New Offer in Compromise Legislation

As discussed in a previous post, Congress has been toying with making changes to the IRS offer-in-compromise program. These changes were included in the “Tax Increase Prevention and Reconciliation Act”, which was signed by President Bush on May 17th.

New Changes – Offer In Compromise 

As such, offers in compromise filed after the magic date, which is sixty days after May 17, 2006, will have to comply with the new rules set out in the Act. Specifically, lump sum offers (those that propose five or fewer installments) must include a non-refundable twenty percent down payment and periodic payment offers (those that propose six or more installments) must include installment payments as outlined in the agreement.

The Effects On Taxpayers 

While this may sound like a significant change, the impact it will have on taxpayers will probably be negligible. Luckily (for taxpayers), the legislation fails to tie the “down payment” or “installments” to any requirement that the taxpayers offers be “reasonable.” As such, taxpayers can continue to simply submit absurdly low initial offers – with the expectation that the IRS will submit a counter proposal. Since any denial of an offer in compromise is appealable, taxpayers can simply wait to appeal their offers rejection and up their offers at that time. This legislation incentivizes taxpayers to submit absurdly low offers. Think about it, why would any taxpayer submit a reasonable offer if they are going to be penalized up front for doing so?

While this may only have a negligible impact on taxpayers, this legislation will go further in making the IRS even less effective in collecting tax revenues. Given the “down payment” or “installment” game that the new legislation incentivizes taxpayers to play, the number of reasonable offers will decline and the number of absurdly low offers will increase. Ultimately, this will result in more offers that require two or more reviews by IRS personnel — doubling or tripling the IRSs offer-in-compromise workload.

Another boon for taxpayers is that the new legislation includes a provision that says that offers are deemed accepted if not rejected by the IRS within 24 months after receipt. Personally I have witnessed offers that, had I not continued to follow up with the IRS, that would very clearly not been resolved within two years. I have also submitted offers that were simply lost by the IRS (the IRS records show that the offer was received, but it was never assigned to anyone or otherwise processed). Given this new provision, now taxpayers, who are incentivized to submit low lump sum offers, may well find that their offers are inadvertently accepted. Taxpayers may now attempt to forestall the already inefficient process. This is especially true now that the IRS offer-in-compromise workload is going to increase dramatically.

The bottom line is that this new legislation was poorly conceived and it adds to the already poor tax administration legislation that is on the books today.