes place, compromise authority is vested in the Attorney General or his delegate[12]

2. Settlement authority is limited to Service personnel to whom the Secretary of the Treasury has delegated the power to compromise tax liabilities? For civil cases, this authority is vested in the District Directors and Assistant District Directors, regardless of the amount of tax sought to be compromised. Compromise authority is also vested in Collection Division Chiefs, Collection Branch Chiefs and Special Procedures Branch Chiefs when the unpaid liability {including any interest, penalty, additional amount or addition to tax) is $100,000 or less.(14) Rejection authority is vested in all of these officials regardless of the amount of liability sought to be compromised, except that authority to reject offers for public policy reasons is restricted to District Directors[15]

3. Cases recommended for acceptance by an approving official involving liabilities of $500 or more {including any interest, penalty, additional amount or addition to tax) require a legal opinion from District Counsel[16]

   The entire offer-in-compromise process must be strictly complied with for a binding contract to be created.[17] This includes written notification of acceptance being received by the taxpayer from an authorized Government official; (18) oral agreements do not bind either party.(19 )On acceptance, the offer becomes available for public inspection in the office of the District Director for a period of one year from the date of acceptance.[20]

   Commencing the Offer

   The Service encourages the submission of adequate compromise proposals consistent with a taxpayer's ability to pay. Accordingly, in cases in which an offer in compromise appears to be a viable solution to a tax delinquency, the Service employee assigned to the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. The taxpayer will, however, be responsible for initiating the first specific proposal for compromise.[21]

   Offers in compromise are submitted on Form 656, Offer in Compromise,[22] generally through revenue officers, although they can be filed in any IRS office or Service Center. If it is determined that an offer merits consideration and the interests of the Government will not be jeopardized thereby, collection activity will normally cease while the offer is considered[23] It is important, therefore, to submit the offer early in the collection process to avoid collection action. The offer should address all outstanding liabilities for all outstanding years[24] The Service will not consider piecemeal offers.[25] In addition, the taxpayer must be in compliance with all filing and payment requirements for periods not included in the offer,[26] including estimated payments, Federal tax deposits and similar obligations.

   The preptinted language on Form 656 requires the taxpayer to incorporate into his offer the following provisions.

1. A waiver of the statute of limitations on assessment and collection during the pendency of the offer plus one year. Should the offer contain a deferred payment provision, this waiver remains in effect until one year after the last installment is paid.

2. A waiver of the right to receive refunds or credits for overpayment of any tax or other liability, including interest and penalties, for periods ending before, within, or as of the end of the calendar year in which the offer is accepted. This provision does not apply to the extent the refund or credit exceeds the difference between the assessment...