Effective Tax Administration Relief

ETA Relief … Surviving an Economic Hardship

Despite a taxpayer’s ability to pay the back tax liability in full, an Offer in Compromise based on “Effective Tax Administration” (ETA) may be entered into when the IRS determines that collection of the full liability would cause the taxpayer “economic hardship” within the meaning of 26 C.F.R. § 301.7122-1(b)(3)(i); 26 C.F.R. § 301.7122-1(c)(3)(i); see also 26 C.F.R. § 301.6343-1.  The existence of economic hardship is a question of fact that can only be determined after analyzing many factors. 

Treasury Regulation 26 C.F.R. § 301.7122-1(c)(3)(i) provides three factors supporting a determination that collection would cause economic hardship within the regulatory meaning including (but are not limited to) –

(a) The taxpayer is incapable of earning a living because of a long-term illness, medical condition, or disability, and it is reasonably foreseeable that the taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;

(b) Although the taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and

(c) Although the taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.

Equity Considerations:

The IRS may also compromise to promote effective tax administration where “compelling public policy or equity considerations” identified by the taxpayer provide a sufficient basis for compromising the liability.  26 C.F.R. § 301.7122-1(b)(3)(ii).  Compromise will be justified only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.  A taxpayer proposing compromise will be expected to demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid the liability in full. 

No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.  26 C.F.R. § 301.7122-1(b)(3)(iii).  Treasury Regulation 26 C.F.R. § 301.7122-1(c)(3)(ii) provides three factors supporting a determination that collection would undermine compliance within the regulatory meaning include (but are not limited to): (a) the taxpayer has a history of noncompliance with the filing and payment requirements of the Tax Code; (b) the taxpayer has taken deliberate actions to avoid the payment of taxes; and (c) the taxpayer has encouraged others to refuse to comply with the tax laws. 

Complicated? You bet.

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