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The regulations state three different grounds for
compromising tax liabilities: (1) Doubt as to liability; (2)
doubt as to collectibility; and (3) promotion of effective tax
administration. Sec. 301.7122-1T(b), Temporary Proced. & Admin.
Regs., 64 Fed. Reg. 39024 (July 21, 1999).4 The parties’
arguments focus exclusively on the ground of doubt as to
collectibility. Doubt as to collectibility arises if the
taxpayer’s assets and income are less than the full amount of the
assessed liability. Id. In determining whether there is doubt
as to collectibility, the Commissioner must determine the
taxpayer’s “ability to pay” the outstanding tax liabilities that
are to be compromised. Sec. 301.7122-1T(b)(3)(ii), Temporary
Proced. & Admin. Regs., supra.
B. Determining a Taxpayer’s Ability To Pay
In determining a taxpayer’s ability to pay outstanding tax
liabilities, the Commissioner takes into account the funds the
taxpayer needs to pay basic living expenses. Id. The taxpayer’s
basic living expenses are determined by evaluating the taxpayer’s
facts and circumstances. Id.
In evaluating a taxpayer’s ability to pay, the Commissioner
considers two types of allowable expenses: (1) necessary
expenses, and (2) conditional expenses. Internal Revenue Manual
4 Final regulations under sec. 7122 were promulgated
effective for offers in compromise pending on or submitted on or
after July 18, 2002. Sec. 301.7122-1(k), Proced. & Admin. Regs.
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Last modified: May 25, 2011