IRS Offers in Compromise
Performance Has Been Mixed; Better Management Information and Simplification Could Improve the Program Gao ID: GAO-06-525 April 20, 2006Taxpayers 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.
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.
RecommendationsOur 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.
Director: Team: Phone:GAO-06-525, IRS Offers in Compromise: Performance Has Been Mixed; Better Management Information and Simplification Could Improve the Program
This is the accessible text file for GAO report number GAO-06-525
entitled 'IRS Offers in Compromise: Performance Has Been Mixed; Better
Management Information and Simplification Could Improve the Program'
which was released on May 23, 2006.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
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:
GAO-06-525:
GAO Highlights:
Highlights of GAO-06-525, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
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 Found:
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.
Figure: Repeat Offers Compared to Total Offers Received, Fiscal Years
2000-2005:
[See PDF for Image]
[End of Figure]
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.
[Hyperlink, http://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 whitej@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
The OIC Program Has Decreased in Size, and Repeat Offers Have
Increased:
OIC Program Performance Has Been Mixed, and IRS Has Not Researched the
Reasons for Some Performance Trends:
Limited Evidence Suggests Offer Mills' Effect on OIC Processing May Not
Be Large:
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:
Partial Payment Proposal Raises Questions:
Conclusions:
Recommendations for Executive Action:
Matter for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Scope and Methodology on Detailed Analysis of IRS's AOIC
Database:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: OIC Program Statistics, Fiscal Years 2000-2005:
Table 2: Numbers of Repeat Offers Received in Fiscal Year 2005:
Table 3: Average Processing Times for Onetime and Repeat Offers by Year
Case Was Closed, Fiscal Years 2000-2005:
Table 4: Distribution of Elapsed Calendar Time for All Offers Accepted
in Fiscal Year 2005:
Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal Year
2005:
Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal
Years 2002-2005:
Table 7: Percentage of Individual Taxpayers in Collection Statuses by
Offer Disposition from 1998 to 2003:
Table 8: Productivity of COIC Processing by Offers Closed, Fiscal Years
2002-2005:
Table 9: Productivity of Field Processing by Offers Closed, Fiscal
Years 2002-2005:
Table 10: Number and Percentage of Rejected Offers That Taxpayers
Appealed, Fiscal Years 2000-2005:
Table 11: Number of Accepted Hardship ETA and Non-Hardship ETA Offers,
Fiscal Years 2000-2005:
Table 12: GAO-Derived OIC Program Disposition Types:
Table 13: IRS OIC Program Disposition Types:
Figures:
Figure 1: Simplified OIC Process:
Figure 2: Number and Percentage of Repeat Offers Compared to Total
Offers Received, Fiscal Years 2000-2005:
Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005:
Figure 4: How IRS Determines Whether an Offer Is Considered for DATC or
ETA:
Figure 5: Conceptual Process for Determining Offer Amounts:
Figure 6: Hardship ETA: Qualify Because of Dependent Care Expenses:
Figure 7: Hardship ETA: Qualify Because of Basic Living Expenses:
Letter:
April 20, 2006:
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.[Footnote 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).[Footnote 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.[Footnote 3]
To address these objectives, we reviewed the Internal Revenue Manual
(IRM) and an IRS policy statement[Footnote 4] 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.
* 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.
* 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.
* 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.
* 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.
* 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)[Footnote 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,[Footnote 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:
* Doubt as to liability (DATL)--Doubt exists that the assessed tax
liability is correct.
* DATC--Doubt exists that the taxpayer could ever pay the full amount
of tax owed.
* 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 actions[Footnote 7] 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
offer[Footnote 8] 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:
[See PDF for image]
[End of figure]
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 penalties[Footnote 9] 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,[Footnote 10]
3. all required federal tax returns filed,
4. employment taxes current,[Footnote 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: Offers received;
2000: 109,818;
2001: 118,893;
2002: 122,405;
2003: 126,466;
2004: 103,106;
2005: 73,301.
Fiscal year: Offers accepted[A];
2000: 31,609;
2001: 37,071;
2002: 27,692;
2003: 18,340;
2004: 14,636;
2005: 14,526.
Fiscal year: End of year inventory;
2000: 88,982;
2001: 92,324;
2002: 68,187;
2003: 54,326;
2004: 35,882;
2005: 18,500.
Fiscal year: Amount of delinquent tax liability (in billions);
2000: $2.43;
2001: $2.45;
2002: $2.25;
2003: $1.32;
2004: $1.32;
2005: $1.49.
Fiscal year: Amount of accepted offers (in billions);
2000: $0.28;
2001: $0.31;
2002: $0.27;
2003: $0.19;
2004: $0.19;
2005: $0.24.
Fiscal year: Amount of tax liabilities written off as a result of OIC
(in billions);
2000: $2.15;
2001: $2.14;
2002: $1.98;
2003: $1.13;
2004: $1.13;
2005: $1.25.
Fiscal year: Percentage of total tax liability accepted in compromise;
2000: 12;
2001: 13;
2002: 12;
2003: 14;
2004: 15;
2005: 16.
Source: GAO analysis of IRS's AOIC database.
[A] Acceptances are shown before any taxpayer appeals to the IRS
Appeals function (Appeals). See table 10 for offers accepted by
Appeals.
[End of table]
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:
[See PDF for image]
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."
[End of figure]
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 offers[Footnote 12]
(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: 2ND;
Number of offers: 17,511.
Order of offer: 3RD;
Number of offers: 6,901.
Order of offer: 4TH;
Number of offers: 2,908.
Order of offer: 5TH;
Number of offers: 1,214.
Order of offer: 6TH;
Number of offers: 525.
Order of offer: 7TH;
Number of offers: 247.
Order of offer: 8TH;
Number of offers: 103.
Order of offer: 9TH;
Number of offers: 52.
Order of offer: 10TH or greater;
Number of offers: 66.
Order of offer: Total;
Number of offers: 29,527.
Source: GAO analysis of IRS's AOIC database.
[End of table]
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:
* timeliness--time taken to make a decision on an offer application,
* quality--extent to which IRS follows OIC Program procedures and makes
appropriate determinations,
* accessibility--ease that taxpayers eligible for offers have
participating in the program,
* compliance--extent to which taxpayers who submit offers pay their
delinquent and future tax obligations, and:
* 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: 2000;
Average processing times in months: Onetime offers: 8.4;
Average processing times in months: Repeat offers[A]: 23.3.
Fiscal year: 2001;
Average processing times in months: Onetime offers: 9.6;
Average processing times in months: Repeat offers[A]: 25.8.
Fiscal year: 2002;
Average processing times in months: Onetime offers: 9.8;
Average processing times in months: Repeat offers[A]: 23.9.
Fiscal year: 2003;
Average processing times in months: Onetime offers: 7.9;
Average processing times in months: Repeat offers[A]: 20.7.
Fiscal year: 2004;
Average processing times in months: Onetime offers: 7.2;
Average processing times in months: Repeat offers[A]: 21.4.
Fiscal year: 2005;
Average processing times in months: Onetime offers: 5.6;
Average processing times in months: Repeat offers[A]: 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.
[A] Elapsed calendar time between IRS receipt of first offer and
disposition of final offer.
[End of table]
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:
Numbers of offers closed by elapsed time;
0 to 6 months: 4,427;
(30.5 percent);
>6 to 12 months: 4,176;
(28.8 percent);
>12 to 24 months: 3,240;
(22.3 percent);
More than 24 months: 2,683;
(18.5 percent).
Source: GAO analysis of IRS data.
Note: Times represent OIC Program processing times and do not include
time in Appeals for appealed cases.
[End of table]
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.[Footnote 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.[Footnote 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: Brookhaven;
OIC work type: Preliminary screening;
Accuracy rate: achieved (percentage): 100.
OIC work type: Financial analysis and offer decision;
Accuracy rate: achieved (percentage): 97.7.
OIC work type: Average;
Accuracy rate: achieved (percentage): 98.9.
Location: Memphis;
OIC work type: Preliminary screening;
Accuracy rate: achieved (percentage): 95.0.
OIC work type: Financial analysis and offer decision;
Accuracy rate: achieved (percentage): 95.6.
OIC work type: Average;
Accuracy rate: achieved (percentage): 95.3.
Location: Field offices;
OIC work type: Financial analysis and offer decision;
Accuracy rate: achieved (percentage): 84.4.
Source: IRS.
[End of table]
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.[Footnote 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: OIC rejection accepted in Appeals (percentage);
2002: 29.0;
2003: 29.6;
2004: 28.2;
2005: 23.5.
Disposition: OIC rejection sustained in Appeals (percentage);
2002: 57.6;
2003: 57.3;
2004: 62.0;
2005: 65.1.
Disposition: Offer withdrawn in Appeals (percentage);
2002: 13.5;
2003: 13.1;
2004: 9.7;
2005: 11.4.
Source: GAO analysis of IRS's AOIC database.
[End of table]
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.[Footnote 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:
[See PDF for image]
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.
[End of figure]
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.[Footnote 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.[Footnote 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).[Footnote 19]
Table 7: Percentage of Individual Taxpayers in Collection Statuses by
Offer Disposition from 1998 to 2003:
Collection status[A]: Full pay;
Withdraw: 30.6;
Reject: 19.4;
Return: 10.6.
Collection status[A]: Other resolution[B];
Withdraw: 8.4;
Reject: 8.3;
Return: 4.6.
Collection status[A]: Currently not collectible;
Withdraw: 16.7;
Reject: 15.7;
Return: 18.6.
Collection status[A]: Installment;
Withdraw: 15.8;
Reject: 14.6;
Return: 9.2.
Collection status[A]: Pending action;
Withdraw: 28.4;
Reject: 42.0;
Return: 57.2.
Collection status[A]: Total[C];
Withdraw: 100.0;
Reject: 100.0;
Return: 100.0.
Source: GAO analysis of IRS data.
[A] In 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.
[B] Includes cases that were "full pay" where the collection statute
expiration date occurred or taxpayer filed bankruptcy.
[C] Columns may not add up to 100 percent because of rounding.
[End of table]
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.[Footnote 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,[Footnote
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: 2002;
Closed offer cases: 66,217;
FTEs: 380;
Closed offers per FTE: 174.
Fiscal year: 2003;
Closed offer cases: 90,888;
FTEs: 362;
Closed offers per FTE: 251.
Fiscal year: 2004;
Closed offer cases: 80,107;
FTEs: 340;
Closed offers per FTE: 236.
Fiscal year: 2005;
Closed offer cases: 52,831;
FTEs: 320;
Closed offers per FTE: 165.
Sources: IRS data and GAO analysis of IRS's AOIC database.
[End of table]
Table 9: Productivity of Field Processing by Offers Closed, Fiscal
Years 2002-2005:
Fiscal year: 2002;
Closed offer cases: 80,325;
FTEs: 448;
Closed offers per FTE: 179.
Fiscal year: 2003;
Closed offer cases: 49,439;
FTEs: 316;
Closed offers per FTE: 156.
Fiscal year: 2004;
Closed offer cases: 41,443;
FTEs: 305;
Closed offers per FTE: 136.
Fiscal year: 2005;
Closed offer cases: 37,852;
FTEs: 249;
Closed offers per FTE: 152.
Sources: IRS data and GAO analysis of IRS's AOIC database.
[End of table]
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 agents[Footnote 22] 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.
* An IRS study[Footnote 23] 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
abuse[Footnote 24] in the system.
* 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.
* 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.
* 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 year[A]: 2000;
Number of offers rejected by OIC Program: 13,071;
Number of rejected offers appealed by taxpayers: 3,976;
Percentage of rejected offers appealed: 30;
Number of offers accepted by Appeals function: 1,393.
Fiscal year[A]: 2001;
Number of offers rejected by OIC Program: 18,568;
Number of rejected offers appealed by taxpayers: 6,819;
Percentage of rejected offers appealed: 37;
Number of offers accepted by Appeals function: 1,953.
Fiscal year[A]: 2002;
Number of offers rejected by OIC Program: 22,287;
Number of rejected offers appealed by taxpayers: 8,129;
Percentage of rejected offers appealed: 36;
Number of offers accepted by Appeals function: 2,334.
Fiscal year[A]: 2003;
Number of offers rejected by OIC Program: 35,721;
Number of rejected offers appealed by taxpayers: 15,376;
Percentage of rejected offers appealed: 43;
Number of offers accepted by Appeals function: 4,464.
Fiscal year[A]: 2004;
Number of offers rejected by OIC Program: 30,874;
Number of rejected offers appealed by taxpayers: 15,888;
Percentage of rejected offers appealed: 51;
Number of offers accepted by Appeals function: 3,928.
Fiscal year[A]: 2005;
Number of offers rejected by OIC Program: 27,409;
Number of rejected offers appealed by taxpayers: 10,224;
Percentage of rejected offers appealed: 37;
Number of offers accepted by Appeals function: 1,221.
Source: GAO analysis of IRS's AOIC database.
[A] Fiscal year in which the OIC Program rejected the offer.
[End of table]
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.[Footnote 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: Hardship ETA offers accepted;
2000: 177;
2001: 479;
2002: 466;
2003: 498;
2004: 428;
2005: 437.
Fiscal year: Non-hardship ETA offers accepted;
2000: -;
2001: -;
2002:
2003: -;
2004: 1;
2005: 30.
Source: GAO analysis of IRS data.
Note: IRS did not compile separate statistics on non-hardship ETA
acceptances before 2004.
[End of table]
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 —: Equity in assets + future income tax liability;
then: Taxpayer may be considered for ETA.
Sources: GAO analysis of IRS Internal Revenue Manual and Treasury
regulations.
[End of Figure]
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:
[See PDF for image]
Sources: GAO analysis of IRS Internal Revenue Manual and Treasury
regulations.
[End of figure]
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.
[End of figure]
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.
[End of figure]
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,[Footnote 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:
* adjust staffing levels to increase productivity and reduce cost per
offer, unless IRS can demonstrate that case complexity has increased
and:
* 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:
* a measure of processing timeliness for taxpayers,
* a measure of accessibility that gauges ease of participation in the
programs, and:
* 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:
* determine causes of the growth in repeat offers;
* determine how repeat offers affect timelines and, if justified based
on the results, take action to meet timeliness goals;
* determine the reasons for trends in accessibility; and:
* 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
[Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-9110 or [Hyperlink, whitej@gao.gov]. 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.
Signed by:
James R. White:
Director, Tax Issues:
Strategic Issues:
[End of section]
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),[Footnote 27] 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 study[Footnote
28] 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.
[End of section]
Appendix II: Scope and Methodology on Detailed Analysis of IRS's AOIC
Database:
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.[Footnote 29] 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.[Footnote 30] 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.[Footnote 31] 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.[Footnote 32] 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: Collections function.
GAO disposition types and offers: 1. Not-processable;
Number of offers: Collections function: 421,086;
Related IRS disposition type: Collections function: IRS #7.
GAO disposition types and offers: 2. Processable return;
Number of offers: Collections function: 192,881;
Related IRS disposition type: Collections function: IRS #10.
GAO disposition types and offers: 3. Withdrawn/terminated;
Number of offers: Collections function: 94,849;
Related IRS disposition type: Collections function: IRS #6 and #8.
GAO disposition types and offers: 4. Rejected;
Number of offers: Collections function: 247,780;
Related IRS disposition type: Collections function: IRS #2, #3, #4, #5,
#9, and #A.
GAO disposition types and offers: 5. Accepted;
Number of offers: Collections function: 264,500;
Related IRS disposition type: Collections function: IRS #1.
GAO disposition types and offers: A. Open in Collections;
Number of offers: Collections function: 18,500;
Related IRS disposition type: Collections function: IRS #A.
GAO disposition types and offers: Total on the AOIC database;
Number of offers: Collections function: 1,239,596;
Related IRS disposition type: Collections function: [Empty].
GAO disposition types and offers: Appeals function.
GAO disposition types and offers: 1. Accepted by Appeals;
Number of offers: Collections function: 25,054;
Related IRS disposition type: Collections function: IRS #2.
GAO disposition types and offers: 2. Reject sustained by Appeals;
Number of offers: Collections function: 43,511;
Related IRS disposition type: Collections function: IRS #3.
GAO disposition types and offers: 3. Withdrawn in Appeals;
Number of offers: Collections function: 7,955;
Related IRS disposition type: Collections function: IRS #9.
GAO disposition types and offers: A. Open in Appeals;
Number of offers: Collections function: 7,417;
Related IRS disposition type: Collections function: IRS #A.
GAO disposition types and offers: Total on the AOIC database;
Number of offers: Collections function: 83,937;
Related IRS disposition type: Collections function: [Empty].
Source: GAO analysis of IRS's AOIC database.
[End of table]
Table 13: IRS OIC Program Disposition Types:
IRS disposition types (or open offers): 1. Accepted;
Number of offers: 264,500;
Related GAO disposition type: Collections #5.
IRS disposition types (or open offers): 2. Accepted by Appeals;
Number of offers: 25,054;
Related GAO disposition type: Collections #4, Appeals #1.
IRS disposition types (or open offers): 3. Rejection sustained by
Appeals;
Number of offers: 43,511;
Related GAO disposition type: Collections #4, Appeals #2.
IRS disposition types (or open offers): 4. Rejected without appeal
rights[A];
Number of offers: 42,880;
Related GAO disposition type: Collections #4.
IRS disposition types (or open offers): 5. Rejected taxpayer did not
exercise appeal rights;
Number of offers: 116,787;
Related GAO disposition type: Collections #4.
IRS disposition types (or open offers): 6. Withdrawn;
Number of offers: 93,311;
Related GAO disposition type: Collections #3.
IRS disposition types (or open offers): 7. Returned not processable;
Number of offers: 421,086;
Related GAO disposition type: Collections #1.
IRS disposition types (or open offers): 8. Termination of
consideration;
Number of offers: 1,538;
Related GAO disposition type: Collections #3.
IRS disposition types (or open offers): 9. Withdrawn in Appeals;
Number of offers: 7,955;
Related GAO disposition type: Collections #4 and Appeals #3.
IRS disposition types (or open offers): 10. Processable return;
Number of offers: 192,881;
Related GAO disposition type: Collections #2.
IRS disposition types (or open offers): A. Open on the AOIC
database[B];
Number of offers: 30,093;
Related GAO disposition type: Collections #4 and #A, Appeals #A.
IRS disposition types (or open offers): Total on the AOIC database;
Number of offers: 1,239,596;
Related GAO disposition type: [Empty].
Source: GAO analysis of IRS's AOIC database.
[A] No longer an available disposition category because all rejected
offers may now be appealed.
[B] Of 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.
[End of table]
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,[Footnote 33] (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,[Footnote
34] 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.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
Commissioner:
April 14, 2006:
Mr. James R. White:
Director, Tax Issues:
Strategic Issues Team:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. White:
Thank you for the opportunity to respond to your draft report entitled,
"IRS Offers In Compromise (OIC) - Performance Has Been Mixed; Better
Management Information and Simplification Could Improve the Program,"
(GAO-06-525).
I am pleased that your report acknowledges many of the improvements we
have made in this important program. As you noted, the timeliness of
determinations has improved even as the costs of the program have been
significantly reduced. This reduction in costs has been primarily
achieved by reducing the number of revenue officers dedicated to the
program. Freeing up these revenue officers to return to core collection
activities also has increased our enforcement presence in other areas,
such as employment tax compliance and combating abusive tax avoidance
transactions.
The report also confirms that these advances in timeliness and
efficiency have not come at the expense of quality. You note that both
the field and campus offer in compromise operations have met their
quality goals, and that the rate at which the Office of Appeals
sustains collection decisions is further evidence that quality goals
are being achieved.
With respect to the audit recommendations, we are in partial agreement
with each of the four recommendations. Many of your concerns mirror our
own and, as a result, we already have efforts under way to address some
of these concerns. Our comments on the draft report's specific
recommendations are enclosed.
If you have any questions, please call me or Kevin Brown, Commissioner,
Small Business/Self-Employed Operating Division, at (202) 622-0600.
Sincerely,
Signed by:
Mark W. Everson:
Enclosure:
Comments of the Internal Revenue Service on the GAO report entitled
"IRS Offers In Compromise (OIC) - Performance Has Been Mixed; Better
Management Information and Simplification Could Improve the Program"
(GAO-06-525):
Recommendation 1:
Take the following steps to immediately improve the OIC program:
* Eliminate the distinctions between hardship-ETA and DATC in the
application, instructions, and procedures to simplify the program, and:
* Adjust staffing levels to increase productivity and reduce cost per
offer, unless IRS can demonstrate that case complexity has increased.
Response:
Although we understand the need to simplify the OIC program whenever
possible, we believe that eliminating the distinction between economic
hardship and doubt as to collectibility offers may not be the best
approach. Nonetheless, we are open to the suggestion that the
instructions in the Form 656 could be clarified in this area. As we
prepare for the next revision of the form, we will consult with
practitioner groups and the Taxpayer Advocate on this issue, and we
will provide greater clarity.
The distinction between these two types of offers is very important in
terms of the additional compromise authority granted in the regulations
promulgated after the IRS Restructuring and Reform Act of 1998. In our
experience, the distinction also has meaning for many potential program
participants. In a doubt as to collectibility situation, the liability
could not be collected in full, even taking into account all of the
taxpayer's income and assets. An economic hardship offer can be
accepted when the tax liability at issue could be collected in full,
but doing so would cause the taxpayer economic hardship. (Economic
hardship is defined as the inability to pay reasonable basic living
expenses.) Because of the economic hardship guidelines, thousands of
taxpayers have had OICs accepted that would have been rejected prior to
the regulations being amended. To the extent the delineation of these
two types of offers in the instructions may alert some taxpayers that
they are potential offer candidates-and may prompt them to better
describe the economic hardship that would result from collection the
distinction may be meaningful and helpful in some cases.
We agree that staffing levels should be adjusted in response to
changing program needs. As the GAO report confirms, we have made
significant adjustments over the past several years. Full-time
equivalents (FTEs) in the Centralized OIC sites have been reduced from
380 in 2002 to 320 in 2005 and revenue officers dedicated to the
program in the field have been reduced from 1,078 in April 2001 to 267
in April 2006. We have moved cautiously in this area so as to minimize
backlogs and gaps in activity, and to ensure that staffing reductions
do not impact timely service. The IRS has been in negotiations with the
National Treasury Employees Union (NTEU) and recently reached:
an agreement that will return about 100 additional revenue officers to
general program collection work.
Recommendation 2:
Develop meaningful measures of performance including:
* A measure of processing timeliness for taxpayers;
* A measure of compliance for all program participants; and:
* A measure of accessibility that gauges ease of participating in the
program.
Response:
We agree that meaningful measures of performance are an essential part
of effective program management. As a result, we have in place a
comprehensive suite of operational measures to gauge the progress and
effectiveness of the program. The three main OIC program objectives are
timeliness, quality, and efficiency, and we are confident that our
existing measures provide the necessary information to assess our
performance in each of these areas. We measure and report on the
timeliness of OIC case closures by tracking the number of months it
takes to close each individual OIC case. We measure the quality of
casework using the embedded quality system. The draft report
acknowledged that the program is meeting its quality goals. The
efficiency of the program is measured by both the number of hours taken
to close a case and the number of field closures per direct staff year.
Consequently, we are not inclined to adopt additional measures at this
time.
Based on our experience with the OIC program, we do not agree that
timeliness measured by taxpayer rather than by individual offer would
be an effective measure of performance. Nonetheless, we do agree that
"repeat offers" is an area worthy of additional review, and we have
already taken steps to address this issue. By making changes to our
processes for requesting additional information from taxpayers, we have
significantly reduced the number of offers returned to taxpayers for
failure to provide requested information. We believe this reduction in
returned offers will help reduce the number of repeat offers because a
higher percentage of cases will be worked to a final decision. We also
plan to ask the Office of Program Evaluation and Risk Assessment
(OPERA) to undertake a small study of repeat offers to get a better
sense of whether we need to make additional changes to the program.
We agree that the IRS can do a better job of compiling information
regarding compliance during the five year monitoring period following
acceptance of an offer. Future compliance is an important potential
benefit of the program. We will explore methods for gathering reliable
post-acceptance compliance information. We also acknowledge that we
have not historically tracked compliance by other program participants.
We have begun to gather data on taxpayer behavior following rejection
through the handoff unit referenced in Recommendation 4.
We are concerned about the perception that the offer in compromise
program is less accessible than in the past. We expect that the
customer satisfaction survey we are currently conducting will give us
some insights into the ease or difficulty of navigating the offer
process. Depending on those results, we may ask OPERA to do some
additional research and analysis on accessibility. We also will engage
practitioner groups in discussions of this issue to determine perceived
barriers to entering the program and how those barriers might be
overcome.
Recommendation 3:
Set processing timeliness goals for taxpayers that are based on an
assessment of taxpayer needs and other benefits.
Response:
We agree that taxpayer needs and other benefits should be taken into
account when setting program goals, including goals related to
timeliness. Our current processing timeliness goals are based in part
on such considerations. Taxpayer and practitioner feedback consistently
reveals a need for a quality determination, effective communication,
and a resolution at the earliest possible time. Our current timeliness
goals were established taking into account these needs, the complexity
of cases, and certain legal requirements which tend to have an impact
on processing time. We are currently conducting a customer satisfaction
survey of taxpayers who participated in the OIC program and will
consider whether feedback from that survey reveals additional taxpayer
needs that should be taken into account it setting timeliness goals.
Recommendation 4:
Conduct analyses of the reasons for performance trends in order to:
* Determine causes of the growth in repeat offers;
* Determine how repeat offers affect timeliness and, if justified based
on the results, take action to meet timeliness goals;
* Determine the reasons for trends in accessibility; and:
* Determine the effectiveness of the handoff unit.
Response:
We agree that an increase in the number of repeat offers could
potentially be a sign of breakdowns in the process. We have shared the
GAO analysis with our research department and hope to validate those
findings in the near future. As referenced in our response to
Recommendation 2, we have already taken several steps that we believe
will reduce the number of repeat offers in the future. In particular,
we recently revised our procedures for requesting missing information
or documents from taxpayers. The IRS will now initiate an additional
taxpayer contact to secure missing information before an OIC is
returned. We have also clarified the steps that must be taken before an
OIC will be returned for failure to make estimated tax payments. As
noted earlier, we also intend to review a representative sample of
repeat offers in order to determine whether other changes are
appropriate. We will use this sample to analyze the effect, if any, of
repeat offers on timeliness.
As your report noted, a decrease in taxpayer participation in a program
does not necessarily indicate that the program is less accessible. We
have continued to improve our forms and instructions to better inform
taxpayers of program requirements and expectations, and believe that
some reduction in offers is attributable to taxpayers making a more
informed decision as to whether the compromise program is right for
them. We hope that our customer satisfaction survey will provide data
regarding any difficulties taxpayers face in participating in the
program so that appropriate changes in procedures can be made.
We agree that it is important for the IRS to determine the
effectiveness of the hand-off unit. We will continue the operational
review process now in place and reach a decision about whether the unit
is effective and should be made permanent.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White (202) 512-9110 or whitej@gao.gov:
Acknowledgments:
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):
FOOTNOTES
[1] GAO, Tax Administration: IRS Should Evaluate the Changes to Its
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15,
2002).
[2] Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998).
[3] This provision is being considered with H.R. 4297, which has been
passed by both the House and the Senate and was in conference as of
April 6, 2006. Although not included in the original House bill, the
Senate-passed version of H.R. 4297 incorporated certain additional
provisions that were originally included in S. 2020, including this
provision related to deposits for offers.
[4] This refers to IRS policy statement P-5-100.
[5] An FTE generally consists of one or more employed individuals who
collectively complete 2,080 hours work in a given year. Therefore, one
full-time employee or two half-time employees equal one FTE.
[6] Department of the Treasury, Internal Revenue Service SB/SE Payment
Compliance and Office of Program Evaluation and Risk Analysis, IRS
Offers in Compromise Program: Analysis of Various Aspects of the OIC
Program (Washington, D.C.: September 2004).
[7] IRS's collection actions can include notices demanding payment;
liens (legal claims filed against a taxpayer's property as security or
payment for the tax debt); and levies (legal seizures of taxpayers'
assets to satisfy tax debts). However, a Notice of Federal Tax Lien may
be filed at any time while the offer is being considered if IRS
determines that the collection of the liability is in jeopardy.
[8] Except offers based on DATL.
[9] Trust fund recovery penalties are assessed against taxpayers
because they withheld taxes from others but did not make a timely
federal tax deposit or payment in that amount. Trust fund taxes are
withheld income and employment taxes, including Social Security taxes,
railroad retirement taxes, and collected excise taxes.
[10] The $150 application fee is waived if (1) the offer is submitted
based solely on "doubt as to liability" or (2) the taxpayer's total
monthly income falls at or below income levels based on the Department
of Health and Human Services' poverty guidelines.
[11] Taxpayers are required to have filed and paid any required
employment tax returns on time for the two quarters prior to filing the
OIC, and must be current with deposits for the quarter in which the OIC
was submitted.
[12] Some taxpayers may submit more than one repeat offer in the same
year. For example, a taxpayer could have submitted a fourth offer in
early 2005 and a fifth offer in late 2005. Offers submitted in fiscal
year 2005 may also have preceding offers submitted in earlier years.
[13] Our analysis of timeliness indicates that one initiative to reduce
costs by increasing timeliness, IRS's upfront screening for
processability, is working as intended. In fiscal year 2005, 75 percent
of initial offers were not processable and were sent back to taxpayers
on average in 10 days.
[14] GAO, Tax Administration: IRS Should Evaluate the Changes to Its
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15,
2002), and Tax Administration: IRS Needs to Further Refine Its Tax
Filing Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov.
22, 2003).
[15] In the SB/SE Collection/Appeals Joint Program Review, October 18
through 22, 2004, IRS reviewed a random sample of 113 cases that had
been rejected by COICs and accepted by Appeals in July and August 2004.
[16] Delinquent taxpayer accounts in fiscal year 2001 were 5.4 million;
in 2002, 5.7 million; and in 2003, 6.2 million. Data were not available
for 2005.
[17] Other measures of participation could be constructed. For example,
the dollar amount of tax liability compromised could be compared to the
dollar amount of aggregate delinquent tax debt.
[18] Department of the Treasury, Internal Revenue Service SB/SE Payment
Compliance and Office of Program Evaluation and Risk Analysis.
[19] Although OPERA collected compliance data on business taxpayers,
the IRS study cautioned that the business data were not reliable for an
analysis similar to the individual master file data analysis because
researchers did not verify the continued operation of businesses that
had interacted with the program.
[20] See GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June
1996), 23, and GAO-03-143, 45.
[21] GAO-02-311, 37.
[22] Enrolled agents are tax professionals, such as certified public
accountants and attorneys, who are permitted by IRS to act on
taxpayers' behalf in tax matters and are subject to Circular 230, IRS's
rules of conduct for tax professionals.
[23] Department of the Treasury, Internal Revenue Service SB/SE Payment
Compliance and Office of Program Evaluation and Risk Analysis.
[24] IRS describes potential abuse as a situation in which taxpayers
have submitted four or more churns. A churn is an offer for which (1)
at least one prior offer was received for the Taxpayer Identification
Number, (2) the final disposition letter mail date for at least one of
the prior offers was within 180 days of the new offer's date, and (3)
the final disposition for at least one of the prior offers for which
the mail date was within 180 days was returned processable, returned
not processable, or rejected.
[25] Section 3462 of the Restructuring Act also required the Secretary
of the Treasury to develop national and local allowances for basic
living expenses, create special rules for the treatment of offers, and
establish procedures for administrative review of rejected offers.
[26] This provision is being considered with H.R. 4297, which has been
passed by both the House and the Senate and was in conference as of
April 6, 2006. Although not included in the original House bill, the
Senate-passed version of H.R. 4297 incorporated certain additional
provisions that were originally included in S. 2020, including this
provision related to deposits for offers.
[27] All offers disposed by the Appeals were rejected by the OIC
Program. We identified all of these as offers rejected by the offer
program and created new disposition dates based on the rejection date
for these offers.
[28] GAO, Tax Administration: IRS Should Evaluate the Changes to Its
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15,
2002).
[29] As of the end of fiscal year 2005, the AOIC database contained
1,239,596 offers, of which 18,500 were still being processed in the
Collections function at the end of the fiscal year. Five offers were
closed on Saturday, October 1, 2005, before our copy of the database
was downloaded to disk. We assume these offers were closed on September
30, 2005, for purposes of our statistics. A total of 4,399 offers had
been removed before these counts to prevent duplication because they
represented transfers from one area office to another prior to
centralization of the AOIC.
[30] The IRS Received Date was used 99.88 percent of the time, and the
Area Office Opening Date was used 0.12 percent of the time. There were
10 instances where the GAO-derived Collections function ending date
preceded the available starting dates. In these instances, the starting
date was made the same as the ending date.
[31] The Area Office Closing Date was used 92.77 percent of the time. A
rejection letter date was used the remaining 7.23 percent of the time.
[32] The GAO-derived Collections function ending date plus 30 days was
used 81.30 percent of the time, and the Sent-to-Appeals date was used
18.70 percent of the time. The database contained 83,937 rejected
offers sent to Appeals, of which 76,520 had been closed by Appeals by
the end of fiscal year 2005.
[33] Individuals and businesses may have more than one tax liability. A
tax liability is defined as the tax debt a taxpayer owes on any
particular type of tax for any particular tax period. For example, a
corporation might owe taxes on annual income for 1 or more years, or
tax periods. At the same time, the corporation might also owe
employment taxes on one or several quarterly tax periods. Each of these
types of taxes and tax periods are separate tax liabilities. When a
taxpayer submits an offer application, all outstanding tax liabilities
should be included.
[34] This can occur, for example, when an individual taxpayer incurs
tax liabilities, then marries and incurs additional tax liabilities
with a spouse. The taxpayer is separately liable for the tax
liabilities incurred before the marriage, but jointly liable with the
spouse for the tax liabilities incurred during the marriage. In these
instances, separate offers are required.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
