An offer in compromise (referred to as an offer or OIC) is a way for the IRS to recoup a portion of the monies owed by taxpayers unable to pay their taxes in full. Revenue Procedure 2003-71 and Notice 2006-68 explain the procedures applicable to the submission and processing of offers to compromise a tax liability under Section 7122 of the Internal Revenue Code.

This section provides information regarding the various collateral agreements that may be secured in conjunction with an offer in compromise.

Authorities relating to this section include:

The Director, Collection Policy, SBSE is responsible for all policies and procedures within the Offer in Compromise program.

The National Program Manager, Offer in Compromise is responsible for development and delivery of policies and procedures within the program.

Managers of employees investigating offers are responsible for ensuring these procedures are followed and employee actions are timely and accurate.

Offer examiners, offer specialists, and other employees investigating offers are responsible for following the procedures in this IRM.

Operational and program reviews are conducted on a yearly basis by the Director, Specialty Collection Offer in Compromise, (SCOIC) and Collection Policy, respectively, with the use of data and reports from the Automated Offer In Compromise (AOIC) system and ENTITY case management system. See IRM 1.4.52, Resource Guide for Managers - Offer in Compromise Manager’s Resource Guide.

Managerial case reviews are also completed as defined in IRM 1.4.52, Offer in Compromise Manager’s Resource Guide. These reviews are a method to determine if the offer amount accurately reflects the reasonable collection potential (RCP) as defined in Policy Statement 5-100.

National quality reviews and consistency reviews are routinely conducted to ensure program consistency and effectiveness in case processing. As a result of these reviews, procedural changes may be required to improve the quality and effectiveness of the program.

AOIC is used to track offers submitted by taxpayers and record case actions and history. Ability to take action on AOIC is limited to specific offer employees. Additional permissions are provided based on an employee’s duties and responsibilities.

ICS is used by FOIC as a method for inventory control and history documentation.

Managers are required to follow program management procedures and controls addressed in IRM 1.4.52, Offer in Compromise Manager’s Resource Guide.

Managerial Requirements for case approval are defined in IRM 1.2.2.6.1, Del. Order 5-1 (Rev. 5), To Accept, Reject, Return, Terminate or Acknowledge Withdrawals of Offers in Compromise. Approving officials ensure collateral agreements are secured when appropriate.

The Office of Chief Counsel conducts reviews of certain offers in accordance with 26 CFR 301.7122-1 - Compromises.

Monitoring OIC (MOIC) monitors the collateral agreement provisions through the life of the contract.

Collateral agreement - A contract associated with a Form 656 that provides additional terms to the standard contract.

For a list of common abbreviations, definitions and acronyms used throughout this IRM, see IRM 5.8.1-1, Common Abbreviations Used in the IRM.

Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at https://rnet.web.irs.gov/Resources/AcronymSearch.aspx.

Additional resources can be found in:

Employees can find helpful information on these websites:

It is appropriate to consider future income collateral agreements for individuals, limited liability companies, and corporations when the investigation reveals that a substantial increase in the taxpayer's future income is expected.

The use of a future income collateral agreement may be an option when current income is lower than the taxpayer's earnings potential. Scenarios where the taxpayer's future income may be substantially higher include the following:

Do not secure a future income collateral agreement:

Future income collateral agreements must be monitored annually for the life of the agreement. The cost of monitoring and the difficulty in tracing income structured through other entities should be considered when deciding whether such an agreement is warranted. If the anticipated income is non-taxable and/or may not appear on a return, it may be necessary to include additional language in the collateral or provide specific instruction to MOIC to assist in monitoring.

If amounts accrue under Form 2261, Collateral Agreement - Future Income (Individual), or Form 2261-A, Collateral Agreement - Future Income Corporation, but are not paid to the IRS on or before the CSED, amounts received thereafter are statutory overpayments under IRC Section 6401(a). Per Rev. Rul. 74-580 and IRM 5.19.7.8, Applying Payments on Accepted OICs, any payments received after CSED expiration are returned or refunded. Collection of amounts paid under a collateral agreement relating to an OIC is based on an assessment and is subject to the period of limitations for collection under IRC 6502 for that assessment just like the amounts paid under the OIC. Just as there can be no agreement between the taxpayer and IRS to extend the period for collection in the terms of the OIC, a collateral agreement cannot extend that period.

The initial basis of an asset is equal to the cost of acquiring it. Adjustments to the basis are made each year for the cost of improvements and accumulated depreciation. When an asset is sold, the basis is used to determine the amount of capital gain to be taxed.

A collateral agreement may be used to reduce the basis of a specific asset, after accumulated depreciation (book value), to a lesser amount or zero. The effect of reducing the basis of a specific asset include limiting or eliminating the amount of depreciation deduction allowed in future years, potentially having the taxpayer incur a higher capital gain tax to be paid if the asset is later sold for an amount more than the adjusted basis or reducing the amount of the loss the taxpayer can claim.

Use Form 2261-B, Collateral Agreement — Adjusted Basis of Specific Assets.

Use the date of the Form 656 (or amended Form 656) that is being accepted.

The beginning year is defined as the year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Specifically describe each asset. Set the amount of the basis at the reduced or zero value.

While the taxpayer’s basis in an asset is permanently reduced by this agreement, adjusted basis collateral agreements are not monitored by MOIC indefinitely. See IRM 5.19.7.12.4, Processing Other Collateral Agreements, for monitoring actions on these offers. Consider the cost to monitor the agreement and the difficulty in tracing the sale or exchange of the property when deciding whether such an agreement is warranted.

If the taxpayer has a loss that can be carried forward to reduce future taxable income, determine if the value warrants the securing of a Form 2261–C, Collateral Agreement —Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits. If a loss is anticipated to offset future taxable income and reduce future taxes by a meaningful amount, it should generally be waived.

Waiver of losses collateral agreements must be monitored annually until all the losses are extinguished or the expiration of the CSED(s) on all tax periods included in the offer. Consider the cost to monitor the agreement and potential for recovery of future tax liabilities when deciding whether such an agreement is warranted.

Use the date of the Form 656 (or amended Form 656) that is being accepted.

The beginning year is usually defined as the next year after the last filed tax return. Insert the year of the last filed tax return in the phrase "for all taxable years beginning after" . Waive net operating losses and capital losses arising from all years prior to and including the last filed tax return. If you elect to start the collateral at a later date, document the reasoning.

Do not prohibit the deduction of losses that arise in years after the offer is accepted.

Certain business credits claimed on Form 3800 may be carried forward. These may be located on page 2 of Form 1040 (Schedule 3, Additional Credits and Payments);Form 1120 Schedule J; or Form 1041 Schedule G.

When completing the forms, consider when you want the agreement to be effective. The waiver of these losses could impact the current year’s liability, so the anticipated date of acceptance is a factor. If the collateral agreement is secured relatively early in the year, the agreements should generally be effective after December 31 of the prior year (so the taxpayer cannot claim the loss when they file this year’s return). If the collateral agreement is secured toward the end of the year, you may want to have it effective after December 31 of the current year.

When a Form 2261-C, Collateral Agreement – Waiver of Net Operating Losses, Capital Losses, and Unused Business Credits is being secured, the collateral agreement section of the terms screen must be completed on AOIC in accordance with IRM 5.8.8, Acceptance Processing.

The IRS does not have the authority to compromise restitution-based assessments (RBA), but offers in compromise for civil tax liabilities may be considered. When computing RCP, the IRS allows payments to the amount of restitution ordered by a court. Although RBA is not included in an offer, a taxpayer must remain compliant with restitution payments ordered by the court to avoid potential default of an acceptance. Annual monitoring of the RBA payments is warranted if:

Do not request monitoring for RBA payments if the allowance of the RBA payment did not significantly impact the determination to accept an offer.

If Form 656 contains the RBA default provision, and you’ve determined monitoring is warranted, include all the information in AOIC that is required. Clearly document the closing AOIC Remarks with the specifics (payment, due dates and duration) of the RBA terms and utilize the collateral section of AOIC Terms Screen. The information typed into the collateral field will be populated into Form 7249 and be part of the public inspection file (PIF), so refer only to the specific section in the Form 656.

If the Form 656 revision being accepted does not contain language in Section 7 that advises failure to pay the amount of restitution ordered by a court will provide basis for the default of the OIC for the civil tax assessments, contact Collection Policy to determine if you should secure a special language collateral agreement.

Specify in the Remarks the duration the monitoring is required. Payments will typically be monitored through the lesser of:

The restitution statement in the collateral section of the AOIC Terms Screen will notify MOIC they must monitor for the RBA default as a provision of the offer. An annual verification of the RBA payments will be conducted for the time specified by the OE/OS in the Remarks. Current payments made to the court pursuant to a restitution order may not always appear on IDRS because of a delay between the payment being made and the payment posting to the MFT 31 module(s). A current accounting of RBA payments can be obtained by requesting a summary of payments made to the court via e-mail to *TS Criminal Restitution. MOIC may issue a Form 2209 Other Investigation to the requesting group to determine if the taxpayer is in compliance with the RBA terms.

The above monitoring procedures apply only to RBA assessments.

Document the reason a collateral agreement was considered and the impact on the case decision. Establish support for a collateral in the rejection narrative so Appeals will be aware of the facts.

In the narrative, provide an estimate of value.

Use the open paragraph option in AOIC to include in the rejection letter that a collateral agreement was requested and refused.

If the offer amount would otherwise be acceptable, the basis for the rejection must be Not in the Best Interest of the Government.

When accepting an offer with a collateral agreement, update the collateral agreement section in AOIC Terms screen. Because this information is populated on the Form 7249 and becomes part of the public inspection file, provide a brief summary vs. detailed collateral agreement language. The collateral agreement term section is added to the end of the Form 656 terms, and should be followed with a period.

When composing the acceptance letter, include paragraph option 673-A. You will be prompted for the form/letter number and name of the collateral agreement, but are limited to 50 characters. The entire title may not fit. Type the name of the form, comma, followed by the title.

As opposed to the Form 7249, do not include a period or comma at the end of the 673-A field. The form number and name will be populated in the letter and will read "The acceptance date is the date of this letter and acceptance is subject to the terms and condition on the enclosed Form 656, Offer in Compromise and Form 2261-C, Waiver of Losses and Credits."

If monitoring of RBA payments is required, populate the collateral terms section in AOIC with the applicable section of Form 656. See IRM 5.8.6.2.4, Taxpayers Who Also Owe Restitution-Based Assessments, for the specific information to document in the collateral section for Form 7249 as well as in the AOIC Remarks. No additional language is required in the acceptance letter.

Review the printed acceptance letter and Form 7249 to ensure the collateral agreement information was populated correctly and there is no erroneous punctuation such as double periods in the acceptance letter.

Enclose a copy of the collateral agreement and the Form 656 with the acceptance letter.

Document AOIC Remarks with information that may assist MOIC with the monitoring of the collateral agreement and reduce the need to refer to the physical file. Examples include:

Consult Area Counsel if you have questions regarding the correct language or structuring of a collateral agreement. If proceeding with acceptance of an offer that does not have concurrence of Counsel, the offer documents must be approved by the Area Director. See IRM 5.8.8.13.2, Counsel Review and Concurrence (Non-Legal Issues).