These temporary regulations add a paragraph that defines the following terms for purposes of the temporary regulations: federally declared disaster; federally declared disaster area; disaster loss; disaster year; and preceding year. A federally declared disaster means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or a successor enactment. A federally declared disaster area is the area determined to be eligible for assistance pursuant to the Presidential declaration in paragraph (b)(1) of this section. A disaster loss is a loss occurring in a federally declared disaster area that is attributable to a federally declared disaster and that is otherwise allowable as a deduction for the disaster year under section 165(a) and §§ 1.165–1 through 1.165–10 of the Income Tax Regulations. The disaster year is defined as the taxable year in which a taxpayer sustains a loss attributable to a federally declared disaster. The preceding year is the taxable year immediately prior to the disaster year.

These temporary regulations generally provide that the due date for making the section 165(i) election is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year (determined without regard to any extension of time to file). This amount of time is comparable to the length of the postponements of the due dates for making the election granted in the notices identified in the Background section of this preamble.

These temporary regulations also authorize the Treasury Department and the IRS to issue additional guidance regarding the time and manner for making the section 165(i) election. The authorization in these temporary regulations will permit the Treasury Department and the IRS to act quickly to adapt to both taxpayer needs and the needs of tax administration as future disasters occur.

Contemporaneously with these temporary regulations, the Treasury Department and the IRS are issuing Rev. Proc. 2016–XX, I.R.B 2015–XX], which specifies how a taxpayer makes a section 165(i) election and incorporates the due date for making the election provided in these temporary regulations.

These temporary regulations extend the period of time for revoking a section 165(i) election to ninety (90) days after the due date for making the election. This change conforms to the rule established by the United States Tax Court in Matheson v. Commissioner, 74 T.C. 836 (1980), acq., AOD–1980–177. These temporary regulations also authorize the Treasury Department and the IRS to issue additional guidance regarding the time and manner of revoking the election. Rev. Proc. 2016–XX specifies how a taxpayer revokes a section 165(i) election and incorporates the due date for revoking the election provided in these temporary regulations.

These temporary regulations reflect rules established elsewhere in federal tax law that a taxpayer cannot deduct the same loss in more than one taxable year. Taxpayers must amend the return for the disaster year in order to make the section 165(i) election for a disaster loss if the taxpayer has deducted such loss for the disaster year. Similarly, taxpayers must amend the preceding year return to revoke a section 165(i) election before filing a return or amended return to deduct the loss in the disaster year. Rev. Proc. 2016–XX contains further guidance for taxpayers in amending returns and taking consistent return positions to minimize the administrative burden on the IRS in ensuring the prompt processing of refunds.

These temporary regulations are effective immediately because they provide relief to taxpayers who suffer casualty losses attributable to federally declared disasters and the Treasury Department and the IRS anticipate a significant number of casualty losses arising from recent instances of flooding in areas located throughout the United States, including Texas and Louisiana.

(a) through (j) [Reserved]. For further guidance, see § 1.165–11T(a) through (j).

Par. 3. § 1.165–11T is added to read as follows:

(a) In general. Section 165(i) allows a taxpayer who has sustained a loss attributable to a federally declared disaster in a taxable year to elect to deduct that disaster loss in the preceding year. This section provides rules and procedures for making and revoking an election to claim a disaster loss in the preceding year.

(b) Definitions. The following definitions apply for purposes of this section:

(1) A federally declared disaster means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or a successor enactment.

(2) A federally declared disaster area is the area determined to be eligible for assistance pursuant to the Presidential declaration in paragraph (b)(1) of this section.

(3) A disaster loss is a loss occurring in a federally declared disaster area that is attributable to a federally declared disaster and that is otherwise allowable as a deduction for the disaster year under section 165(a) and §§ 1.165–1 through 1.165–10 of the Income Tax Regulations.

(4) The disaster year is the taxable year in which a taxpayer sustains a loss attributable to a federally declared disaster.

(5) The preceding year is the taxable year immediately prior to the disaster year.

(c) Scope and effect of election. An election made pursuant to section 165(i) for a disaster loss attributable to a particular disaster applies to the entire loss sustained by the taxpayer from that disaster during the disaster year. If the taxpayer makes a section 165(i) election with respect to a particular disaster occurring during the disaster year, the disaster to which the election relates is deemed to have occurred, and the disaster loss to which the election applies is deemed to have been sustained, in the preceding year.

(d) Requirement to file consistent returns. A taxpayer may not make a section 165(i) election for a disaster loss if the taxpayer claims a deduction (as a loss, as cost of goods sold, or otherwise) for the same loss for the disaster year. If a taxpayer has claimed a deduction for a disaster loss for the disaster year and the taxpayer wishes to make a section 165(i) election with respect to such loss, the taxpayer must file an amended return to remove the previously deducted loss on or before the date that the taxpayer makes the section 165(i) election for such loss. Similarly, if a taxpayer has claimed a deduction for a disaster loss for the preceding year based on a section 165(i) election and the taxpayer wishes to revoke that election, the taxpayer must file an amended return to remove the loss for the preceding year on or before the date the taxpayer files the return or amended return for the disaster year that includes the loss.

(e) Manner of making election. An election under section 165(i) to deduct a disaster loss for the preceding year is made on an original federal tax return for the preceding year or an amended federal tax return for the preceding year in the manner specified by guidance issued pursuant to these regulations. See paragraph (h) of this section.

(f) Due date for making election. The due date for making the section 165(i) election is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year (determined without regard to any extension of time to file).

(g) Revocation. Subject to the requirements in paragraph (d) of this section, a section 165(i) election may be revoked on or before the date that is ninety (90) days after the due date for making the election.

(h) Additional guidance. The time and manner for making and revoking a section 165(i) election under paragraphs (d), (e), (f), and (g) of this section may be modified through guidance published in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d) of this chapter).

(i) Effective/Applicability date. This section is effective October 14, 2016 and applies to elections, revocations, and any other related actions that can be made or taken on or after October 14, 2016.

(j) Expiration date. The section expires October 13, 2019.

Approved: September 19, 2016.

To bring the user fee rate for offers in compromise closer to the full cost to the IRS of providing this taxpayer specific service, the proposed regulations under § 300.3 would increase the user fee for an offer in compromise to $300. The proposed regulations do not modify other portions of the User Fee Regulations regarding offers in compromise, such as § 300.3(b)(1)(i) and (ii) which waive the user fee for offers in compromise submitted by low-income taxpayers and offers in compromise based solely on doubt as to liability. The increased user fee for offers in compromise is proposed to be effective for offers submitted on or after February 27, 2017.

The Independent Offices Appropriations Act (IOAA) (31 U.S.C. 9701) authorizes each agency to promulgate regulations establishing the charge for services provided by the agency (user fees). The IOAA provides that these user fee regulations are subject to policies prescribed by the President and shall be as uniform as practicable. Those policies are currently set forth in the Office of Management and Budget (OMB) Circular A-25, 58 FR 38142 (July 15, 1993; OMB Circular).

The IOAA states that the services provided by an agency should be self-sustaining to the extent possible. 31 U.S.C. 9701(a). The OMB Circular states that agencies that provide services that confer special benefits on identifiable recipients beyond those accruing to the general public are to establish user fees that recover the full cost of providing those services. The OMB Circular requires that agencies identify all services that confer special benefits and determine whether user fees should be assessed for those services.

Agencies are to review user fees biennially and update them as necessary to reflect changes in the cost of providing the underlying services. During this biennial review, an agency must calculate the full cost of providing each service, taking into account all direct and indirect costs to any part of the U.S. government. The full cost of providing a service includes, but is not limited to, salaries, retirement benefits, rents, utilities, travel, and management costs, as well as an appropriate allocation of overhead and other support costs associated with providing the service.

An agency should set the user fee at an amount that recovers the full cost of providing the service unless the agency requests, and the OMB grants, an exception to the full cost requirement. The OMB may grant exceptions only where the cost of collecting the fees would represent an unduly large part of the fee for the activity or any other condition exists that, in the opinion of the agency head, justifies an exception. When the OMB grants an exception, the agency does not collect the full cost of providing the service and therefore must fund the remaining cost of providing the service from other available funding sources. By doing so, the agency subsidizes the cost of the service to the recipients of reduced-fee services even though the service confers a special benefit on those recipients who should otherwise be required to pay the full costs of receiving that benefit as provided for by the IOAA and the OMB Circular.

The offer in compromise program confers a special benefit on identifiable recipients beyond those accruing to the general public. A taxpayer with an accepted offer in compromise receives the special benefit of resolving his or her tax liabilities for a compromised amount, provided the taxpayer complies with the terms of the offer, and the benefit of paying the compromised amount over a period not to exceed 24 months. Further, section 6331(k)(1) of the Code generally prohibits the IRS from levying to collect taxes while a request to enter into an offer in compromise is pending, for 30 days after a rejection, and, if a timely appeal of a rejection is filed, for the duration of the appeal. Because of these special benefits, the IOAA and the OMB Circular authorize the IRS to charge a user fee for the offer in compromise that reflects the full cost of providing the service of the offer in compromise program to the taxpayer.

The amount of the offer in compromise user fee was last changed in 2014. As required by the IOAA and the OMB Circular, the IRS completed its 2015 biennial review of the offer in compromise program and determined that the full cost of an offer in compromise is $2,450.

In accordance with the OMB Circular, this proposed amendment to the regulations increases the offer in compromise fee to recover more of the costs associated with such offers. These proposed regulations propose to charge less than full cost. While agencies are generally required to charge full cost, the OMB Circular permits certain limited exceptions to this requirement. The IRS requested and the OMB approved an exception to the full cost requirement. The proposed fee for processing an offer in compromise is $300. In light of constraints on IRS resources for tax administration, the Treasury Department and the IRS have determined that it is necessary to recoup more of the costs of the offer in compromise program. The IRS will continue its practice of providing services subject to user fees at costs less than otherwise charged where there is a compelling tax administration reason to do so. Therefore, these proposed regulations do not modify the portions of the current regulations that except low-income taxpayers and offers based on doubt as to liability from the user fee. The proposed fee balances the need to recover more of the costs with the goal of encouraging offers in compromise.

As required under the OMB Circular, the IRS will review the user fee for offers in compromise during its 2017 biennial review. The IRS also plans to evaluate the impact of the current proposed fee increase on the offer in compromise program, and the IRS will take this impact into consideration when revising the offer in compromise user fee in the future.

User fee calculations begin by first determining the full cost for the service. The IRS follows the guidance provided by the OMB Circular to compute the full cost of the service, which includes all indirect and direct costs to any part of the U.S. government including but not limited to direct and indirect personnel costs, physical overhead, rents, utilities, travel, and management costs. The IRS’s cost methodology is described below.

Once the total amount of direct and indirect costs associated with a service is determined, the IRS follows the guidance in the OMB Circular to determine the costs associated with providing the service to each recipient, which represents the average per unit cost of that service. This average per unit cost is the amount of the user fee that will recover the full cost of the service.

The IRS follows generally accepted accounting principles (GAAP), as established by the Federal Accounting Standards Advisory Board (FASAB) in calculating the full cost of providing services. The FASAB Handbook of Accounting Standards and Other Pronouncements, as amended, which is available at http://files.fasab.gov/pdffiles/2015_fasab_handbook.pdf, includes the Statement of Federal Financial Accounting Standards SFFAS No. 4: Managerial Cost Accounting Concepts and Standards for the Federal Government (SFFAS No. 4). SFFAS No. 4 establishes internal costing standards under GAAP to accurately measure and manage the full cost of federal programs. The methodology described below is in accordance with SFFAS No. 4.

The IRS determines the cost of its services and the activities involved in producing them through a cost accounting system that tracks costs to organizational units. The lowest organizational unit in the IRS’s cost accounting system is called a cost center. Cost centers are usually separate offices that are distinguished by subject-matter area of responsibility or geographic region. All costs of operating a cost center are recorded in the IRS’s cost accounting system and allocated to that cost center. The costs allocated to a cost center are the direct costs for the cost center’s activities as well as all indirect costs, including overhead, associated with that cost center. Each cost is recorded in only one cost center.

To establish the per unit cost, the total cost of providing the service is divided by the volume of services provided. The volume of services provided includes both services for which a fee is charged as well as subsidized services. The subsidized services are those where OMB has approved an exception to the full cost requirement, for example, to charge a reduced fee to low-income taxpayers. The volume of subsidized services is included in the total volume of services provided to ensure that the IRS, and not those who are paying full cost, subsidizes the cost of the reduced-cost services.

Not all cost centers are fully devoted to only one service for which the IRS charges a user fee. Some cost centers work on a number of different services. In these cases, the IRS estimates the cost incurred in those cost centers attributable to the service for which a user fee is being calculated by measuring the time required to accomplish activities related to the service, and estimating the average time required to accomplish these activities. The average time required to accomplish these activities is multiplied by the relevant organizational unit’s average labor and benefits cost per unit of time to determine the labor and benefits cost incurred to provide the service. To determine the full cost, the IRS then adds an appropriate overhead charge as discussed below.

Overhead is an indirect cost of operating an organization that cannot be immediately associated with an activity that the organization performs. Overhead includes costs of resources that are jointly or commonly consumed by one or more organizational unit’s activities but are not specifically identifiable to a single activity. These costs can include:

To calculate the overhead allocable to a service, the IRS first calculates the Corporate Overhead rate and then multiplies the Corporate Overhead rate by the direct labor and benefits costs determined as discussed above. The IRS calculates the Corporate Overhead rate annually based on cost elements underlying the Statement of Net Cost included in the IRS Annual Financial Statements, which are audited by the Government Accountability Office. The Corporate Overhead rate is the ratio of the sum of the IRS’s indirect labor and benefits costs from the supporting and sustaining organizational units—those that do not interact directly with taxpayers—and all non-labor costs to the IRS’s labor and benefits costs of its organizational units that interact directly with taxpayers.

The Corporate Overhead rate of 65.85 percent for costs reviewed during FY 2015 was calculated based on FY 2014 costs as follows:

The IRS used data from cost centers dedicated to the offer in compromise program and cost centers that work on the offer in compromise program, as well as other IRS programs, to determine the full cost of the offer in compromise program. The IRS used the most recent two years of data, in this case FY 2013 and FY 2014, and averaged those costs in order to assure anomalies, such as short term increases or decreases in costs or numbers of offers in compromise, would not artificially impact the measured costs.

The offer in compromise program work is primarily performed by dedicated offices; therefore, the cost of most of the program can be determined through the costs recorded in the cost centers underlying the offices dedicated to the offer in compromise program. The IRS identified the offices that provide 100 percent of their time to this program (Offer in Compromise Offices), determined the full costs of the Offer in Compromise Offices for FY 2013 and 2014, and averaged the costs for those two years to determine the annual average costs of those offices. The average costs for the Offer in Compromise Offices were as follows:

Because overhead and support costs are already included in the “Non-Labor and Support Costs” allocated to these cost centers, a Corporate Overhead factor has not been added to determine the full cost of the Offer in Compromise Offices.

There are three IRS organizations that perform work for the offer in compromise program, but that are not exclusively dedicated to the offer in compromise program (Non-OIC Dedicated Offices). Those organizations are:

To calculate the average offer in compromise program costs attributable to these Non-OIC Dedicated Offices, the IRS obtained the time spent by each organization on the offer in compromise program for FY 2013 and 2014, calculated an annual average of that time for each office, and multiplied that annual average time by the average hourly rates for that organization. After determining the total labor and benefits costs for the Non-OIC Dedicated Offices, the IRS added the Corporate Overhead costs allocable to these organizations to determine the full cost of the services provided by the Non-OIC Dedicated Offices. The costs are calculated as follows:

To determine the full cost of the offer in compromise program, the IRS combined the Offer in Compromise Offices’ full cost and the Non-OIC Dedicated Offices’ full cost. The IRS calculated the unit cost by dividing the total offer in compromise program cost by the average of offer in compromise cases that were closed in FY 2013 and in FY 2014. Closed offers are offers that have been issued an acceptance letter, closed as rejected or withdrawn/terminated, or returned. An offer may be returned either because the offer was not processable when received, or after the offer was initially determined to be processable circumstances occur that cause the offer to no longer be processable or the Service is unable to proceed with the offer investigation. The IRS closed 70,622 offer in compromise cases in FY 2013 and 64,332 offer in compromise cases in FY 2014, for an average of offer in compromise cases closed in FY 2013 and FY 2014 of 67,477.

* * * * *

(b) Fee—(1) The fee for processing an offer to compromise submitted before February 27, 2017, is $186. The fee for processing an offer to compromise submitted on or after February 27, 2017, is $300. No fee will be charged if an offer is— * * *

* * * * *

(d) Effective/applicability date. This section is applicable beginning February 27, 2017.

(a) through (i) [Reserved]. [The text of proposed § 1.165–11(a) through (i) is the same as the text of § 1.165–11T(a) through (i) published elsewhere in this issue of the Bulletin].