Thursday, January 10, 2008

Taxpayer Advocate Says: The Offer in Compromise Process Needs to be Fixed.

On January 9th, the Taxpayer Advocate released her report to congress identifying the most serious problems that are being encountered by taxpayers. The report is well over 700 pages and addresses many issues. One of the problems discussed in the report is that the Offer in Compromise program is not being used to any significant extent.

The Offer in Compromise is a process by which a person or business that is facing a tax liability can resolve that debt for less than the amount due. A compromise can be reached if the taxpayer doesn’t have the ability to pay the entire amount (Doubt as to Collectability), doesn’t actually owe the tax (Doubt as to Liability) or if other special circumstances exist (Effective Tax Administration).

The number of Offers in Compromises that have been accepted by the IRS has dropped by 70% since 2001. The culprit is many of the changes that have been implemented concerning the program. The goal of the changes has been noble: to reduce the amount of frivolous offers that are being submitted. Unfortunately, the result of the changes is not consistent with the goal and the number of viable Offers in Compromise that are submitted has decreased.

Some of the recent rules have been to require the payment of a $150 fee and a 20% down payment when an Offer in Compromise filed. In lieu of the 20% down payment, a taxpayer may choose to make installment payments while the offer is pending. Each of these payments, once made, are non refundable regardless of whether the offer is rejected or simply returned without being processed due to a technical requirement that was not satisfied.

Often, hiring a professional to help with an Offer in Compromise can avoid the return of an offer. However, because the rules are plentiful and some of them complicated, those that cannot afford representation are hit with a double whammy. That is, not only is their Offer in Compromise returned without consideration, the IRS keeps the down payments made when it was filed. This means that those that are financially destitute do not have the resources to try again after the technical problem is fixed. Even for those people that make relatively large offers to compromise tax debts that are even larger, the down payment requirements can preclude the ability to refile a returned offer.

Possibly the best recommendation concerning Offers in Compromise made in the Taxpayer Advocate's report is that people should be given credit for down payments made on other recent offers. That is, the report suggests that if an offer is returned, rejected or withdrawn within the preceding 24 months, the taxpayer submitting the offer should be given credit for any payments made in connection with the earlier offer.

While this solution would still require that down payments be made, the credit for recent payments made in connection with a previous compromise attempt would encourage a resubmission of a returned viable offer.

My suggestion would go one step further so as to allow credit (in some fashion) for prior payments made against a tax liability even if those payments were made outside of the compromise process (for example, through an installment agreement). If, as the Taxpayer Advocate suggests, Offers in Compromise are currently discouraged by the system, taxpayers that could have submitted an offer (but didn’t because of the procedures in place) should be given credit for payments they made before submitting an offer.

4 comments:

Tess said...

What does one do when an OIC was presented with a check to the IRS over 120 days ago?

Rob Teuber said...

The first response to your questions is "it depends." Four months is really not that long to wait when dealing with the Offer in Compromise program. In any tax matter, it is never a problem to call the IRS to find out the status of your case. Significantly, however, if the IRS does not act on an offer in compromise (i.e. accept or deny it) the compromise is automatically accepted. So, the fact is that the IRS generally acts within the required time frame, but not necessarily as quickly as people may like.

Tess said...

I've searched the IRS web site and many other sites. I cannot find where the IRS has a "time limit" to accept the OIC.

Rob Teuber said...

I have often said that I think that the IRS website is full of good information. Of course, information on a website is only useful if it can be found. I expect that the search function on the IRS website could use some fine tuning.

Take a look at this link: http://www.irs.gov/newsroom/article/0,,id=159954,00.html and go to the fourth paragraph from the bottom. While the changes in the law mostly affected people adversely, the two year time limit was a positive development to keep things from sitting out there for too long.