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5.8.10  Special Case Processing

5.8.10.1  (11-15-2004)
Overview

  1. During the investigation of an offer, certain situations may be encountered that require consideration before a final determination can be made. This section discusses how to treat these situations when evaluating an offer.

5.8.10.2  (11-15-2004)
Bankruptcy

  1. Bankruptcy can have a specific impact on the Service's consideration of an offer. A taxpayer may attempt to file both bankruptcy and an offer simultaneously, a taxpayer may file an offer in an attempt to avoid bankruptcy or a taxpayer may file an offer after a bankruptcy has been concluded. The following discusses these situations.

5.8.10.2.1  (11-15-2004)
Offers In Compromise (OIC) During Bankruptcy

  1. The Service will not consider an offer under its administrative offer in compromise procedures while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides procedures to resolve the Service's claim.
  2. An offer will not be considered under administrative offer in compromise procedures until the bankruptcy is concluded. In Chapter 7 cases, an administrative compromise with the taxpayer can be considered after the taxpayer has received a discharge. See IRM 5.8.10.2.3, below. In chapter 11, 12, and 13 cases, an administrative compromise will not be considered until the taxpayer completes payments under the plan or the bankruptcy is dismissed by the court.
  3. If a taxpayer is in bankruptcy when an administrative offer submitted or during a pending offer investigation, the offer is returned.

5.8.10.2.2  (11-15-2004)
Offers In Compromise Before Bankruptcy

  1. When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead.
  2. Benefits to the Service:
    • The Service can negotiate for amounts collectible from future income and from assets beyond the reach of the government, that may not be collectible if the taxpayer files bankruptcy.
    • Negotiations may result in an offer amount that exceeds the amount recoverable in an insolvency proceeding.
    • Terms for payment of an offer may result in the funds being collected in a shorter time than through bankruptcy.

     

  3. Benefits to the Taxpayer:
    • Bankruptcy carries certain negative repercussions that an offer in compromise will not cause, such as the effect on credit ratings.
    • Bankruptcy does not discharge all tax liabilities.
    • If a Notice of Federal Tax Lien (NFTL) has been filed, the federal tax lien may survive bankruptcy against certain assets.

     

  4. While evaluating the acceptability of an offer when the threat of bankruptcy is a consideration, determine the reasonable collection potential as defined in 5.8.5, Financial Analysis. To determine the amount that would be collected through bankruptcy and what liabilities would be discharged contact an advisor in the Insolvency Section and discuss the facts of the case.
  5. Analysis of the collectibility if bankruptcy were filed along with the financial analysis and a determination of liabilities that would be fully discharged, should result in the information necessary to make an informed decision regarding the offer and to attempt negotiation with the taxpayer.
  6. When doing the analysis consider the following questions:
    • Is the Service the sole or major creditor?
    • Would taxes be dischargeable in bankruptcy?
    • Does the offer amount equal or exceed what we can reasonably expect to recover from bankruptcy?
    • Are there other considerations, such as what can be collected on liabilities that would not be discharged or from property outside of the bankruptcy, including third parties?

     

    Note:

    Under no circumstances will the Service accept less than would be recoverable from a Chapter 7 bankruptcy, unless special circumstances exist.

     

  7. If it is determined that processing an offer under the Service's administrative procedures is the better alternative, then proceed with the offer process.

5.8.10.2.3  (11-15-2004)
Acceptance of Offer In Compromise After Chapter 7 Bankruptcy

  1. In most Chapter 7 bankruptcies, the discharge is issued and the stay lifted in approximately 5 months. An offer will not normally be considered under the Service's administrative procedures until the discharge is granted.
  2. For debtors discharged by Chapter 7 where the case is still pending, it is uncertain whether the Service would still have a valid claim in bankruptcy if an offer is accepted. Therefore, the amount acceptable for an offer should include the amount we reasonably expect to recover from the bankruptcy in addition to what can be collected from the taxpayer on non-discharged liabilities or from property outside the bankruptcy.

5.8.10.2.4  (11-15-2004)
Bankruptcy After Offer In Compromise Acceptance

  1. When a taxpayer files bankruptcy after an offer is accepted, the Service may need to take specific actions to secure unpaid offer funds or to secure payment of tax through the bankruptcy proceeding. (See IRM 25.17 for additional information.)
  2. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.
  3. When we become aware that a bankruptcy has been filed after the acceptance of an offer in compromise:
    If… Then…
    The offer funds have been paid in full The bankruptcy filing has no effect on the accepted offer.
    The offer funds have not been paid in full Contact the Insolvency Unit to determine necessary action to secure the Service's interest in the bankruptcy proceeding.

5.8.10.3  (11-15-2004)
Other Insolvency Cases

  1. A copy of the court order or other evidence should accompany Form 656.
  2. The following should be secured in "Receiverships" and other non-bankruptcy insolvencies:
    • A general statement of the circumstances which resulted in the receivership and the purpose of the receivership; that is, whether the objective is liquidation of assets, conservation of assets, foreclosure of a mortgage or reorganization.
    • A copy of the petition for the appointment of a receiver and a copy of the court order appointing the receiver or trustee can be used in lieu of a general statement, if the petition provides the information above.
    • Copies of all pertinent schedules filed with the court.

     

  3. Consideration of an offer frequently presents questions concerning the rights of the government to priority in the collection of the tax claims over the claims of other creditors of the taxpayer.
  4. The rights of other creditors are based on liens which may be recognized by state law, but because of the taxpayer's assignment of assets for the benefit of other creditors, the provisions of 31 U.S.C. 3713 apply.
  5. When considering the offer:
    • Evaluate the rights of all creditors,
    • Evaluate all facts and circumstances relating to the various claims,
    • Verify all pertinent dates, such as the origin and filing of all claims and liens, and
    • Verify the steps which have been taken towards the enforcement of the claimant's alleged rights.

     

    If… Then…
    The priority rights of the United States are disregarded when the funds of the estate are disbursed An assignee for the benefit of creditors, as well as an executor or administrator of a decedent's estate, may become personally liable.
    A corporation is the assignor and the tax liability sought to be compromised consists of withholding of Federal Insurance Contribution Act (FICA) taxes, or taxes which the assignor might be required to withhold or collect from others and pay over to the government Consider the possibility of enforcing the TFRP provisions of the code.

     

  6. When questions arise regarding the priority rights of the United States contact Area Counsel.

5.8.10.4  (11-15-2004)
Death of Taxpayer

  1. When the Service is notified of the death of the taxpayer who submitted an offer that is currently under consideration, the Service can no longer consider the offer. A termination letter will be generated from AOIC and the offer should be closed with the termination closure option.
  2. Many times the offer under consideration was submitted jointly by a husband and wife. In that situation contact with the surviving spouse should be made to determine whether there is a probate proceeding pending.
    If… Then…
    There is a probate. Explain that consideration of the offer will be terminated and that another offer can be submitted once the probate has been concluded. Contact Technical Support and advise of the probate proceeding and the tax liability due. Terminate consideration of the offer.
    There will be no probate proceeding and the surviving spouse does not want us to continue considering the offer. Terminate consideration of the joint offer due to the death of the spouse.
    There will be no probate proceeding, the surviving spouse does want us to continue considering the offer, and the surviving spouse was appointed executor by a will. Obtain a copy of the will and an amended offer reflecting the spouse as deceased and continue consideration of the joint offer.
    There is no probate proceeding and the surviving spouse wants the Service to continue consideration the offer, however the spouse was not appointed executor by a will. Since the surviving spouse does not have rights to compromise the liability of the deceased taxpayer, secure an amended offer removing the deceased spouse's name and continue consideration of an offer for the surviving spouse's obligation only.

     

5.8.10.5  (11-15-2004)
Transferee

  1. When an offer investigation reveals the potential for a transferee situation, the burden of proof of transferee liability rests with the government.

    Note:

    If a determination that a transferee investigation should be initiated, it will not be conducted by the Offer Investigator. Instead, it will be conducted by a field Revenue Officer (RO) by generating an Other Investigation (OI).
    OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.

     

    If… Then…
    A potential transferee is discovered during an offer investigation Conduct an investigation to determine if a transferee exists.
    A transferee liability exits 1. Determine the amount the Service may reasonably expect to collect from the transferee.
    2. Include a sum substantially equal to the value determined in the calculation of reasonable collection potential (RCP).
    3. Attempt to negotiate an acceptable offer amount with the transferee value included in the reasonable collection potential (RCP) calculation.
    There is a question whether a transferee liability may be established and sustained 1. Determine the value of the transferee based on the degree of doubt regarding the transferee being sustained.
    2. Attempt to negotiate an acceptable offer amount including this value in the reasonable collection potential (RCP).

    Note:

    Flexibility should be exercised during negotiations if the transferee assessment will not be pursued.

    While investigating an offer and the Offer Investigator determines that a transferee assessment should be pursued and negotiations have not resulted in an acceptable offer amount
    1. Attempt to secure a withdrawal letter from the taxpayer
    2. If the taxpayer does not withdraw the offer, prepare the rejection closing documents and follow procedures for recommending rejection with appeal rights. Include the value of the transferee in the reasonable collection potential (RCP).
    Prepare an Other Investigation (OI) to be issue to a field revenue officer to investigate the transferee issue.

     

5.8.10.6  (11-15-2004)
Discharge and Subordination Requests

  1. The government is bound by the payment terms of an accepted offer period. We cannot require payment of the offer amount in different terms, other than agreed to in the offer agreement.

    Note:

    In these cases, the discharge or subordination investigation will not be conducted by the Offer Investigator. Instead, it must be conducted by the appropriate Technical Support by generating an Other Investigation (OI).
    OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.

     

  2. Requests for discharge or subordination received while an offer is pending are to be handled as follows:
    If… Then…
    The discharge or subordination request is approved. Advise the taxpayer that proceeds from the discharge or subordination will be applied to the offer, if accepted. If the offer is not accepted, the proceeds will be applied to the tax liability. Before delivering the discharge or subordination, require the taxpayer to execute a Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability. In the signature block have them write the word "irrevocable" . Retain the signed Form 3040 in the offer case file for use in the event the offer is returned, withdrawn or rejected.

     

  3. Requests for discharge or subordination received after an offer has been accepted but before all the payment terms have been met should be handled as follows:
    If… Then…
    The taxpayer does not intend to apply the proceeds received from the discharge or subordination to the offer amount Deny the discharge or subordination request.
    The taxpayer does intend to apply the proceeds toward the offer amount Request an investigation of the discharge or subordination from Technical Support and then coordinate with Technical Support to apply the proceeds to the offer amount.

     

5.8.10.7  (11-15-2004)
Effect of Previous Offers on Collection Statute

  1. Over the years there have been numerous changes in the law and IRS procedures relating to the extension of the statutory period for collection while offers are being considered. The information provided in this section will assist in determining the correct CSED, which can impact the number of required payments.
  2. For offers pending prior to 1/1/2000, the taxpayer executed a waiver of the statutory period for collection, extending the collection statute for the period the offer was under consideration and for an additional one year. For offers accepted prior to 1/1/2000 this waiver of the statutory period for collection also includes the period of time the terms of an accepted offer are still in effect.

    Note:

    RRA 98 imposed a limitation for offers subject to the waiver of collection statute. The waiver cannot extend the Collection Statute Expiration Date (CSED) beyond either 12/31/2002, or the original CSED, whichever is later.

     

  3. For offers submitted or pending after 12/31/1999, the statutory period for collection is suspended, by operation of law, while the offer is pending, for 30 calendar days following rejection of an offer, and for the period the rejection is being considered in Appeals. This suspension of the collection statute is effective through 12/20/2000.
  4. For offers pending prior to 1/1/2000 that were still pending on or after 1/1/2000, the collection statute is extended by both waiver periods (see paragraph (2)) and by the suspension period (see paragraph (3)).

    Note:

    The limitation on the waiver of collection statute applies to these offer periods.

     

  5. The Community Renewal Tax Relief Act of 2000 was signed into law on 12/21/2000. This act eliminated the suspension of the statutory period for collection, effective on the day of enactment (12/21/2000).
  6. The Job Creation and Workers Assistance Act was signed into law March 9, 2002. This law reinstated the suspension of the statutory period for collection by operation of law while the offer is pending, for 30 calendar days following rejection of an offer, and for the period the rejection is being considered in Appeals.
  7. Cases may be encountered where prior rules were in effect. The following chart shows the changes that have occurred in this area.
    If the offer has a… and is… then…
    Pending date of 1/1/2000 or later Accepted prior to 12/21/2000 CSED is extended from pending date (TC 480) until acceptance date (TC 780).
    Pending date of 1/1/2000 or later Accepted between 12/21/2000 and 3/8/2002 CSED is only extended from pending date (TC 480) through 12/20/2000.
    Pending date of 1/1/2000 or later Accepted after 3/9/2002 CSED is extended from pending date (TC 480) through 12/20/2000 and if still pending is also extended from 3/9/02 until date of acceptance (TC 780).
    Pending date of 1/1/2000 or later Rejected and taxpayer does not appeal CSED is extended from the pending date (TC 480) until 30 calendar days after rejection letter is issued (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
    Pending date of 1/1/2000 or later Rejection sustained in appeals CSED is extended from the pending date (TC 480) until Appeals issues their decision letter (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
    Pending date prior to 1/1/2000 Accepted prior to 1/1/2000 CSED is extended from the pending date (TC 480) until all terms of the offer are met (TC 780) plus 1 year. This extension cannot extend the CSED beyond 12/31/2002. If the original CSED is beyond 12/31/2002 then it remains the CSED of record.
    Pending date prior to 1/1/2000 Accepted after 12/31/1999 but prior to 12/21/2000 CSED is extended from the pending date (TC 480) through 12/31/99 plus one year, but this extension cannot extend the CSED beyond 12/31/2002. In addition, if the offer is still pending on 1/1/2000, the CSED is also extended from that date until it is accepted (TC 780).
    Pending date prior to 1/1/2000 Accepted after 12/20/2000 CSED is extended from the pending date (TC 480) through 12/31/99 plus one year, but this extension cannot extend the CSED beyond 12/31/2002. In addition, the CSED is extended from 1/1/2000 through 12/20/2000. From 12/21/2000 until 3/8/2002 it is not extended. If the offer is still pending on 3/9/2002 the CSED is also extended from that date until it is accepted (TC 780).
    Pending date prior to 1/1/2000 Rejected prior to 1/1/2000 CSED is extended from the pending date (TC 480) until the rejection date (TC 481) plus 1 year. This extension cannot extend the CSED beyond 12/31/2002. If the original CSED is beyond 12/31/2002 then it remains the CSED of record.
    Pending date prior to 1/1/2000 Rejected 1/1/2000 or later CSED is extended from the pending date (TC 480) until 12/31/1999 plus 1 year. This extension cannot extend the CSED beyond 12/31/2002. In addition CSED is extended from 1/1/2000 until 12/20/2000 or the rejection date (TC 481) whichever is earlier, and from 3/9/2002 until the rejection date (TC 481) plus 30 calendar days.

     

  8. If only one party to a joint assessment files an offer, then the statute is suspended just for that person. The appropriate CSED suspension code must be input on IDRS to identify the specific taxpayer for which the offer applies. They are described in the table below.
    P Primary
    S Secondary
    B Both

     

5.8.10.8  (11-15-2004)
Indication of Fraud

  1. During the verification of financial statements, employees should always be aware of any indications of fraud relating to offers in compromise. The following are offer in compromise fraud warning signs most readily identifiable:

    Taxpayer Interviews

    a. Failing to keep proper books and records in a business or profession.
    b. No records, poorly kept records, or attempts to falsify or alter records.
    c. Destroying books and records without plausible explanation or refusal to make certain records available.
    d. Extent of taxpayer's control of sales and receipts and his/her apparent unwillingness to delegate this function to his/her employees.
    e. Engaging in illegal activities.
    f. Personal living standard and asset acquisition inconsistent with reported income.
    g. Indications that valuable assets belonging to the taxpayer are being acquired and held in the name of others.
    h. Self-serving statements with no documentary proof.
    i. Repeated procrastination on the part of the taxpayer in making and keeping appointments with you.
    j. Hasty agreement to adjustments and undue concern about immediate closing of the case may indicate that more thorough examination is needed.

     

    Verification of Financial Statement

    a. Uncooperative attitude displayed by:

    • Not providing requested information
    • Refusal to make certain records available
    • Not furnishing adequate explanations for discrepancies or questionable items.
    b. Trying to conceal a pertinent fact or record.
    c. Failing to deposit all receipts to business account.
    d. Use of nominees or false names.
    e. Unusual depletion of assets shortly before filing the offer.
    f. Inflated salaries, payment of bonuses or cash withdrawals by officers, directors, shareholders or other insiders.
    g. Transfers of property to insiders, shareholders or relatives shortly before filing the offer.
    h. Payoff of loans to directors, officers, shareholders, relatives or other insiders shortly before filing the offer.
    i. Complicated corporate structures and relationships.
    j. Undervaluing of assets.
    k. Overstatement of liabilities.

     

    The fraud indicators below can fall into any of the above categories:

    a. Making false, misleading, and inconsistent statements.
    b. Using currency instead of banks accounts or making large expenditures in currency.
    c. Concealment of bank accounts and other property.

     

  2. If indications of fraud are identified follow established procedures for preparing a referral to Criminal Investigation and suspend the investigation until the following:
    If Criminal Investigation… Then…
    Rejects the referral Investigation of the offer may continue.
    Accepts the referral No contact will be made with the taxpayer regarding the status of the offer until Criminal Investigation informs the taxpayer of the criminal investigation and/or authorizes the Offer Investigator to contact the taxpayer.

     

  3. Once the taxpayer has been notified by Criminal Investigation of the pending investigation and Collection has been authorized to contact the taxpayer, the Offer Investigator will advise the taxpayer of the following:
    • The offer could be returned because other investigations are pending that may affect the liability sought to be compromised or the grounds on which it was submitted,
    • Action on the offer will be suspended pending the outcome of the criminal investigation, or
    • The offer could be withdrawn.
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