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 come into compliance 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.
The Safe Accountable, Flexible, and Efficient Transportation Act
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:
- 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
- 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.
Thoughts About the Act
If enacted, this law would no doubt result in fewer taxpayers coming forward to submit offers. To be eligible to submit an OIC, a taxpayer generally has to either not owe the tax liability or genuinely not be able to repay the debt. Those who do not beleive they owe the liablity may not be willing to submit non-refundable tax payments. This is particularly true for taxpayers who are struggling financially.
These taxpayers will likely have to make smaller payments, which means that they will propose offers in excess of five installments. Under this new law, these taxpayes will have to pay more. The IRS’s statistics show that on average it takes the IRS more than a year to accept or reject offers. I personally have handled cases where the IRS has taken more than two years to process the OIC. Having to make continuing installment payments until the IRS accepts or rejects their offer could be a serious problem for taxpayers who need the OIC to come into compliance.
This has to be considered along side the IRS’s own admission that the number of OICs that have been rejected has increased each year.
The U.S. government may loose out too. The OIC is a voluntary program. It is used by many taxpayers who have had no IRS collection efforts on their accounts. The IRS simply hasn’t gotten to these taxpayers. It does not have the resources to do so. Its these taxpayers and the taxes they would pay to the IRS that will be lost by the U.S. government. These taxpayers may be better served by discharging their liablities in bankruptcy, leaving the U.S. government with nothing.
It should also be noted that an accepted OIC encourages future compliance and generates tax revenues for the U.S. government. 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. With fewer OICs being submitted, there would be fewer taxpayers who are compliant so that they keep their prior OICs in place.