July 19, 1999
IRS to Help Taxpayers Facing Economic Hardships
Settle Tax Debts With New Offer in Compromise Plan
WASHINGTON - Some taxpayers facing severe or unusual
economic hardships will have a new way of settling their tax debts under an Internal
Revenue Service plan announced Monday.
Under new regulations filed with the Federal Register on July 19, the IRS for the first
time will be allowed to consider economic hardship factors in cases where taxpayers try to
settle unpaid tax debts through the Offer in Compromise program and where settlement would
promote effective tax administration.
For taxpayers caught in severe hardships, this gives the IRS a new tool to work
with people and help settle their tax debt, IRS Commissioner Charles O. Rossotti
This change expands the Offer in Compromise program, which allows the IRS to negotiate
a settlement with people unable to pay their entire tax bill. Prior to the new
regulations, the IRS could accept the taxpayers Offer in Compromise only when there
was doubt about the whether the tax debt could ever be collected or whether it was owed.
The IRS has already put in place changes that make it easier for taxpayers to apply for
a compromise under existing regulations. The IRS Restructuring and Reform Act approved
last year by Congress and President Clinton called for expanding the Offer in Compromise
program as part of a new set of taxpayer rights provisions.
The provision outlined in the temporary regulations (TD 8829) creates a new category of
Offer in Compromise to resolve cases where acceptance of the offer would promote effective
Under this new provision, taxpayers may be eligible for a compromise if:
Collection of the entire tax liability would create economic hardship, or
Exceptional circumstances exist where collection of the entire tax liability would be
detrimental to voluntary compliance.
According to the regulations, an Offer in Compromise cannot be approved in situations
where it would undermine compliance with the tax laws. To qualify, taxpayers also must
have a history of paying and filing their taxes.
This new type of offer gives the IRS a safety valve to handle tax cases in
difficult situations, Rossotti said. We now have more flexibility to settle
debts with taxpayers in ways we couldnt before.
The temporary regulations outline several possible examples where taxpayers might
qualify for the new type of Offer in Compromise:
Economic hardship can include taxpayers - and their dependents -facing a long-term
illness, medical condition or disability where the persons financial resources will
be exhausted while providing for care and support.
An example can include a parent who has assets large enough to pay the tax bill, but
those assets will be needed for care of a child with a long-term illness.
Economic hardship can also cover cases where the sale or liquidation of assets to pay
the tax bill would prevent the taxpayer from meeting basic living expenses. An example
could be a retiree with a retirement fund large enough to pay the tax bill, but using the
fund would deprive the person of basic living expenses.
In the second area, an Offer in Compromise may be granted under exceptional
circumstances, such as extraordinary events beyond a taxpayers control. An example
might include someone who was hospitalized for several years, could not manage any
financial affairs and was unable to file tax returns.
Rossotti said the new compromise offer strikes a balance between helping individual
taxpayers in severe circumstances and protecting all taxpayers by collecting as much of
the tax bill as possible.
Ultimately, this program will help all taxpayers, Rossotti said.
Instead of collecting nothing from taxpayers with an unpaid tax bill, were
able to collect something and resolve the case. And it gives people in dire financial
situations a way of satisfying their tax obligations.
The IRS cautioned the new program is tailored only for taxpayers entangled in very
severe circumstances, and its not designed to be a sweeping program for everyone
with financial difficulties or a panacea for people with tax problems.
This will help some people in trouble that we havent been able to help
before, Rossotti said. But it shouldnt be misinterpreted by people as an
open invitation to avoid paying taxes."
The IRS anticipates implementing the temporary regulations and beginning to process
applications within 60 days. This will give the IRS enough time to finalize new
procedures, print new forms and train Collection employees on the new guidelines.
The IRS also is nearing completion on a new application for the special Offers in
Compromise category, which will be Form 656-A. This new form will be submitted in addition
to Form 656, the standard Offer in Compromise application. When the taxpayer submits new
656-A applications, the IRS must first determine whether a taxpayer is eligible for one of
the traditional Offer in Compromise options. If the taxpayer is not, then the agency will
consider the application under the new economic hardship provisions.
The temporary regulations issued this week will be in effect for three years, which
will give the IRS an opportunity to monitor the programs progress and get feedback
from tax practitioners and others.
This will give us the chance to fine tune the program in the future,
In fiscal year 1998, the IRS accepted 25,052 Offers in Compromise, leading to the
collection of $290 million out of $1.9 billion in outstanding tax bills. Earlier this
year, the IRS took several steps to expand access to the Offer in Compromise program. To
help taxpayers, the IRS program now features more straightforward rules, increased
flexibility by key agency employees, new payment procedures and a new review process for
There is a delicate balance to this program, Rossotti said. We have
to carefully balance the rights of individual taxpayers with the rights of all taxpayers.
The goal is to be fair to everyone.
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