The IRS can resolve a tax liability for less than the total amount of tax, interest and penalty owed through the Offer in Compromise process. One basis for making a deal is the theory of Effective Tax Administration or “ETA Offers.” These ETA Offers may be used to deal away a tax liability if the taxpayer is facing “economic hardship” or there are reasons of public policy that justify a reduction in the liability.
It is important to note that the ETA Offer is not used when a taxpayer cannot afford to pay the liability (a situation that would call for a Doubt as to Collectability offer). Rather, the ETA Offer is used when, in spite of the ability of the person to pay the tax debt in full, special circumstances exist that warrant a deal.
There are two types of ETA Offers. First, an ETA Offer may be accepted if collection of the liability in full would cause the taxpayer economic hardship (within the meaning of the Treasury Regulations). Second, an ETA Offer can be accepted when public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability (a non-hardship ETA Offer).
For an offer to be accepted based on economic hardship, the IRS will generally consider the offer acceptable when, even though the tax could be collected in full, the amount offered reflects the amount the IRS can collect without causing the taxpayer economic hardship. The IRS will base its determination to accept a particular amount on the taxpayer’s facts and circumstances by analyzing the taxpayer’s financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.
An ETA Offer based on non-hardship grounds (i.e. based on compelling public policy or equity considerations) will generally be acceptable if it reflects what is fair and equitable under the particular facts and circumstances of the case. A compromise is justified under this standard where, from the IRS’ perspective, collection of the full liability would not undermine public confidence that the tax laws are being administered in a fair and equitable manner and would not adversely affect the overall tax system.
While an Offer in Compromise can be accepted on the basis of Effective Tax Administration, other than the broad standards identified above, there has been little guidance from the IRS as to when it considers acceptance of such an offer appropriate. This is reflected in the statistics. Less than one-half of one percent of the Offers in Compromise accepted in 2007 were ETA Offers. Acceptance of ETA Offers is rare.
The Taxpayer Advocate Service has written that one of the reasons for the low acceptance rate of ETA Offers is that IRS employees lack sufficient training when it comes to such compromises. As such, the Taxpayer Advocate has speculated that the IRS may be seeking forced collection action against taxpayers before considering whether an ETA Offer is appropriate. A change in this area is certainly appropriate.
The issues discussed above mean that ETA Offers are likely to remain unused to any substantial degree until the guidance and training issues are addressed. Once addressed, the ETA Offer may still be uncommon, however, even if the number of accepted ETA Offers was increased tenfold, this type of compromise would still be on the low end of the Offer in Compromise spectrum.