Qualitative Aspects Of Offers In Compromise In A Quantitative World

The Internal Revenue Service's statements of policy on acceptance of an Offer in Compromise (OIC) to close a case in collection have historically reflected little flexibility in permitting one's actual expenses to offset actual income in computing the amount of future income which might be available to satisfy tax arrearages under the present value of future income test. This test is the second prong of the IRS's evaluation of collectibility in an Offer in Compromise case. IRS will accept 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. It thus becomes more likely that IRS will see more of a tax liability being collectible in proportion to the extent it limits actual expense offsets in the calculation of net income available to pay the tax. So, it might appear that IRS has institutionally stacked the deck against compromise. However, the word "reasonably" is generally understood by IRS management to be a qualitative more than a quantitative standard. Thus, in an appropriate case, IRS will accept less than its quantitatively based tests determine to be collectible as a matter of expediency and the degree to which qualitative considerations are presented in favor of compromise. The trouble with that notion is that IRS internal directives on doubt as to collectibility do not permit either hardship nor facts sympathetic to the taxpayer's particular situation to have any bearing upon whether an Offer will be accepted. Therefore, qualitative considerations are heard only in the realm of higher authority, and it remains the usual case that Offers with qualitative support factors for acceptance are rejected if they fail the qualitative tests of equity in assets and present value of income. It thus becomes necessary in a fair case for compromise on qualitative grounds that one appeal the findings of district personnel to the Regional Appeals Office, where there is greater discretion, and thus greater receptivity to such Offers. In the current environment for Offers, qualitative factors are built into Revenue Officer Manual Provisions only in the specific context of an Offer based upon Equity in Tax Administration, a recently legislated ground for an Offer upon which a taxpayer who is seen to be able to pay the liability presents significant "qualitative" factors of personal hardship which make it inequitable for IRS to collect the tax owed in full. Curiously, IRS personnel base Offer decisions mainly on qualitative factors in such a case but are likely to refuse to consider qualitative factors in doubt as to collectibility cases, unless they are considered by management or in an appeal from a rejection at the district level. Nothing of substance has changed but the form in which one chooses to proceed can alter the substance.

An Offer in Compromise is a legitimate alternative to the perpetuation of enforced collection through protracted Installment Agreements and suspension of collection when a tax may not be currently collectible. This is so even with many years left to run on the statute of limitations against collection. This is because the IRS's goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government.

The source of the Service's authority to compromise is found in IRC Section 7122. The principles upon which the taxpayer and IRS strike a compromise are those governing the law of contracts. The IRS is not required to act favorably on an Offer. By way of advocacy however, of the weight of documentary and testimonial evidence proffered by the taxpayer directly and/or through third parties, which qualify business variables, health factors, loss of or reduction in income, hardship, age, and such other factors to IRS to support an inference that IRS would more likely do better by compromising than by enforcing collection, a compromise on favorable terms to the taxpayer may be realized.