number release date uil august gl-141964-01 cc pa cbs br2 date bulletin no collection bankruptcy and summonses bulletin department of the treasury office_of_chief_counsel internal_revenue_service objection to jurisdiction lost by delay by failing to object before the bankruptcy court to its retention of jurisdiction over the debtor’s action to determine tax_liability the government waived the right to contest jurisdiction on appeal according to the ninth circuit in kieslich v united_states u s app lexis 9th cir date the debtor filed for chapter bankruptcy in in the service filed a proof_of_claim for unpaid and income taxes which claim was later denied as time-barred after the trustee objected the debtor then brought successive actions to determine his tax_liability one of which was pending at the time his bankruptcy case was closed in although the debtor received a discharge his tax debt was nondischargeable under b c a a in the bankruptcy court found the debtor was not liable for the tax_deficiency the united_states appealed and before the district_court for the first time challenged the subject matter jurisdiction of the bankruptcy court the district_court remanded to the bankruptcy court for the purpose of determining its subject matter jurisdiction the bankruptcy court held that it properly had continued jurisdiction over the debtor’s suit the government again appealed and the district_court reversed holding that the bankruptcy court lacked jurisdiction the debtor then appealed to the ninth circuit the ninth circuit reversed holding that the government waived its right to contest jurisdiction due to its failure to raise the issue at the trial level the ninth circuit reasoned that a district_court has discretion to retain supplemental jurisdiction over state law claims even where the federal claim is resolved and a party must object to such retained jurisdiction at the trial level the ninth circuit considered the bankruptcy court’s retention of jurisdiction in this case to be subject_to the same rule the court thus held that the government waived its objection to the bankruptcy court’s discretionary exercise of jurisdiction over related suits by failing to raise it before the bankruptcy court august bulletin no bankruptcy code cases jurisdiction of bankruptcy court nonacquiesce in collection_due_process case action on decision the commissioner does not acquiesce in the following decision subject mesa oil inc v united state sec_86 a f t r 2d ria d colo issue whether a verbatim recording of a collection_due_process_hearing is required under sec_6320 and sec_6330 to create a judicially reviewable administrative record discussion mesa oil inc a corporation engaged in processing used oil for industrial use was delinquent in paying its payroll_taxes for several quarters in an attempt to collect the unpaid taxes the service filed a notice_of_federal_tax_lien and issued to mesa oil a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 the service also issued to mesa oil a notice_of_intent_to_levy and your right to a hearing mesa oil requested and was given a cdp hearing by the irs office of appeals on the filing of the notice_of_federal_tax_lien appeals issued mesa oil a notice_of_determination sustaining the lien filing from which pursuant to sec_6330 mesa oil appealed to the district_court the district_court held the administrative record to be inadequate for judicial review under sec_6330 because no record of the hearing was kept no record of the evidence or arguments presented at that hearing was made and no analysis of the evidence or arguments was presented in the determination the district_court ordered that the record on remand may be made either through audiotape videotape or stenographic transcription we do not believe that sec_6320 and sec_6330 require a cdp hearing to be recorded verbatim congress did not intend cdp hearings to be conducted in a manner different from proceedings with appeals instituted prior to the passage of the irs restructuring and reform act of 115_tc_35 the references in sec_6330 to a hearing by appeals indicate that congress contemplated the type of informal administrative appeals hearing that has been historically conducted by appeals and prescribed by sec_601_106 statement of procedural rules see h_r conf_rep no pp the fundamental purpose of proceedings with appeals is to provide an informal setting in which taxpayers and appeals officers can resolve tax issues to maintain a productive informal forum for the resolution of tax issues these procedures do not include a verbatim recording requirement and should not now include such a requirement for cdp hearings august bulletin no to the extent the district_court in this case intended to hold that cdp hearings must be recorded by videotape audiotape or stenographic transcription we disagree cdp hearings should be carefully documented by appeals officers in determination letters and case memoranda which with any documents provided by the taxpayers or otherwise obtained by the appeals officers will constitute the record for review by the court collection_due_process impartiality august bulletin no cases bankruptcy code cases allowance of claims objections in re sousa bankr lexis b a p 1st cir date - debtor in chapter bankruptcy filed objection to service’s timely filed proof_of_claim but did not serve u s attorney or department of justice with notice of hearing the bankruptcy court ruled that since the service had actual notice of the hearing since the debtor had spoken with a special procedures employee about it it would sustain the objection to the proof_of_claim the b a p reversed holding that as the united_states is the real party in interest service must be properly effectuated to grant the bankruptcy court jurisdiction notice to the service through its special procedures staff does not cure the jurisdictional defect the court held and any judgment entered without proper service is void bankruptcy code cases exceptions to discharge no late or fraudulent_returns in re rushing bankr lexi sec_958 bankr d az date - the debtor failed to file tax returns for - so the service prepared substitute returns as part of a subsequent offer_in_compromise the debtor submitted returns for those years after filing for bankruptcy the debtor moved to determine the dischargeability of its tax debt under b c a b under the beard test 82_tc_766 a document must represent an honest and reasonable attempt to satisfy the requirements of the tax law among other requirements although the court refused to hold as a matter of law that after the service has prepared a substitute return and assessed a deficiency a debtor never can meet the honest and reasonable requirement the court found that a return submitted with an oic based on doubt as to collectibility does not have a tax consequence consequently the debtor’s submission of the returns with his proposed oic was not an honest and reasonable attempt and the taxes were nondischargeable bankruptcy code cases proofs of claim in re pattullo u s app lexis 9th cir date unpublished - in debtor’s chapter case the service stipulated to the amounts of its secured and unsecured claims which did not include interest the debtor later filed a chapter case and the service objected claiming the debtor exceeded the jurisdictional limitations under b c sec_109 the ninth circuit upholding the lower courts found the doctrine_of claim preclusion bound the service to its earlier stipulation the court found the same claim was involved in both cases finding the service could have performed a more thorough investigation of the debtor’s collateral in the chapter case the appeals court also affirmed that the service was not entitled to interest not claimed in the earlier case although the service would not have been entitled to the interest in the chapter proceeding it could august bulletin no have included the post-petition pre-stipulation interest in the stipulation by not doing so the service waived its claim to the interest bankruptcy code cases setoff in re kadrmas bankr lexis bankr w d wis date - debtors argued that the service was not entitled to setoff their exempt discharged tax_refund the court after determining the service had a valid right of setoff under b c sec_553 held that a creditor’s pre-petition right to setoff is unaffected by a debtor’s discharge the court also reviewed cases weighing whether a debtor’s right of exemption under sec_522 trumps the service’s right of setoff the court concluded that although the majority of cases favor exemption the better reasoned cases favor setoff since a creditor’s setoff right is not defeated by exemption under sec_542 while in bankruptcy the setoff right is not defeated by exemption under sec_553 after discharge bankruptcy code cases subordination freeland trustee v i r s in re white trailer corp aftr2d n d ind date - payment for debtor’s merchandise including collected excise_taxes was made to bank lockbox the bank applied all monies to its outstanding loan instead of forwarding the taxes to the service so the service filed a claim for the unpaid taxes against the debtor the trustee argued that as the service did not pursue collection against the bank its claim should be equitably subordinated under b c c the district_court affirming the bankruptcy court disagreed the court first found that inequitable conduct by the government was necessary to subordinate an excise_tax claim because the government had a priority claim to the funds in the lockbox and because the government did not delay in asserting its claim for the unpaid taxes the court found no misconduct further the court held that equitable subrogation as suggested by the trustee was inconsistent with the provisions of the bankruptcy code as set out by 517_us_535 collection_due_process watson v commissioner t c memo date - court imposed sanctions against taxpayer whose only substantive claim was that he had no tax_liability because his tax indebtness had been assumed by the federal government the court also found that the taxpayer had received a notice_of_deficiency based on a signed return receipt discounting the taxpayer’s assertion that he did not sign the receipt collection_due_process last_known_address lopez v commissioner t c memo date - service sent notice_of_intent_to_levy and notice of right to a hearing to taxpayer’s last_known_address based on the taxpayer’s last filed return the taxpayer had sent in a return with a different addre sec_32 days previously but it was incomplete august bulletin no the taxpayer did not timely request a cdp hearing although he received an equivalent_hearing and the taxpayer challenged the service’s proposed levy the court held it lacked jurisdiction to hear the taxpayer’s petition because there was no notice_of_determination from the equivalent_hearing and the notice provided to the taxpayer’s address was sufficient under sec_6330 damages suits for against u s failure to release lien thomson v united_states u s dist lexis s d fla date - taxpayer brought suit against united_states claiming an installment_agreement where the service agreed not to file a tax_lien against his business the court dismissed the suit on the grounds of sovereign immunity finding no cause of action under sec_7432 because the taxpayer’s liability was not satisfied or legally unenforceable nor had the taxpayer filed a bond the court further found the taxpayer’s bare allegation that all administrative remedies were exhausted was insufficiently specific to meet the standards of sec_7432 and sec_7433 finally the court found no cause of action under sec_6159 because the alleged installment_agreement was not in writing nor under sec_6331 because the service filed a lien not a levy levy forcible entry suits against the u s or employees tort suits rogers v vicuna u s app lexis 1st cir date - taxpayer brought suit under sec_7433 against revenue officers who seized his car the first circuit determined that irs agents who enter private property where the taxpayer’s vehicle is clearly visible from the street on an unobstructed driveway need no court warrant to seize the vehicle but may rely on administrative levy payment application of payment trust_fund_taxes collection norwalk liquidating inc v united_states u s dist lexis n d ohio date - liquidating corporation assessed with taxes including trust funds taxes entered into informal installment_payment agreement the debtor then requested an abatement of penalties and interest asserting that it had reasonable_cause for late payment under sec_6651 and sec_6656 the service disallowed the claims and the court agreed although the debtor urged the court to follow the case-by-case analysis set out by the second and third circuits the court considered itself bound by the bright line test espoused by the sixth circuit in 33_f3d_589 6th cir which held that financial difficulties can never constitute reasonable_cause for nonpayment of withholding taxes by an employer the debtor also argued that the tax_payments were improperly allocated to penalties and interest rather than to the trust_fund_taxes the court found the debtor offered no evidence that it had designated in writing how the payments were to be applied even if it had the court pointed out august bulletin no the service likely would have levied on the funds making the payments involuntary and subject_to the service’s allocation penalties failure to collect withhold or pay over willfulness trust_fund_taxes in re nutt aftr2d bankr m d fla date - corporate owner who did not participate in daily business operations was assessed with the trust fund recovery penalty the owner did not have actual knowledge of the payroll tax delinquency until date and after that date there were no unencumbered funds with which to pay the taxes nor did the service prove the owner knew of creditor payments from unencumbered funds after that date the court held that as the company had no prior record of tax delinquency and that when the owner had actual knowledge of the delinquency he made payments and contacted the service to work out a payment plan the owner was not willful the objection to the service’s claim for trust_fund_taxes was sustained summonses privileges accountant-client cavallaro v united_states u s dist lexis d mass date - service issued a third-party_recordkeeper summons to an accounting firm to obtain documents involving the tax consequences of a merger between two closely-held businesses the principals of the businesses moved to quash the summonses arguing that the communications were privileged as this case predated the amendment to sec_7525 the court examined the judicial doctrine_of accountant client privilege where a communication is made in confidence for the purpose of obtaining legal advice from a lawyer the court found no evidence that the taxpayers’ law firm hired the accounting firm in question nor that the taxpayers hired the accounting firm to assist in obtaining legal advice from the law firm the court also considered the taxpayers’ contention that a privilege existed pursuant to the common interest doctrine where a communication between two or more clients with a common interest in a matter agree to exchange information on the matter and are represented by separate counsel the court found that the taxpayers were not all represented by counsel and consequently the common interest doctrine did not apply the court thus denied the motion to quash summonses third party right to intervene or proceeding to quash united_states v arnold u s dist lexis m d fla date - court denied motion to quash third-party_recordkeeper summonses brought by attorney and accountant of taxpayer the court held that although the third parties could intervene in a proceeding to challenge a third-party_summons they had no independent right to bring such a suit the attorney and accountant lived in a different judicial district than the court where the petition to quash was filed and the service stated that the summonses were issued to aid in the collection of tax_liability the court thus lacked subject matter jurisdiction over the petition to quash august bulletin no finally the court denied the third parties’ motion for a protective_order finding no privilege in the fee information they sought to protect august bulletin no the following material was released previously under sec_6110 portions may be redacted from the original advice chief_counsel_advice offer-in-compromise procedures for counsel review date cc pa cbs br2fwschindler gl-103449-00 uilc memorandum for all area_counsel sb_se from deborah a butler associate chief_counsel procedure and administration subject chief_counsel notice cc-2001-036 counsel opinion in offer_in_compromise cases sec_7122 grants the secretary the authority to compromise civil or criminal liabilities arising under the internal revenue laws ever since that authority was granted the code has required that an opinion of counsel be placed on file in certain cases see sec_7122 chief_counsel notice cc-2001-036 issued date sets forth procedures to be followed by associate chief_counsel sb_se offices when issuing the statutorily required opinion this memorandum provides background information that was considered in drafting the notice we encourage you to share this information with local offices where review of offers in compromise is performed introduction on date temporary regulations were issued which expanded the secretary’s authority to compromise tax_liabilities under sec_7122 see t d compromises fed reg date in addition to the traditional compromise grounds of doubt as to liability and doubt as to collectibility the temporary regulations authorize the secretary to compromise when compromise will promote effective tax_administration specifically where there is no doubt as to either liability or collectibility the service may now compromise on the basis that collection of the full tax_liability would create august bulletin no economic hardship or regardless of the taxpayer’s financial condition exceptional circumstances exist such that collection of the full liability would be detrimental to voluntary compliance by taxpayers see temp sec_301_7122-1t b since publication of those regulations questions have arisen regarding the opinion of counsel when the service proposes acceptance grounded on the promotion of effective tax_administration at the same time the service’s increased reliance on compromise as the preferred method of resolving cases has given rise to a number of questions about the role of the office_of_chief_counsel in the offer_in_compromise program as a general matter issues that have arisen include what form the required opinion of counsel is to take when asked to review offers in compromise based on the promotion of effective tax_administration whether a negative opinion of counsel in such cases would preclude acceptance of the offer by the service whether counsel must issue a negative opinion in collectibility cases if the service proposes acceptance of less than what could otherwise be collected and whether and to what degree counsel offices should question offer groups’ deviation from internal_revenue_manual methods or from service policies in general the chief_counsel notice is intended to provide clarity on these issues although an opinion of counsel is statutorily required in certain cases the form and content of that opinion as well as the force and effect it should be given are matters which are within the discretion of the secretary and the commissioner the notice defines counsel’s role in the offer_in_compromise program with the goals of supporting the commissioner’s compromise policy improving the quality of the program as a whole and assisting our client by providing the legal support needed to resolve cases in an efficient and timely manner sec_7122 and its legislative_history the internal_revenue_code requires an opinion of counsel when certain compromises are made and establishes the minimum requirements as to what that opinion should contain the code provides record -whenever a compromise is made by the secretary in any case there shall be placed on file in the office of the secretary the opinion of the general counsel for the department of the treasury or_his_delegate with his reasons therefor with a statement of- the amount of tax assessed the general counsel for the treasury has delegated the functions relative to the review of offers in compromise to the chief_counsel of the internal_revenue_service see general counsel order no rev date august bulletin no 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 the amount actually paid in accordance with the terms of the compromise notwithstanding the foregoing provisions of this subsection no such opinion shall 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 dollar_figure however such compromise shall be subject_to continuing quality review by the secretary sec_7122 the procedure for obtaining review of offers recommended for acceptance is contained in the service’s irm handbook offers in compromise chapter and in the chief_counsel directives manual part chapter ccdm the opinion of counsel is sought after a recommendation of acceptance has been made but prior to formal acceptance of the offer by the official with delegated authority to accept irm the service expects that counsel’s opinion will assess both whether the legal requirements for compromise are met and whether the offer conforms to the service’s policies and procedures irm the language of sec_7122 requires that certain information about the case be included with counsel’s opinion but it does not give any precise instruction as to what else the opinion should address the legislative_history of the section is even less clear but does support the notion that counsel’s review will include both legal and policy elements the idea that the counsel opinion need not favor compromise is clearly supported by this history even though the phrase with his reasons therefor implies that the general counsel will give reasons supporting the decision to compromise during consideration of the predecessor section to b congress removed language which would have made the concurrence of counsel a prerequisite to compromise sec_102 of the act of july initially required the advice and consent of the solicitor of internal revenue prior to compromise by the commissioner see j s seidman seidman’s history of the federal_income_tax laws the phrase with his reasons therefor initially modified advice and consent indicating that the solicitor was to give reasons supporting his consent to the compromise in subsequent debate it was acknowledged that removing the requirement of consent by the solicitor while continuing to require that an opinion be placed on file after the compromise was made resulted in an august bulletin no awkward construction but no change was made prior to enactment see comments of senator morton cong globe 40th cong 2d sess july other parts of the legislative_history suggest that the dual legal and policy role of counsel is consistent with the intent of the statute although it would be reasonable to assume that an opinion by the general counsel would be legal in nature congressional debate suggests that the original purpose of requiring the written opinion of the solicitor was to prevent compromise based on insufficient information the senate debate showed concern over both abuse and fraud by taxpayers against the government and abuse and fraud against taxpayers by government officials one of the stated purposes of requiring that the opinion of the solicitor be placed on file was to ensure that the commissioner had all of the facts before him the commissioner of internal revenue was not to make a compromise until after a full and fair investigation congress apparently believed it would be good for the compromise process to have a check from a source not connected with the assessors and collectors of internal revenue not that the solicitor was deemed less subject_to corruption than the collector and assessor of internal revenue but it was felt that it would be more difficult to corrupt all three see comments of senator turnbull cong globe 40th cong 2d sess july excerpts from the discussion on this section suggest that congress was aware that the modified version of the proposed statute made the opinion of the solicitor gratuitous the commissioner was required to obtain the assent of the secretary_of_the_treasury prior to compromise but the opinion of the solicitor need only be placed on file after a compromise was made thus the opinion of counsel would have no effect on the decision to accept or reject an offer to compromise and could only act as a check on the compromise power to the extent the commissioner was concerned about what the opinion later placed in the record might say although there was discussion in the senate to the effect that it would be more sensible to require that the opinion be rendered before a compromise is accepted the language was not changed prior to enactment and subsequent revisions of the sec_2 in further support of the idea that a favorable opinion by counsel is not a prerequisite to compromise at least one court has concluded that the lack of a counsel opinion does not render the compromise invalid see 59_f2d_242 ct_cl the court found that since the provision requires an opinion of counsel after the compromise has been made i t is addressed to the officer and is directory and a failure to comply therewith would not affect the compromise itself or its validity id see also 324_f2d_960 ct_cl concurring opinion if a legally binding compromise can be executed without the need of a counsel opinion notwithstanding the requirement in the statute it is difficult to conclude that a negative opinion by counsel would prevent compromise unless the opinion stated that the case could not be compromised at all under the existing statute and regulations august bulletin no have not specified that counsel’s opinion be placed on file prior to acceptance of the compromise see seidman supra the change made in sec_7122 in as part of the taxpayer bill of right sec_2 tbor2 is the most recent hint as to the role congress intends counsel to play in the compromise process the amount of assessed tax below which an opinion of counsel is not required was raised from dollar_figure to dollar_figure and the final sentence reading however such compromise shall be subject_to continuing quality review by the secretary was added the conference_report gave no indication as to why the change was made but the insertion of the final sentence makes it reasonable to assume that congress believed counsel review in some way contributed to the overall quality of the compromise program however no indication was given as to how or in what way congress intended counsel to contribute to the compromise process these few indications of the congressional intent behind sec_7122 do not provide any particular clarity as to the meaning of the section the review criteria in the ccdm are however consistent with the concerns expressed by congress in its debate of the original measure and with the sentence added in counsel review that is focused on both the authority to compromise and a full development of the facts is in keeping with congress’s apparent belief that a check on the system would guard against corruption insure that the accepting official is fully informed and contribute to the overall quality of case resolutions traditional role of counsel in offers in compromise the scope of the sec_7122 opinion has traditionally tracked the service’s understanding of the legal bounds of the compromise authority arguably counsel’s review has failed to adjust as our understanding of the legal requirements for compromise has evolved based principally on various opinions of the attorney_general the service had long taken the position that compromise is authorized only when it is established that there is doubt regarding the amount or existence of the liability or there is uncertainty that the liability could be collected see generally t d compromises fed reg date discussing evolution of offer_in_compromise authority and policy from 1930's to 1990's in response to a request from acting secretary_of_the_treasury acheson attorney_general cummings considered the scope of the secretary’s authority to compromise concluding 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 ‘compromise ’ op atty gen xiii-47-7138 date august bulletin no relying upon this opinion and others which had reached similar conclusions the commissioner adopted a policy of compromising only on the bases of doubt as to liability or collectibility see commissioner’s statement of policy with respect to the compromise of taxes interest and penalties date see also sec_301_7122-1 the commissioner’s statement of policy also provided that the acceptability of an offer to compromise should be determined with regard to the degree of doubt present in a particular case this policy was implemented within the service by adopting a practice of accepting offers based on doubt as to collectibility only when the amount offered reflected the taxpayer’s maximum capacity to pay pursuant to this statement of policy counsel generally reviewed proposed agreements to verify that the amount offered reflected the maximum capacity to pay offers were not regarded as legally sufficient unless the maximum capacity to pay standard was met the form_7249 offer acceptance report was revised in to include a statement that could be checked to indicate that the offer was legally sufficient thus eliminating the need to place a separate narrative opinion on file the text of that statement illustrates that doubt as to collectibility and legal sufficiency were defined in near identical terms at that time doubt as to collectibility this offer is consistent with the taxpayer’s ability to pay since the offer amount is greater than the value of the taxpayer’s current collectable assets based upon the taxpayer’s projected future income the service believes collection of the remaining liability is in doubt form_7249 offer acceptance report rev emphasis added if the basis for compromise was doubt that any greater amount could be collected then any offer for less would not only fall short of the standard for acceptance but would also appear to be ineligible for compromise based on collectibility as a legal matter in the early 1990's the service began an effort to expand the use of offers in compromise this led to the adoption of a new compromise policy in while continuing to base the compromise of cases on a finding of doubt as to liability doubt as to collectibility or both the policy removed references to the maximum capacity to pay standard in favor of language stating that a compromise may be accepted if it reasonably reflects collection potential policy statement p-5-100 this change in terminology was intended to recognize that the collection potential of a case could not always be determined with precision and to signal a willingness to be flexible in resolving cases the general_rule with regard to acceptances remained unchanged however and taxpayers were still expected to make offers consistent with their ability to pay see eg op atty gen xiii-47-7140 date op atty gen op atty gen august bulletin no at about the same time the office_of_chief_counsel made clear its position that collectibility or lack thereof is defined by examining the taxpayer’s case as a whole once it is determined that the taxpayer’s assets and future income are insufficient for the government to collect the tax_liability in full the amount accepted to settle the controversy is a matter within the service’s discretion the commissioner’s delegation of authority was eventually revised to permit certain officials to accept offers from taxpayers notwithstanding the fact that the offer may not reflect the amount that could be collected by other means this authority however was expressed by reference to whether counsel had issued a negative opinion regarding the legal sufficiency of the proposed acceptance district directors service_center directors director austin compliance center and regional directors of appeals are delegated the authority to accept offers in compromise in the event counsel renders a negative legal opinion regardless of the amount of the liability sought to be compromised this applies only to offers in compromise - doubt as to collectibility this authority may not be redelegated see delegation_order no rev date acceptances of an offer for less than full collection potential came to be known as delegation_order acceptances although the text of the delegation implies that service officials could accept offers regardless of any negative opinion by counsel internal guidance encouraging the use of this authority made clear that this authority could only be used when a basis for compromise had been established current service procedures authorize acceptance of less than reasonable collection potential to resolve a case when it is necessary to avoid economic hardship such cases are now called special circumstances cases the delegation_order was revised in to add a delegation of authority to accept offers based on the promotion of effective tax_administration at that time a decision was made to specifically delegate the authority to accept offers based on special circumstances criteria rather than to define the authority by reference to the negative opinion of counsel see delegation_order no rev date delegating authority to accept offers based on special circumstance criteria to district directors deputy assistant_commissioner international and chiefs of we do not believe that this conclusion was intended to imply that the service is authorized to resolve all cases that could not be collected in full for merely nominal sums or that the compromise statute authorized the creation of an ad hoc amnesty program rather it is an unspoken assumption that compromise authority will only be exercised in a manner consistent with the service’s other obligations under the code and in furtherance of its overall mission see eg sec_6301 the secretary shall collect the taxes imposed by the internal revenue laws policy statement p-5-2 collecting principles the public trust requires us to ensure that all taxpayers promptly file their returns and pay the proper amount of tax regardless of the amount owed august bulletin no appeals irm explaining special circumstances criteria and acceptance authority the commissioner’s expanded delegation of authority had not previously been met with a corresponding change in the procedures for counsel review although the ccdm recognized that an affirmative opinion by counsel is not a prerequisite to compromise the procedures continued to imply that counsel must issue a negative opinion whenever the service intended to accept less than reasonable collection potential even where the area director identified special circumstances which warranted the acceptance of some lesser amount thus some counsel offices continued to issue opinions to the effect that offers were legally insufficient even though all of the legal requirements for compromise had been met and any disagreements were grounded in policy concerns chief_counsel notice cc-2001-036 the chief_counsel notice makes clear that counsel’s review consists of both legal and policy elements the legal standard for establishment of each basis for compromise as defined by the regulation is briefly stated the revised procedure calls for counsel to sign the form_7249 offer acceptance report in all cases provided the proposed action is within the service’s authority and complies with the requirements of the law the notice also briefly outlines the service’s acceptance policy with regard to each basis for compromise if counsel is of the opinion that the proposed acceptance is inconsistent with the service’s policies it should advise the offer group of its concerns by separate memorandum conversely if counsel recognizes and supports the decision to deviate from normal acceptance standards the procedures will no longer imply that a negative opinion must be issued the revised procedure will allow counsel to more clearly communicate the nature of any concerns to the area director and staff counsel signature on the acceptance report will indicate to the area director that the proposed acceptance is legally permissible under the code and regulations notwithstanding any disagreements over policy concerns the lack of a signature will no longer merely signal that approval of a higher authority is needed but will indicate more serious problems that call into question the legality of the proposed compromise expressly authorizing counsel to support deviations from normal policy in appropriate cases by issuing a separate memorandum will serve to foster an environment of cooperation and send a message to offer groups that both they and counsel are working toward the same goals the notice makes a conscious effort to eliminate the legal sufficiency terminology from the irs lexicon the term legally sufficient appears only in the internal_revenue_manual and chief_counsel directives manual the lack of a consistent definition of the term in the ccdm and elsewhere has invited individuals to attach their own meaning use of the august bulletin no term has also perpetuated the misconception that the service’s usual standard for the acceptance of offers is in some way legally mandated and that a counsel opinion to the effect that an offer reflects less than could be collected by other means is necessarily a legal determination of greater concern however is the implication that any negative recommendation of counsel even one which concludes that the case could not be compromised at all under the statute can be disregarded if the proper official signs the letter accepting the offer because the legal sufficiency determination in the ccdm contained elements that the notice divides into separate and distinct inquiries continued use of the term could potentially cause continued confusion we hope that this memorandum will provide useful background for your offices as they implement the revised procedures for counsel review of offers in compromise august bulletin no offers in compromise overpayment interest date cc pa cbs rcgrosenick gl-114973-01 uil memorandum for george w bezold attorney associate area_counsel milwaukee cc sb mil from joseph w clark senior technician reviewer branch cbs subject payment of interest on overpayments of offers in compromise this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue whether interest is payable to a taxpayer who following acceptance of an offer_in_compromise remits more than the amount reflected in the offer but less than the actual tax_liability conclusion under the circumstances described we agree that the taxpayer is not entitled to interest facts your memorandum posits three scenarios in which a taxpayer submits an offer_in_compromise oic for dollar_figure you ask under each scenario whether the taxpayer is entitled to be paid interest scenario the taxpayer pays dollar_figure in cash and dollar_figure obtained through a loan scenario the taxpayer pays dollar_figure the service also offsets the taxpayer’s income_tax refund in both the year of acceptance and erroneously the following year scenario the taxpayer pays dollar_figure in december then mistakenly pays an additional dollar_figure the following july august bulletin no it is assumed for the purpose of each scenario that the taxpayer’s liability has not been fully satisfied because the taxpayer has not fulfilled all of the terms and conditions of the oic at the time the extra payment was made it also is assumed that the service fails to timely repay the taxpayer within days of the claim you conclude under each scenario that the taxpayer is not entitled to interest under the first scenario you conclude that the additional dollar_figure submitted by the taxpayer is a deposit under all scenarios you conclude that the taxpayer’s payment of more than the amount provided in the oic is not an overpayment because the amount submitted is less than the amount of the taxpayer’s liability therefore there is no requirement under sec_6611 that interest be paid to the taxpayer law and analysis sec_6611 provides that the service will pay interest on any overpayment of a tax overpayment is not defined in the code but is treated by the courts as any payment of a tax in excess of what is rightfully due 494_us_596 n the common sense interpretation is that a tax is overpaid when a taxpayer pays more than is owed for whatever reason or no reason at all 332_us_524 there can be no overpayment_of_tax until the entire tax_liability has been satisfied sec_301_6611-1 since compromise of a tax_liability pursuant to an oic under sec_7122 will always be for less than the total_tax liability the service has no authority to pay interest on monies paid relative to an oic in the absence of express congressional consent to an award of interest the united_states is immune from an interest award 446_us_253 in the absence of specific provision by contract or statute or express consent by congress interest does not run on a claim against the united_states unlike the return of the funds actually collected from a person the payment of interest will result in the net depletion of treasury funds congress has only authorized the use of appropriated funds for the payment of interest in specific situations such as where there is an overpayment entitling a taxpayer to a refund under the internal_revenue_code see eg sec_6611 these specific grants of authority indicate that the service does not have any general item d of form_656 offer_in_compromise provides i we will comply with all provisions of the internal_revenue_code relating to filing my our returns and paying my our required taxes for years or until the offered amount is paid in full whichever is longer in the situations described the taxpayer has not fulfilled this condition sec_6611 provides that if the service refunds an overpayment within days of the taxpayer’s filing a claim for credit or refund no interest will be paid under sec_6401 the word overpayment includes certain payments and credits but that section does not provide an exclusive list august bulletin no authority to pay interest in cases not covered by the specific grants see eg 180_f2d_410 no additional interest on replacement refund check because right to recover interest from government must come from contract or congressional enactment in the absence of specific congressional authorization interest cannot be provided to a party when funds are returned to such party in 285_f2d_451 ct_cl the taxpayer submitted funds along with an offer_in_compromise to the service these funds were deposited in a special account for amounts received other than by collection such as by compromise after several months the service rejected the offer and returned the taxpayer’s money without interest the service later assessed the taxpayer and the taxpayer sued to recover the purported difference between the amount submitted with his offer plus accrued interest and the amount of the assessment discussing the taxpayer’s demand for interest the court found no provision of law that would authorize the service to pay the court held that the taxpayer’s remittance did not constitute an overpayment relying on several cases8 in which payments made prior to tax assessments were treated as deposits not subject_to interest upon their return the court concluded that because the amount held by the government did not exceed the taxpayer’s liability and because the taxpayer could have requested a return of the amounts held at any time there was no overpayment and no authority to award interest see also eg sec_1311 correction of certain errors by adjustment treated as an overpayment but specifically excluding compromises under sec_7122 similarly under the scenarios described above the amounts received in excess of what the taxpayer proposed as the compromise amount do not constitute overpayments under sec_301_7122-1t g any sum submitted with a proposed oic or during the pendency of an oic is considered a deposit if the oic is withdrawn unprocessable or rejected the regulation provides that any amounts submitted will be returned to the taxpayer without interestdollar_figure 323_us_658 97_fsupp_993 130_f2d_537 3d cir as a general_rule the gross amount of all taxes and revenues received under the provisions of the internal_revenue_code and collections of whatever nature footnote con’t received or collected pursuant to the authority of any internal revenue law are paid daily into the treasury of the united_states as internal revenue collections sec_7809 as one exception to the general_rule sums offered in compromise are deposited in a deposit fund account once the offer is accepted the amount is withdrawn from the deposit account and deposited in the treasury as internal revenue collections sec_7809 as part of the contractual conditions signed by the taxpayer on form_656 offer_in_compromise item provides in relevant part i we understand that the irs august bulletin no absent statutory authority sovereign immunity prevents an award of interest 478_us_310 the service has no statutory authority to award interest unless there is an overpayment sec_6611 to the extent that the amount received by the service does not exceed the taxpayer’s liability there is no overpayment under the three scenarios described above the taxpayer is not entitled to interest on the amounts received by the service in excess of the compromised tax_liability case development hazards and other considerations the foregoing analysis assumes that the taxpayer has not fully satisfied his tax_liability at the time the service receives and holds the excess funds if however the service has adjusted the taxpayer’s account balance so that the monies received on account of the oic fully satisfied the taxpayer’s liability any funds held by the service would be considered an overpayment under sec_6611 and subject_to the 45-day repayment rule under sec_6611 trust_fund_taxes date cc pa cbs br3 gl-122253-01 uil memorandum for miriam a howe associate area_counsel sbse - laguna niguel cc sb ln from subject charles e samuel acting chief branch collection bankruptcy summonses trust fund compliance initiative tfci checklist your ref gl-811406-99 memo of date this chief_counsel_advice responds to your request of date that we review guidance that was provided by your office to your local collection function last year and that we advise you whether that prior advice is generally in line with the service’s current thinking on this subject in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent our advice focuses on how the collection function may select taxpayer cases that are likely to be appropriate for using the service’s extraordinary civil administrative tools described in irm - ie the letter warning notice form 941-m monthly filing and the special tax deposits std requirements of sec_7512 - will not pay interest on any amount i we submit with the offer august bulletin no where no criminal tax prosecution is anticipated but a mandatory injunction to stop further employment_tax pyramiding under sec_7402 may be sought if the taxpayer continues to pyramid after the civil administrative tools have been appropriately useddollar_figure while there are strong and clear statutory and historical links between the collection function first imposing std requirements on a taxpayer under sec_7512 and the ci function later then pursuing criminal prosecution of a taxpayer who failed to comply with these std requirements under sec_7215 or another criminal tax provision the causal relationship between the service imposing std requirements on a taxpayer and the united_states bringing a mandatory civil injunction under sec_7402 to stop further pyramiding by a taxpayer who has failed to comply with employment_tax requirements is not so rigid however the service’s manual provisions irm and its law enforcement manual provision lem describing std guidelines have been written to cover both potential paths of follow-up legal action - criminal prosecution or civil injunctive relief - in the same numbered sections a subtle reading of these provisions is accordingly sometimes necessary for the service to distinguish between appropriate handling and selection guidelines for a criminal tfci case and for a civil tfci casedollar_figure general tfci case selection and monitoring guidance we are agreed that the tfci administrative procedures described in irm are generally for use with in-business taxpayers which have shown a continuing pattern of failing to pay their full trust fund tax_liabilities on a timely basis ie pyramiding the service’s use of tfci administrative and judicial procedures - i e issuing the letter warning notice imposing monthly form 941-m filing and std requirements closely monitoring a taxpayer’s compliance with these requirements and initiating a criminal prosecution or civil injunctive action in the event of a taxpayer’s failure to substantially comply - is not subject_to collection_due_process cdp or other administrative appeal nevertheless we are aware that the headquarters ci function has issued guidance to its field ci offices that is supportive of the collection function’s current trust fund compliance initiative tfci upon request we can provide you the name and telephone number of the headquarters ci analyst who has been working with the collection function on this project our only prior published guidance in the tfci area a general litigation bulletin glb summary of a memorandum of date in case gl br3-0411-95 see glb lexi sec_2 with selection tolerance text redactions may also be confusing to field offices about the substantial differences that we believe exist between a std case that is potentially appropriate for criminal prosecution and a failure to pay employment_tax case that may be appropriate for seeking a civil injunction august bulletin no rights within the service tfci administrative procedures generally require a taxpayer to comply prospectively with reporting and paying its federal employment_tax obligations already due under the law albeit on a more structured and strictly monitored basis by the service while the judicial process already exists to ensure protection of a taxpayer’s rights in the event of a criminal prosecution or civil injunctive action as your prior advice and our prior tfci guidance see footnote indicate the purpose of tfci is not to produce any certain number of sec_7215 criminal or sec_7402 civil cases to bring to court but rather to increase overall future collection of revenue and ongoing compliance among a select population of chronic in-business pyramiders the first tfci checklist factor listed in your prior advice is a local dollar tolerance figure that we assume is meant to represent the taxpayer’s quarterly trust fund tax_liability and that may have been derived by your office from the local criminal tax tolerance figure for another city that was discussed in the glb summary referenced in footnote above the glb summary did reflect our concern that local tolerances for criminal tax purposes should be flexible enough to consider the amount of a taxpayer’s accumulated total_tax liabilities as well as the amount of the taxpayer’s quarterly trust fund tax_liabilities an important tolerance consideration that the glb summary perhaps failed to reflect adequately is that it may often be appropriate to impose tfci administrative requirements with no genuine expectation that criminal prosecution may result but that civil injunctive relief could well be sought as a remedy for the taxpayer’s substantial noncompliance when the quarterly trust fund tax_liabilities of the taxpayer are well below those adopted on a local basis for criminal tax prosecution purposes in fact the lem provision and current tfci pilot city instruction dollar tolerances for issuing forms to impose std requirements are approximately one fifth of the apparent quarterly dollar tolerance amount referred to in your checklist one of the tfci pilot cities also persuaded the headquarters collection function to lower this quarterly dollar tolerance figure even further for the pilot program in that city in a pending civil injunction case that has been brought by the tax_division to stop employment_tax pyramiding in the san diego area the taxpayer’s quarterly trust fund tax_liability also falls below the suggested lem tolerance figure for issuing form_2481 but the taxpayer’s pattern of failing to pay its trust fund tax_liabilities was a long one and the accumulated unpaid employment_tax liabilities of the taxpayer were large by the time injunctive relief was sought accordingly for civil tfci purposes we recommend that your tfci checklist identify a local quarterly trust fund tax_liability tolerance guide that is closer to the lem figure for issuing forms in accordance with the local counsel practice in many cities for instituting any kind of affirmative suit we also believe that your tfci checklist should identify for revenue officers a local accumulated employment_tax liability tolerance guide that your office would generally expect to be met before your office would forward a civil suit referral to the tax_division to request that a suit be filed for a mandatory civil injunction to stop the taxpayer from further employment_tax pyramiding in the case of responsible august bulletin no persons who may have established a pattern of pyramiding for one entity and then moving on to a new entity when the service begins to take action this accumulated employment_tax liability tolerance may include unpaid employment_tax totals for all entities managed or controlled by the responsible_person in addition to specifying that the taxpayer should be in business currently pyramiding at a local quarterly dollar tolerance guideline and have accumulated a total employment_tax liability at a suggested local dollar tolerance level we recommend that your local tfci checklist consolidate a number of the separate behavior items now identified in your checklist under a new general category along the lines of past inability to comply with the law no single one of your suggested past behavioral items need be present to issue the letter place the taxpayer on monthly filing or impose the std regime but the overall picture of taxpayers selected for tfci civil monitoring should be one of past inability to comply with employment_tax laws either the business taxpayer or the individual s actually running the business should have a demonstrated history of noncompliance with federal employment_tax laws this may include repeated failure_to_file returns for trust_fund_taxes or repeated failure to pay over trust_fund_taxes even if returns are properly filed factors to consider include evidence of chronic undercapitalization of the business chronic lateness in filing or paying over taxes ie always trying to play catch-up but instead falling further and further behind past business failures including bankruptcies where unpaid taxes constituted a major claim against the debtor abandonment of past business entities leaving unpaid and uncollectible tax_liabilities past sec_6672 investigations past offers in compromise on basis of collectibility for either the businesses operated by the responsible individuals or by the individuals themselves for sec_6672 assessments next we recommend that your local tfci checklist for civil purposes prominently highlight the factor service unable to collect inability to collect and that you explain that both the business and the potentially responsible persons should have no assets or no assets with more than de_minimis equity from which collection can reasonably be made for the trust_fund_taxes oweddollar_figure as a practical matter this is the tfci case selection factor for civil purposes that you may expect to be the most critical in determining which of the local collection field function’s cff’s chronic problem employment_tax cases will be most appropriate for using tfci administrative tools and which cff employment_tax cases should continue for the most part to be handled for civil purposes via the service’s traditional lien levy and trust fund recovery penalty tfrp tools and procedures as they have been substantially_modified by the irs restructuring and reform act rra the service’s inability to collect from the business or its responsible persons has been the the de_minimis equity factor for tfci procedures is already alluded to in irm the first if then contingency in the note to irm and irm in the chapter describing how to work cases involving an in-business repeater trust fund taxpayer august bulletin no factor that has drawn by far the most number of questions from cff employees in the operation of tfci in the present pilot cities in considering the inability to collect factor cff needs to be mindful that it is looking at the likely forced sale value of a taxpayer’s assets and there is some local flexibility in determining the range of what is de_minimis equity in the assets of the taxpayer and its responsible persons we do not intend to suggest for instance that tfci tools would be inappropriate for a day care provider that is operating out of leased or fully encumbered property whose primary unencumbered assets may only be used furniture or toys these are probably circumstances involving de_minimis equity on the other hand the taxpayer employer may be an undercapitalized medical services provider whose responsible_person already assessed for the tfrp under sec_6672 owns a personal_residence individually that may reasonably be expected to produce dollar_figure of net sale proceeds for the service if a u s district_court judge approves a levy on the personal_residence pursuant to sec_6334dollar_figure before going the tfci civil route for this taxpayer employer we would ordinarily expect cff to pursue the possible personal_residence sale of the taxpayer’s responsible_person for the tfrp even if the taxpayer employer’s accumulated total employment_tax liabilities already exceed dollar_figure in general the dollar figure that cff may use as a local tolerance for de_minimis equity is not a dollar figure that should rise in proportion to the taxpayer’s total unpaid liability in general a taxpayer’s present ability to delay the service’s ultimate collection of employment_tax liabilities by electing to use the cdp rights created by rra should not be heavily considered by cff in determining whether there is an inability to collect for civil tfci purposes on a case-by-case basis after cff has fully consulted with local sbse counsel we may agree that tfci tools are appropriate for civil use where an in-business taxpayer employer has a pending cdp hearing request and is believed to have previously abused and or is presently abusing its cdp hearing rights to delay levies of a recurring nature on the taxpayer’s replenishable property eg levies on bank accounts or accounts_receivable and has pyramided further employment_tax liabilities while pursuing its prior and or present cdp hearing rights in such cases due to the pending cdp hearing request the service would ordinarily be providing the taxpayer with comparable breathing room as under tfci from enforced collection activity that would allow a willing taxpayer to come into current period employment_tax compliance if a taxpayer of this type loses its cdp appeal to stop a levy and also fails to comply with std requirements that were imposed while the cdp appeal was pending then it could be appropriate to levy first after the cdp appeal is concluded and follow-up that levy with an immediate request for a co-owner or tenancy by the entireties interests could significantly reduce or eliminate any actual forced sale value in a personal_residence so these interests should be considered carefully by cff in evaluating whether a responsible_person has more than de_minimis forced sale equity in a personal_residence for tfci case selection purposes august bulletin no mandatory civil injunction against the taxpayer to promote future employment_tax compliance by that time the taxpayer would have shown its inability or unwillingness to pay current trust fund tax_liabilities even though the service had followed tfci procedures and the taxpayer had been free from enforced collection action for as long as this most recent cdp hearing request had been pending until the service’s levy was eventually permitted to go forward and was actually made there are several reasons why the service’s inability to collect is such a critical factor for appropriate tfci civil case selection even though there is no statutory or case law prohibition on the service pursuing enforced collection actions and also making use of its strictly administrative tfci tools against a taxpayer as explained further below follow-up tfci legal action is likely to be infeasible where the service’s efforts to collect past tax_liabilities have arguably materially impaired the taxpayer’s ability to comply with the tfci administrative procedures that have been imposed for current reporting periods effective deterrence and resource use considerations generally tilt against the service’s use of a std regime and enforced collection action at the same time if the collection actions are likely to undermine the follow-up legal action options available to the service for the taxpayer’s failure to comply with std requirements tfci civil case procedures for cff after initial case selection occurs eg administrative monitoring referral to counsel for legal action participation in legal action as a potential witness and monitoring a taxpayer’s compliance with injunctive relief approved by a court for several years may potentially be more time consuming if the taxpayer does not comply quickly and span a greater length of time than using the service’s traditional enforced collection activity for taxpayers who have assets with equity even when these taxpayers take full advantage of their cdp hearing and appeal rights one of the traditional showings required of a party seeking injunctive relief is that the requesting party has no alternative adequate remedy at law the service’s traditional administrative collection procedures and its tfci administrative monitoring procedures if not futile probably fall under the general category of potential adequate remedies at law to be considered first though the boundaries of what various courts may require for injunctive relief in these employment_tax pyramiding circumstances have not been well tested yet on the other hand it is a well-established principle of equitable jurisprudence that equity does not require the doing of a vain or useless thing that equity does not it is also generally more cost effective for the service to use its revenue officers to achieve taxpayer compliance and its appeals officers to resolve taxpayer disputes than to involve all of its legal representatives local sbse counsel cbs to review the suit letter per ccdm n and the tax_division to file and argue the case plus court personnel before these administrative avenues have been adequately explored or shown to be futile august bulletin no require one to do useless or unnecessary acts to obtain relief to which he is otherwise clearly entitleddollar_figure accordingly where a taxpayer’s responsible persons have followed a pattern of pyramiding for one entity and then when the service takes notice moving on quickly to pyramiding under a new entity’s name and ein our office the headquarters collection function and the tax_division are now in substantial agreement that the service may be able to skip tfci administrative monitoring procedures and move immediately to seek injunctive reliefdollar_figure this is because the taxpayer’s behavior in these circumstances has made it futile for the service to attempt to pursue its typical tfci administrative progression which first involves a period of monitoring for compliance after the letter is issued and then calls for a further period of monitoring for compliance after it has become necessary for cff to impose std and monthly filing_requirements on the taxpayer if an employer takes on a new tax identity when tfci tools are used the service may never be able to complete the tfci administrative progression because the employer will not hold still keep its tax identity long enough though not prescribed by irm or discussed in your prior advice our office has often recommended that a standing local tfci committee with representatives of several functions including local counsel be used to guide the selection of appropriate local cases for_the_use_of tfci administrative tools and for providing participating revenue officers with support and advice in following the monitoring procedures and in moving through the various potential phases of the tfci progression multi-functional local tfci committees with representation from local counsel and serving these purposes are pincite see 30a c j s equity 327_f2d_201 10th cir equity will not require a useless thing or insist upon an idle formality 240_f2d_59 4th cir equity does not require the doing of a vain thing as a condition of relief union oil co of california v reconstruction oil co p 2d cal app equity will not require the performance of an idle act see also kondik v united_states aftr 2d n d ohio aff'd 81_f3d_655 6th cir in circumstances of this type the new entity may also have more than de_minimis equity in assets but these assets may sometimes only be effectively reached by the service to satisfy the unpaid tax_liabilities of the predecessor entities by first filing a suit seeking equitable relief to set_aside fraudulent_conveyances from the prior entity to the new entity the service is not required to exhaust its alternative equitable remedies in court before seeking injunctive relief so it may likewise be appropriate in these circumstances for the united_states to seek an injunction immediately against a new entity transferee with more than de_minimis assets in order to prevent future employment_tax pyramiding and a further transfer of the transferee’s assets to another new successor entity august bulletin no the heart of the present pilot city initiatives and were critical in the working of earlier tfci efforts in the mid-1990s for cases of chronic employment_tax pyramiders that are first considered by the local tfci committee for inclusion in the initiative but are then rejected for the time being at least because the service’s inability to collect has not been appropriately explored yet the tfci committee members may also now serve the especially important function of guiding revenue officers as to how they may still pursue appropriate enforcement actions in a post-rra environment at each tfci monitoring stage after the service has made the decision to deliver the letter warning notice to the taxpayer cff and the local tfci committee if one exists should consider whether any_action by the service with respect to any of the taxpayer’s prior stage tax delinquencies has materially impaired the taxpayer’s ability to comply with its current period reporting and payment of employment_taxes see irm and lem if efforts by the service to collect pre-letter tax period liabilities of the taxpayer have impaired the taxpayer’s ability to comply with the letter then it will generally be difficult for the service to conclude that it afforded the taxpayer with a reasonable opportunity to comply with the letter requirements before placing the taxpayer on a std regime as directed by irm once cff has hand-delivered the form_2481 to a taxpayer to put the taxpayer under std requirements the service should also generally refrain from taking any enforcement action that would arguably deprive the taxpayer of sufficient funds to comply with std requirements unless cff and the local tfci committee has finally determined that it will neither pursue criminal prosecution nor civil injunctive remedies if the taxpayer fails to comply with the std requirements see irm c and a part of the service’s reasoning behind its general policy of refraining from actions to collect past tax delinquencies while a taxpayer goes through the tfci progression is that although irm does mention the possibility of the service obtaining an installment_agreement ia for tax delinquent accounts after delivering the form_2481 as long as the taxpayer would be left with sufficient funds to comply with std requirements the service generally will not be entertaining an ia or offer_in_compromise oic from a taxpayer under the std regime until after the taxpayer has demonstrated compliance with std procedures for the preceding two quarters and only if the taxpayer has remained in current compliance with std in the quarter in which the ia or oic is made see irm and providing guidance for handling the in-business repeater trust fund taxpayer irm describing when oics by an in-business taxpayer for employment_taxes are considered not processible at this point of a taxpayer’s compliance with std requirements for two consecutive full quarters and continued compliance the service would ordinarily be thinking about when - possibly at the end of the third quarter of full compliance see the note below irm - it would become appropriate to move the taxpayer off the std regime instead of pursuing a request for bringing a civil injunction suit august bulletin no a criminal conviction of a taxpayer under sec_7215 for failing to comply with std requirements is unlikely where a taxpayer may credibly argue that the service’s own actions made it nearly impossible or difficult for the taxpayer to comply with the std requirements the same logic also applies to how a federal district_court is likely to view an initial request by the united_states for civil injunctive relief when a taxpayer may credibly argue that the primary or a significant reason that the taxpayer is unable to remain in current federal employment_tax compliance is that the service continues to seize its funds to satisfy past taxes that are necessary for the taxpayer to pay its current tax liabilitiesdollar_figure accordingly we generally believe that it is a best practice while a taxpayer is under tfci monitoring procedures for cff to refrain from levying to collect any past taxes the taxpayer may owe to avoid the taxpayer’s potential defense of material impairment however for potential civil tfci purposes we do not believe that filing appropriate notices of federal_tax_lien nftls against the taxpayer or continuing cdp hearings requested by the taxpayer are enforcement actions by the service that could genuinely impair a taxpayer’s ability to pay its current tax_liabilities while under tfci monitoring for potential civil tfci purposes on a case by case basis after consulting fully with local sbse counsel we also believe that it may be possible for cff to levy without materially impairing the taxpayer employer’s ability to comply with the warnings in the letter and std requirements on the non-essential property of current responsible persons and on the property of former responsible persons with no continued relationship to the employer’s business that cff did not know of or did not know of the equity in the property when tfci procedures were instituted in order to collect assessed tfrp liabilities there may also be very rare circumstances for civil tfci purposes where a levy could be appropriate with local sbse counsel’s concurrence on property titled in the taxpayer employer’s name while the employer was under std requirements for instance cff could first discover after it as you may imagine the same logic also will likely apply once a civil injunction is issued to require prospective employment_tax compliance from a taxpayer a court will be wary of imposing sanctions for a taxpayer’s noncompliance with its prior injunction order if the taxpayer may credibly argue that cff efforts to collect prior tax_liabilities impaired the taxpayer’s ability to comply with the current period tax_payments required by the injunction if cff knew of the equity in the responsible person’s property before tfci procedures were considered then it would have been appropriate to levy upon the property before resorting to tfci procedures except in the potential case-by-case circumstances alluded to above where the responsible_person initiated an abusive cdp hearing request in the view of both cff and local sbse counsel to delay the levy and the taxpayer employer has pyramided further employment_tax liabilities while the responsible_person pursues his her cdp hearing rights august bulletin no placed the employer under std requirements that the employer had a yacht or airplane titled in its name that the employer’s responsible_person uses principally for pleasure and that the service’s seizure and sale of the yacht or airplane could be accomplished with no material disruption to the operations or financing of the employer’s business but still produce more than de_minimis net sale proceeds to pay a portion but not most of the employer’s past employment_tax delinquencies for potential criminal tfci purposes the ci function should be closely consulted in advance with regards to any proposed cff enforcement actions any time after the letter warning has been issued to the taxpayer and the ci function may impose further limits on cff actions than we have recommended above for civil tfci purposes of course if cff and the local tfci committee have selected inability to collect cases for_the_use_of tfci tools before the decision is made to issue the letter as we recommend then refraining from collecting past tax delinquencies during tfci monitoring should not pose a genuine collection risk to the revenues because the past taxes would not be collectible anyway finally in terms of general tfci guidance we believe that the context of the service using monthly form 941-m return filing_requirements for a taxpayer employer as part of the tfci progression should be further explained issuing the letter is administratively required by irm before a taxpayer is recommended by cff for monthly filing however tfci procedures permit but do not require that a taxpayer have first been monitored under monthly filing_requirements before std requirements may be imposed apart from the std regime monthly filing may be imposed upon a taxpayer ordinarily as a remedy for the taxpayer’s timely tax reporting return filing problems as opposed to the taxpayer’s timely tax payment problems when monthly form 941-m filing_requirements are imposed upon a taxpayer apart from the std regime a taxpayer is required to continue making required tax deposits electronically or by federal tax deposits ftds see irm i imposing monthly filing_requirements upon a taxpayer also imposes additional administrative burdens on the revenue_officer monitoring the taxpayer’s compliance with monthly filing see irm through so apart from the std regime many revenue officers may be reluctant to impose monthly filing on a taxpayer if the taxpayer’s compliance problem is more in the tax payment area than in the tax reporting area when std requirements are imposed by cff on a taxpayer the taxpayer is also ordinarily put under monthly form 941-m filing_requirements the form_2481 notice to make special deposits of taxes for imposing std requirements contains a box that the revenue_officer ordinarily checks to impose monthly filing at the same time when a taxpayer is under std requirements the taxpayer is directed by the form_2481 as explained by the revenue_officer to immediately deposit the funds necessary to pay its federal employment if the net sale proceeds of the yacht or airplane sale come close to satisfying the employer’s delinquent tax_liabilities in full then the probability of the united_states seeking a civil injunction in the near term would ordinarily be relatively low august bulletin no taxes in the required special bank account and to keep the funds deposited in that special bank account until full payment is made to the service with the required return while a taxpayer is under the std regime cff should suppress issuance of ftd alerts for the taxpayer see irm because the taxpayer should make its deposits in the special bank account instead of continuing to follow ordinary ftd requirements accordingly if std requirements are imposed upon a taxpayer without also requiring monthly filing of the taxpayer then the funds to pay the employer’s federal employment_tax obligations will sit in the special bank account until the end of the quarter instead of the end of each month under monthly filing with std before being paid over to the service see irm b further specific comments on your tfci memo checklist in the revised local tfci guidance that you may prepare for your local cff use we recommend that you delete the present references to potential worker classification issues in a tfci case on your page sec_2 item c and the checklist factor at the bottom of the page we believe that tfci procedures are not likely to be of much use to cff in addressing worker classification disputes with an employer because std requirements do not address the correctness of the employer’s reporting position criminal prosecution or a civil injunction for a taxpayer which is allegedly violating std requirements only because of a non-frivolous reporting position on worker classification is probably not likely on your page near the end of the first sentence of item we recommend that you strike the words should issue letter and substitute with words along the lines of should consider whether tfci procedures are appropriate for this taxpayer and whether to begin the tfci progression by issuing a letter to the taxpayer we believe the service should be sparing in its future use of letter sec_903 using them only when the service reasonably believes that it will be willing to follow through on the full tfci civil progression if not criminal prosecution in the event of a taxpayer’s substantial non-compliance with the tfci administrative procedures we believe that the keys to cff’s effective future use of letter sec_903 as a deterrent to future employment_tax pyramiding will lie in large part with appropriate case selectivity upfront a genuine commitment to follow through and effective local and national publicity of its tfci efforts in regard to the potential deterrent effect of properly used letter sec_903 you note appropriately on your page that although sec_7215 itself refers to a criminal fine of not more than dollar_figure and imprisonment of not more than one year per violation the violation is classified as a class a misdemeanor under federal sentencing guidelines and under these guidelines a class a misdemeanor is punishable by a fine of not more than dollar_figure per violation see u s c a and b hence the present letter criminal tax warnings to a taxpayer are accurate august bulletin no on your page in the second sentence of the second paragraph from the bottom we recommend that you remove the present references to consent orders providing for entry and seizure of assets because it is now uncertain whether the united_states will seek consent orders of the type that were obtained in mid-1980 cases with the preliminary injunction since the code’s requirements for seizures have evolved somewhat in the intervening years on your page in the second and third lines of the second paragraph from the bottom we recommend that you strike the words corporate_income_tax on your page we further recommend that you strike the first full paragraph which describes a potential injunction order requiring a taxpayer to file monthly employment_tax returns and to pay with certified funds the initial injunctive relief that we expect the united_states to obtain by consent in the pending san diego area injunction case is along the following lines a defendants shall timely make all future required federal tax deposits in connection with the operation of their business b defendants shall each mail an affidavit to the specified irs address revenue_officer on the first day of each month following the entry of this order to the effect that they have personally ensured that for each pay_period during the prior month federal taxes required to be deposited in connection with their business have been fully deposited c in the event the defendants comply with the terms set forth in paragraphs a and b above for a period of five years this court shall dissolve this order but d if the defendants fail to comply with the terms set forth in paragraphs a and b above then this court shall enter a subsequent order directing that no funds may be disbursed by check or otherwise from the business by the defendants or their agents until any and all federal taxes required to be deposited are in fact deposited and the required affidavits are mailed to the irs under these circumstances the court may also grant such other equitable relief as the court may deem just and appropriate to ensure the defendants’ compliance with the internal revenue laws on your page we recommend that you substitute for your checklist factor at the bottom of the page emphasizing insolvency the important tfci selection factor of service unable to collect inability to collect factor which we discussed previously we imagine that a very large percentage of cff employment_tax cases involve insolvent taxpayers but a much smaller percentage of these insolvent taxpayers will likely be appropriate for cff to use tfci tools ie the cases where the service is unable to collect from assets with more than de_minimis equity as we have emphasized previously the taxpayer’s ability to full pay its delinquent tax_liabilities is not an appropriate test for resorting to tfci tools if the service has the ability to collect a portion of a taxpayer’s delinquent tax_liability that august bulletin no represents more than a de_minimis amount it is still more appropriate for the service to use its traditional enforcement tools rather than resort to the use of tfci tools we are also unpersuaded that taxpayer insolvency alone will lead very many courts to order a business shut down at the preliminary injunction stage of a tfci case however a taxpayer’s contempt of a court’s injunction order in a tfci case may well lead a court as a sanction to order the taxpayer’s business sold to satisfy its tax debts and to prevent future violations of the court’s injunction offers administration in compromise collateral agreements effective tax date cc pa cbs br2 gl-114892-01 uilc memorandum for associate area_counsel sb_se area newark from joseph w clark senior technician reviewer branch collection bankruptcy summonses subject collateral agreements in effective tax_administration offers in compromise this chief_counsel_advice responds to your request dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views issue can the internal_revenue_service accept as additional consideration for an offer_in_compromise a collateral_agreement or other document which will entitle the government to the proceeds from the sale of a particular asset at some point in the future conclusion yes although treasury regulations establish certain conditions that must be satisfied in order to compromise under sec_7122 of the internal_revenue_code the terms of a compromise_agreement including the amount acceptable to resolve a case are policy matters within the discretion of the commissioner insistence upon an agreement allowing the government to collect from particular assets in the future is a permissible exercise of that discretion august background bulletin no the compliance area director has asked your advice on the following scenario the taxpayers an elderly couple who are not employed have submitted an offer_in_compromise an analysis of the taxpayers’ financial condition shows that the tax could be collected in full the major source of potential collection is their home which has substantial net equity however the service has determined that seizure of the home would cause the taxpayers economic hardship and that collection in full cannot be accomplished otherwise based on the determination that collection in full would create economic hardship the service is considering accepting the taxpayers’ offer on the basis of the promotion of effective tax_administration the area director is concerned however that compromise under such circumstances would only serve to create a windfall for the taxpayers’ heirs he has proposed obtaining a collateral_agreement in such compromises which would allow the taxpayers to reside in their home until their deaths thereafter the home would be sold with the proceeds going to the government as part of the compromise law analysis sec_7122 of the internal_revenue_code grants the secretary the authority to compromise and establishes certain rules to be followed in exercising that authority treasury regulations further define the secretary’s authority by establishing permissible bases for compromise see temp sec_301_7122-1t b the regulations provide procedures for the submission and processing of offers to compromise as well as other rules relating to the acceptance or rejection of offers and how the submission of offers impacts upon the service’s ability to continue collection efforts see temp sec_301_7122-1t c - i none of these rules however address how much should be accepted to resolve a case or what terms or conditions should be included in a compromise_agreement the preamble to the temporary regulations explains this omission stating 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 t d compromises fed reg date in exercising this discretion the service may request a s additional consideration that the taxpayer enter into any collateral_agreement or post any security which is deemed necessary for the protection of the interests of the united_states temp sec_301_7122-1t d august bulletin no terms and conditions applicable to all compromises are set forth in form_656 offer_in_compromise which must be submitted by all taxpayers offering to compromise with the service the service’s procedures recognize that additional terms may be appropriate in some cases these agreements commonly known as collateral agreements are discussed in chapter of the offer_in_compromise handbook irm standard collateral agreements include waivers net operating losses agreements reducing the basis in particular assets or agreements to pay a set percentage of future income over a certain base_amount see irm such agreements allow the service to recover part of the difference between the amount of the offer and the total liability however collateral agreements should not be used to allow acceptance of an amount less than the financial analysis dictates or to recover amounts that should have been included on the form_656 as part of the compromise see irm similar to the foregoing examples of collateral agreements an additional agreement like the one proposed by the area director is legally permissible and insisting on such an agreement would be within the service’s discretion as with the other types of collateral agreements whatever obligation a taxpayer undertook for example to sell the house and forward the proceeds to the service would have to take place within the statute_of_limitations applicable to the tax to which the proceeds would be applied sec_6502 establishes a ten-year statute_of_limitations within which a tax_liability must be collected or a proceeding in court commenced prior to the amendment of that section by the irs restructuring and reform act of rra the form_656 and any collateral agreements provided that the statute_of_limitations for collection was waived for the period of time that any terms of the compromise or collateral_agreement remained outstanding however following the amendment of sec_6502 of the code by section of rra the ten-year statute_of_limitations can no longer be extended by agreement for this purpose as a result the terms of compromises and collateral agreements can last only for the period remaining on the collection statute an agreement for the limited amount of time remaining on the collection statute would not appear to address the concerns raised by the area director one alternative might be the acceptance of some other type of debt_instrument granting the service the ability to collect as a state-law creditor rather than through the administrative collection provisions of the internal_revenue_code courts have long recognized that the service may accept bonds letters of credit or mortgages as a means of securing the payment of taxes and have upheld the service’s right to collect on such instruments as separate debts not subject_to the administrative collection procedures set forth in the internal_revenue_code see 313_us_289 287_us_32 united_states v john barth co 268_us_370 bonds 50_fsupp2d_107 d r i promissory note secured_by mortgage julicher v internal_revenue_service u s t c big_number usdc e d pa irrevocable letter_of_credit august bulletin no in each of those cases the taxpayers attempted to defeat the government’s right to collect on the debt_instrument by arguing that the statute_of_limitations for collection under the code had expired each court held that the instrument executed in the government’s favor created a new debt not subject_to the period of limitations for taking administrative collection action or bringing suit see royal indemnity u s pincite gulf states u s pincite barth u s pincite the court in citizens bank summed up the reasoning in this line of cases as follows the principle to be derived from barth and julicher is that where the government suspends the collection of a tax at the request of a taxpayer who in turn provides the government with security for later payment the government is not thereafter bound by the statute_of_limitations applicable to the original obligation instead the government may proceed against the security provided to it in consideration of its earlier forbearance citizens bank f_supp 2d pincite thus a mortgage on the taxpayers’ personal_residence may give the service an enforceable agreement of the sort contemplated by the area director there is no mention of this kind of arrangement in the offer_in_compromise handbook but mortgages bonds and other similar arrangements are discussed in irm collateral_agreement and security type collateral that handbook contemplates the use of mortgages not as a replacement lien on property already subject_to the lien arising under sec_6321 of the code but as a means of securing the government’s right to collect from property the assessment lien does not attach to such as real_property held as a tenancy_by_the_entirety see irm dollar_figure the handbook further states the service should never obtain a consensual lien in lieu of filing a notice_of_federal_tax_lien and reducing the tax claim to judgment or requiring the taxpayer post a bond irm this instruction is in keeping with the handbook’s recognition that the filing of a notice_of_federal_tax_lien provides the service greater protection than a debt_instrument enforceable only under state law see irm a although the irm authorizes the use of mortgages and other consensual security arrangements in certain limited circumstances the offer_in_compromise handbook does not appear to have considered the use of such instruments as part of a compromise because of the novelty of such an arrangement we recommend that the area director consult with the office of compliance policy sb_se for guidance as to whether and under what it is significant that the mortgage in citizens bank gave the service a security_interest in property that was not already subject_to the lien created by the failure to pay the tax_liability the personal_residence used as an example in the area director’s question is already subject_to the government’s lien and is reachable by levy august bulletin no circumstances a collateral_agreement allowing the service to collect from a personal_residence in the future can be secured as consideration for a compromise offers in compromise collateral agreements security interests date cc pa cbs br2 gl-127696-01 uic memorandum for associate area_counsel sb_se area ft lauderdale from joseph w clark senior technician reviewer branch collection bankruptcy summonses subject collateral agreements with mortgages and offers in compromise this chief_counsel_advice responds to your e-mail dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issues whether the service can accept an offer to compromise a tax_liability which is already secured_by a mortgage under an existing collateral_agreement and whether acceptance of such an offer requires the service to release the mortgage conclusions the service may accept an offer to compromise a tax_liability even though it is independently secured_by a mortgage under a collateral_agreement a collateral_agreement in which a taxpayer grants additional security to the service creates an independent cause of action separate from any_action to collect on the underlying tax debt thus the service is not required to release the mortgage unless it otherwise agrees to in the compromise facts taxpayer failed to pay several years worth of tax_liabilities as a result a statutory lien attached to taxpayer’s home and the service filed notices of federal_tax_lien in the proper county records taxpayer then wished to sell her home and purchase a new property she approached the service seeking to discharge the lien on her home in order to facilitate its sale taxpayer and the service entered into a collateral_agreement under august bulletin no the terms of the agreement the service issued a certificate of discharge for the property taxpayer was selling and in return taxpayer executed a promissory note for the full amount of the statutory liens plus statutory additions secured_by a mortgage on the new property the service further agreed to forebear from exercising its rights under the mortgage until the taxpayer dies sells the property or defaults under the collateral_agreement the promissory note or the mortgage taxpayer agreed to waive the statute_of_limitations on collection and the service refiled its notices of federal_tax_lien now taxpayer wishes to compromise her tax_liabilities including an additional liability incurred after the collateral_agreement was signed taxpayer submitted an offer to compromise conditioned on the service’s release of its mortgage law and analysis the collateral_agreement in certain cases a taxpayer with an outstanding tax_liability may wish to offer additional security in exchange for an agreement from the service to refrain from foreclosing its existing liens these agreements are provided for in the service’s irm handbook collateral agreements and security type collateral in rare situations the service is authorized to accept mortgages in exchange for extending the amount of time for the collection_of_taxes irm see sec_7101 sec_301_7101-1dollar_figure collateral agreements are designed to create additional security for the service not to replace any statutory liens the service may have in those cases where mortgages are accepted service policy is clear that the mortgage should never be used in lieu of filing a notice_of_federal_tax_lien irm a collateral_agreement does not compromise tax_liabilities and should not be confused with collateral agreements in the context of offers in compromise in the offer context collateral agreements provide the service with additional consideration beyond what is secured in the offer irm in that context the offer and the collateral_agreement together make up the compromise_agreement see 303_f2d_1 5th cir a collateral_agreement such as the one at issue here is different because it gives the service an alternate means for collecting the full amount of the overdue taxes indeed in this case taxpayer agreed to remain liable for the entire amount of her outstanding tax debt clearly no compromise was intended it is well settled that a collateral_agreement secured_by a mortgage_bond or some other surety creates an independent cause of action separate from one to collect taxes royal preferably the tax claim will be reduced to judgment thus extending the time for collection august bulletin no indem co v united_states 313_us_289 it is not denied that the bond created a new cause of action distinct from that on the taxpayer’s obligation 287_us_32 a bond made in such circumstances affords a cause of action separate and distinct from one to collect the tax 279_us_370 the making of the bond gives the united_states a cause of action separate and distinct from an action to collect taxes which it already had 113_f2d_322 2nd cir the bond gave the united_states a cause of action entirely separate and distinct from the one to collect taxes julicher v internal_revenue_service u s t c big_number e d penn the taxpayer in the instant case provided the service with another means to collect the money owed most recently the long-standing rule that a collateral_agreement similar to the one at issue here gives the service an independent means for collecting overdue taxes was affirmed in 50_fsupp2d_107 d r i in that case a delinquent taxpayer executed a promissory note secured_by a mortgage on his father’s property in order to prevent the service from immediately seizing his assets ten years passed and the taxpayer failed to make any payments on the note id pincite the service began to foreclose on the mortgage and the taxpayer objected arguing that the action was barred by the statute_of_limitations id the court disagreed and in granting summary_judgment to the government it concluded that the promissory note and the mortgage gave the government an independent means for collecting the taxes owed and the statute_of_limitations bar cannot be extended by implication to that note and mortgage id pincite emphasis added as the above quote highlights further evidence that collateral agreements are separate obligations comes from the court’s treatment of the statute_of_limitations courts have been exceedingly concerned with the issue of fairness with regard to collateral agreements recognizing that taxpayers enter into collateral agreements in order to delay the collection_of_taxes courts have noted that it is only fair for the service to get something out of the deal citizens bank f_supp 2d pincite for the government to defer its collection efforts at the request of the taxpayer it must have gotten something more in return than what it already had thus because the collateral_agreement gives the service more than what it already had ie more than a statutory lien the collateral_agreement is unaffected by the statute_of_limitations as the supreme court noted once a taxpayer secures for himself a temporary reprieve from the collection of his taxes he should not object to making good the contract by which he obtained the delay he sought john barth co u s pincite in this case taxpayer agreed to waive the statute_of_limitations on collection of her tax_liabilities due to changes instituted by irs restructuring and reform act of this extension will expire on date p l 112_stat_655 after that date the service will be barred from collecting under its statutory liens however because the mortgage creates a separate cause of action the service is not prevented by august bulletin no the statute_of_limitations from collecting under it 313_us_289 287_us_32 john barth co 279_us_370 oswego falls corp 113_f2d_322 citizens bank 50_fsupp_107 julicher u s t c big_number the offer_in_compromise because the collateral_agreement creates an independent cause of action the original unpaid taxes giving rise to the statutory liens remain as separate liabilities if the service wishes to compromise those liabilities it is within its discretion to do so sec_7122 temp sec_301_7122-1t absent language in the compromise_agreement to the contrary the mortgage will remain unaffected compromise agreements that conform to the statutory requirements are construed as contracts and thus are subject_to the general rules governing contracts 372_f2d_352 3rd cir lane 303_f2d_1 5th cir 429_fsupp_42 s d tex taxpayer has submitted an offer containing a term requiring the service to release the mortgage if the service were to accept this offer it would be bound by that term because an acceptance cannot change the terms of an offer restatement second of contracts sec_59 sec_61 if compliance does not want to release the mortgage it should request taxpayer to amend her offer when evaluating whether an offer to compromise is acceptable the service takes into account reasonable collection potential irm the reasonable collection potential in this case should include what could be collected under the mortgage further it should include what can be collected under the service’s statutory liens although your e-mail does not address any liens under the collateral_agreement the service expressly retained its statutory liens and in fact refiled the notices of federal_tax_lien after taxpayer waived the statute_of_limitations the certificate of discharge only affected the property then covered by the tax_lien that the taxpayer subsequently sold sec_6325 a lien would have automatically attached to taxpayer’s subsequently purchased home glass city bank v united_states 362_us_265 this is something to be taken into account before accepting any offer