IRS Offers in Compromise: Performance Has Been Mixed; Better
Management Information and Simplification Could Improve the
Program (20-APR-06, GAO-06-525).
Taxpayers unable to fully pay their tax liabilities may apply for
an offer in compromise (OIC), an agreement with IRS to pay what
they can afford. IRS writes off the rest of the liability. In
2005, IRS accepted over 14,000 offers. Because of concerns about
program performance and a new category of offers based on
exceptional circumstances, GAO was asked to (1) describe the
trends in program's performance and their causes and (2)
determine whether IRS's regulations for exceptional circumstance
offers are consistent with statute. GAO examined five program
objectives: timeliness, quality, accessibility, compliance, and
cost.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-525
ACCNO: A52077
TITLE: IRS Offers in Compromise: Performance Has Been Mixed;
Better Management Information and Simplification Could Improve
the Program
DATE: 04/20/2006
SUBJECT: Income taxes
Performance management
Performance measures
Program evaluation
Tax administration
Taxpayers
IRS Offer in Compromise Program
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GAO-06-525
* Report to the Committee on Finance, U.S. Senate
* April 2006
* IRS OFFERS IN COMPROMISE
* Performance Has Been Mixed; Better Management Information and
Simplification Could Improve the Program
* Contents
* Results in Brief
* Background
* Three Types of Compromise
* IRS's Process for Making Offer Determinations
* The OIC Program Has Decreased in Size, and Repeat Offers Have
Increased
* In Recent Years, IRS's OIC Program Has Decreased in Size
* Repeat Offers Have Grown Significantly
* OIC Program Performance Has Been Mixed, and IRS Has Not
Researched the Reasons for Some Performance Trends
* OIC Performance Can Be Measured Relative to Five Objectives
* Timeliness Has Improved for Some Taxpayers but Remains
Mixed, and IRS's Timeliness Goals Are Set for Offers, Not
Taxpayers
* IRS's Data Show That Quality Goals Have Been Met
* Declines in OIC Program Size Combined with Trends in IRS's
Other Collection Programs Raise Questions about OIC Program
Accessibility
* IRS Monitors Taxpayer Compliance with the Terms of Their
Accepted Offers, but Does Not Routinely Track Aggregate
Compliance Trends for Program Participants
* Offers Closed Declined Faster Than FTEs, Resulting in
Productivity Declines and Increased Costs per Offer
* Limited Evidence Suggests Offer Mills' Effect on OIC Processing
May Not Be Large
* Offer Mills Cannot Be Easily Distinguished from Legitimate
Practitioners
* Best Available Evidence, Though Incomplete, Suggests That
Offer Mills Do Not Have a Large Effect on OIC Processing but
That They Might Harm Taxpayers
* IRS Has Implemented Procedures Designed to Reduce the Impact
of Offer Mill Abuse
* IRS Notifies Taxpayers of Their Appeal Rights through Various
Channels
* ETA Regulations Are Consistent with Statute, but Hardship ETA and
DATC Offers Are Not Meaningfully Distinct and Non- Hardship ETA
Offers Are Rare
* Regulations on ETA Are Consistent with the Restructuring Act
* IRS Has Accepted Hundreds of ETA Offers Annually since
Fiscal Year 2001 but Non-Hardship ETA Offers Are Rare
* No Meaningful Distinction Exists between Hardship ETA and
DATC Offers
* ETA Rules Have Created Complexity and Confusion in the OIC
Application Process, According to Tax Professionals
* Partial Payment Proposal Raises Questions
* Conclusions
* Recommendations for Executive Action
* Matter for Congressional Consideration
* Agency Comments and Our Evaluation
* Scope and Methodology
* Scope and Methodology on Detailed Analysis of IRS's AOIC Database
* Establishing GAO-Derived Dates and Disposition Codes
* Distinguishing between Multiple Offers Submitted by Taxpayers
* Generating Other OIC Program Statistics
* Comments from the Internal Revenue Service
* GAO Contact and Staff Acknowledgments
Report to the Committee on Finance, U.S. Senate
April 2006
IRS OFFERS IN COMPROMISE
Performance Has Been Mixed; Better Management Information and
Simplification Could Improve the Program
Contents
Tables
Figures
April 20, 2006Letter
The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate
In fiscal year 2005, the Internal Revenue Service's (IRS) Offer in
Compromise (OIC) Program reached agreements with taxpayers to accept over
14,000 offers. An OIC is an agreement in which IRS and a taxpayer agree to
settle or compromise the taxpayers' federal tax liability for less than
the full amount owed. Generally, IRS accepts offers in cases in which
taxpayers cannot afford to pay their full tax liability. In 2005, the OIC
Program accepted offers in which taxpayers paid on average 16 percent of
their tax liability. IRS wrote off the rest of the liability, about $1
billion, for those taxpayers.
For years, Congress has been concerned about the performance of the OIC
Program. In 2002, we issued a report that you requested on the inventory
of OIC cases and the quality and timeliness of decisions.1 Since that
time, concerns about performance, including the timeliness of offer
processing, the quality of offer decisions, and the accessibility of the
program to taxpayers, have persisted. Other concerns include whether offer
mills (tax practitioners that consistently use negligent or deceptive
practices to exploit taxpayers and the OIC Program by making misleading
claims and submitting unrealistic offers) have been affecting program
performance, whether taxpayers have been accorded their appeal rights
granted in statute, and whether IRS has been using its authority to grant
offers for exceptional circumstances as Congress intended. Offers are most
commonly accepted when taxpayers cannot pay the full amounts they owe.
These offers are called doubt as to collectibility (DATC) offers.
According to IRS regulations, offers for exceptional circumstances, called
effective tax administration (ETA) offers, are granted in cases where
taxpayers can fully pay their tax liabilities but where collecting the
full amount would create economic hardship or where compelling public
policy or equity reasons provide sufficient basis for compromise. Because
of these concerns about the program, IRS instituted a number of
initiatives intended to reduce unrealistic offers from taxpayers and
improve program performance, including centralized processing of less
complex cases, a revised application form, an offer application fee of
$150, and increased emphasis on taxpayer communication.
Because of your continuing interest in ensuring that IRS is administering
the OIC Program as efficiently and effectively as possible, you requested
this review. As agreed, the objectives of our review were to (1) describe
the trends in OIC program size; (2) describe the trends in program
performance and assess the extent to which IRS has researched the reasons
for the trends; (3) assess whether offer mills affect taxpayers and OIC
processing; (4) assess how well IRS ensures that taxpayers are provided
the right to appeal a rejected offer; and (5) determine whether Treasury's
ETA regulations are consistent with the provision of the IRS Restructuring
and Reform Act of 1998 (Restructuring Act).2 Near the end of our review,
your staff asked that we comment on a legislative proposal that would
require OIC applicants requesting an offer in compromise to make a partial
payment.3
To address these objectives, we reviewed the Internal Revenue Manual (IRM)
and an IRS policy statement4 to determine the OIC Program's objectives;
obtained a copy of IRS's Automated Offer in Compromise (AOIC) database,
the primary management information system for the program; and used that
database to develop trend data on the program. We performed various data
reliability analyses and determined that the AOIC database was
sufficiently reliable for the purposes of our work. We also obtained data
from IRS on its program staffing levels and the results of its OIC case
quality reviews. We interviewed program officials at IRS's Small
Business/Self-Employed Operating Division headquarters in Washington,
D.C., IRS's centralized OIC processing center in Brookhaven, New York, and
IRS's Austin Compliance Center in Texas, which houses key OIC managerial
operations and maintains the AOIC database. We also obtained information
from IRS's Office of the Chief Counsel, Office of Professional
Responsibility (OPR), Office of Program Evaluation and Risk Analysis
(OPERA), and the National Taxpayer Advocate (Taxpayer Advocate) of the
Taxpayer Advocate Service, in Washington, D.C., and interviewed
representatives from several tax practitioner organizations, the
Federation of Tax Administrators, and an official from a state attorney
general's office. Appendix I provides a more detailed description of the
scope and methodology for this review, and appendix II provides technical
details on how we analyzed the AOIC database. We performed our work from
February 2005 through February 2006 in accordance with generally accepted
government auditing standards.
Results in Brief
During fiscal years 2000 to 2005 the OIC Program decreased in size,
according to a variety of measures, although the number of repeat
offers-revised offers submitted by taxpayers after IRS closed their
earlier cases-increased. IRS accepted over 14,000 offers in 2005, down by
more than half from 2000. The amount of delinquent tax debt covered by
accepted offers decreased to $1.5 billion in 2005 (of which $.24 billion
was accepted in the compromises) from $2.4 billion in 2000. During the
same years, the number of repeat offers grew from about 20,000 to 31,000
and the proportion of offers received by IRS that were repeats more than
doubled.
OIC Program performance relative to five objectives-timeliness, quality,
accessibility, compliance, and cost-has been mixed. We identified the five
objectives by reviewing the IRM and an IRS policy statement. IRS officials
said that they track the program's performance for timeliness, quality,
and cost and noted that although accessibility and compliance are not
formally tracked, they are program aims.
o Timeliness: For taxpayers who submitted one offer, case processing time
improved from 8.4 months on average in fiscal year 2000 to 5.6 months in
2005. For taxpayers who submitted repeat offers, processing time stayed at
over 22 months from the first offer to the disposition of last offer. IRS
does not measure or set goals for timeliness from the perspective of the
taxpayer. It measures timeliness for each offer, but this masks the time
taxpayers with repeat offers wait for a final disposition. In addition,
IRS has not analyzed the reasons for the number or growth of repeat offers
or their impact on timeliness. Without such an analysis IRS does not know
whether it would be less costly to deal once with a taxpayer, even if it
takes more time to work the single offer, than to process repeat offers.
o Quality: According to its new quality measurement system, IRS met its
case processing quality goals of 94 percent for less complex cases in
fiscal year 2005, the first year for which data are available relative to
a goal. IRS also met its quality goal of 84 percent for more complex
cases, but is in the process of changing that measurement system. IRS
measures quality according to whether case processing procedures are
followed by the OIC Program staff.
o Accessibility: Declines in OIC participation rates, combined with the
concerns of outside observers, such as the Taxpayer Advocate and some tax
practitioner organizations, raise questions about whether the offer
program's accessibility has decreased. While not a direct measure of
accessibility, which we define as the ease of participation in the OIC
Program, participation rates might be an indicator of changes in
accessibility. One measure of participation is the number of offers
accepted relative to the number of delinquent taxpayers fiscal year. The
number of accepted offers has gone down by more than half since fiscal
year 2000 while the number of delinquent taxpayers has stayed roughly
constant. IRS has not done an analysis of whether accessibility has
changed and, if so, why. Without such an analysis, IRS will not know
whether the questions raised by the declining participation rate should be
of concern.
o Compliance: While IRS monitors each accepted offer to determine if
taxpayers fulfill the terms of their offer agreements and future tax
filing and payment requirements, it does not routinely track overall
compliance trends for all OIC program participants, including those whose
offers were not accepted. IRS issued a study of compliance in 2004 and
cited costs as a reason for not repeating it. However, we identified
several lower cost methods for measuring compliance, including aggregating
individual offer information IRS already collects. Aggregate compliance
data would be useful because, in response to its compliance study, IRS
created a new unit called the Hand-Off Unit to pursue collection actions
with taxpayers whose offers were rejected or withdrawn. Without compliance
data, IRS would be unable to determine the effectiveness of its new
Hand-Off Unit or other improvement initiatives.
o Cost: Offers closed declined faster than program staffing since fiscal
year 2003. For example, from fiscal years 2003 to 2005, the number of less
complex offers closed declined from almost 91,000 to 53,000 while the
number of full-time equivalent staff (FTE)5 assigned to those cases
declined from 362 to 320. This represented a productivity decline of 251
cases closed per FTE to 165 and an increase in cost per case. For more
complex offers, the productivity decline during these years was smaller,
from 156 cases closed per FTE to 152. If IRS had maintained fiscal year
2003 productivity levels in fiscal year 2005, it would have needed about
117 fewer FTEs that could have been reallocated to other work.
Evidence of offer mills' impact on OIC processing and on taxpayers is
limited because offers mills cannot easily be distinguished from
legitimate practitioners. The available evidence suggests that the impact
is not large. For example, an IRS study published in 2004,6 while subject
to limitations, found that a small number of offers submitted with the
assistance of professional practitioners were abusive and concluded that
offer mills were not driving abuse in the system.
IRS notifies taxpayers whose offers are rejected of their appeal rights
through various channels, including the offer form instructions, the
rejection letter, and the IRS Web site. In fiscal year 2004, more than
half of the taxpayers whose offers were rejected by the OIC Program
submitted appeals, indicating that many taxpayers were aware of their
appeal rights.
IRS's ETA regulations are consistent with the provisions of the
Restructuring Act, which are broadly written. The regulations were
intended to expand the basis on which IRS would grant compromises and
created two forms of ETA offers-hardship and non-hardship. From fiscal
year 2001 to 2005, IRS accepted more than 400 ETA offers annually. In
fiscal year 2005, IRS accepted 30 non-hardship ETA offers, up from 1 in
fiscal year 2004. Hardship ETA offers are not meaningfully distinct from
DATC offers. In both cases, the decision to accept the offer is based on
taxpayers' assets, future income, and reasonable living expenses. The lack
of distinction between hardship ETA offers and DATC offers causes
unnecessary program complexity and confusion to taxpayers and tax
practitioners. For example, taxpayers applying for hardship ETA offers are
faced with the paradoxical process of proving that they can pay the tax
liability and then explaining why they cannot afford to pay it. Only
non-hardship ETA offers are meaningfully distinct from DATC offers.
Because of the broad language in the Restructuring Act, whether the number
of non-hardship ETA offers satisfies Congress's intent is not clear.
A legislative proposal that would require taxpayers to make a partial
payment with their offer applications raises several questions for IRS.
For example, IRS would need to determine how the requirement would apply
to taxpayers with repeat offers and whether it would affect the program's
accessibility.
To better manage and simplify the OIC Program, we are recommending that
IRS develop a more meaningful measure of timeliness, accessibility, and
compliance; set timeliness goals that measure timeliness from the
perspective of the taxpayer; determine the reasons for the trends in
repeat offers, timeliness, and accessibility; determine the effectiveness
of the Hand-Off Unit to conduct follow-up collection efforts on taxpayers
whose offers were rejected or withdrawn; eliminate the distinction between
hardship ETA and DATC offers; and reduce staff to increase productivity
and reduce cost per offer. In addition, if Congress's intent regarding the
number of non-hardship ETA offers has not been met, Congress should
provide IRS with more specific guidance on the criteria for such offers.
In commenting on a draft of this report (see app. III), the Commissioner
of Internal Revenue partially agreed with our recommendations. IRS agreed
to explore methods for gathering compliance information, study repeat
offers, and reduce staffing. IRS did not agree to measure or set goals for
timeliness from the perspective of the taxpayer. In addition, IRS
indicated that eliminating the distinction between economic hardship and
doubt as to collectibility offers may not be the best approach but that it
is open to suggestions on clarifying the offer instructions. The
Commissioner said that IRS will study whether our other recommended
changes should be implemented.
Background
Section 7122 of the Internal Revenue Code authorizes the Secretary of the
Treasury to compromise tax delinquencies. The purpose of the OIC Program
is to (1) collect what can be fairly and reasonably collected from
taxpayers who cannot fully pay their delinquent tax liability, (2) collect
the tax in a timely and cost-effective manner, and (3) provide taxpayers
with a fresh start toward complying with all future tax filing and payment
requirements. Generally, IRS views the OIC Program as a last resort after
taxpayers have explored all other available voluntary payment options,
such as installment agreements. IRS resolves less than 1 percent of all
balance due accounts through the OIC Program.
In recent years, the OIC Program underwent numerous program changes
intended to reduce the number of inappropriate offers submitted by
taxpayers and improve its operations. The changes include the following.
In 2001, IRS established the centralized OIC (COIC) processing centers in
Brookhaven, New York, and Memphis, Tennessee, to reduce inventory and
processing times and reduce costs. Process examiners, lower-grade staff at
the COICs, perform the initial processing of new offer applications, which
includes determining whether taxpayers' applications meet IRS's
processability criteria. Offer examiners, higher-grade staff at these
COICs, process less complex offers to completion by reviewing taxpayers'
financial information and making decisions about whether to accept the
offers. COICs primarily examine offers involving wage and investment
income. Based on a pilot test, IRS plans to have COIC staff work some
offers from taxpayers with self-employment income starting in the summer
of 2006. More complex offers are sent to IRS field offices around the
country where offer specialists, who are higher graded than offer
examiners, work the offers to completion. These offers take longer to
investigate and may require face-to-face meetings with the taxpayers. In
2003, IRS implemented an offer application fee requirement. Taxpayers
submitting offer applications must include a $150 fee unless they qualify
for a fee waiver. In 2004, IRS revised the OIC application form to make it
more user-friendly to taxpayers. In that same year, IRS management put
more emphasis on communicating with taxpayers while processing offers. In
addition to these program changes, the Restructuring Act also mandated a
new basis for accepting offers ETA.
Three Types of Compromise
According to IRS regulations and guidance, compromises can be granted for
one of the following three reasons:
o Doubt as to liability (DATL)-Doubt exists that the assessed tax
liability is correct.
o DATC-Doubt exists that the taxpayer could ever pay the full amount of
tax owed.
o Effective Tax Administration (ETA)-No doubt exists that the taxpayer can
fully pay the taxes owed, but exceptional circumstances nonetheless lead
IRS to compromise.
IRS has two categories of ETA offers, hardship and non-hardship. According
to IRS's regulations, hardship ETA offers are those that IRS grants
because collecting the full liability would create economic hardship for
the taxpayer, while non-hardship ETA offers are granted on a basis of
equity and public policy. (How economic hardship qualifies a taxpayer for
an ETA offer will be addressed later in the report.) According to IRS,
equity and public policy considerations may be used to accept an offer
when doing so would not adversely affect voluntary compliance for
taxpayers in general.
While an offer is being reviewed, the statute of limitations for
collection and collection actions7 are suspended. The statute of
limitations for collection generally restricts the time IRS has to collect
delinquent taxes to 10 years from the date of assessment. The statute of
limitations for collection and collection actions continues to be
suspended if IRS rejects an offer through the 30-day period that a
taxpayer has to make a decision on whether to appeal the rejection
decision. If a taxpayer appeals, the suspensions continue through the end
of the appeal process.
IRS's Process for Making Offer Determinations
As illustrated in figure 1, the offer process starts when an offer
application is submitted by a taxpayer. The application package, Form 656,
consists of over 50 pages that include detailed instructions on
determining eligibility for filing an offer and a worksheet for
calculating the offer amount for individual and business taxpayers. The
offer8 must be supported by a current statement of the taxpayer's
financial condition, including data on assets, liabilities, and monthly
income and expenses.
Figure 1: Simplified OIC Process
IRS typically receives and begins the processing of offers in one of two
COICs. The first step is screening out offers based on DATL. DATL offers
involving trust fund recovery penalties9 and personal liability for excise
taxes are processed by the OIC Program and all others are referred to IRS
examination staff. IRS then screens the remaining offers for
processability, using five criteria:
1.current version of OIC application form used,
2.$150 application fee included,10
3.all required federal tax returns filed,
4.employment taxes current,11 and
5.taxpayer not in bankruptcy proceeding.
Generally, if any of the five requirements are not met, the application is
returned to the taxpayer as "not processable." According to IRS officials,
since fiscal year 2003, the requirement to use the current application
form has not been enforced although it remains part of IRS's
processability criteria. Program officials said that they do not want to
return offer applications to taxpayers solely because the most current
form was not used.
Next, IRS screens out taxpayers who, based on their self-reported
financial data, can fully pay their tax debts. The financial data include
income, assets, and living expenses. If, after subtracting the taxpayers
self-reported living expenses from their income and assets, IRS determines
taxpayers can fully pay their tax debt and no exceptional circumstances
exist, the offers are rejected without further processing.
IRS then sorts offers by complexity. Complex offers, such as those that
are business related or those from individual taxpayers required to file
Schedule C (Profit or Loss from Business), are generally sent to field
offices. The less complex offers remain in COIC for processing. Next, IRS
reviews each offer to determine whether the taxpayer provided enough
financial information for a decision to be made about whether to accept
the offer. If not, IRS requests more information from the taxpayer. If the
taxpayer does not provide the information, the offer is returned and the
offer is closed. A returned offer has not been rejected.
When IRS has sufficient financial information to make a decision, it first
determines whether an offer can be accepted on the basis of DATC. If not,
IRS considers the offer under ETA rules. At any point during the process,
taxpayers may withdraw their applications.
The step of rejecting an offer includes an administrative review. When OIC
staff propose rejecting an offer, IRS is required by the Restructuring Act
to conduct an independent administrative review. If the offer is rejected,
the taxpayer has the right to appeal the decision. Offers that are
returned, withdrawn, or deemed unprocessable do not have appeals rights.
If IRS accepts the offer, it monitors the taxpayer for 5 years to ensure
that the taxpayer remains compliant with the agreement and future tax
obligations.
The OIC Program Has Decreased in Size, and Repeat Offers Have Increased
From fiscal years 2000 through 2005 the OIC Program decreased in size,
according to measures such as the number of offers received by IRS, the
number of offers accepted, and the dollar amount accepted in compromises.
During the same years, repeat offers, as a percentage of offers received,
grew significantly.
In Recent Years, IRS's OIC Program Has Decreased in Size
According to a variety of summary measures, IRS's OIC Program has
decreased in size. The number of offers received peaked in fiscal year
2003, and in fiscal year 2005 was lower than any year since fiscal year
2000 (see table 1). Offers accepted and the year-end inventory of open
offers both peaked in fiscal year 2001 and were lower in 2005 than
previous years.
Table 1: OIC Program Statistics, Fiscal Years 2000-2005
Fiscal year 2000 2001 2002 2003 2004 2005
Offers received 109,818 118,893 122,405 126,466 103,106 73,301
Offers accepteda 31,609 37,071 27,692 18,340 14,636 14,526
End of year inventory 88,982 92,324 68,187 54,326 35,882 18,500
Amount of delinquent tax $2.43 $2.45 $2.25 $1.32 $1.32 $1.49
liability (in billions)
Amount of accepted offers $0.28 $0.31 $0.27 $0.19 $0.19 $0.24
(in billions)
Amount of tax liabilities $2.15 $2.14 $1.98 $1.13 $1.13 $1.25
written off as a result of
OIC (in billions)
Percentage of total tax 12 13 12 14 15 16
liability accepted in
compromise
Source: GAO analysis of IRS's AOIC database.
aAcceptances are shown before any taxpayer appeals to the IRS Appeals
function (Appeals). See table 10 for offers accepted by Appeals.
The amount of delinquent tax liability covered by accepted offers ranged
annually from about $1.3 billion to $2.5 billion during fiscal years 2000
to 2005. The amount accepted in a compromise of annual delinquent tax
liability increased from 12 percent in fiscal year 2000 to 16 percent in
fiscal year 2005. The amounts of delinquent tax liability covered by
accepted offers, the amounts accepted, and amounts written off were lower
at the end of the period than at the beginning but with some upswing over
the last 3 years. While not a measure of program size, the percentage of
delinquent tax liability covered by accepted offers increased to 16
percent in fiscal year 2005.
IRS attributes the decline in inventory to a combination of factors,
including the centralized processing established in August 2001 and the
decrease in offers received.
Repeat Offers Have Grown Significantly
Repeat offers, as a percentage of offers received, grew significantly from
fiscal year 2000 to 2005. Repeat offers occur when a taxpayer submits an
offer that IRS does not accept, IRS closes the case, and then the taxpayer
submits another offer covering at least some of the same tax liability.
Some taxpayers submit several repeat offers.
The number and percentage of repeat offers more than doubled from fiscal
year 2000 to 2003 (see fig. 2). After that, the number declined, but
because the number of offers received also declined, the percentage stayed
about the same. In fiscal year 2005, 40 percent (or 29,527) of the offers
received were repeat offers.
Figure 2: Number and Percentage of Repeat Offers Compared to Total Offers
Received, Fiscal Years 2000-2005
Note: Some taxpayers make only one effort to compromise a tax liability.
We call these offers "onetime offers." Other taxpayers make multiple
attempts to compromise a tax liability. We call the first of these
attempts an "initial offer" and each subsequent attempt a "repeat offer."
Thousands of offers were multiple repeats. Of the 29,527 repeat offers
received in fiscal year 2005, table 2 shows that for example 17,511 (or 59
percent) were second offers and 6,901 were third offers12 (see table 2).
Taxpayers whose repeat offers were received in 2005 submitted 2.8 offers
on average.
Table 2: Numbers of Repeat Offers Received in Fiscal Year 2005
Order of offer Number of offers
2nd 17,511
3rd 6,901
4th 2,908
5th 1,214
6th 525
7th 247
8th 103
9th 52
10th or greater 66
Total 29,527
Source: GAO analysis of IRS's AOIC database.
IRS has not analyzed the reasons for the proportion of repeat offers, the
substantial increase since fiscal year 2000 shown in figure 2, or the
number of multiple repeats shown in table 2. There are a range of possible
reasons. On the one hand, repeat offers could be the product of IRS
attempts to reduce inventory and close offer cases more quickly. Closing
cases quickly could leave some taxpayers still wanting to negotiate over
the amount of their offers-they would have to submit repeat offers. On the
other hand, repeat offers could be the result of taxpayer confusion or a
tactic to delay collection action.
OIC Program Performance Has Been Mixed, and IRS Has Not Researched the
Reasons for Some Performance Trends
Based on our analysis of OIC data, program performance has been mixed
relative to five objectives-timeliness, quality, accessibility,
compliance, and cost. We identified these objectives by reviewing the IRM
and an IRS policy statement. IRS's performance in one measure of
timeliness has improved, and the program has met its quality goals.
However, some taxpayers wait more than 2 years to get an offer accepted,
and cost per offer has increased. Some of IRS's measures mask this
performance because IRS measures performance by offer and not by taxpayer.
Furthermore, IRS has not researched the causes of some performance trends.
OIC Performance Can Be Measured Relative to Five Objectives
Based on the IRM and an IRS policy statement, we identified five
performance objectives for the OIC Program:
o timeliness-time taken to make a decision on an offer application,
o quality-extent to which IRS follows OIC Program procedures and makes
appropriate determinations,
o accessibility-ease that taxpayers eligible for offers have participating
in the program,
o compliance-extent to which taxpayers who submit offers pay their
delinquent and future tax obligations, and
o cost-resources used to process offers.
IRS officials said that they track the program's performance with respect
to timeliness, quality, and cost. They also said that they do not measure
the program's success by measuring compliance and accessibility but agreed
these were aims of the program. IRS has numeric targets for timeliness and
quality. The officials also view taxpayer service as another program
objective. We agree that taxpayer service should be a program objective.
In IRS's telephone assistance program, service is measured by a
combination of timeliness, quality, and accessibility. While there may be
other measures of service, we believe that service to taxpayers is covered
by the above five objectives.
Timeliness Has Improved for Some Taxpayers but Remains Mixed, and IRS's
Timeliness Goals Are Set for Offers, Not Taxpayers
The OIC Program measures timeliness based on how long it takes to make a
decision about an offer and not how long it has taken taxpayers, some of
whom have repeat offers, to get their tax liabilities finally resolved.
IRS has a 6-month target for making decisions on offers in COICs and a
9-month target for making a decision on offers in the field. Measured on
an offer basis, IRS met its COIC 6-month target for 94 percent of offers
and its field 9-month target for 62 percent of offers in fiscal year 2005.
The picture looks different when timeliness is measured by how long it
takes taxpayers to have their tax liabilities ultimately resolved-the
elapsed calendar time from when IRS first receives an offer to when IRS
makes a decision on a taxpayer's final offer. In fiscal year 2005, IRS
took about 6 months on average to process onetime offers (both COIC and
field) but took far longer to resolve the tax liabilities of taxpayers
with repeat offers. The timeliness of onetime offers has improved from an
average of 8.4 months in fiscal year 2000 to an average of 5.6 months in
fiscal year 2005, as shown in table 3.
Table 3: Average Processing Times for Onetime and Repeat Offers by Year
Case Was Closed, Fiscal Years 2000-2005
Fiscal year Average processing times in months
Onetime offers Repeat offersa
2000 8.4 23.3
2001 9.6 25.8
2002 9.8 23.9
2003 7.9 20.7
2004 7.2 21.4
2005 5.6 22.4
Source: GAO analysis of IRS's AOIC database.
Note: Times represent OIC Program processing times and do not include time
in Appeals for appealed cases.
aElapsed calendar time between IRS receipt of first offer and disposition
of final offer.
The average elapsed calendar time it takes for taxpayers with repeat
offers to get their cases finally resolved was over 22 months in fiscal
year 2005-close to the same elapsed time as in 2000. Taking almost 2 years
to resolve cases could result from the growth in the proportion of repeat
offers or other factors, such as the time taxpayers wait before submitting
repeat offers.
Timeliness from the perspective of accepted offers is shown in table 4,
which shows that 40 percent of offers accepted in fiscal year 2005 had
elapsed calendar times of more than 12 months from IRS receipt of first
offer to final disposition of the last offer, and over 18 percent had
elapsed calendar times of more than 24 months. Over 91 percent of the
accepted offers taking more than 24 months were repeats.
Table 4: Distribution of Elapsed Calendar Time for All Offers Accepted in
Fiscal Year 2005
0 to 6 months >6 to 12 >12 to 24 More than 24
months months months
Numbers of offers closed by 4,427 4,176 3,240 2,683
elapsed time
(30.5 percent) (28.8 (22.3 (18.5
percent) percent) percent)
Source: GAO analysis of IRS data.
Note: Times represent OIC Program processing times and do not include time
in Appeals for appealed cases.
Even though IRS may be meeting its timeliness targets for processing most
offers, measuring timeliness by offer masks the elapsed calendar time
between receipt of a first offer and disposition of a final offer for
taxpayers filing repeat offers. Furthermore, IRS has not analyzed the
effect of the number and growth of repeat offers on timeliness. An
analysis of the extent timeliness could be improved, if at all, by
reducing repeat offers could help program managers make decisions about
whether program changes to improve timeliness would be justified. For
example, it might be less costly for IRS to deal once with a taxpayer,
even if it takes more time to work the single case, rather than have to
process repeat offers.13
Another issue is that IRS does not have a rationale for its numeric goals
for processing times. In 2002, after we recommended that IRS set a
timeliness goal for the offer program based on taxpayer needs, other
benefits such as compliance, and program cost, IRS retained its old goal
of 6 months for COIC offers and established a separate goal of 9 months
for field offers. However, the two current goals still are not based on a
documented analysis of taxpayer needs, other benefits, and program costs.
Without measuring timeliness from the perspective of the taxpayer and
without a rationale for timeliness goals set for taxpayers, IRS may be
missing an opportunity to effectively drive program improvements from a
taxpayer's perspective. As we discussed in other reports, industry
guidance for customer service recommended setting goals based on how long
customers were willing to wait for the service, the value of the service
to the organization, and the costs of providing the service.14 Measuring
timeliness from the perspective of taxpayers and setting goals based on
taxpayer needs would inform IRS management of any gaps between actual
timeliness and the goal providing a better basis for making decisions
about program improvements.
IRS officials expressed concern about whether setting timeliness goals by
taxpayer would be feasible or desirable. In terms of feasibility, the
officials said because it does not know whether or when a taxpayer whose
offer is not accepted would submit another offer, it would be difficult to
develop a timeliness goal from the perspective of taxpayers. While it may
be difficult to predict individual taxpayers' behavior, IRS has historical
data that may be helpful for establishing timeliness goals from the
perspective of taxpayers. For example, average timeliness for taxpayers
from previous years might be a benchmark useful for setting goals for
future average timeliness. In terms of desirability, IRS officials said a
measure of timeliness from the perspective of taxpayers might be
interpreted by some as an indication that offer policies might be
compromised in order to meet the goal. IRS has quality measures intended
to ensure that appropriate decisions are made in offer processing.
Furthermore, IRS currently sets timeliness goals for offers despite the
fact that the same incentives to compromise quality seem to apply.
IRS's Data Show That Quality Goals Have Been Met
Measured by both IRS's internal customer accuracy measures and decisions
by the Appeals function (Appeals), IRS has met its quality goals for the
OIC Program (see table 5).
Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal Year 2005
Location OIC work type Accuracy rate
achieved (percentage)
Brookhaven Preliminary screening 100
Financial analysis and offer decision 97.7
Average 98.9
Memphis Preliminary screening 95.0
Financial analysis and offer decision 95.6
Average 95.3
Field offices Financial analysis and offer decision 84.4
Source: IRS.
In the COICs, IRS measures the customer accuracy rate using the embedded
quality measurement system (EQMS) that was implemented in fiscal year
2004. IRS exceeded its goal of 94 percent for fiscal year 2005. For the
OIC Program, EQMS measures how well employees follow offer processing
procedures. Quality is measured by the sample of cases reviewed that met
the standards for following the required steps, such as contacting the
taxpayer or getting managerial review to process cases. IRS believes that
offer examiners make more consistent decisions when they follow all the
required processing steps. According to the OIC Program Manager, EQMS is
better than the system previously used in the centralized processing
centers, the collection quality measurement system (CQMS). CQMS is still
being used in field offices but is to be phased out in fiscal year 2006 as
EQMS is being phased in. IRS also met its field quality goal of 84 percent
using CQMS for fiscal year 2005. According to the OIC Program Manager, IRS
plans to set a field goal using EQMS after collecting and analyzing data
for field cases during the first year that EQMS is implemented in field
offices.
Appeals data offer some additional evidence about the quality of OIC
Program decisions, although the data are a limited quality indicator
because only rejected offers can be appealed. Of rejected offers appealed,
in fiscal year 2005, Appeals sustained 65 percent of rejection decisions
while deciding to accept offers in 24 percent of the cases, as shown in
table 6 (11 percent were withdrawn). A decision by Appeals to accept an
offer is not always the same as overruling the OIC Program. Appeals
accepted some offers that the OIC Program had rejected because taxpayers
provided Appeals with new financial information. An IRS study of 113 cases
where offers were accepted in Appeals concluded that 38 percent of offers
were accepted by Appeals based on taxpayers providing new financial
information rather than Appeals disagreeing with the OIC Program
decisions.15 Table 6 also shows some improvement in the sustention rate
from fiscal years 2002 through 2005.
Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal Years
2002-2005
Disposition 2002 2003 2004 2005
OIC rejection accepted in Appeals (percentage) 29.0 29.6 28.2 23.5
OIC rejection sustained in Appeals (percentage) 57.6 57.3 62.0 65.1
Offer withdrawn in Appeals (percentage) 13.5 13.1 9.7 11.4
Source: GAO analysis of IRS's AOIC database.
Declines in OIC Program Size Combined with Trends in IRS's Other
Collection Programs Raise Questions about OIC Program Accessibility
Declines in OIC participation rates since fiscal year 2000 raise questions
about whether accessibility has decreased. We define accessibility as how
easy it is for potentially eligible taxpayers to participate in the OIC
Program. IRS officials agreed with this definition but said that they do
not measure accessibility and do not monitor changes in accessibility over
time. Tracking accessibility could provide information about the
effectiveness of efforts to reduce barriers to program participation for
taxpayers wishing to make legitimate offers. For example, IRS recently
made changes to the offer application form intended to make the offer
application process easier for taxpayers to understand.
Furthermore, the Taxpayer Advocate, the American Institute of Certified
Public Accountants, and the National Association of Enrolled Agents have
raised concerns about barriers to OIC Program access. They cited confusion
about the offer requirements and procedures, the lengthy time needed to
get offers resolved, and the difficulty in getting what they believe are
reasonable offers accepted as deterrents to taxpayers' ability to
participate in the program. The Taxpayer Advocate stated that some
practitioners are often not willing to recommend the program to their
clients because of these issues. A small number of practitioners we spoke
with, as well as the practitioner organizations we contacted, made the
point that the OIC process is too burdensome for taxpayers. Without a
measure of accessibility, it is difficult to assess the merits of these
concerns.
Measuring access, or ease of participation, may require questioning
taxpayers about why they did or did not participate in the program. Such
direct evidence does not currently exist. However, it is possible to
measure participation with readily available data. While not the same as
accessibility, trends in participation rates might be an indicator of
whether changes in accessibility have occurred. A measure of participation
would compare OIC Program participation to the pool of potentially
eligible taxpayers.
Over the years 2000 to 2004, the number of accepted offers declined by
more than half, as shown in figure 3. Over the same years, one proxy
measure of potentially eligible taxpayers, the number of delinquent
taxpayers, stayed roughly constant at 5.9 million delinquent taxpayer
accounts in fiscal year 2000 and 6.0 million in 2004.16 It seems likely
that the number of potentially eligible taxpayers is correlated with the
number of delinquent taxpayers. Not all delinquent taxpayers are eligible
for the OIC Program, but it seems likely that an increase in delinquent
taxpayers would also increase the number of taxpayers potentially eligible
for an offer.
Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005
Note: Because many of the offers received in fiscal year 2005 have not
been disposed of, the numbers of accepted and rejected offers shown in the
table will grow.
The fact that accepted offers declined by more than half at the same time
that the number of delinquent taxpayers was staying roughly constant
raises the question of whether something has happened to reduce the
program's accessibility.17 The two trends do not demonstrate that
accessibility has declined because they do not directly measure ease of
use. It is possible that taxpayers decided for reasons unrelated to
accessibility to reduce their participation in the program. However, it is
possible that concerns like those expressed by the Taxpayer Advocate
explain the decline. IRS has not done an analysis to determine whether the
ease of using the program has changed, and, if so, why.
IRS officials told us that the reason they do not measure accessibility is
that the program is available to all eligible taxpayers and that taxpayers
self-select their participation. They also said that IRS has not measured
the decline in the size of the program relative to changes in the pool of
potentially eligible taxpayers. On the other hand, IRS has taken steps,
such as requiring a $150 offer application fee and revising the offer
application form, intended to reduce the number of unrealistic offers
without reducing the accessibility of the program to potentially eligible
taxpayers. In addition, the OIC Program Manager told us that to determine
whether there are eligible taxpayers who do not participate in the
program, IRS is considering studying whether some taxpayers with
delinquent accounts are eligible for offers.
Without a measure of accessibility that gauges ease of use, IRS does not
know whether accessibility has changed over time. As a consequence, IRS
does not know whether the declines in participation rates indicate a
decline in accessibility, nor does IRS know whether the concerns raised by
the Taxpayer Advocate and others about a decline in accessibility are
correct. Furthermore, IRS would be unable to evaluate whether its efforts
to reduce inappropriate offers, without reducing accessibility by eligible
taxpayers, have been successful.
There may be more than one way to measure accessibility. One way would be
to measure program participation rates and, if participation is changing,
do follow-up questioning of taxpayers about whether ease of use had
changed. Potentially eligible taxpayers could be asked, for example, about
whether they perceived barriers to their participating in the program. If
accessibility is found to be declining, then analysis of what IRS did to
cause the decline would be useful for making decisions about whether and
how to address the decline.
IRS Monitors Taxpayer Compliance with the Terms of Their Accepted Offers,
but Does Not Routinely Track Aggregate Compliance Trends for Program
Participants
IRS Policy Statement P-5-100 and the IRM state that by accepting offers,
the OIC Program should provide taxpayers a fresh start toward future
voluntary compliance with their filing and payment requirements. IRS
rejects offers on the basis of a financial analysis of taxpayers' assets,
expected income, and reasonable living expenses-an analysis that IRS uses
to show whether taxpayers have the ability to pay more of their tax debt
than they offered to pay in their OIC applications.
In accordance with the compliance objective for accepted offers, IRS has a
unit called Monitoring OIC (MOIC), which monitors the compliance of
taxpayers with accepted offers for 5 years, and possibly beyond 5 years in
cases of deferred payment offers, where payments are made over the
remaining life of the collection statute. MOIC, however, does not
routinely report to OIC management its aggregate data on taxpayer
compliance, which would show trends on the compliance of taxpayers with
accepted offers. In 2004, IRS completed a study that addressed several
aspects of the OIC Program, including compliance.18 According to the
study, about 80 percent of individual taxpayers with accepted offers from
calendar years 1995 and 2001 remained in compliance with filing and
payment requirements, excluding taxpayers who had received only one
collection notice.
The study also examined the compliance of taxpayers whose offers were
rejected, withdrawn, or returned. The study found that follow-up
collection actions had not been completed in many cases, even though the
taxpayers had submitted offer applications stating a willingness and
ability to pay part of their delinquent tax debt and even though IRS had
concluded for rejected offers that the taxpayers could pay more than the
amount they offered. For example, 42 percent of rejected offers during the
study period, calendar years 1998 to September, 8, 2003, were pending
collection action, and 15.7 percent had been declared currently not
collectible (see table 7).19
Table 7: Percentage of Individual Taxpayers in Collection Statuses by
Offer Disposition from 1998 to 2003
Collection statusa Withdraw Reject Return
Full pay 30.6 19.4 10.6
Other resolutionb 8.4 8.3 4.6
Currently not collectible 16.7 15.7 18.6
Installment 15.8 14.6 9.2
Pending action 28.4 42.0 57.2
Totalc 100.0 100.0 100.0
Source: GAO analysis of IRS data.
aIn cases where the taxpayers had tax liabilities for more than one year
or tax period, OPERA used IRS's most recent information on the taxpayer's
collection status.
bIncludes cases that were "full pay" where the collection statute
expiration date occurred or taxpayer filed bankruptcy.
cColumns may not add up to 100 percent because of rounding.
IRS created a new unit called the Hand-Off Unit partly because the 2004
study concluded that rejected offers languished without further collection
action. The Hand-Off Unit takes the rejected or withdrawn cases and
initiates appropriate collection procedures with taxpayers using the
financial information gained during the OIC process. Like MOIC, the
Hand-Off Unit currently does not analyze compliance trends on a routine
basis, although officials told us that IRS would eventually have that
capability but has not set a date. To properly assess IRS performance on
achieving its compliance objective, IRS also would need to collect and
assess such trend information on a periodic basis.
The 2004 study represents a useful assessment of OIC's compliance benefits
for one time and uses an appropriate measurement unit-the taxpayer.
However, it is no longer useful for ongoing management decisions because
the data in the study are now about 3 to 11 years old. The study period
predated many of IRS's recent program changes, which might affect the
program's performance with respect to compliance. For example, the new
Hand-Off Unit, which was started after the 2004 report, may help achieve
greater compliance of taxpayers with rejected or withdrawn offers, but IRS
will not know whether it works if it does not track overall compliance
trends.
The OIC Program Manager said that IRS found the 2004 study too costly to
repeat, requiring thousands of staff hours from the OIC Program and
expertise from OPERA. However, only a portion of the work for the 2004
study was devoted to studying compliance; the Program Manager said that he
did not know how much it would cost to repeat the compliance portions
alone. Further, IRS does not use alternatives for the kind of
compliance-benefit information the 2004 study provided, although such
alternatives exist and some are lower cost. For example, IRS could repeat
only the compliance portion of its OPERA study or use the existing status
reports collected by MOIC, which cover taxpayers who default on their
offers but are not routinely aggregated for OIC managers, to monitor
trends on the compliance of taxpayers with accepted offers. The only
additional costs to use the MOIC reports would be aggregating the data.
The Treasury Inspector General for Tax Administration (TIGTA) also
conducted a file review of accepted offers to assess aggregate compliance
performance, which the OIC Program could use as a model. According to a
TIGTA audit manger, the TIGTA study was something IRS should be able to do
at a lower cost than the OPERA report. Using the MOIC data that are
already available or employing the TIGTA approach would not yield as
elaborate a study as IRS's 2004 study, but the alternative methods would
provide information more useful to managers than having no information at
all.
We previously concluded that having the proper performance measures in
place is critical for successful program adjustments and in assessing
achievement of objectives.20 Because aggregate compliance trends are not
tracked and analyzed periodically, IRS does not know the effects that
recent program changes have had on taxpayer compliance; furthermore, IRS
will have greater difficulty determining what additional program changes
may be needed to ensure its best performance on achieving its compliance
objective.
Trend information on compliance also is necessary to assess the
performance of IRS's new Hand-Off Unit. In our 2002 report,21 we said that
IRS should develop evaluation plans before starting new initiatives; it
did not do so in this case.
Offers Closed Declined Faster Than FTEs, Resulting in Productivity
Declines and Increased Costs per Offer
Productivity of both COIC and field staff, measured by the ratio of offers
closed per FTE, declined from fiscal years 2003 to 2005 (see tables 8 and
9). While productivity improved from fiscal years 2002 to 2003, the
productivity declines in the following years resulted from IRS reducing
offer processing staff at a lower rate than the decline in offers closed.
For example, the average number of closed offers per FTE in COIC decreased
from 251 to 165 from fiscal years 2003 through 2005. Other factors equal,
decreases in productivity increase cost per offer.
Table 8: Productivity of COIC Processing by Offers Closed, Fiscal Years
2002-2005
Fiscal year Closed offer cases FTEs Closed offers per FTE
2002 66,217 380 174
2003 90,888 362 251
2004 80,107 340 236
2005 52,831 320 165
Sources: IRS data and GAO analysis of IRS's AOIC database.
Table 9: Productivity of Field Processing by Offers Closed, Fiscal Years
2002-2005
Fiscal year Closed offer cases FTEs Closed offers per FTE
2002 80,325 448 179
2003 49,439 316 156
2004 41,443 305 136
2005 37,852 249 152
Sources: IRS data and GAO analysis of IRS's AOIC database.
If IRS had maintained productivity at fiscal year 2003 levels, the agency
would have had the flexibility to reallocate a substantial number of FTEs
to other areas. In fiscal year 2005, IRS would have been able to reassign
110 FTEs in COICs and 7 FTEs in field offices. As the inventory of offers,
which affects the number of offer closures, declined in fiscal years 2004
and 2005, IRS did reduce FTEs, particularly in the field. However, the
number of offers closed declined more rapidly than the number of FTEs,
hence the decline in productivity. In January 2006, IRS officials told us
that they anticipate making additional staff reductions in fiscal year
2006.
OIC officials provided some possible reasons for the decline in
productivity, including an increase in offer complexity and a plan to keep
more staff working on offers than might have been necessary to ensure that
service to taxpayers was maintained. Over the fiscal years 2003 to 2005,
however, there is some evidence that offers have not grown more complex.
Figure 3 does not show a noticeable change in case complexity. For
example, the percentage of not processable offers, the simplest and
fastest cases to close, was somewhat higher in fiscal year 2005 than in
fiscal year 2003. With respect to the desire to maintain service to
taxpayers, IRS has shifted collections staff from one type of case to
another. Thus, IRS has flexibility to move staff to maintain service in
the face of an unexpected upswing in offer submissions, especially since a
pool of experienced OIC processors would be available.
OIC officials told us that since fiscal year 2001, they have substantially
reduced the OIC Program's costs, particularly in field offices. Based on
IRS information, the number of revenue officers assigned to OIC cases have
declined from 1,078 as of April 2001 to 267 in April 2006-a reduction of
811 revenue officers. In March 2006, IRS's OIC Program Manager told us
that because IRS will start processing offers from taxpayers filing
simpler Schedule C forms at the COICs later in the year, it will further
reduce the number of revenue officers in field offices by 100.
Limited Evidence Suggests Offer Mills' Effect on OIC Processing May Not Be
Large
Reliable and complete data on offer mills' involvement with the OIC
Program do not exist, preventing firm assessments on the extent that offer
mills affect OIC processing. However, limited evidence from IRS, states,
and our own analysis, taken together, suggests that offer mills do not
have a large effect on OIC processing. There is, however, anecdotal
evidence that offer mills may harm taxpayers. IRS has created procedures
and guidance designed to mitigate potential negative effects of offer
mills on OIC processing, although the effectiveness of the procedures and
guidance cannot be measured.
Offer Mills Cannot Be Easily Distinguished from Legitimate Practitioners
IRS collects some information about professional tax practitioners, who
assist taxpayers making offers, but the data are not sufficient for
distinguishing offer mills from legitimate practitioners.
For purposes of this report, an offer mill is a professional tax
practitioner that consistently uses negligent or deceptive practices to
exploit taxpayers and the OIC Program by making misleading claims and
submitting unrealistic offers. For example, an offer mill might use
deceptive advertising, creating a false expectation that the recipient of
the advertisement would qualify for an offer or save as much as the
advertisement suggests. An offer mill also might file incomplete or repeat
offers to exploit the rule that suspends collection proceedings while
offers are being considered.
IRS does collect two types of information about professional practitioners
on the OIC application, but this information is not always submitted with
the application. First, the OIC application asks enrolled agents22 to
identify themselves on the form and to submit a power of attorney (POA)
Form 2848 with the taxpayer's application. In addition, the form asks
taxpayers to identify anyone who helped prepare the application. However,
non-enrolled agents are not required to sign the offer application. A
manager at the Brookhaven COIC said that IRS has had cases in which it has
learned that a professional practitioner was used but not identified in
the offer application.
IRS designates some offers as solely to delay the payment of taxes, which
IRS tracks in the AOIC. The definition of solely to delay applies to any
offer-whether submitted by the taxpayer alone or with the assistance of a
POA. IRS considers an offer submitted solely to delay as one that is not
substantially different from a previous offer that IRS rejected or
returned. Solely to delay offers could be linked to POA or other
practitioner data in the AOIC, but that data's usefulness is limited
because professional tax practitioners are not always identified on OIC
applications. Additionally, because determining whether an offer is
submitted solely to delay is subjective and may require enough submissions
to notice a pattern, IRS may not always detect when an offer has been
submitted solely to delay.
Best Available Evidence, Though Incomplete, Suggests That Offer Mills Do
Not Have a Large Effect on OIC Processing but That They Might Harm
Taxpayers
The best available information on offer mills from IRS-although limited by
the same factors described in the previous section-suggests that offer
mills do not have a large effect on OIC processing.
o An IRS study23 published in 2004 found that a small number of offers
submitted with the assistance of professional practitioners were abusive
and concluded that offer mills were not driving abuse24 in the system.
o The OIC Program can make referrals to OPR regarding suspected
practitioner abuse but rarely does so. In November 2005, OPR was
investigating only 36 cases involving OIC and practitioners.
o An official with the Maryland OIC program told us that the state program
has had no significant problems with offer mills or other practitioners in
processing OIC applications there. Furthermore, a representative of the
Federation of Tax Administrators, an organization of state tax officials,
said that problems state OIC programs have with tax practitioners
generally have more to do with consumer rights issues than with tax
collection.
o In fiscal year 2005, there were 972 offers with POAs that were returned
as "solely to delay." This was about 1 percent of all cases closed in
2005. The effect of these cases on processing may have been small. IRS
returned 83 percent of the offers deemed solely to delay that had POAs in
6 months or less.
Anecdotal evidence also indicates that misconduct by offer mills may have
harmed some taxpayers even though there was no effect on OIC processing.
For example, the Connecticut Attorney General's Office investigated one
company offering OIC preparation services because the company charged
taxpayers for submitting offers but then did not send the offers to IRS.
In 2005, the state of Missouri settled with a firm over deceptive
advertising tactics and for failing to complete OIC services as promised.
OIC processing was not adversely affected in these cases. The Taxpayer
Advocate also told us about one case in which an offer mill charged such a
large fee that the taxpayer ended up filing for bankruptcy, rather than
compromising with IRS.
IRS Has Implemented Procedures Designed to Reduce the Impact of Offer Mill
Abuse
IRS officials said that current procedures reduce negative effects that
offer mills might otherwise cause. For example, in 2004, IRS issued a
consumer alert about abusive offer mills because of concerns about
potentially deceptive advertising tactics used in the OIC preparation
industry. The alert advises taxpayers to be wary of promoters making
unrealistic claims about the OIC Program. According to the alert, "Some
promoters are inappropriately advising indebted taxpayers to file an OIC
application with the IRS. This bad advice costs taxpayers money and time."
IRS also has given instructions to its OIC processing staff on identifying
offer mills that might be violating IRS's rules for enrolled agents and on
making referrals of potential violators to OPR. OIC process examiners and
offer examiners sometimes work directly with taxpayers, rather than
through offer mills. They do this because while taxpayers may be making
good-faith efforts to pay what they can of their taxes by compromising,
offer mills may not be making good-faith efforts to help the taxpayers.
IRS officials also said that the $150 OIC application fee discourages
frivolous offers.
IRS Notifies Taxpayers of Their Appeal Rights through Various Channels
IRS has established formal means to notify taxpayers of their appeal
rights, including providing information about appeal rights on the offer
application form and in the offer rejection letter that IRS sends
taxpayers. In addition, IRS's Web site and some IRS publications contain
information for taxpayers on rights and responsibilities in appealing
rejected offers.
The offer application package (Form 656) contains information on
taxpayers' rights to appeal rejected offers. Under step 7 of the
application process, "What to Expect after the IRS Receives Your Offer,"
is information on what a taxpayer can expect if IRS rejects an offer.
Specifically, the application states that taxpayers will be sent a letter
explaining why their offers were rejected and their right to submit an
appeal.
IRS's Web site also provides information on appealing rejected offers,
including links to information about appeal rights and how IRS reviews
appeals. The Web site's resources include Tax Topic 204, Offers in
Compromise; the Collection Appeal Rights link; IRS Publication 5, Your
Appeal Rights and How to Prepare a Protest If You Don't Agree; and a video
clip on the offer process with information on how to appeal a rejected
offer.
The IRS AOIC database contains entries intended to document the sending of
rejection letters, with information on how to appeal, to taxpayers. We
tested the AOIC database to ascertain whether such entries were made. Our
limited review did not indicate any problems in documenting whether
rejection letters and appeals instructions were being sent as required. We
did not contact taxpayers to determine whether they actually received the
letters.
The percentage of rejected offers that were appealed indicates that many
taxpayers were aware of their appeal rights. The percentage of offers
appealed ranged from 30 percent to 51 percent (see table 10).
Table 10: Number and Percentage of Rejected Offers That Taxpayers
Appealed, Fiscal Years 2000-2005
Fiscal Number of Number of rejected offers Percentage of Number of
yeara offers appealed by taxpayers rejected offers offers
rejected by appealed accepted by
OIC Program Appeals
function
2000 13,071 3,976 30 1,393
2001 18,568 6,819 37 1,953
2002 22,287 8,129 36 2,334
2003 35,721 15,376 43 4,464
2004 30,874 15,888 51 3,928
2005 27,409 10,224 37 1,221
Source: GAO analysis of IRS's AOIC database.
aFiscal year in which the OIC Program rejected the offer.
ETA Regulations Are Consistent with Statute, but Hardship ETA and DATC
Offers Are Not Meaningfully Distinct and Non-Hardship ETA Offers Are Rare
IRS's ETA regulations are consistent with the provisions of the
Restructuring Act, which were broadly written. While IRS has annually
accepted hundreds of offers based on ETA, non-hardship ETA offers accepted
have been rare. However, hardship ETA offers are not meaningfully distinct
from DATC offers. The lack of distinction between DATC and hardship ETA
offers causes unnecessary program complexity and confusion for taxpayers
and tax practitioners.
Regulations on ETA Are Consistent with the Restructuring Act
IRS's ETA regulations are consistent with the changes made to the OIC
provisions by the Restructuring Act. The law required IRS to develop
guidelines for determining when an OIC is adequate and should be accepted
to resolve a dispute.25
The OIC provisions in the Restructuring Act were written broadly and did
not specify criteria for what constitutes an adequate offer or when an
offer was appropriate for resolving a dispute. IRS and Treasury staff who
drafted the regulations incorporated language from the Restructuring Act's
conference report. According to the conference report, the existing OIC
regulations should be expanded to permit IRS to consider factors beyond
DATL or DATC in determining whether to accept a compromise. The conference
report also stated that it was anticipated that IRS would take into
account factors such as equity, hardship, and public policy where a
compromise of an individual taxpayer's income tax liability would promote
ETA. Although the term "effective tax administration" was not defined or
addressed in the Restructuring Act, IRS sought to incorporate the
conference report's ETA language into its regulations. The conference
report also did not specifically define what was meant by effective tax
administration.
In addition to using the ETA language from the conference report, IRS's
regulations created two categories of ETA offers-non-hardship, which
includes offers granted for reasons of equity and public policy, and
hardship, which are granted for cases in which full payment would cause
financial strain for the taxpayer.
IRS Has Accepted Hundreds of ETA Offers Annually since Fiscal Year 2001
but Non-Hardship ETA Offers Are Rare
IRS accepted hundreds of ETA offers each fiscal year from 2001 to 2005. A
small number of those acceptances were non-hardship ETA offers (see table
11). In fiscal year 2005, IRS accepted 467 offers on an ETA basis, with 30
being non-hardship ETA offers.
Table 11: Number of Accepted Hardship ETA and Non-Hardship ETA Offers,
Fiscal Years 2000-2005
Fiscal year 2000 2001 2002 2003 2004 2005
Hardship ETA offers accepted 177 479 466 498 428 437
Non-hardship ETA offers accepted - - - - 1 30
Source: GAO analysis of IRS data.
Note: IRS did not compile separate statistics on non-hardship ETA
acceptances before 2004.
The low number of non-hardship ETA acceptances is consistent with IRS
guidance, which says that IRS should accept non-hardship ETA offers only
in rare instances. IRS officials said that non-hardship ETA acceptances
should be infrequent to keep the OIC Program from becoming an insurer of
last resort. For example, an IRS official said that IRS would be wary of
compromising with a business that could afford to pay its taxes but whose
payroll manager embezzled company funds if the company were negligent in
monitoring the manager because compromising might lead other businesses to
become less diligent in protecting against such losses.
On the other hand, the Taxpayer Advocate has said that making non-hardship
ETA acceptances difficult to accept may erode taxpayers' faith in the
fairness of the income tax system. The Taxpayer Advocate and
representatives of tax practitioner groups also have said that the low
number of non-hardship ETA acceptances violates Congress's intent in
passing the Restructuring Act, which was to make compromises easier for
taxpayers to reach by expanding the basis on which compromises would be
made.
As already noted, the provisions of the Restructuring Act on offers are
broadly written and IRS's ETA regulations are consistent with the
Restructuring Act. The act did not define criteria for accepting offers.
Consequently, whether the number of non-hardship ETA offers IRS accepted
satisfied Congress's intent is not clear.
No Meaningful Distinction Exists between Hardship ETA and DATC Offers
Although consistent with the law, regulations and guidance for reviewing
hardship ETA offers are so similar to rules and guidance for determining
acceptable DATC offers that the two types of offers are effectively
indistinguishable from each other. For both types of offers, doubt exists
that a taxpayer can afford to fully pay the tax liability owed.
IRS differentiates ETA offers (both hardship and non-hardship) from DATC
offers by comparing a taxpayer's equity in assets and future income with
the taxpayer's tax liability (see fig. 4). If equity in assets and future
income is less than or equal to tax liability, then IRS processes the
offer as DATC. If the equity in assets and future income is greater than
tax liability, then IRS processes the offer under ETA rules. IRS considers
ETA only after it has determined DATC does not apply. According to IRS
guidance, taxpayers are eligible for ETA offers only when they can "full
pay" the liability out of their equity in assets and future income.
Figure 4: How IRS Determines Whether an Offer Is Considered for DATC or
ETA
If ... ... then
Equity in assets + future income <= tax Taxpayer may be considered for
liability DATC
Equity in assets + future income > tax Taxpayer may be considered for ETA
liability
Sources: GAO analysis of IRS Internal Revenue Manual and Treasury
regulations.
Once IRS determines that it will consider an offer as DATC or ETA, it
calculates acceptable offer amounts following the procedure in figure 5.
Figure 5: Conceptual Process for Determining Offer Amounts
Equity in assets + future income - living expenses = acceptable offer
Sources: GAO analysis of IRS Internal Revenue Manual and Treasury
regulations.
Non-hardship ETA offers are distinguishable from DATC offers in IRS rules
and guidance because the criteria used to evaluate non-hardship ETA do not
overlap with DATC. However, allowable living expenses that reduce DATC
offer amounts are similar to the criteria IRS uses to determine whether
taxpayers qualify for hardship ETA offers, making the difference between
these two types of offers unclear. For example, a taxpayer applying for a
DATC offer with medical expenses would include the medical care costs in
calculating an acceptable offer amount; however, the IRM also lists
medical expenses as a factor that would lead to consideration for hardship
ETA.
Examples from IRS guidance and regulations do not add clarity to the
distinction between an acceptable ETA hardship offer and an acceptable
DATC offer. One example (see fig. 6) shows that taxpayers can qualify for
ETA offers because of dependent care expenses; however, dependent care is
also a factor that IRS considers as an allowable expense under DATC.
Another example (see fig. 7) shows that taxpayers can qualify for a
hardship ETA offer if fully paying their taxes would jeopardize their
ability to pay basic living expenses; however, such expenses also comprise
a group of factors that reduces a taxpayer's total income for determining
the amount of an offer under DATC.
Figure 6: Hardship ETA: Qualify Because of Dependent Care Expenses
The taxpayer has assets sufficient to satisfy the tax liability and
provides full time care and assistance to a dependent child, who has a
serious long-term illness. It is expected that the taxpayer will need to
use the equity in assets to provide for adequate basic living expenses and
medical care for the child. The taxpayers overall compliance history does
not weigh against compromise.
Source: IRS's ETA regulations.
Figure 7: Hardship ETA: Qualify Because of Basic Living Expenses
The taxpayer is retired and his only income is from a pension. The
taxpayer's only asset is a retirement account, and the funds in the
account are sufficient to satisfy the liability. Liquidation of the
retirement account would leave the taxpayer without an adequate means to
provide for basic living expenses. The taxpayer's overall compliance
history does not weigh against compromise.
Source: IRS's ETA regulations.
IRS officials said that although overlap exists between DATC and hardship
ETA, taxpayers who qualify for hardship ETA today would not have qualified
for DATC before the Restructuring Act because IRS did not have the
authority to compromise when taxpayers' equity and income exceeded their
tax liability. However, in light of the additional legal authority granted
by the Restructuring Act that IRS acknowledges, the distinction IRS makes
in its rules and guidance between current DATC and hardship ETA offers is
not meaningful. Based on our review, only ETA cases accepted on
non-hardship grounds are meaningfully distinct from DATC offers because
the criteria for accepting them are different.
ETA Rules Have Created Complexity and Confusion in the OIC Application
Process, According to Tax Professionals
Instructions on applying for ETA also cause unnecessary program
complexity, while ETA rules and regulations cause confusion among
taxpayers and professionals, according to the Taxpayer Advocate,
practitioner organizations, and individual tax professionals with whom we
consulted.
The OIC Program Manager said that it does not matter whether taxpayers
check ETA, DATC, or DATL on their applications because each offer is
evaluated for all three. Yet taxpayers still must check a box on the OIC
application form (Form 656) indicating which type of offer they seek.
Having to determine which box to check adds complexity to the process for
taxpayers and tax practitioners. The choice among offer types also adds
complexity for IRS, which determines which type of offer the taxpayer has
made (i.e., DATC, DATL, or ETA). One professional tax practitioner told us
that in filling out an OIC application for a client, she checked more than
one box even though, according to IRS definitions, the types are mutually
exclusive. Confusion and complexity may increase the burden for some
taxpayers-the time and costs needed to prepare an offer application.
Furthermore, as was discussed earlier, the Taxpayer Advocate has said that
confusion about offer requirements and program procedures may reduce the
program's accessibility.
Because of the wording of the instructions, taxpayers applying for
hardship ETA also are faced with the paradoxical process of proving that
they can pay the tax liability and then explaining in writing why they
cannot afford to pay it. According to the definition in the instructions,
ETA offers have no "doubt as to collectibility," but the instructions also
say that the applicant must explain the circumstances that would justify
an offer-circumstances equivalent to inability to pay.
The National Association of Enrolled Agents said that IRS's ETA rules were
complex and difficult to understand, and the American Institute of
Certified Public Accountants has said that ETA regulations do not provide
sufficient guidance for determining which OICs qualify as ETA offers. The
Taxpayer Advocate and other professionals also have said that it is
difficult to know what types of offers will qualify for ETA based on the
ETA regulations and guidance.
Partial Payment Proposal Raises Questions
Proposed legislation, originally introduced in the Senate,26 would require
taxpayers to make a partial payment with their offer applications.
Taxpayers seeking a lump-sum offer would be required to pay 20 percent of
the amount of the offer as a nonrefundable down payment. The term
"lump-sum offer" means any offer of payments made in five or fewer
installments. Alternatively, a periodic payment offer would have to be
accompanied by the payment of the amount of the first proposed
installment. The new provision also gives the Secretary of the Treasury
authority to issue regulations waiving any such payment. Finally, no user
fee would be imposed on any offer accompanied by a payment. IRS would have
60 days from enactment to implement the changes.
The legislative proposal that would require taxpayers to make a partial
payment with their offer applications raises several questions for IRS.
One is how the partial payment would apply in the case of repeat offers.
For second and subsequent offers, would another partial payment be
required? Is the payment nonrefundable for every disposition category?
Should the rules for partial payments be consistent with the current rules
for processing fees? Currently, if an offer fails to meet IRS's
processability criteria, IRS returns the $150 processing fee to taxpayers
along with their offer applications.
Another question is whether the proposal might affect the program's
accessibility. Would a partial payment requirement discourage eligible
taxpayers from submitting offers? As discussed earlier, IRS does not
monitor accessibility. Without a measure of accessibility, the impact of a
partial payment on accessibility might not be easily determined.
Another question is whether 60 days are enough time to implement the
partial payment requirements. IRS officials stated that computer systems
would require changes to accommodate the imposition of partial payments.
We did not determine how long it would take IRS to make the changes.
Conclusions
Because some delinquent taxpayers will always be unable to fully pay their
tax debts, IRS's OIC Program is necessary to ensure that taxpayers pay
what they can and have a "fresh start" toward complying with their future
obligations. The performance of the program is important because factors
like the timeliness of offer decisions can have a large impact on
taxpayers in difficult financial straits and because the IRS resources
devoted to the program are significant.
Opportunities exist to make immediate improvements to the program and
lower costs. First, staffing adjustments have not kept pace with declines
in cases in recent years, resulting in lower productivity. Reducing
staffing to increase productivity to its recent levels would lower program
costs. Second, because the distinction between DATC and ETA hardship
offers is not meaningful, the program is unnecessarily complex.
Practitioners and others have complained about the resulting confusion and
burden on taxpayers, which may discourage taxpayers from using the
program. Costs to taxpayers and IRS could be reduced by eliminating the
distinction.
The success of the program also depends on how well IRS management
understands the reasons for the program's performance. One step in
understanding performance is measuring it. IRS's measurement of timeliness
on an offer basis masks how long it takes to make a final decision for
taxpayers to get their liabilities resolved. IRS's tracking of
accessibility is also incomplete because it is not done relative to the
size of the pool of potentially eligible taxpayers. IRS's tracking of the
future compliance of program participants is also incomplete because it
does not routinely measure compliance.
Another step in understanding performance is setting goals. Numeric goals
provide objective criteria for assessing performance. The numeric goals
for OIC timeliness still are not based on an analytical assessment of
taxpayer needs and other benefits, and the goals are set for each case
rather than for taxpayers.
A third step in understanding performance is analysis that determines the
causes of performance. By understanding the causes of performance, IRS
management can make better-informed decisions about how to improve
performance. IRS's 2004 compliance study is an example-it led to the
creation of the Hand-Off Unit. Because IRS has implemented several recent
improvement initiatives, such as the Hand-Off Unit, additional analysis is
necessary to understand their impact on compliance. Further, IRS has not
analyzed other trends. IRS has not determined the causes of the large
growth in repeat offers since 2000, despite their impact on timeliness
from a taxpayer's perspective. In addition, IRS has not analyzed factors
that affect trends in the OIC Program's accessibility. Without such an
analysis, IRS will not know whether the declining OIC participation rate
is an indication of a decrease in accessibility.
Recommendations for Executive Action
We recommend that the Commissioner of Internal Revenue:
1.Take the following steps to immediately improve the OIC Program:
o adjust staffing levels to increase productivity and reduce cost per
offer, unless IRS can demonstrate that case complexity has increased and
o eliminate the distinctions between hardship ETA and DATC in the
application, instructions, and procedures to simplify the program.
2.Develop meaningful measures of performance, including
o a measure of processing timeliness for taxpayers,
o a measure of accessibility that gauges ease of participation in the
programs, and
o a measure of compliance for all program participants.
3.Set processing timeliness goals for taxpayers that are based on an
assessment of taxpayer needs and other benefits.
4.Conduct analyses of the reasons for performance trends in order to
o determine causes of the growth in repeat offers;
o determine how repeat offers affect timelines and, if justified based on
the results, take action to meet timeliness goals;
o determine the reasons for trends in accessibility; and
o determine the effectiveness of the Hand-Off Unit.
Matter for Congressional Consideration
If Congress's intent regarding the number of ETA non-hardship offers has
not been met to date, Congress should provide IRS with more specific
guidance on the criteria for such offers.
Agency Comments and Our Evaluation
In his April 14, 2006, letter the Commissioner of Internal Revenue (see
app. III) said that he partially agrees with our recommendations. IRS
provided separate technical comments, which we incorporated into our
report where appropriate.
The Commissioner indicated that IRS believed that eliminating the
distinction between economic hardship and doubt as to collectibility
offers may not be the best approach but said that IRS is open to
suggestions to clarify offer instructions and will consult with
practitioner groups and the Taxpayer Advocate on whether more clarity is
needed. The Commissioner said that the distinction is important because
the Restructuring Act gave IRS additional authority to accept offers. The
Commissioner further stated that the distinction has meaning for potential
program participants. However, as we stated in the report, the regulations
and guidance for reviewing hardship ETA offers are so similar to rules and
guidance for determining acceptable DATC offers that the two types of
offers are effectively indistinguishable from each other. IRS's examples
of acceptable hardship ETA offers (see pp. 36 and 37 of this report),
further illustrate that they are not meaningfully distinct from DATC
offers because they demonstrate that there is doubt that such taxpayers
could provide for their living expenses, which IRS authorizes for all
offers, and pay their tax liabilities. This makes the offers in the
examples similar to DATC offers. Considering this, the OIC Program could
be simplified by eliminating the differences between hardship ETA and
doubt as to collectibility offers.
The Commissioner agreed with our recommendation that IRS adjust staffing
levels to increase productivity and reduce cost.
The Commissioner said that IRS does not agree that timeliness measured by
taxpayer rather than by individual offer would be an effective measure of
performance. IRS said that its existing timeliness measure by OIC case
closure is sufficient, but it did agree to analyze the affect of repeat
offers on timeliness. An analysis of the extent that timeliness could be
improved, if at all, by reducing repeat offers could help program managers
make decisions about whether program changes to improve timeliness would
be justified. However, as the report states, it might be less costly for
IRS to deal once with a taxpayer, even if it takes more time to work the
single case, rather than have to process repeat offers.
IRS agreed that it could do a better job of compiling information on OIC
Program compliance and will explore methods for doing so.
With respect to measuring accessibility, the Commissioner said that IRS is
concerned about the perception that the OIC Program is less accessible
than in the past. He said that IRS would use a customer satisfaction
survey to gain insights into accessibility and might do additional
research about barriers to entering the program. As we stated in the
report, tracking accessibility could provide information about the
effectiveness of efforts to reduce barriers to program participation for
taxpayers wishing to make legitimate offers.
With respect to setting timeliness goals for taxpayers based on an
assessment of taxpayers' needs and other benefits, the Commissioner said
that IRS's current timeliness goals are based in part on such
considerations but also said that IRS would consider whether taxpayer
feedback reveals additional taxpayer needs. However, as the report states,
IRS was unable to provide any analytical support for its 6- and 9-month
processing goals. Furthermore, IRS does not set goals from the perspective
of taxpayers. We continue to believe measuring timeliness from the
perspective of taxpayers and setting goals based on taxpayer needs would
inform IRS management of any gaps between actual timeliness and the goal
of providing a better basis for making decisions about program
improvements.
The commissioner agreed to analyze the causes of the growth in repeat
offers.
He also agreed to study how repeat offers affect timeliness.
As already noted, the Commissioner agreed to study accessibility using a
customer satisfaction survey of taxpayers who participated in the OIC
Program. While such a survey may be informative, its benefits may be
limited because it does not question nonparticipants. As the report
states, measuring access may require questioning taxpayers about why they
did not participate in the program.
The Commissioner agreed to study the effectiveness of the Hand-Off Unit.
As agreed with your offices, unless you publicly release the contents
earlier we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies to interested congressional
committees, the Secretary of the Treasury, the Commissioner of Internal
Revenue, and other interested parties. The report will also available at
no charge on the GAO Web site at http://www.gao.gov .
If you or your staff have any questions about this report, please contact
me at (202) 512-9110 or [email protected] . Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix IV.
James R. White Director, Tax Issues Strategic Issues
Appendix I Scope and Methodology
To identify recent trends in Offer in Compromise (OIC) Program
performance, we analyzed information and program statistics in the
Internal Revenue Service's (IRS) Automated OIC database (AOIC).
Specifically, we developed independent statistical trend analyses for four
of five key performance objectives-timeliness of case processing, quality,
accessibility, and cost. We reviewed OIC Program data primarily from
fiscal years 2000 through 2005. To determine how well IRS understands the
reasons for the trends, we interviewed key officials in IRS's SB/SE
Division responsible for collection policy and the OIC Program. We also
reviewed available evaluations IRS had conducted in examining these
trends.
To develop trend information on the timeliness of case processing, we (1)
separated offers disposed by the OIC Program from those disposed by the
Appeals function (Appeals),1 and (2) identified the number of onetime and
repeat offers and developed statistics on processing times for those
offers. Some taxpayers make only one effort to compromise a tax liability.
We call these offers onetime offers. Other taxpayers make multiple
attempts to compromise a tax liability. We call the first of these
attempts an initial offer and each subsequent attempt a repeat offer. To
generate statistics on processing times for the various disposition types,
we developed disposition categories by aggregating disposition categories
from the AOIC database. For more information about how we developed repeat
offers and disposition categories, see appendix II.
To assess trends in the quality of the OIC Program, we collected
information and interviewed IRS officials on the accuracy rates from IRS's
embedded quality measurement system (EQMS) for the centralized processing
centers. Field locations only recently implemented EQMS; consequently, we
used accuracy rates from IRS's collection quality measurement system for
the field locations. We compared the program's accuracy rates against
accuracy goals to assess the extent to which IRS staff followed procedures
and made appropriate decisions. We also compiled and analyzed data on
offer decisions by Appeals from the AOIC database to determine trends by
year.
Regarding the OIC Program's accessibility, we compiled statistics on offer
receipts and the dispositions of these receipts from the AOIC database. To
develop information on the pool of potentially eligible taxpayers for the
program, we obtained data on IRS taxpayer delinquent accounts. We
interviewed IRS officials about the measures they used to determine
accessibility and also interviewed representatives of tax practitioner
organizations and the National Taxpayer Advocate of the Taxpayer Advocate
Service for their views about the program's accessibility.
To assess IRS's efforts to measure compliance, we reviewed IRS's reports
on compliance by IRS's Office of Program Evaluation and Risk Assessment
(OPERA). We used IRS policy statement P-5-100 and information on the OIC
Program objectives from the Internal Revenue Manual as criteria for
defining compliance, which the OIC Program Director generally confirmed.
We also drew on our 2002 study2 of IRS's OIC program, in which we
recommended that IRS make plans to conduct evaluations of initiatives that
affect the program's performance. To learn about possible alternatives for
measuring compliance, we consulted an official with the Treasury Inspector
General for Tax Administration to learn about its methods for studying
compliance in one of its reports. We interviewed IRS officials who were
knowledgeable about the Monitoring OIC (MOIC) Unit and with the OIC
Hand-Off Unit to gather information about how post-OIC compliance was
tracked.
We developed data on the productivity of the OIC Program by obtaining
information from IRS on the number of full-time equivalent staff working
in the OIC Program and compared this to the number of case closures from
the AOIC database. We also interviewed IRS officials regarding any IRS
analysis on productivity and reasons for productivity trends.
To estimate the extent of offer mills' participation in the OIC Program,
we derived the number of offers designated solely to delay in the AOIC
database that also were submitted with power of attorney forms. Also using
the AOIC database, we measured how long IRS took to process those cases.
We interviewed IRS officials with the OIC Program in Austin, Texas, and in
Brookhaven, New York, and officials at the Office of Professional
Responsibility (OPR), who investigate practitioner misconduct, in
Washington, D.C. We also interviewed officials with OPERA about its work
on abuse of the OIC Program. We reviewed reports on potential OIC abuse by
IRS and internal IRS guidance on handling suspected cases of practitioner
misconduct. We interviewed officials with the Federation of Tax
Administrators (FTA), the state of Maryland OIC Program, and the
Connecticut Attorney General's Office and compared their experiences with
practitioner and offer mill misconduct with those cited by IRS officials.
We selected FTA because its membership includes tax administration
officials from states that have OIC programs. An FTA official referred us
to the Maryland OIC Program. OPR cited the state of Connecticut's
involvement with investigating offer mills during an interview. Finally,
we conducted literature reviews for information about offer mills.
To assess how well IRS ensures that taxpayers are provided the right to
appeal rejected offers, we analyzed the AOIC database to determine whether
these taxpayers were sent the rejection letter notifying them of their
appeal right. We reviewed IRS publications containing information about
taxpayers' rights to appeal rejected offers and searched the IRS Web site
for similar information. We performed limited testing of the AOIC database
to determine whether appropriate entries were being made that ensured that
a computer-generated rejection letter with appeals information had been
sent to each taxpayer whose offer was rejected from fiscal years 2000 to
2005. We did not contact taxpayers to determine whether they actually
received the letters. We interviewed OIC Program officials about the offer
appeals process and followed up with Appeals officials, including Appeals
staff at the Brookhaven, New York, campus who review and process rejected
offers.
To determine whether IRS's regulations on effective tax administration
(ETA) were consistent with the IRS Restructuring and Reform Act of 1998
(Restructuring Act), we reviewed the Restructuring Act, its legislative
history, OIC regulations that were in place before the Restructuring Act,
and the regulations issued to address the Restructuring Act changes. We
met with representatives of the IRS Chief Counsel's Office who were
involved in drafting the new and revised regulations on ETA offers. In
addition, we reviewed their project files to gather documentation on how
the ETA regulations evolved. The files contain documentation, such as
internal memorandums, early draft of the regulations circulated to
internal stakeholders, and public comments received after the proposed
regulations were issued. In addition, we compared IRS's internal guidance
on ETA and doubt as to collectibility (DATC) and IRS's regulations on ETA
to determine whether they were distinct. We discussed ETA and DATC
procedures, guidance, and rules with OIC Program officials and staff in
Austin, Texas and staff in IRS's centralized processing center in
Brookhaven, New York, who processes offer applications. To gain
perspective from some external OIC Program stakeholders on how IRS
implemented ETA rules, we interviewed professional tax practitioners and
representatives of the National Association of Enrolled Agents (NAEA) and
the American Institute of Certified Public Accountants (AICPA). We
selected NAEA and AICPA because they had previously testified or commented
about IRS's OIC Program. We also conducted a literature review on ETA.
To comment on the legislative proposal requiring partial payments with
offer applications, we drew on the results of our work relating to repeat
offers and trends in OIC Program performance. Our review was conducted in
accordance with generally accepted government auditing standards from
February 2005 through February 2006.
Scope and Methodology on Detailed Analysis of IRS's AOIC DatabaseAppendix
II
To examine various measures of timeliness, quality, accessibility, and
cost, we obtained a copy of portions of IRS's AOIC database as of
September 30, 2005. The AOIC database contains processing information on
offers submitted by taxpayers and related tax liability information since
the OIC Program's inception to the current day.1 The AOIC database is a
relational database, and we limited our analysis to selected tables
relevant to our objectives.
To ensure the reliability of the computer-based data provided to us, we
conducted interviews with key agency personnel to ascertain the types of
program edits and controls used to ensure the accuracy of data entry and
data migration into the AOIC database from IRS's Master File. We also
conducted various reliability analyses on data fields used in our analysis
and reproduced reports prepared for program officials for their day-to-day
management activities. We concluded that data in the AOIC database are
sufficiently reliable for purposes of our engagement.
We concentrated our OIC Program analyses in two main areas: (1) the length
of time it takes IRS to process offers by type of offer disposition (for
example, accepted or rejected dispositions) and (2) the number of times
taxpayers "repeat" offer submissions when a prior submission is not
accepted and the length of time this processing of multiple offers takes.
We also developed statistics on offer program inventory levels, the amount
and percentages of tax debt compromised, and the number of offers
processed under ETA regulations. In addition, we identified the number of
offers returned to taxpayers because IRS believed a principal reason for
the offer submission was to delay collection activities, and we determined
how many of these offers had been prepared by professional practitioners.
In general, we reported statistics for the 6 most recent fiscal years
beginning in fiscal year 2000.
Establishing GAO-Derived Dates and Disposition Codes
In examining reports IRS prepares from AOIC data, we determined IRS does
not produce offer program statistics in a way that would allow us to
answer our objectives. For example, IRS's analyses aggregates offer
disposition statistics from both IRS's Collections function (i.e., the
offer program) and its Appeals function. We wanted to separate these data
in order to examine the OIC Program's performance.
We separated offer processing time between the Collection and Appeals
functions by examining available date fields in the AOIC database and
creating our own starting and ending processing dates. For our Collections
function start date, we used the earlier of the dates IRS received an
offer from a taxpayer, the IRS Received Date, or the date the offer was
initially entered into the AOIC database, the Area Office Opening Date.2
For our Collections function end date, we used the Area Office Closing
Date except for rejected offers. For rejected offers, we checked to see if
a rejection letter had been generated and the date on which this occurred.
If this date was earlier than the Area Office Closing Date, then we used
the rejection letter date.3 Offers that were still being processed in the
Collections function are considered open offers and do not have ending
dates.
The Appeals function start date was also based on the earlier of two
dates: (1) the date in the AOIC database, known as the Sent to Appeals
Date, when it was present, or (2) our Collections function ending date
plus 30 days when the Sent to Appeals date was not available or succeeded
this date on offers known to have been appealed. The Collections ending
date plus 30 days is the legal limit on the amount of time given a
taxpayer to appeal a rejected offer.4 The Appeals function ending date was
always the official Area Office Closing date.
We also segregated offer disposition types between the Collection and
Appeals functions. The AOIC database contains 10 disposition types, of
which 3 represent Appeals function dispositions. Offers that are appealed
by taxpayers remain open on the AOIC database pending Appeals function
disposition decisions. We segregated the dispositions by creating five
GAO-derived Collections function dispositions and three Appeals function
dispositions. For example, we collapsed all of the offers contained in
five of the program's disposition types, as well as certain offers still
open on AOIC, into our "Rejected" offers disposition category. This showed
the Collections function had rejected 247,780 offers during the program's
history. These offers were as follows: (1) the 25,054 offers accepted by
IRS's Appeals function, (2) the 43,511 offers where the Appeals Function
sustained the Collections function, (3) the 42,880 offers rejected by the
Collections function without appeal rights, (4) the 116,787 offers
rejected by the Collections function where the taxpayer did not exercise
appeal rights, (5) the 7,955 offers withdrawn in Appeals, and (6) the
11,593 offers rejected by the Collections function but not yet closed on
AOIC pending possible Appeals function activities. We combined all of
these offers to demonstrate that the Collections function had rejected
247,780 offers over the history of the OIC program. Tables 12 and 13
reflect this roll-up and compare other GAO-derived disposition types for
the Collections and Appeals functions to IRS's disposition types. We have
also included offers currently open in AOIC to balance offers between the
two disposition sets.
Table 12: GAO-Derived OIC Program Disposition Types
GAO disposition types and offers Number of offers Related IRS disposition
type
Collections function
1. Not-processable 421,086 IRS #7
2. Processable return 192,881 IRS #10
3. Withdrawn/terminated 94,849 IRS #6 and #8
4. Rejected 247,780 IRS #2, #3, #4, #5, #9,
and #A
5. Accepted 264,500 IRS #1
A. Open in Collections 18,500 IRS #A
Total on the AOIC database 1,239,596
Appeals function
1. Accepted by Appeals 25,054 IRS #2
2. Reject sustained by Appeals 43,511 IRS #3
3. Withdrawn in Appeals 7,955 IRS #9
A. Open in Appeals 7,417 IRS #A
Total on the AOIC database 83,937
Source: GAO analysis of IRS's AOIC database.
Table 13: IRS OIC Program Disposition Types
IRS disposition types (or open Number of offers Related GAO disposition
offers) type
1. Accepted 264,500 Collections #5
2. Accepted by Appeals 25,054 Collections #4, Appeals
#1
3. Rejection sustained by 43,511 Collections #4, Appeals
Appeals #2
4. Rejected without appeal 42,880 Collections #4
rightsa
5. Rejected taxpayer did not 116,787 Collections #4
exercise appeal rights
6. Withdrawn 93,311 Collections #3
7. Returned not processable 421,086 Collections #1
8. Termination of consideration 1,538 Collections #3
9. Withdrawn in Appeals 7,955 Collections #4 and
Appeals #3
10. Processable return 192,881 Collections #2
A. Open on the AOIC databaseb 30,093 Collections #4 and #A,
Appeals #A
Total on the AOIC database 1,239,596
Source: GAO analysis of IRS's AOIC database.
aNo longer an available disposition category because all rejected offers
may now be appealed.
bOf the 30,093 offers open on the AOIC database as of September 30, 2005,
18,500 were still being processed by the Collections function, while
11,593 had been rejected by the Collections function. Of the rejected
offers, 7,417 had been appealed and were open in Appeals, and 4,176 were
awaiting a taxpayer's decision on whether to appeal.
Distinguishing between Multiple Offers Submitted by Taxpayers
Because many taxpayers submit more than one offer in an effort to
compromise tax liabilities, and because IRS does not track multiple offers
from the same taxpayer, we independently developed estimates of the
average (1) number of offers taxpayers submitted on the same tax
liability,5 (2) time it took IRS to process all of these offers, and (3)
calendar time duration between the date the first in a series of offers
was submitted and the date the last in the series was closed. In order to
track these multiple offer submissions, we coined the term offer sets.
Offer sets may contain one or many offers. We defined an offer set with
only one offer as a onetime offer. For offer sets containing two or more
offers, we defined the first offer in the set as an initial offer and the
second and subsequent offers in the set as repeat offers. An offer set
with two or more offers was also known as a repeat offer set.
Our criteria for calling a subsequent offer a repeat offer depended on
whether tax liability information was available for comparison between two
offers. For cases where tax liability information for one or both of two
chronological offer dispositions had not been migrated from IRS's Master
File to the AOIC database, a common occurrence when offers were closed not
processable, we set a 1-year time limit for designating the subsequent
offer as a repeat offer. Where the tax liability information was available
for two offers, we compared it to see if any one tax liability matched. If
it did, we called the subsequent offer a repeat and the length of time
between offer submissions did not matter. Finally, any time an offer that
was part of a repeat offer set was accepted, we assumed that offer was the
last offer in the offer set. Any subsequent attempt by a taxpayer to
compromise the same tax liabilities started a new offer set.
We believe a 1-year time limit is reasonable as a criterion for
establishing repeat offers because most tax modules are 1 year in length
corresponding with a taxpayer's annual filing requirement (for example, a
tax module for an individual or corporate taxpayer would represent a
calendar year period that they were required to file an income tax
return). Taxpayers submitting offers must include all outstanding tax
liabilities in the offer submissions, and we believe taxpayers who have
not successfully compromised tax liability are not likely to have fully
paid that tax liability and at the same time incurred a new tax liability,
which they attempt to compromise within that 1-year period.
The actual number of repeat offers and the average duration of time it
takes taxpayers to compromise tax liabilities are estimates because (1)
taxpayers continue to submit offers in the future for current tax
liabilities for which prior offers were not accepted, (2) some taxpayers
may fully pay outstanding tax liabilities then immediately incur new
liabilities, and (3) some taxpayers filing jointly simultaneously attempt
to compromise separate tax liabilities,6 and it was not always possible to
separately identify the two sets of offers. In the first situation, we
underestimated the average time it takes to compromise tax liabilities
when taxpayers extend that period by making future attempts to compromise
their liabilities. In the second situation, we overestimated the number of
repeat offers and the average time, but we believe such occurrences are
rare. In the third situation, scenarios existed where we could have either
underestimated or overestimated the actual number of repeat offers or the
average duration times. On balance, we believe the first situation is the
most common and that our estimates of the actual number of repeat offers
and the average time duration are conservative.
Generating Other OIC Program Statistics
We also used our GAO-derived dates and disposition types to develop
additional statistics using the AOIC database. For example, when OIC
Program staff believe one of the reasons a taxpayer submitted an offer was
an attempt to delay the collections process, they will enter one of
several codes designating the offer as such in the AOIC database and
return the offer to the taxpayer. We analyzed AOIC data by these codes and
determined how frequently offers were returned for each code, the
percentages of all offers submitted that were solely to delay collection
activities, and how many offers involved professional practitioners. We
also determined how long it took the OIC Program to return solely to delay
offers involving professional practitioners.
In addition, we used the AOIC database to estimate how many ETA offers
were processed over time. Before October 2005, IRS did not make a
distinction between ETA offers on the AOIC database and offers accepted
based on doubt as to collectability with special circumstances. These
offers were commingled and categorized as offers where an alternative
basis was used for compromise. However, an agency official told us that we
could use all offers designated as alternative basis offers as a proxy for
the number of ETA offers processed by IRS. The agency added a data field
beginning in October 2005 to specifically track ETA offers.
Furthermore, we calculated the Collections function's inventory levels for
fiscal years 2000 through 2005. In addition, we used the tax liability and
offer amount fields in the AOIC database to determine the percentage of
tax debt compromised by IRS's Collection function.
Appendix III Comments from the Internal Revenue Service
Appendix IV GAO Contact and Staff Acknowledgments
James R. White (202) 512-9110 or [email protected]
In addition to the contact named above, Charlie Daniel, Assistant
Director; Evan Gilman; Eric Gorman; Shirley Jones; Susan Mak; Michael
Rose; Samuel Scrutchins; and Jennifer Li Wong made key contributions to
this report.
(450379)
transparent illustrator graphic
www.gao.gov/cgi-bin/getrpt? GAO -06-525.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact James R. White at (202) 512-9110 or
[email protected].
Highlights of GAO -06-525, a report to the Committee on Finance, U.S.
Senate
April 2006
IRS OFFERS IN COMPROMISE
Performance Has Been Mixed; Better Management Information and
Simplification Could Improve the Program
Taxpayers unable to fully pay their tax liabilities may apply for an offer
in compromise (OIC), an agreement with IRS to pay what they can afford.
IRS writes off the rest of the liability. In 2005, IRS accepted over
14,000 offers. Because of concerns about program performance and a new
category of offers based on exceptional circumstances, GAO was asked to
(1) describe the trends in program's performance and their causes and (2)
determine whether IRS's regulations for exceptional circumstance offers
are consistent with statute. GAO examined five program objectives:
timeliness, quality, accessibility, compliance, and cost.
What GAO Recommends
GAO recommends that IRS (1) measure accessibility, compliance, and
timeliness by taxpayer; (2) set timeliness goals by taxpayer; (3) analyze
causes of trends in repeat offers, timeliness, and accessibility; (4)
adjust staffing to correspond with workload; and (5) eliminate the
distinction between most exceptional circumstances offers and offers based
on inability to fully pay.
IRS partially agreed with our recommendations. IRS agreed to consider
tracking compliance, study repeat offers, and reduce staffing. IRS did not
agree to measuring or set goals for timeliness from the perspective of
taxpayers. IRS said it will study whether our other recommended changes
should be implemented.
OIC Program performance has been mixed. Timeliness improved for taxpayers
making one offer to 5.8 months in 2005 but stayed constant, at an average
of two years, for those making repeat offers. Quality goals have been met
but IRS does not routinely track compliance and accessibility. Further,
cost per offer has increased in that IRS has not decreased staffing since
fiscal year 2003 in proportion to declines in offers. Improving the
program depends on how well IRS management understands the reasons for the
program's performance. One step in understanding performance is measuring
it. However, IRS does not measure timeliness from the perspective of the
taxpayer-for taxpayers with repeat offers IRS measures the time to decide
each offer but not the overall time to resolve the taxpayer's liability.
IRS lacks compliance and accessibility trend data useful for assessing
performance. Another step in understanding performance is setting goals.
IRS set numeric goals for timeliness and quality, but IRS's timeliness
goals do not have a rationale and are not based on taxpayer needs or other
benefits. A third step in understanding performance is analysis. While IRS
has done some analyses that led to program changes, IRS has not analyzed
the effect of repeat offers on timeliness to determine whether it would be
less costly to deal once with a taxpayer rather than have to process
repeat offers. IRS also has not analyzed whether the decrease in offers
accepted since fiscal year 2003 reflects a decrease in program
accessibility, or whether the efforts to improve the compliance of program
participants have been successful.
IRS's regulations for exceptional circumstance offers, intended for
taxpayers who can fully pay, are consistent with statute. However, most
exceptional circumstance offers are granted to taxpayers who cannot fully
pay. These offers are not meaningfully distinct from the more common
offers based on inability to fully pay. The lack of distinction causes
unnecessary program complexity and confusion. Taxpayers are faced with the
paradoxical process of proving that they can pay their tax liability and
then explaining why they cannot.
Repeat Offers Compared to Total Offers Received, Fiscal Years 2000-2005
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