OIC final regs. issued.

• Author: Ely, Mark H.
• Position: Offer-in-compromise

Editor's note: Mr. Ely is the former chair of the AICPA Relations with the IRS Committee. Messrs. Dougherty and Taylor are members of the IRS Practice and Procedures Committee.

The IRS issued final regulations under Sec. 7122 that provide administrative guidance when considering an offer-in-compromise (OIC). An OIC is an agreement between the Service and a taxpayer to settle a liability for less than the amount due (i.e., the amount determined and assessed). Even though the final rules reflect the IRS's regular practice of compromising on tax liabilities when their existence, amount or collectibility is in question, they also direct the Service to accept offers "to promote effective tax administration" based on economic hardship, equity or public policy.

Economic Hardship

In defining "economic hardship" the final regulations refer to Regs. Sec. 301.6343-1, which defines the term as a taxpayer's inability to pay reasonable basic living expenses when age, employment status and history, and dependents are considered. In addition, an economic hardship might also include a taxpayer's:

* Medical condition and its effect on his or her ability to earn a living, and the cost of medical treatment;

* Need to use all of his or her income to support dependents; and

* Inability to borrow against or liquidate assets without affecting the capacity to meet basic living expenses.

To reflect these changes, the IRS amended the examples in the temporary regulations, but emphasizes that the final regulations' examples are not exclusive and do not suggest that all of the facts in a given example have to be present for the Service to accept an OIC.

Although Sec. 7122 does not explicitly exclude economic hardship as a basis for compromise for a business (i.e., non-individual) taxpayer, Treasury and the IRS concluded that applying this standard to businesses would not promote effective tax administration. Thus, the final regulations do not allow businesses to use the economic-hardship standard. Note: This standard, as set forth in Kegs. Sec. 301.6343-1, also applies only to individuals, not businesses.

Public Policy and Equity

Under previous temporary regulations, the IRS could compromise to promote effective tax administration, even if no other basis for compromise was available. According to the final regulations, a taxpayer seeking a compromise on this basis must identify a compelling public policy or equity reason for doing so. The IRS can also extend this...