IRS Offer-In-Compromise Program Fraught with Delays

On March 30, the Treasury Inspector General for Tax Administration released the results of its 2001-2009 audit of the IRS in a 29-page report – Increasing Request for Offers in Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers.

What Is the Offer in Compromise?

Simply put, the Offer in Compromise (OIC) is a voluntary settlement agreement between the IRS and the taxpayer. The OIC settles the tax debt for less than what the IRS has determined the taxpayer owes. The Inspector General’s report spells out the three grounds for an OIC:  “doubt that more than the offered amount can be collected, a verifiable doubt as to the amount owed, or to promote effective tax administration.” The OIC program has been very successful in helping delinquent taxpayers, perhaps too successful for the IRS to administer properly.

Treasury Inspector General Audits the IRS

The Treasury Inspector General audited the Small Business/Self-Employed Division of the IRS and found the agency severely lacking in its administration of the OIC program.

The Deputy Inspector General for Audit, Michael Phillips, highlighted several problems with the IRS’ processing of offers under the OIC program. “[T]he IRS did not always contact taxpayers when promised, and inventory backlogs caused processing delay.” This may not sound like a big deal, after all the IRS is made up of hard-working agents who can only do so much in a day. But if you happen to be one of the self-employed taxpayers trying to remedy a significant delinquent tax problem and getting no response from the IRS, it is a very big deal. How can any small business make prudent financial and operations decisions going forward with the dark cloud of unresolved tax problems hanging overhead indefinitely?

Concerned with the negative consequences of an ineffectual OIC program on taxpayers, the Inspector General’s lengthy IRS-audit focused on the following:

● The IRS’ ability to timely process taxpayer requests for the OIC program;

● The IRS’ ability to consistently apply the OIC program guidelines;

● The IRS’ ability to accurately measure OIC program results;

● The IRS’ ability to effectively promote the OIC program to taxpayers.

Findings of the Treasury Inspector General

The Treasury Inspector General found that, despite a 28% increase in the number of taxpayers seeking relief under the OIC program between FY 2007 and FY 2011, available IRS resources devoted to processing OIC offers deceased. With a 28% increase in taxpayer need, there was a decrease in IRS staff to process OIC offers.

The Inspector General also “reviewed a statistically valid sample of offers [in compromise] and found the IRS did not process all offers timely.” In fact, the IRS processed only 73% of the offers submitted by taxpayers under the OIC program. Of those who submitted offers between July 1, 2010, and December 31, 2010, the Inspector General estimated that the IRS failed to contact 9,509 taxpayers as promised. The Inspector General also found that on October 25, 2011, the IRS had “7,472 unassigned offers in holding queues awaiting assignment to OIC staff.”

Additionally, one IRS processing site had four times as many unassigned self-employed taxpayer offers as found at a comparable site, and 37% of those small business offers had been languishing for over six months.

Along with the other problems, the IRS incorrectly dated offers during processing. As many as 712 taxpayers who sent in offers between July 1 and December 31, 2010, were affected by the date-stamping error. Lastly, the Inspector General found that the IRS lacked “formal performance measures for streamlined offers.”

IRS in Compromise with the Treasury Inspector General

In response to the Treasury Inspector General’s audit report, the IRS agreed to take corrective action, including:

● Revision of its OIC procedures;

● Training IRS employees;

● Either adding a formal performance measure for streamlined offers or applying its streamlined process to all offers;

● Keeping taxpayers better informed by telling them it will take longer for the IRS to contact them, and by sending a follow-up letter to the taxpayer if the “contact by” date isn’t met;

● Reassigning offers between IRS sites to expedite OIC processing;

● Using the streamlined OIC process on the remaining backlog of OIC cases.

If you have questions about the Offer In Compromise and how this program can help you with a delinquent tax bill, then contact the Pew Law Center today and speak with one of our knowledgeable tax resolution attorneys.