Congress Compromises Offers in Compromise

The Offer in Compromise (OIC) has proven to be an invaluable tool for taxpayers to resolve tax disputes with the IRS. OICs have allowed taxpayers to become compliant with our tax laws and they have also allowed the government to collect tax liabilities that would otherwise go uncollected. Yet, Congress has taken a notion to compromise the OIC program.

Both the House and Senate have now passed versions of the Safe Accountable, Flexible, and Efficient Transportation Act of 2005 (Act). This Act will be sent to a conference committee soon. If passed the Act will require taxpayers to:

1. Submit non-refundable up-front lump-sum payments equal to twenty-percent of the offer if the offer proposes a payment schedule of five or fewer installments or
2. Submit non-refundable installment payments equal to the installments that are proposed in the offer beginning when the offer is submitted and continuing until the IRS accepts the offer – no matter how long that may be.

This legislation will have two outcomes:

1. It will result in fewer taxpayers coming forward to submit offers. To be eligible to submit an OIC a taxpayer has to either not owe the tax liability or have an economic hardship that prevents him or her from being able to pay the tax liability in full. I find it hard to believe that any taxpayer who does not owe a tax liability or who can not pay it will be willing or able to submit non-refundable tax payments. This is particularly true for poorer taxpayers. They will likely have to make smaller payments, which means that they will propose offers in excess of five installments which, under the new legislation, will require that they submit continuing installment payments until the IRS accepts or rejects their offer. IRS statistics indicate that on average it takes the IRS more than one year to accept or reject offers. I personally have handled cases where the IRS has taken more than two years to process the OIC. Moreover, the IRS admits that the number of OICs that have been rejected has increased each year. As a result poorer taxpayers will face the situation of having to make continuing payments on taxes that they do not owe and/or that they cannot pay with the real prospect of having their offer rejected more than one year later. This really is a heads-you-lose tails-I-win situation.
2. It will result in the government collecting less tax revenues. A number of taxpayers who would have come forward and offered to settle with the IRS will now either refuse to pay anything or take other actions such as filing bankruptcy, exercising collection due process rights, and/or pursuing litigation. In the case of poorer taxpayers, if they opt to simply not pay their tax liabilities it is very probable that the IRS will end up collecting nothing or next to nothing on the tax debt. In the case where taxpayers pursue other remedies, IRS statistics indicate that when taxpayers pursue these remedies the chance that the government will collect nothing from the taxpayer increases substantially. Moreover, a number of taxpayers have paid tax revenues under compulsion of the OIC rule that once the OIC is accepted the taxpayer has to remain compliant with our tax laws for five years or face the prospect of having their OIC voided. With fewer taxpayers filing OICs there will be fewer taxpayers that are subject to this compulsion. The end result will be a reduction in the amount of tax revenues collected.

If all of that is not bad enough, Congress had the gall to title the Part of the Act in which these provisions are found “Improvements in Efficiency and Safeguards in Internal Revenue Service Collection.” When I see such titles, which are so contrary to the text of the underlying legislation, I often wonder if members of Congress (or their staff) actually read the text of the legislation or if they just voted based on the mislabeled title. In this case it appears to be the later rather than the former.

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