As discussed in a previous post, Congress has been toying with making changes to the IRS offer-in-compromise program. These changes were eventually included in the “Tax Increase Prevention and Reconciliation Act,” which President Bush signed into law on May 17, 2006.
The new rules apply to offers in compromise filed 60 days after the date of enactment. This article explores the impact of these changes on taxpayers and the IRS, as well as the incentives created by the new legislation.
About the IRS’s Offer in Compromise Program
The IRS Offer in Compromise (OIC) is a process that enables taxpayers to settle unpaid taxes for less than the full amount owed.
It is governed by Section 7122 and has three grounds for submission: doubt as to collectibility, doubt as to liability, and promoting effective tax administration. Most offers are submitted based on doubt as to collectibility.
To be eligible for the doubt as to collectibility offer, taxpayers must meet certain criteria and propose either lump sum or periodic payments based on their reasonable collection potential (“RCP”). The IRS evaluates offers by examining the taxpayer’s income, assets, and financial information.
Many OICs are rejected due to unrealistic offers or invalid reasons, and taxpayers should be cautious of tax resolution firms promising settlements for “pennies on the dollar” without understanding their specific situation.
New Changes in the Offer-in-Compromise Program
According to the new rules set out in the Tax Increase Prevention and Reconciliation Act, lump-sum offers (those that propose five or fewer installments) must include a non-refundable 20% down payment, while periodic payment offers (those that propose six or more installments) must include installment payments as outlined in the agreement. These changes are in accordance with Section 7122.
Deemed Acceptance of Offers After 24 Months
One aspect of the new legislation that may benefit taxpayers is the provision stating that offers are deemed accepted if not rejected by the IRS within 24 months of receipt. Some taxpayers may find that their offers are inadvertently accepted due to the inefficiencies within the IRS offer processing system. This may encourage taxpayers to submit low lump-sum offers and attempt to stall the already slow process, particularly as the IRS’s offer-in-compromise workload is expected to increase significantly.
Effects on Taxpayers & the IRS
The other aspects of the new legislation are additional requirements for OICs:
- Current tax year compliance: Taxpayers who submit an OIC must be in compliance with all federal tax filing and payment requirements for the current tax year. This means that taxpayers must have filed all required tax returns and paid all taxes due for the current tax year before submitting an OIC.
- Increased application fee: The application fee for submitting an OIC is from $150 to $186 as of 2021. This fee is non-refundable and must be paid at the time of submitting the OIC application.
- Retention of payments: The IRS retains any payments made by taxpayers while their OIC is under consideration. These payments can be applied to the taxpayer’s tax liability if the OIC is not accepted.
- Expedited processing: The IRS to develop guidelines for the expedited processing of OICs in cases of economic hardship or where the collection of the full tax liability would cause undue economic hardship.
- Review of low-income taxpayers: The IRS to review its policies and procedures for OICs for low-income taxpayers and make appropriate changes to ensure that these taxpayers are not unfairly burdened by the OIC process.
While these changes may seem significant at first glance, their actual impact on taxpayers is likely to be minimal.
The legislation does not require the down payment or installments to be tied to any “reasonable” offer, allowing taxpayers to continue submitting 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 wait to appeal the rejection of their offer and increase their offers at that time. The legislation thus incentivizes taxpayers to submit unreasonably low offers, as they would face penalties upfront for submitting reasonable offers.
The new legislation may have the unintended consequence of reducing the IRS’s effectiveness in collecting tax revenues. By incentivizing taxpayers to submit absurdly low offers, the number of reasonable offers is likely to decline, and the number of unreasonably low offers will increase. As a result, more offers will require two or more reviews by IRS personnel, potentially doubling or tripling the IRS’s offer-in-compromise workload.
The new legislation regarding the Offer-in-Compromise program, as introduced by the Tax Increase Prevention and Reconciliation Act, was poorly conceived and adds to the existing issues with tax administration legislation. Taxpayers may be able to take advantage of the inefficiencies and incentives created by these changes, while the IRS faces increased workload and potential difficulties in collecting tax revenues. It is crucial for taxpayers to consult with experienced tax attorneys to navigate the complexities of the new OIC rules and ensure compliance with Section 7122.