The IRS issued Rev. Proc. 2003-71 (making Rev. Proc. 96-38 obsolete) to give additional clarification regarding the application of the regulations and the acceptance of an OIC.
Rev. Proc. 2003-71 provides that an OIC based on doubt as to liability would be acceptable if it reasonably reflects the amount the IRS expects to collect through litigation, including an evaluation of the hazards or litigation, which is within the sole discretion of the IRS.
An OIC based on doubt as to collectibility is acceptable if the IRS determines that the liability cannot be collected in full and the offer reflects an amount that could be collected through other means, taking into consideration a taxpayer’s basic living requirements.
Rev. Proc. 2003-71 stipulates that special circumstances would warrant a further downward adjustment.
The promotion of effective tax administration reflects a desire to treat disadvantaged taxpayers fair and equitably. Where the IRS believes the full amount of the tax liability could be collected, an OIC will still be accepted if the IRS determines collection would impose economic hardship on the taxpayer. Thus, an ill taxpayer may be relieved of the full liability because of their inability to replace the assets used to satisfy the tax liability, which may place a future financial burden on them. These compromises are justified because enforcing the full liability in these circumstances may serve to undermine public confidence that the tax laws are being fairly administered.
The regulations and Rev. Proc. 2003-71 generally provide that an OIC may be made any time before the case has been referred to the Department of Justice for prosecution or defense.
If an OIC is pending (has been accepted for processing, i.e., officially signed and accepted by an authorized IRS employee), the IRS may not levy a taxpayer’s property. Levy is also suspended for 30 days after an OIC rejection and while an appeal of the rejection is pending.