The IRS consumes volumes of information. It processes this information largely by processing paper forms. This includes paper forms submitted by you, the taxpayer and your tax attorneys, and by internal forms created by IRS employees.
This inefficient paper form submission and processing is complemented by an insistence on sending taxpayer notices by mail. The mail adds an extra element of delay and potential for errors.
When it comes to IRS debts and back taxes, this IRS system often fails. The IRS has programs in place that can either break or simply get bogged down. This can be problematic for taxpayers, particularly those who are trying to settle their back taxes with the IRS.
Congress has apparently taken note of this. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) makes substantial changes to the IRS offer in compromise program. Most notably, TIPRA includes a provision in which an offer in compromises is “deemed” accepted by the IRS.
This change has not been discussed widely in the tax press, but warrants consideration.
The Offer in Compromise Process
The offer in compromise (“OIC”) program is intended to compromise tax debts for less than is actually owed.
This is the IRS settlement process. It is often described in radio commercials and late-night TV ads as “settling tax debts for pennies on the dollar.” And yes, the IRS is authorized to settle tax debts for pennies on the dollar. It does so all the time.
That’s the good news. The bad news is that the IRS is notoriously slow in processing offers. An IRS offer specialist may not even be assigned to the offer in compromise for upwards of six months. There are other instances where the IRS fails to respond to the offer at all. These offers may simply be lost. It happens.
The Deemed Accepted Change
This brings us back to TIPRA and the “deemed” acceptance of offers.
TIPRA adds subsection (f) to Section 7122. This subsection indicates that the IRS is deemed to have “accepted” an offer in compromise if the offer in compromise is not withdrawn, returned or rejected within 24 months after the IRS received the offer in compromise:
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.
This new law is effective for any offer in compromise submitted two months after May 2006. This means that the first offers will be “deemed” accepted by the IRS starting in May of 2008.
Questions About the Deemed Acceptance
It is not entirely clear what the impact will be for this new law. There are a few possibilities.
One possibility is that the IRS will make changes to its internal processes to ensure that offers are evaluated and a decision rendered within two years.
Another possibility is that the IRS does not make any changes and either a bunch of offers will be deemed accepted or nothing will happen. We suspect the latter scenario will play out.
The reason why we think this will be the case is that the new law does not provide any mechanism for establishing that the offer was accepted or that the terms were complied with. Let’s consider a typical case, to highlight the issue.
Say a taxpayer owes the IRS back taxes and submits an offer. The offer proposes to pay $10,000–with $2,000 paid upfront and $2,000 monthly payments for the first five months after the offer is accepted by the IRS.
The IRS sends the taxpayer a letter saying that it will evaluate the offer, and then it does not do so within two years.
While the offer may be deemed accepted by the IRS, the taxpayer will probably still not comply with the terms of the offer. To do so, the taxpayer would have had to start making the monthly payments required by the offer. It is not likely that the taxpayer would (1) know to do this or (2) actually make the payments timely given that the acceptance date isn’t clear (does it start from the date of mailing or the date the IRS deems the offer processible?).
There are also questions about how to get the IRS to update its records to reflect the deemed offer that it accepted. Is this to be handled administratively, in court using the collection due process hearing procedures, or by suing the IRS in district court? If there is no administrative or CDP hearing remedy, it would seem that many taxpayers wouldn’t have a remedy as they may not be able to afford expensive tax litigation in district court as this forum requires the taxpayer to pay the tax liability first and sue for a refund (if they could pay the tax first, they might just pay the tax balances…).
TIPRA adds a provision in which taxpayer-submitted offers in compromise are “deemed” accepted by the IRS if not rejected within 24 months. However, it remains unclear how this change will be implemented, and taxpayers should be aware of its limitations and consider paying the full amount upfront with their offers to increase the chances of acceptance.
It is not clear how the deemed acceptance of offers will play out. Taxpayers who submit offers should be cognizant of this new rule and its limitations. Until we have more clarity about how the IRS will adapt to this new law and whether it provides an avenue for relief, those submitting offers may want to pay the full amount up front with their offers. This may increase the chances that the deemed offer will be upheld.