NEWS-FEDERAL, 2005TAXDAY, (May 19, 2005), Item #I.6, IRS Taxpayer Advocate Expresses Frustration with Offer-In-Compromise Program

IRS Taxpayer Advocate Expresses Frustration with Offer-In-Compromise Program

Despite a push from Congress to facilitate the offer-in-compromise (OIC) program, the IRS "has almost a bias to reject offers," IRS National Taxpayer Advocate Nina Olson said on May 18.

An IRS study found that new OIC offers dropped 45 percent in the first six months of fiscal year (FY) 2005 compared to the first half of FY 2004, from 57,000 to 39,000 submissions, Olson said. This decline suggests that taxpayers are losing faith in the program, she indicated, adding that the number of offers that IRS disposed of decreased 41 percent. The IRS also returned 50 percent of offers without processing them. She explained that taxpayers cannot appeal the return of an offer and may not receive a refund of their $150 user fee if they fail to respond to an IRS request for information.

The IRS hinders its own collection efforts by rejecting offers. The study found that, for 44 percent of the offers rejected by the IRS, the amount ultimately collected was less than half of the amount offered, Olson said. Of the offers rejected from businesses (usually for employment taxes), 45 percent were later classified as "currently not collectible."

The IRS has complained that taxpayers are "churning" offers, but the study found that, for 59 percent of the offers returned, the Service ultimately collected less than half of the amount offered, Olson noted. The IRS ultimately accepted another 24 percent of previously returned offers. Olson said that the IRS should keep cases open and work them, rather than spending its time closing and reopening cases.

Taxpayers appealed 58 percent of rejected offers to the IRS Appeals office. Appeals accepted one-third of those offers, according to Olson. This suggests that taxpayers must go to Appeals for offers that could have been accepted at a lower level, although the study does not indicate whether taxpayers increased their offers on appeal.

Highway Bill

Olson expressed concern about some of the tax provisions in the highway bill (the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (SAFETEA), HR 3). The bill would allow the IRS to exclude "frivolous" offers from its OIC cases. While the implementation of this provision is unclear, the IRS could decide not to track offers, which would make it tougher for the Taxpayer Advocate Service to monitor the program.

Anther provision would authorize the IRS to require a 20-percent payment with lump-sum offers and keep the payment, even if it rejects the offer, Olson said. The payment would not be treated as a deposit. This could hurt not only low-income taxpayers but those who are seeking loans, IRA withdrawals or other financial aid as part of their OIC efforts.

The OIC program is a compliance tool, Olson said. The study shows that taxpayers whose offers are accepted have remained compliant five years later. The 20-percent initial payment program will discourage compliance.

A more helpful provision in the law would require the IRS to accept an offer pending for at least two years. Olson said that the IRS has not improved the currency of its OIC backlog.

Taxpayer Service

Olson also described the challenge to taxpayer service in a time of increased enforcement. She said that Congress's previous displeasure with the IRS, which led to the IRS Restructuring and Reform Act of 1998 (P.L. 105-206), stemmed from the IRS's failure to recognize that taxpayers are trying to comply with the tax laws, and its view that taxpayers are noncompliant. As the IRS steps up its enforcement efforts, Olson said that Congress, practitioners and the watchdog agencies must be vigilant to prevent IRS backsliding.

Olson spoke at a program sponsored by BNA Tax Management held at the offices of Buchanan Ingersoll.

By Brant Goldwyn, CCH News Staff