Offers in compromise: IRS updates OIC submission and processing procedures.

Rev. Proc. 2003-71, IRB 2003-36, Sept. 8, 2003 updates the procedures for submitting and processing OICs, reflecting tax law changes made by the 1998 IRS Restructuring and Reform Act (P.L. 105-206). Rev. Proc. 2003-71 also includes provisions relating to the new $150 OIC user fee.

Rev. Proc. 2003-71 is generally effective Aug. 21, 2003. However, the user fee provisions are effective for offers submitted after Oct. 31, 2003.

Submitting an Offer

An offer to compromise a tax liability must be submitted in writing on Form 656, Offer in Compromise. None of the standard terms may be stricken or altered, and the form must be signed under penalty of perjury.

The offer should include all liabilities to be covered by the compromise, the legal grounds for compromise, the amount the taxpayer proposes to pay, and the payment terms--which include amounts and due dates. The offer also should contain any other information required by Form 656. The IRS occasionally revises Form 656 and may require offers to be submitted on the form's most recent version, which is available at www.irs.gov.

An offer in compromise should include the legal grounds for compromise and provide enough information for the IRS to determine whether the offer fits within its acceptance policies. The OIC must explain why the offer can be compromised under one of the following legal grounds:

Doubt as to Liability: Doubt as to liability exists when there is a dispute as to the existence or amount of the correct tax liability. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment on the liability's existence.

An offer to compromise on doubt as to liability generally will be considered acceptable if it reasonably reflects the amount the IRS would expect to collect through litigation. This analysis includes consideration of the litigation hazards that would be involved if the liability were litigated. The evaluation of litigation hazards is not an exact science and is within the IRS' discretion.

Doubt as to Collectibility: Doubt as to collectibility exists when the taxpayer's assets and income cannot satisfy the liability's amount.

An offer to compromise based on doubt as to collectibility generally will be considered acceptable if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the IRS could collect through other means, including administrative and judicial collection remedies. This amount is the reasonable collection potential of a case.

In determining a case's reasonable collection potential, the IRS will take into account the taxpayer's reasonable basic living expenses. The IRS may accept an offer of less than a case's total reasonable collection potential if there are special circumstances.

Promotion of Effective Tax Administration: The IRS may compromise to promote effective tax administration where it determines that, although collection in full could be achieved, it would cause the taxpayer economic hardship. Economic hardship is defined as the inability to pay reasonable basic living expenses.

No compromise may be entered into on this basis if the liability's compromise would undermine taxpayers' tax law compliance. The determination to accept a particular amount will be based on the taxpayer's individual facts and circumstances.

If there are no other grounds for compromise, the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising. Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.

The taxpayer will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full. No compromise may be entered into on this basis if it would undermine taxpayers' tax law compliance.

An offer to compromise based on compelling public policy or equity considerations generally will be considered acceptable if it reflects what is fair and equitable under the case's particular facts and circumstances.

Forms and Other Documentation

The offer to compromise should include all information necessary to verify the grounds for compromise. Except for offers based solely on doubt as to liability, this includes financial information provided in a manner approved by the IRS.

Individual or self-employed taxpayers must submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Corporate or other business taxpayers must submit Form 433-B, Collection Information Statement for Businesses. The IRS may require a business taxpayer's officers or partners to complete Form 433-A. These forms must include any attachments or other documentation that the IRS requires.

Other Rules

Rev. Proc. 2003-71 contains additional rules covering the following areas:

* When an offer becomes pending and return of offers;

* Case building, investigation and evaluation;

* Withdrawing an offer to compromise;

* Accepting an offer to compromise; and

* Rejecting an offer to compromise.

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 4696999 or [e-mail].