Internal Revenue Service has taken steps to improve the offer in compromise process for both taxpayers and the IRS, but it can still do more, according to a new report.
An offer in compromise is an agreement between a taxpayer and the IRS that settles a tax liability for a payment of less than the full amount owed.
A taxpayer submits a request for an OIC on Form 656, Offer in Compromise, along with an application fee of $186 and a nonrefundable payment equal to 20 percent of the offer amount or the initial periodic payment (although the fee and payment requirement depends on the type of offer and whether the taxpayer qualifies for the low-income exemption or is filing a doubt as to liability offer). If the IRS doesn’t make a determination on an OIC within 24 months, it will be deemed as accepted.
The report, from the Treasury Inspector General for Tax Administration, acknowledged that the IRS has made progress in the offer in compromise process since a previous TIGTA report in 2012. IRS management has updated the application forms for offers in compromise, created an online pre-qualifier tool, established a group of offer specialists to work on payroll service provider cases, and encouraged more taxpayers to consider whether the offers would actually benefit them.
Nevertheless, according to the National Taxpayer Advocate’s Annual Report to Congress in 2014, the processing of offers in compromise continues to be one of the most serious problems affecting taxpayers.
In its new report, TIGTA found that IRS employees did not always complete the initial processing of offers in compromise on a timely basis, nor did they always contact taxpayers by the promised date, or send interim letters when the promised dates were not met. In addition, TIGTA found that 10 of the 92 rejected offer cases in its sample (that is, 11 percent) did not include any documentation that alternative resolutions were discussed with the taxpayer.
TIGTA recommended the IRS remind its employees of the requirement to complete the processing determinations for offers in compromise within the required period of 16 days and contact taxpayers within 120 days. The IRS should also ensure its employees are aware of the requirements for sending interim letters when the initial 120-day contact date is not met, and update its review guidance to specifically include verification that alternative resolutions were discussed with taxpayers when an offer is not accepted, TIGTA suggested. In addition, IRS management should emphasize the need to discuss alternate resolutions in operational reviews of subordinate managers and in refresher training.
In response to the report, IRS officials agreed with TIGTA’s recommendations.
The IRS said it would issue a memorandum reminding its employees and managers that processing determinations need to be completed within 16 days of receipt. Taxpayer contact must be made within 120 days, and an interim letter should be sent if taxpayer contact is not made within the initial 120 days. In addition, the IRS agreed to add or revise its review guidance to include a verification that alternative resolutions were discussed with the taxpayer when applicable, and the agency said it intends to conduct refresher training on alternative resolutions.
The IRS pointed to the success of its online pre-qualifier tool in streamlining the process and its Fresh Start initiative. “This easy to use online tool helps taxpayers determine whether they meet basic eligibility requirements, are a good offer candidate given their financial circumstances, and what a reasonable offer might be given their circumstances,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report.
Taxpayers who use the tool have a higher acceptance rate than those who do not. Since the implementation of Fresh Start procedures in 2012, the OIC acceptance rate as a percentage of dispositions has increased from 34 percent in fiscal year 2011 to 44 percent in fiscal year 2015.
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