User Fees for Offers in Compromise, 70654-70658 [2016-24666]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 198 (Thursday, October 13, 2016)]
[Proposed Rules]
[Pages 70654-70658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24666]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 300

[REG-108934-16]
RIN 1545-BN38


User Fees for Offers in Compromise

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed amendments to the regulations 
that provide user fees for offers in compromise. The proposed 
amendments affect taxpayers who wish to pay their liabilities through 
offers in compromise. The proposed effective date for these proposed 
amendments to the regulations is for offers in compromise submitted on 
or after February 27, 2017. This document also provides a notice of 
public hearing on these proposed amendments to the regulations.

DATES: Written or electronic comments must be received by November 28, 
2016. Outlines of topics to be discussed at the public hearing 
scheduled for December 16, 2016 at 10:00 a.m. must be received by 
November 28, 2016.

ADDRESSES: Send submissions to: Internal Revenue Service, CC:PA:LPD:PR 
(REG-108934-16), Room 5203, Post Office Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
108934-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224 or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-
108934-16). The public hearing will be held in the Main IR Auditorium 
beginning at 10:00 a.m. in the Internal Revenue Service Building, 1111 
Constitution Avenue NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed amendments to 
the regulations, Maria Del Pilar Austin at (202) 317-5437; concerning 
submissions of comments, the hearing, or to be placed on the building 
access list to attend the hearing, Regina Johnson, at (202) 317-6901; 
concerning cost methodology, Eva Williams, at (202) 803-9728 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed regulations that would amend Sec.  
300.3 of the User Fee Regulations (26 CFR part 300), which provides for 
a user fee applicable to offers in compromise under section 7122 of the 
Internal Revenue Code (Code).
    Section 7122(a) provides the Secretary the authority to compromise 
any civil or criminal case arising under the internal revenue laws, 
prior to the referral of that case to the Department of Justice. 
Section 7122(d)(1) requires the IRS to prescribe guidelines for 
officers and employees of the IRS to determine whether an offer in 
compromise is adequate and should be accepted to resolve a dispute. 
Those guidelines can generally be found in Sec.  301.7122-1. Under 
those guidelines, an offer in compromise may be accepted if there is 
doubt as to liability, if there is doubt as to collectability, or if 
acceptance will promote effective tax administration. See Sec.  
301.7122-1(b).
    When the IRS receives an offer in compromise, it initially 
determines whether the taxpayer submitting the offer is eligible for 
the offer in compromise program and, if the taxpayer is eligible, 
whether the offer submitted is otherwise processable. Currently, a 
taxpayer may be ineligible for the offer in compromise program for a 
number of reasons, including if the taxpayer is in bankruptcy or has 
not filed all required tax returns. The IRS will return an offer as 
nonprocessable if the taxpayer is ineligible or if the offer has not 
been properly submitted.
    If the IRS determines the offer in compromise is processable, then 
except where the offer is made under section 7122(d)(3)(B) relating 
only to issues of liability and the case is processed without a 
financial investigation, the IRS investigates and verifies the 
taxpayer's financial information submitted with the offer to determine 
whether such a compromise is appropriate before accepting the terms of 
the offer in compromise. If the IRS initially rejects a processable 
offer in compromise based on an investigation of the taxpayer's 
financial position, section 7122(e)(1) provides that the IRS must 
conduct an independent administrative review of that decision before 
communicating the rejection to the taxpayer. If the independent 
administrative review upholds the IRS's initial decision to reject a 
processable offer in compromise, section 7122(e)(2) provides that the 
taxpayer is notified of the rejection and has the right to appeal the 
rejection to the IRS's Appeals Office. When the IRS accepts an offer in 
compromise, the IRS processes the payments and monitors the taxpayer's 
compliance with the terms of the offer.
    Under Sec.  300.3, the IRS currently charges $186 for processing an 
offer in compromise, which includes reviewing and monitoring the offer. 
Under Sec.  300.3(b)(2)(i) and (ii), if a fee is charged and the offer 
is accepted to promote effective tax administration or accepted based 
on doubt as to collectability where the IRS has determined that 
collection of an amount greater than the amount offered would create 
economic hardship, then the user fee is applied against the amount to 
be paid under the offer unless the taxpayer requests that it be 
refunded. Section 300.3(b)(1)(i) and (ii) provide that no fee is 
charged if an offer is based solely on doubt as to liability, or made 
by a low-income taxpayer.

Explanation of Provisions

A. Overview

    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 Sec.  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 Sec.  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.

B. User Fee Authority

    The Independent Offices Appropriations Act (IOAA) (31 U.S.C.

[[Page 70655]]

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.

C. Offer in Compromise Program User Fee

    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.

D. Calculation of User Fees Generally

    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 https://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.
1. Cost Center Allocation
    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

[[Page 70656]]

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.
2. Determining the Per Unit Cost
    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.
3. Cost Estimation of Direct Labor and Benefits
    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.
4. Calculating Overhead
    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:
     General management and administrative services of 
sustaining and support organizations.
     Facilities management and ground maintenance services 
(security, rent, utilities, and building maintenance).
     Procurement and contracting services.
     Financial management and accounting services.
     Information technology services.
     Services to acquire and operate property, plants and 
equipment.
     Publication, reproduction, and graphics and video 
services.
     Research, analytical, and statistical services.
     Human resources/personnel services.
     Library and legal services.
    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:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Indirect Labor and Benefits Costs........                 $1,693,339,843
Non-Labor Costs..........................       +         $2,832,262,970
                                                   ---------------------
Total Indirect Costs.....................                 $4,525,602,813
Direct Labor and Benefits Costs..........       /         $6,872,934,473
                                                   ---------------------
Corporate Overhead Rate..................                         65.85%
------------------------------------------------------------------------

E. Calculation of Offer in Compromise User Fee

    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:

------------------------------------------------------------------------
        Offer in compromise offices                 Average costs
------------------------------------------------------------------------
Labor and Benefits........................  $61,125,895
Non-Labor and Support Costs...............  90,730,487
Offer in Compromise Offices Full Cost.....  151,856,382
------------------------------------------------------------------------

    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:
     Office of Chief Counsel
     Small Business/Self-Employed (Examination)
     Office of Appeals
    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

[[Page 70657]]

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:

                        Non-OIC Dedicated Offices
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                         Office of Chief Counsel
------------------------------------------------------------------------
Average Hours...........................................          13,688
Average Salary and Benefits Rate........................          $57.00
Chief Counsel Labor Cost................................        $780,216
------------------------------------------------------------------------
                               Examination
------------------------------------------------------------------------
Average Hours...........................................           3,723
Average Salary and Benefits Rate........................          $52.72
Examination Labor Cost..................................        $196,277
------------------------------------------------------------------------
                            Office of Appeals
------------------------------------------------------------------------
Average Hours...........................................         128,610
Average Salary and Benefits Rate........................          $55.10
Examination Labor Cost..................................      $7,086,411
------------------------------------------------------------------------
          Total Cost for Chief Counsel, Examination and Appeals
------------------------------------------------------------------------
Total Labor and Benefits Cost...........................      $8,062,904
Corporate Overhead at 65.85%............................      $5,309,422
Total Non-OIC Dedicated Offices Cost....................     $13,372,326
------------------------------------------------------------------------

    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.

                    Unit Cost for Offer in Compromise
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Total Offer in Compromise Offices.......................    $151,856,382
Total Non-OIC Dedicated Offices.........................     $13,372,326
Offer in Compromise Program Full Cost...................    $165,228,708
Average FY 2013 and 2014 Annual Volume of Closed Offers           67,477
 in Compromise..........................................
Unit Cost...............................................          $2,450
------------------------------------------------------------------------

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It is hereby certified that these regulations will not 
have a significant economic impact on a substantial number of small 
entities. This certification is based on the information that follows. 
The economic impact of these regulations on any small entity would 
result from the entity being required to pay a fee prescribed by these 
regulations in order to obtain a particular service. The dollar amount 
of the fee is not, however, substantial enough to have a significant 
economic impact on any entity subject to the fee because generally the 
fee is applied to offset an existing tax obligation that the entity 
owes the IRS. As such, the fee does not represent a payment of any 
amount greater than what a substantial number of entities owe the IRS. 
Low-income taxpayers and taxpayers making offers in compromise based on 
doubt as to liability will continue not to be charged a fee and 
therefore will not be impacted economically by these proposed 
regulations. Accordingly, a regulatory flexibility analysis is not 
required. Pursuant to section 7805(f) of the Internal Revenue Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any comments that are 
submitted timely to the IRS as prescribed in this preamble under the 
ADDRESSES heading. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. All comments will be 
available at www.regulations.gov or upon request.
    A public hearing has been scheduled for December 16, 2016, 
beginning at 10:00 a.m. in the Main IR Auditorium of the Internal 
Revenue Service Building, 1111 Constitution Avenue NW., Washington, DC. 
20224. Due to building security procedures, visitors must enter at the 
Constitution Avenue entrance. In addition, all visitors must present 
photo

[[Page 70658]]

identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments or electronic comments by November 28, 2016 and submit an 
outline of the topics to be discussed and the amount of time to be 
devoted to each topic (a signed original and 8 copies) by November 28, 
2016 . A period of 10 minutes will be allotted to each person for 
making comments. An agenda showing the scheduling of the speakers will 
be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Maria Del Pilar Austin 
of the Office of the Associate Chief Counsel (Procedure and 
Administration). Other personnel from the Treasury Department and the 
IRS participated in their development.

List of Subjects in 26 CFR Part 300

    Reporting and recordkeeping requirements, User fees.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 300 is proposed to be amended as follows:

PART 300--USER FEES

0
Paragraph. 1. The authority citation for part 300 continues to read as 
follows:

    Authority:  31 U.S.C. 9701 * * *

0
Par 2. In Sec.  300.3, paragraphs (b)(1) introductory text and (d) are 
revised to read as follows:


Sec.  300.3  Offer to compromise fee.

* * * * *
    (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.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-24666 Filed 10-12-16; 8:45 am]
 BILLING CODE 4830-01-P