Compromises

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [TD 8829] RIN 1545-AW87

TITLE: Compromises

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations that provide
additional guidance regarding the compromise of internal revenue
taxes. The temporary regulations reflect changes to the law made by
the Internal Revenue Service Restructuring and Reform Act of 1998
and the Taxpayer Bill of Rights II. The text of these temporary
regulations serves as the text of the proposed regulations set forth
in the notice of proposed rulemaking on this subject in the Proposed
Rules section of this issue of the Federal Register.

DATES: Effective date. These temporary regulations are effective
July 21, 1999.

Applicability date. For dates of applicability, see �301.7122-1T(j)
of these regulations.

FOR FURTHER INFORMATION CONTACT: Carol A. Campbell, (202) 622-3620
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains temporary regulations amending the Procedure
and Administration Regulations (26 CFR part 301) under section 7122
of the Internal Revenue Code (Code). The regulations reflect the
amendment of section 7122 by section 3462 of the Internal Revenue
Service Restructuring and Reform Act of 1998 ("RRA 1998") Public Law
105-206, (112 Stat. 685, 764) and by section 503 of the Taxpayer
Bill of Rights II Public Law 104-168, (110 Stat. 1452, 1461).

As amended by RRA 1998, section 7122 provides that the Secretary
will develop guidelines to determine when an offer to compromise is
adequate and should be accepted to resolve a dispute. The
legislative history accompanying RRA 1998 explains that Congress
intended that factors such as equity, hardship, and public policy be
evaluated in the compromise of individual tax liabilities, in
certain circumstances, if such consideration would promote effective
tax administration. H. Conf. Rep. 599, 105 Cong., 2d Sess. 289
(1998).

The current regulations under Treasury regulation �301.7122-1 permit
the compromise of cases on only the grounds of doubt as to
collectibility, doubt as to liability, or both. These regulations
are being removed. Like the current regulations, the temporary
regulations provide for compromise based on doubt as to liability
and doubt as to collectibility; however, they also provide for
compromise based upon specific hardship and/or equitable criteria if
such a compromise would promote effective tax administration. The
inclusion in these regulations of a standard that will allow
compromise on grounds other than doubt as to liability or doubt as
to collectibility represents a significant change in the IRS'
exercise of compromise authority.

Section 7122 of the Code provides broad authority to the Secretary
to compromise any case arising under the internal revenue laws, as
long as the case has not been referred to the Department of Justice
for prosecution or defense. Although the statutory language of
Section 7122 does not explicitly place limits on the Secretary's
authority to compromise, opinions of the Attorney General and the
regulations issued under section 7122 prior to RRA 1998 authorized
the Secretary to compromise a liability under the revenue laws only
when there was doubt as to liability (uncertainty as to the
existence or amount of the tax obligation) or doubt as to
collectibility (uncertainty as to the taxpayer's ability to pay).
The opinion of the Attorney General most often cited as the
principal source of these limitations is the 1933 opinion of
Attorney General Cummings that was issued in response to an inquiry
from then Acting Secretary of the Treasury Acheson.

In requesting an opinion from the Attorney General, Acting Secretary
of the Treasury Acheson expressed concern that the country was
trying to recover from the depression. He suggested that the public
interest required compromise of tax claims where collection of the
tax would "destroy a business, ruin a tax producer, throw men out of
employment, or result in the impoverishment of widows or minor
children of a deceased taxpayer." The Secretary expressed the belief
that in ordinary times, compromise of cases on public policy grounds
should be rare but that, in light of the current state of the
country, public policy should play a significantly greater role.

Expressing the belief that it was more important that "the business
of the taxpayer be preserved and not destroyed," Acting Secretary
Acheson suggested that cases should be compromised where the
taxpayer is insolvent, even though the tax is fully collectible, and
that penalties and certain interest charges should be "compromisable
wherever justice, equity, or public policy seems to justify the
compromise... ." Letter from Treasury Department, XIII-47-7137 (July
31, 1933).

Attorney General Cummings replied that "[t]here is much to be said
for the proposition that a liberal rule should exist, but my opinion
is that if such a course is to be taken it should be at the instance
of Congress. I conclude that where liability has been established by
a valid judgment or is certain, and there is no doubt as to the
ability of the Government to collect, there is no room for 'mutual
concessions,' and therefore no basis for a 'compromise.'" Op. Atty.
Gen. 6, XIII-47-7138 (October 24, 1933). See also Op. Atty. Gen. 7,
XIII-47-7140 (October 2, 1934), wherein Attorney General Cummings
stated that "[t]here appears to be no statutory authority to
compromise solely upon the ground that a hard case is presented,
which excites sympathy or is merely appealing from the standpoint of
equity, but the power to compromise clearly authorizes the
settlement of any case about which uncertainty exists as to
liability or collection."

Although the 1933 opinion of Attorney General Cummings is the most
often cited opinion regarding the limits of the IRS' compromise
authority (prior to RRA 1998), the conclusion he reached mirrored
conclusions reached by a number of his predecessors.

Thus, since 1868, a number of Attorneys General opined that when
liability is not at issue, the Secretary's compromise authority
permitted compromise only when "the full amount of the debt" could
not be collected. See, e.g., 12 Op. Atty. Gen. 543 (1868); 16 Op.
Atty. Gen. 617 (1879) (the Secretary's authority to compromise does
not permit the "voluntary relinquishment" of any part of a lawfully
assessed tax from a solvent person or corporation).

Following the issuance of Attorney General Cummings' 1933 opinion,
Commissioner Helvering established a policy that IRS tax collectors
should make every endeavor to secure offers that represent the
taxpayer's "maximum capacity to pay." Commissioner's Statement of
Policy with Respect to the Compromise of Taxes, Interest, and
Penalties, July 2, 1934. Commissioner Helvering recognized that the
Attorney General's opinion did not specify or quantify the amount of
doubt necessary to compromise, but concluded that "...the Treasury
Department does not propose to compromise when there is merely the
possibility of doubt. The doubt as to liability or collectibility
must be supported by evidence and must be substantial in character,
and when such doubt exists, the amount acceptable will depend upon
the degree of doubt found in the particular case." Id. Implementing
the policy established by Commissioner Helvering, the IRS concluded
that an offer premised upon doubt as to collectibility should be
accepted only when the amount offered represented the maximum amount
the taxpayer could pay, taking into account net equity in assets and
both current and future income.

The interpretation of section 7122 adopted by Attorney General
Cummings (and reflected in Treasury reg. �301.7122-1(a)), together
with the "maximum capacity to pay" policy established by
Commissioner Helvering, have been the fundamental guiding principles
for IRS offer in compromise programs for the past 65 years. From the
1930's to the early 1990's, offers to compromise were not widely
used to resolve tax cases. In the early 1990s, however, the IRS
determined that expanded use of offers to compromise could
contribute to more effective tax administration in two important
respects. First, the IRS determined that compromise could be used as
a technique to enhance overall compliance by providing taxpayers
with a reasonable avenue to resolve past difficulties. Second, the
IRS determined that it should make more effective use of offers to
compromise to help manage the inventory of delinquent tax accounts.

Accordingly, while still operating within the basic legal and policy
guidelines established in the 1930's, the IRS initiated two
significant changes intended to enhance the compromise program.

In 1992, the IRS adopted a new compromise policy and issued revised
compromise procedures. The policy provides that an offer to
compromise will be accepted when it is unlikely that the tax
liability can be collected in full and the amount offered reasonably
reflects collection potential. As set forth in the new policy
statement, the goal of the compromise program is to achieve
collection of what is potentially collectible at the earliest
possible time and at the least cost to the government while
providing taxpayers with a fresh start toward future voluntary
compliance. Policy Statement, P-5-100. In administering its policies
under the offer program, the threshold question of "doubt as to
liability or doubt as to collectibility" set forth in the
regulations constituted a legal requirement that must be followed;
once that threshold was met, however, the IRS could legally accept
less than the taxpayer's maximum capacity to pay. References in the
offer procedures to "maximizing collection" and "maximum capacity to
pay" were replaced with "reasonably reflects collection potential."
Id.

In determining whether an offer reasonably reflects collection
potential, the IRS takes into consideration amounts that might be
collected from (1) the taxpayer's assets, (2) the taxpayer's present
and projected future income, and (3) third parties (e.g., persons to
whom the taxpayer had transferred assets). Although most doubt as to
collectibility offers only involve consideration of the taxpayer's
equity in assets and future disposable income over a fixed period of
time, the IRS on occasion also will consider whether the taxpayer
should be expected to raise additional amounts from assets in which
the taxpayer's interest is beyond the reach of enforced collection
(e.g., interests in property located in foreign jurisdictions or
held in tenancies by the entirety).

IRM 57(10)(10).1.

The compromise program was also affected by a 1995 IRS initiative
designed to ensure uniform treatment of similarly situated
taxpayers. In administering its collection operations, including
both the installment agreement program and the compromise program,
the IRS has always permitted taxpayers to retain sufficient funds to
pay reasonable living expenses. Certain commentators had asserted
that there were wide variances in the type and amount of such
reasonable expense allowances within and between districts. In
September of 1995, the IRS adopted and published national and local
standards for determining allowable expenses, designed to apply to
all collection actions, including offers to compromise. National
expense standards derived from the Bureau of Labor Statistics
Consumer Expenditure Survey were promulgated for expense categories
such as food, clothing, personal care items, and housekeeping
supplies. Local expense standards derived from Census Bureau data
were promulgated for housing, utilities, and transportation.

The IRS allowable expense criteria play an important role in
determining whether taxpayers are candidates for compromise or
installment agreements. Although offers to compromise and
installment agreements are separate mechanisms for resolving
outstanding tax liabilities, there often is a significant interplay
between the two programs, because a taxpayer's income available to
satisfy the tax liability is determined after the deduction of
allowable expenses. In some cases, the allowable expense criteria
may be the determining factor in whether the taxpayer receives an
installment agreement or a compromise. An installment agreement must
provide for payment in full of the amount of the outstanding
liability through regular, periodic payments (generally monthly).
I.R.C. �6159. An offer to compromise, by contrast, reflects the fact
that the taxpayer has no ability to pay the liability in full.
Accordingly, taxpayers entering into compromise agreements can pay
an amount less than the full amount due in satisfaction of the
liability.

Congress now has directed the Secretary to consider factors other
than doubt as to collectibility and doubt as to liability in
determining whether to accept an offer to compromise. Under
�7122(c), added by RRA 1998, factors such as equity, hardship, and
public policy will be considered in certain circumstances where such
consideration will promote effective tax administration. The
legislative history of this provision (H.

Conf. Rep. 599, 105 Cong., 2d Sess. 289 (1998)) states that -- th
...the conferees expect that the present regulations will be
expanded so as to permit the IRS, in certain circumstances, to
consider additional factors (i.e., factors other than doubt as to
liability or collectibility) in determining whether to compromise
the income tax liabilities of individual taxpayers. For example, the
conferees anticipate that the IRS will take into account factors
such as equity, hardship, and public policy where a compromise of an
individual taxpayer's income tax liability would promote effective
tax administration. The conferees anticipate that, among other
situations, the IRS may utilize this new authority, to resolve
longstanding cases by forgoing penalties and interest which have
accumulated as a result of delay in determining the taxpayer's
liability. The conferees believe that the ability to compromise tax
liability and to make payments of tax liability by installment
enhances taxpayer compliance. In addition, the conferees believe
that the IRS should be flexible in finding ways to work with
taxpayers who are sincerely trying to meet their obligations and
remain in the tax system. Accordingly, the conferees believe that
the IRS should make it easier for taxpayers to enter into offer-in-
compromise agreements, and should do more to educate the taxpaying
public about the availability of such agreements.

Another consideration for compromise cases is Chief Counsel review.
Since its enactment in section 102 of the Act of July 20, 1868 (15
Stat. 166), the statute authorizing the Secretary to compromise
liabilities has contained a requirement that Counsel issue opinions
regarding certain of those compromises. Section 7122(b) of the Code
requires that the opinion of Counsel, with the reasons therefor, be
placed on file whenever a compromise is made by the IRS. Chief
Counsel opinions assess both whether the offer meets the legal
requirements for compromise and whether the offer conforms to IRS
policy and procedure. The opinion provided by Chief Counsel,
however, does not have to be in favor of compromise. Pursuant to
delegated authority, district directors, service center directors,
and regional directors of Appeals have the authority to accept an
offer that Counsel has opined does not conform to IRS policy.

Until passage of the Taxpayer Bill of Rights II (TBOR 2), Chief
Counsel review was required in all cases in which the liability
compromised was $500 or more. Under TBOR 2, such an opinion is
required only in cases where the compromised liability is $50,000 or
more.

Explanation of Provisions

The temporary regulations continue the traditional grounds for
compromise based on doubt as to liability or doubt as to
collectibility. In addition, to reflect the changes made in RRA
1998, the temporary regulations allow a compromise where there is no
doubt as to liability or as to collectibility, but where either (1)
collection of the liability would create economic hardship, or (2)
exceptional circumstances exist such that collection of the
liability would be detrimental to voluntary compliance.

Compromise based on these hardship and equity bases may not,
however, be authorized if it would undermine compliance. Although
the temporary regulations set forth the conditions that must be
satisfied to accept an offer to compromise liabilities arising under
the internal revenue laws, they do not prescribe the terms or
conditions that should be contained in such offers. Thus, the amount
to be paid, future compliance or other conditions precedent to
satisfaction of a liability for less than the full amount due are
matters left to the discretion of the Secretary.

The temporary regulations also add provisions relating to the
promulgation of requirements for providing for basic living
expenses, evaluating offers from low income taxpayers, and reviewing
rejected offers, as required by RRA 1998. The temporary regulations
also add provisions relating to staying collection, modifying the
dollar criteria for requiring the opinion of Chief Counsel in
accepted offers, and setting forth the requirements regarding
waivers and suspensions of the statute of limitations.

Except for the provision related to dollar criteria for Chief
Counsel review, all of the additional provisions of �301.7122-1T are
authorized by RRA 1998. The modification of dollar criteria for
Chief Counsel review is authorized by section 503(a) of the Taxpayer
Bill of Rights II.

As required by �7122(c)(2)(A) and (B), added by RRA 1998, the
temporary regulations provide for the development and publication of
national and local living allowances that permit taxpayers entering
into offers to compromise to have an adequate means to provide for
their basic living expenses. The determination whether the published
standards should be applied in any particular case must be based
upon an evaluation of the individual facts and circumstances
presented. The Secretary will determine the appropriate means to
publish these national and local living allowances.

In accordance with �7122(c)(3)(A), the temporary regulations also
require the development of supplemental guidelines for the
evaluation of offers from "low income" taxpayers. The temporary
regulations permit the Secretary to determine which taxpayers
qualify as "low income" taxpayers based upon current dollar criteria
applied by the U.S. Department of Health and Human Service under
authority of section 673(2) of the Omnibus Budget Reconciliation Act
of 1981, or any other measure reasonably designed to identify such
taxpayers.

In accordance with �7122(d)(1), the temporary regulations provide
that all proposed rejections of offers to compromise will receive
independent administrative review prior to final rejection. Section
7122(d)(2) requires and the temporary regulations also provide that
the taxpayer has the right to appeal any rejection of an offer to
compromise to the IRS Office of Appeals. The temporary regulations
provide, however, that when the IRS returns an offer to compromise
because it was not processable under IRS procedures, because the
offer was submitted solely to delay collection or because the
taxpayer failed to provide requested information required by the IRS
to evaluate the offer, such a return of the offer does not
constitute a rejection and thus, does not entitle the taxpayer to
appeal rights under this provision. In the event that an offer to
compromise is returned under these circumstances and the IRS
institutes collection action, the taxpayer may have the right to
consideration of the whole of his or her collection case under other
provisions of the Code.

Pursuant to section 6331(k) of the Code, as amended by section 3462
of RRA 1998, the temporary regulations also provide that for offers
pending on or submitted on or after January 1, 2000, no enforced
collection activity may be taken by the IRS to collect a liability
while an offer to compromise is pending, or for the 30 days
following any rejection of an offer to compromise, or during any
period that an appeal of any rejection, when such appeal is
instituted within the 30 days following rejection, is being
considered. Collection activity will not, however, be precluded in
any case where collection is in jeopardy or the offer to compromise
was submitted solely to delay collection.

Effective through December 31, 1999, the temporary regulations
continue to require the taxpayer to waive the running of the
statutory period of limitations on collection as a condition of
acceptance of an offer to compromise. Effective January 1, 2000,
waivers of the statute of limitations on collection will no longer
be required for the acceptance of an offer to compromise. Instead,
the statute of limitations for collection will be suspended during
the period the offer to compromise is under consideration by the
IRS. This provision of the temporary regulations implements section
3461 of RRA 1998.

The temporary regulations also implement section 503(a) of the
Taxpayer Bill of Rights II by specifying that Chief Counsel review
of an accepted offer to compromise is required only for offers in
compromise involving $50,000 or more in unpaid liabilities.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined
that sections 553(b) & (d) of the Administrative Procedure Act (5
U.S.C. chapter 5) do not apply to these regulations. Please refer to
the cross-referenced notice of proposed rulemaking published
elsewhere in this issue of the Federal Register for the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter
6). Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small business.

Drafting Information

The principal author of these temporary regulations is Carol A.
Campbell of the Office of Assistant Chief Counsel (General
Litigation). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part
301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read
in part as follows:

Authority: 26 U.S.C. 7805 * * *

�301.7122-1--[Removed]

Par. 2. Section 301.7122-1 is removed.

Par. 3. Sections 301.7122-0T and 301.7122-1T are added to read as
follows:

�301.7122-1T-0 Table of contents.

This section list the captions that appear in the temporary
regulations under �301.7122-1T.

�301.7122-1T Compromises (temporary).

(a) In general.

(b) Grounds for compromise.

(c) Procedures for submission and consideration of offers.

(d) Acceptance of an offer to compromise a tax liability.

(e) Rejection of an offer to compromise.

(f) Effect of offer to compromise on collection activity

(g) Deposits.

(h) Statute of limitations.

(i) Inspection with respect to accepted offers to compromise.

(j) Effective date.

�301.7122-1T Compromises (temporary).

(a) In general.

(1) The Secretary may exercise his discretion to compromise any
civil or criminal liability arising under the internal revenue laws
prior to reference of a case involving such a liability to the
Department of Justice for prosecution or defense.

(2) An agreement to compromise may relate to a civil or criminal
liability for taxes, interest, or penalties. Unless the terms of the
offer and acceptance expressly provide otherwise, acceptance of an
offer to compromise a civil liability does not remit a criminal
liability, nor does acceptance of an offer to compromise a criminal
liability remit a civil liability.

(b) Grounds for compromise.

(1) In general. The Secretary may compromise a liability on any of
the following three grounds.

(2) Doubt as to liability. Doubt as to liability exists where there
is a genuine dispute as to the existence or amount of the correct
tax liability under the law. Doubt as to liability does not exist
where the liability has been established by a final court decision
or judgment concerning the existence or amount of the liability. See
�301.7122(e)(4) for special rules applicable to rejection of offers
in cases where the IRS is unable to locate the taxpayer's return or
return information to verify the liability.

(3) Doubt as to collectibility.

(i) In general. Doubt as to collectibility exists in any case where
the taxpayer's assets and income are less than the full amount of
the assessed liability.

(ii) Allowable Expenses. A determination of doubt as to
collectibility will include a determination of ability to pay. In
determining ability to pay, the Secretary will permit taxpayers to
retain sufficient funds to pay basic living expenses. The
determination of the amount of such basic living expenses will be
founded upon an evaluation of the individual facts and circumstances
presented by the taxpayer's case. To guide this determination,
guidelines published by the Secretary on national and local living
expense standards will be taken into account.

(iii) Nonliable spouses. (A) In general. Where a taxpayer is
offering to compromise a liability for which the taxpayer's spouse
has no liability, the assets and income of the nonliable spouse will
not be considered in determining the amount of an adequate offer,
except to the extent property has been transferred by the taxpayer
to the nonliable spouse under circumstances that would permit the
IRS to effect collection of the taxpayer's liability from such
property, e.g., property that was conveyed in fraud of creditors, or
as provided in paragraph (b)(3)(iii)(B) of this section. The IRS
may, however, request information regarding the assets and/or income
of the nonliable spouse for the sole purpose of verifying the amount
of and responsibility for expenses claimed by the taxpayer.

(B) Exception. Where collection of the taxpayer's liability from the
assets and/or income of the nonliable spouse is permitted by
applicable state law (e.g., under state community property laws),
the assets and income of the nonliable spouse will be considered in
determining the amount of an adequate offer except to the extent
that the taxpayer and the nonliable spouse demonstrate that
collection of such assets and income would have a material and
adverse impact on the standard of living of the taxpayer, the
nonliable spouse, and their dependents.

(4) Promote effective tax administration. If there are no grounds
for compromise under paragraphs (b)(2) and (3) of this temporary
regulation, a compromise may be entered into to promote effective
tax administration when--

(i) Collection of the full liability will create economic hardship
within the meaning of �301.6343-1; or

(ii) Regardless of the taxpayer's financial circumstances,
exceptional circumstances exist such that collection of the full
liability will be detrimental to voluntary compliance by taxpayers;
and

(iii) Compromise of the liability will not undermine compliance by
taxpayers with the tax laws.

(iv) Special rules for evaluating offers to promote effective tax
administration.

(A) The determination to accept or reject an offer to compromise
made on the ground that acceptance would promote effective tax
administration within the meaning of this section will be based upon
consideration of all the facts and circumstances, including the
taxpayer's record of overall compliance with the tax laws.

(B) Factors supporting (but not conclusive of) a determination of
economic hardship under paragraph (b)(4)(i) include-

(1) Taxpayer is incapable of earning a living because of a long term
illness, medical condition, or disability and it is reasonably
foreseeable that taxpayer's financial resources will be exhausted
providing for care and support during the course of the condition;

(2) Although taxpayer has certain assets, liquidation of those
assets to pay outstanding tax liabilities would render the taxpayer
unable to meet basic living expenses; and

(3) Although taxpayer has certain assets, the taxpayer is unable to
borrow against the equity in those assets and disposition by seizure
or sale of the assets would have sufficient adverse consequences
such that enforced collection is unlikely.

(C) Factors supporting (but not conclusive of) a determination that
compromise would not undermine compliance by taxpayers with the tax
laws include--

(1) Taxpayer does not have a history of noncompliance with the
filing and payment requirements of the Internal Revenue Code;

(2) Taxpayer has not taken deliberate actions to avoid the payment
of taxes; and

(3) Taxpayer has not encouraged others to refuse to comply with the
tax laws.

(D) Examples. The following examples illustrate cases that may be
compromised under the provisions of paragraph (b)(4)(i):

Example 1. Taxpayer has assets sufficient to satisfy the tax
liability. Taxpayer provides full time care and assistance to her
dependent child, who has a serious long-term illness. It is expected
that the taxpayer will need to use the equity in her assets to
provide for adequate basic living expenses and medical care for her
child. Taxpayer's overall compliance history does not weigh against
compromise.

Example 2. Taxpayer is retired and his only income is from a
pension. The taxpayer's only asset is a retirement account, and the
funds in the account are sufficient to satisfy the liability.
Liquidation of the retirement account would leave the taxpayer
without an adequate means to provide for basic living expenses.
Taxpayer's overall compliance history does not weigh against
compromise. Example 3. Taxpayer is disabled and lives on a fixed
income that will not, after allowance of adequate basic living
expenses, permit full payment of his liability under an installment
agreement. Taxpayer also owns a modest house that has been specially
equipped to accommodate his disability. Taxpayer's equity in the
house is sufficient to permit payment of the liability he owes.
However, because of his disability and limited earning potential,
taxpayer is unable to obtain a mortgage or otherwise borrow against
this equity. In addition, because the taxpayer's home has been
specially equipped to accommodate his disability, forced sale of the
taxpayer's residence would create severe adverse consequences for
the taxpayer, making such a sale unlikely.

Taxpayer's overall compliance history does not weigh against
compromise.

Example 4. Taxpayer is a business that despite the adoption of a
wide array of precautions, including the employment of outside
auditors, suffered an embezzlement loss. Although the taxpayer
reviewed and signed employment tax returns and signed checks for
payment of all employment tax liabilities, the embezzling employee
successfully intercepted these checks and diverted the funds. At the
time taxpayer discovers the diversions, taxpayer promptly contacts
the IRS and begins proceedings to obtain recovery from the employee
and the auditor. Taxpayer is unsuccessful in obtaining any recovery
from either the employee or the auditor. While taxpayer has accounts
receivable that will satisfy the tax delinquencies, taxpayer would
be unable to remain in business if those receivables were seized by
the IRS. Further, while taxpayer will continue to generate some
profit if permitted to remain in business, those profits would not
be sufficient to pay the accrued liabilities prior to the time
collection of the liabilities became barred by the statute of
limitations. Taxpayer's overall compliance history does not weigh
against compromise.

(E) The following examples illustrate cases that may be compromised
under paragraph (b)(4)(ii):

Example 1. In October of 1986, taxpayer developed a serious illness
that resulted in almost continuous hospitalizations for a number of
years. The taxpayer's medical condition was such that during this
period the taxpayer was unable to manage any of his financial
affairs. The taxpayer has not filed tax returns since that time. The
taxpayer's health has now improved and he has promptly begun to
attend to his tax affairs. He discovers that the IRS prepared a
substitute for return for the 1986 tax year on the basis of
information returns it had received and had assessed a tax
deficiency.

When the taxpayer discovered the liability, with penalties and
interest, the tax bill is more than three times the original tax
liability. Taxpayer's overall compliance history does not weigh
against compromise.

Example 2. Taxpayer is a salaried sales manager at a department
store who has been able to place $2,000 in a tax-deductible IRA
account for each of the last two years. Taxpayer learns that he can
earn a higher rate of interest on his IRA savings by moving those
savings from a money management account to a certificate of deposit
at a different financial institution. Prior to transferring his
savings, taxpayer submits an E-Mail inquiry to the IRS at its Web
Page, requesting information about the steps he must take to
preserve the tax benefits he has enjoyed and to avoid penalties. The
IRS responds in an answering E-Mail that the taxpayer may withdraw
his IRA savings from his neighborhood bank, but he must redeposit
those savings in a new IRA account within 90 days. Taxpayer
withdraws the funds and redeposits them in a new IRA account 63 days
later. Upon audit, taxpayer learns that he has been misinformed
about the required rollover period and that he is liable for
additional taxes, penalties and additions to tax for not having
redeposited the amount within 60 days. Had it not been for the
erroneous advice that is reflected in the taxpayer's retained copy
of the IRS E-Mail response to his inquiry, taxpayer would have
redeposited the amount within the required 60-day period. Taxpayer's
overall compliance history does not weigh against compromise.

(c) Procedures for submission and consideration of offers. (1) In
general. An offer to compromise a tax liability pursuant to section
7122 must be submitted according to the procedures, and in the form
and manner, prescribed by the Secretary.

An offer to compromise a tax liability must be signed by the
taxpayer under penalty of perjury and must contain the information
prescribed or requested by the Secretary.

However, taxpayers submitting offers to compromise liabilities
solely on the basis of doubt as to liability will not be required to
provide financial statements.

(2) When offers become pending and return of offers. An offer to
compromise becomes pending when it is accepted for processing. If an
offer accepted for processing does not contain sufficient
information to permit the IRS to evaluate whether the offer should
be accepted, the IRS will request the taxpayer to provide the needed
additional information. If the taxpayer does not submit the
additional information that the IRS has requested within a
reasonable time period after such a request, the IRS may return the
offer to the taxpayer. The IRS may also return an offer to
compromise a tax liability if it determines that the offer was
submitted solely to delay collection or was otherwise
nonprocessable. An offer returned following acceptance for
processing is deemed pending only for the period between the date
the offer is accepted for processing and the date the IRS returns
the offer to the taxpayer. See paragraphs (e)(5)(ii) and (f)(2)(iv)
of this temporary regulation for rules regarding the effect of such
returns of offers.

(3) Withdrawal. An offer to compromise a tax liability may be
withdrawn by the taxpayer or the taxpayer's representative at any
time prior to the IRS' acceptance of the offer to compromise. An
offer will be considered withdrawn upon the IRS' receipt of written
notification of the withdrawal of the offer by personal delivery, or
by certified mail, or upon issuance of a letter by the IRS
confirming the taxpayer's intent to withdraw the offer.

(d) Acceptance of an offer to compromise a tax liability. (1) An
offer to compromise has not been accepted until the IRS issues a
written notification of acceptance to the taxpayer or the taxpayer's
representative.

(2) As additional consideration for the acceptance of an offer to
compromise, the IRS may request that taxpayer enter into any
collateral agreement or post any security which is deemed necessary
for the protection of the interests of the United States.

(3) Offers may be accepted when they provide for payment of
compromised amounts in one or more equal or unequal installments.

(4) If the final payment on an accepted offer to compromise is
contingent upon the immediate and simultaneous release of a tax lien
in whole or in part, such payment must be made in accordance with
the forms, instructions, or procedures prescribed by the Secretary.

(5) Acceptance of an offer to compromise will conclusively settle
the liability of the taxpayer specified in the offer. Neither the
taxpayer nor the Government will, following acceptance of an offer
to compromise, be permitted to reopen the case except in instances
where-

(i) False information or documents are supplied in conjunction with
the offer;

(ii) The ability to pay and/or the assets of the taxpayer are
concealed; or

(iii) A mutual mistake of material fact sufficient to cause the
offer agreement to be reformed or set aside is discovered.

(6) Opinion of Chief Counsel. Except as otherwise provided in this
paragraph (d)(6), if an offer to compromise is accepted, there will
be placed on file the opinion of the Chief Counsel for the IRS with
respect to such compromise, along with the reasons therefor.
However, no such opinion will be required with respect to the
compromise of any civil case in which the unpaid amount of tax
assessed (including any interest, additional amount, addition to the
tax, or assessable penalty) is less than $50,000.

Also placed on file will be a statement of--

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the tax,
or assessable penalty, imposed by law on the person against whom the
tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the
compromise.

(e) Rejection of an offer to compromise. (1) An offer to compromise
has not been rejected until the IRS issues a written notice to the
taxpayer or his representative, advising of the rejection, the
reason(s) for rejection, and the right to an appeal.

(2) The IRS may not notify a taxpayer or taxpayer's representative
of the rejection of an offer to compromise until an independent
administrative review of the proposed rejection is completed.

(3) Low income taxpayers. No offer to compromise received from a low
income taxpayer may be rejected solely on the basis of the amount of
the offer without evaluating whether that offer meets the criteria
in paragraph (b) of this section. For purposes of this paragraph (e)
(3), a low income taxpayer is a taxpayer who falls at or below the
dollar criteria established by the poverty guidelines updated
annually in the Federal Register by the U.S. Department of Health
and Human Services under authority of section 673(2) of the Omnibus
Budget Reconciliation Act of 1981 or such other measure that is
adopted by the Secretary.

(4) Offers based upon doubt as to liability. Offers submitted on the
basis of doubt as to liability cannot be rejected solely because the
IRS is unable to locate the taxpayer's return or return information
for verification of the liability.

(5) Appeal of rejection of an offer in compromise. (i) In general.
The taxpayer may administratively appeal a rejection of an offer to
compromise to the IRS Office of Appeals (Appeals) if, within the 30-
day period commencing the day after the date on the letter of
rejection, the taxpayer requests such an administrative review in
the manner provided by the Secretary.

(ii) Offer to compromise returned following a determination that the
offer was nonprocessable, a failure by the taxpayer to provide
requested information, or a determination that the offer was
submitted for purposes of delay. Where a determination is made to
return offer documents because the offer to compromise was
nonprocessable, because the taxpayer failed to provide requested
information, or because the IRS determined that the offer to
compromise was submitted solely for purposes of delay under
paragraph (c)(2) of this section, the return of the offer does not
constitute a rejection of the offer for purposes of this provision
and does not entitle the taxpayer to appeal the matter to Appeals
under the provisions of this section (e)(5) of this temporary
regulation. However, if the offer is returned because the taxpayer
failed to provide requested financial information, the offer will
not be returned until an independent administrative review of the
proposed return is completed.

(f) Effect of offer to compromise on collection activity. (1) Offers
submitted prior to and not pending on or after December 31, 1999.
For offers to compromise submitted prior to and not pending on or
after December 31, 1999, the submission of an offer to compromise
will not automatically operate to stay the collection of any
liability.

Enforcement of collection may, however, be deferred if the interests
of the United States will not be jeopardized thereby.

(2) Offers pending on or made on or after December 31, 1999.

(i) In general.

For offers pending on or made on or after December 31, 1999, the IRS
will not make any levies to collect the liability that is the
subject of the compromise during the period the IRS is evaluating
whether such offer will be accepted or rejected, for 30 days
immediately following the rejection of the offer, and for any period
when a timely filed appeal from the rejection is being considered by
Appeals.

(ii) Revised offers submitted following rejection. If, following the
rejection of an offer to compromise pending on or made on or after
December 31, 1999, the taxpayer makes a good faith revision of that
offer and submits the revised offer within 30 days after the date of
rejection, the IRS will not levy to collect the liability that is
the subject of the revised offer to compromise while the IRS is
evaluating whether to accept or reject the revised offer.

(iii) Jeopardy. The IRS may levy to collect the liability that is
the subject of an offer to compromise during the period the IRS is
evaluating whether that offer will be accepted if it determines that
collection of the liability is in jeopardy.

(iv) Offers to compromise determined by IRS to be nonprocessable or
submitted solely for purposes of delay. The IRS may levy to collect
the liability that is the subject of an offer to compromise at any
time after it determines, under paragraph (c)(2) of this section,
that a pending offer did not contain sufficient information to
permit evaluation of whether the offer should be accepted, that the
offer was submitted solely to delay collection, or that the offer
was otherwise nonprocessable.

(v) Offsets under section 6402. Notwithstanding the evaluation and
processing of an offer to compromise, the IRS may, in accordance
with section 6402, credit any overpayments made by the taxpayer
against a liability that is the subject of an offer to compromise
and may offset such overpayments against other liabilities owed by
the taxpayer to the extent authorized by section 6402.

(g) Deposits. Sums submitted with an offer to compromise a liability
or during the pendency of an offer to compromise are considered
deposits and will not be applied to the liability until the offer is
accepted unless the taxpayer provides written authorization for
application of the payments. If an offer to compromise is withdrawn,
is determined to be nonprocessable, or is submitted solely for
purposes of delay and returned to the taxpayer, any amount tendered
with the offer, including all installments paid on the offer, will
be refunded without interest. If an offer is rejected, any amount
tendered with the offer, including all installments paid on the
offer, will be refunded, without interest, after the conclusion of
any review sought by the taxpayer with Appeals.

Refund will not be required if the taxpayer has agreed in writing
that amounts tendered pursuant to the offer may be applied to the
liability for which the offer was submitted.

(h) Statute of limitations.

(1) Offers submitted prior to and not pending on or after December
31, 1999. For offers to compromise submitted prior to and not
pending on or after December 31, 1999, --

(i) if the 10-year period specified in section 6502(a) will expire
prior to December 31, 2002, and

(ii) payments due under the agreement are scheduled to be made after
the date upon which the 10-year period specified in section 6502(a)
will expire -- no offer will be accepted unless the taxpayer
executes a consent to extend the statutory period of limitations on
the collection of the liability involved until the date one year
subsequent to the date of the last scheduled payment or until
December 31, 2002, whichever is earlier.

(2) Offers pending on or made on or after December 31, 1999. For
offers pending on or made on or after December 31, 1999, the statute
of limitations on collection will be suspended while collection is
prohibited under paragraph (f)(2) of this section.

(3) For any offer to compromise, the IRS may continue to require,
where appropriate, the extension of the statute of limitations on
assessment. However, in any case where waiver of the running of the
statutory period of limitations on assessment is sought, the
taxpayer must be notified of the right to refuse to extend the
period of limitations or to limit the extension to particular issues
or particular periods of time.

(i) Inspection with respect to accepted offers to compromise. For
provisions relating to the inspection of returns and accepted offers
to compromise, see section 6103(k)(1).

(j) Effective date. Except as otherwise provided, this section
applies to offers to compromise submitted on or after July 21, 1999,
through July 19, 1999.

Charles O. Rossotti
Commissioner of Internal Revenue
Approved:
Donald C. Lubick
Assistant Secretary of the Treasury (Tax Policy)

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