Tax Administration

The Internal Revenue Service's (IRS) Offer in Compromise Program involves compromises on tax debts as a result of doubts about liability or collectibility. Amounts collected through the program are small relative to IRS' overall collections--$106 million in accepted offers versus about $24 billion in overall collections in fiscal year 1992. Nonetheless, the program has grown rapidly since IRS began promoting it in February 1992. IRS believes that the program improves taxpayer compliance and will boost collections but has no way of measuring whether the program is achieving these ends. Such information is crucial because the program's growth may strain IRS' collection resources and because the program could undermine voluntary compliance should taxpayers conclude that the program is too liberal. One effect of the program's growth has been added costs for IRS to investigate all taxpayer offers. The mounting number of offers and limited collection resources underscore the need for IRS to streamline the investigation of low-dollar cases, reduce inefficient manual monitoring of deferred payments receipts, and obtain authority to determine which offers need to be reviewed by legal counsel. Despite new IRS procedures clarifying its policy on offers, acceptance rates for offers continue to vary widely at IRS district offices.

GAO found that: (1) IRS has not demonstrated that the Offer in Compromise Program will increase collections and improve taxpayer compliance; (2) IRS needs reliable data to measure the effectiveness of the program; (3) IRS must improve the efficiency of the program to make the best use of its collection resources; (4) IRS must ensure that the program is being implemented consistently in its district offices; (5) IRS needs better indicators of the program's effectiveness, such as the program's yield, revenues collected, the extent that noncompliant taxpayers are brought back into the tax system, and the extent that participating taxpayers remain compliant in subsequent years; (6) IRS administrative costs are increased by the requirement to obtain a legal opinion on all offers with tax liabilities of $500 or more; (7) IRS should have discretionary authority to decide when offers need legal review; (8) IRS could improve its efficiency by automating the monitoring process; (9) IRS should consider the effect that settling for less than the full tax liability might have on taxpayers who pay their taxes in full; and (10) IRS needs to determine the causes for variability in offer acceptance rates among its district offices.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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