TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
MORE TAXPAYERS CAN BENEFIT FROM THE NEW
OFFER IN COMPROMISE PROVISIONS
Reference No. 2000-40-093
An offer in compromise is a proposal by a taxpayer to settle unpaid tax accounts for less than the full amount of the balance due. The Internal Revenue Service (IRS) accepted 30,542 offers and $312 million to satisfy $2.3 billion in tax liabilities during Fiscal Year 1999.
Most of Section 3462 of the IRS Restructuring and Reform Act of 1998 (RRA 98) amended Internal Revenue Code (I.R.C.) § 7122 to codify that the IRS must have guidelines for processing offer applications. The overall objective of our audit was to determine if the IRS had implemented I.R.C. § 7122 as amended by RRA 98 § 3462 concerning the offer in compromise program.
The IRS has modified the offer in compromise process to implement I.R.C. § 7122 as amended by RRA 98 § 3462. Temporary Treasury regulations issued in July 1999 made a significant change to the IRS’ exercise of compromise authority by allowing additional grounds for compromise. The IRS did not interpret the RRA 98 § 3462 provisions as being immediate requirements for all offers. Instead, the IRS’ intent was that changes to the offer process and the expansion of acceptance criteria would not be applicable until revised procedures were prepared and implemented. Taxpayers who had offers rejected may submit a new offer for evaluation under the new guidelines.
We also identified additional actions the IRS can take to continue its efforts to improve the offer process.
Offer Application Instructions Could Be Improved to Ensure Taxpayers Provide Information Needed for the Evaluation Process
Instructions with the offer in compromise application indicate that information must reflect the taxpayer’s financial situation for the past six months. While these instructions do provide a general explanation of the offer requirements, they do not prepare taxpayers for what may subsequently be asked from them during the evaluation process.
Taxpayers have experienced problems in providing information. According to the automated case control system as of April 20, 1999, there were 766 of 1,719 offers (45 percent) submitted and rejected after the enactment of the RRA 98 because of a failure to provide information.
Ensuring Taxpayers Are Allowed the Means to Provide for Basic Living Conditions Could Be Applied Further When Considering the Equity in Assets
RRA 98 § 3462 requires the IRS to consider the facts and circumstances of each taxpayer when determining how much is allowed for monthly living expenses. As a result, the IRS modified the calculation of collection potential to include as an asset only the portion of a checking account that exceeds the taxpayer’s monthly necessary living expenses. However, the IRS could include additional areas. Currently, there are no similar exemptions in the Internal Revenue Manual guidelines for:
Appendix IV summarizes 4 taxpayers from our random sample of 83 rejected offers who we believe had circumstances that could be perceived as hardship factors. In our opinion, these cases illustrate the need for more flexibility in how assets are used in the offer calculation.
Some Procedures Restrict or Discourage a Taxpayer’s Access to the Appeals Process
RRA 98 § 3462 amended I.R.C. § 7122 to allow a taxpayer to appeal any rejection of a proposed offer in compromise to the Office of Appeals. We believe that certain IRS procedures discourage the broadest application of the appeal process to offers that are not considered acceptable. The temporary regulations deny appeal rights to taxpayers who might disagree as to the reasonableness of the IRS information requests. In addition, the procedure that allows taxpayers the opportunity to withdraw their offer when informed of the IRS’ tentative decision to not accept their offer results in taxpayers waiving their review and appeal rights. Finally, issuing letters to taxpayers without explaining the specific reasons why the offer was not accepted may not provide taxpayers with enough information to prepare an effective appeal request.
A Management Information System Needs to Be Developed for Offers Accepted Based on Special Circumstances and for the Independent Administrative Review
The IRS does not have a permanent management information system that provides it information on offers accepted based on a taxpayer’s special circumstances or on the independent administrative review of rejected offers required by RRA 98 § 3462. Without a management information system, it will be impossible to monitor and manage a consistent application of these offer processes.
Summary of Recommendations
We recommend that the Assistant Commissioner (Collection) revise guidelines to better prepare taxpayers to supply information for the offer process, allow further flexibility when determining an acceptable offer amount, and encourage taxpayer access to the appeal process. In addition, a management information system should be developed for both the acceptance of offers in compromise based on special circumstances and the results of the independent administrative review of rejected offers.
Management’s Response: IRS management agreed with the majority of our recommendations and has initiated corrective actions. Management’s complete response to the draft report is included as Appendix V.
Office of Audit Comment: IRS management does not believe that the current process of returning incomplete requests needs to be changed. Although allowing the taxpayer to withdraw the offer may provide an uncomplicated way to close the investigation, we believe that rejecting the offer provides greater assurance that the taxpayer is aware of, and receives, all of his/her appeal rights. Also, we believe that the taxpayer may become confused if the IRS returns the offer without rejecting it. Instead of resubmitting the offer with additional information, the taxpayer may misunderstand and consider the offer as having been closed.