An Offer in compromise (OIc) is a collection tool used in situations where it is unlikely that amounts owed can be collected in full. The OIc can provide a delinquent taxpayer with a fresh start toward compliance.

Our review identified the following opportunities for enhancing the effectiveness of the OIc Program and for further promoting fair, consistent taxpayer treatment.

• The risk of accepting questionable OIc’s needs to be reduced. Our analysis of 289 cases identified 125 cases (43%) in which the adequacy of the investigation is questionable. ****1,3d****. However, the investigation was not expanded to probe for unreported income or overstated expenses even though either of these conditions could significantly impact the decision to accept or reject the OIc. To reduce the risk of accepting questionable OIc’s, we believe examiners need to be better prepared to conduct OIc investigations and that quality controls need to be expanded.
• "Processability" determinations need to be standardized to avoid any perception that taxpayers are treated unfairly. We found that taxpayers are not always informed of the reasons for an "unprocessable" determination. In addition, districts are using different rules to make their determinations. These practices can lead to taxpayers submitting multiple OIc’s and cause an "unprocessable" determination in one district and not another.
• To expedite rejection decisions, workload management practices could be improved and information from IRS data systems used more. Almost 57 percent of the OIc’s that were rejected between March 1993 and October 1997 became overage during the investigation. Although recent IRS reports indicate there has been improvement, additional actions could be taken to become more responsive to taxpayers. Group managers need to make sure their reviews include cases that have been open for extended periods of time and cases with no recent activity. Also, using OIc "specialists" to conduct investigations and accessing automated data systems earlier in the process can impact the timeliness of rejection decisions.

The most fundamental actions needed to reduce the risk of accepting questionable OIc’s are to make sure examiners are knowledgeable of IRS’ automated data systems and how the information can be used to enhance the investigative and financial analysis processes. This could be accomplished by providing mandatory training for OIc examiners that emphasizes assembling and analyzing data from automated systems.

Steps also need to be taken to strengthen specific OIc controls and procedures. Among others that are described later in the report, these steps include (1) using the collection Quality Measurement System to evaluate samples of accepted and rejected OIc’s, (2) standardizing "processability" determinations, and (3) adopting the practice of using OIc specialists.

Redaction Legend:

1 = Tax return/Return information
3d = Identifying Information - Other Identifying Information of an Individual or Individuals