a

GAO

United States Government Accountability Office

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
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

IRS OFFERS IN COMPROMISE 

Performance Has Been Mixed; Better 

Management Information and 

Simplification Could Improve the 

Program 

Highlights of GAO-06-525, a report to the 

Committee on Finance, U.S. Senate 

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. 

Taxpayers unable to fully pay their

tax liabilities may apply for an offer 

in compromise (OIC), an 

agreement with IRS to pay what 

they can afford. IRS writes off the 

rest of the liability. In 2005, IRS 

accepted over 14,000 offers. 

Because of concerns about 

program performance and a new

category of offers based on

exceptional circumstances, GAO

was asked to (1) describe the 

trends in program’s performance 

and their causes and (2) determine

whether IRS’s regulations for 

exceptional circumstance offers 

are consistent with statute. GAO

examined five program objectives:

timeliness, quality, accessibility,

compliance, and cost. 

What GAO Recommends

GAO recommends that IRS 

(1) measure accessibility, 

compliance, and timeliness by

taxpayer; (2) set timeliness goals 

by taxpayer; (3) analyze causes of

trends in repeat offers, timeliness, 

and accessibility; (4) adjust staffing 

to correspond with workload; and

(5) eliminate the distinction 

between most exceptional 

circumstances offers and offers 

based on inability to fully pay. 

IRS partially agreed with our 

recommendations. IRS agreed to

consider tracking compliance, 

study repeat offers, and reduce 

staffing. IRS did not agree to

measuring or set goals for

timeliness from the perspective of

taxpayers. IRS said it will study

whether our other recommended 

changes should be implemented. 

OIC Program performance has been mixed. Timeliness improved for 

taxpayers making one offer to 5.8 months in 2005 but stayed constant, at an 

average of two years, for those making repeat offers. Quality goals have been

met but IRS does not routinely track compliance and accessibility. Further, 

cost per offer has increased in that IRS has not decreased staffing since 

fiscal year 2003 in proportion to declines in offers. Improving the program 

depends on how well IRS management understands the reasons for the 

program’s performance. One step in understanding performance is 

measuring it. However, IRS does not measure timeliness from the 

perspective of the taxpayer—for taxpayers with repeat offers IRS measures 

the time to decide each offer but not the overall time to resolve the 

taxpayer’s liability. IRS lacks compliance and accessibility trend data useful 

for assessing performance. Another step in understanding performance is 

setting goals. IRS set numeric goals for timeliness and quality, but IRS’s 

timeliness goals do not have a rationale and are not based on taxpayer needs 

or other benefits. A third step in understanding performance is analysis. 

While IRS has done some analyses that led to program changes, IRS has not 

analyzed the effect of repeat offers on timeliness to determine whether it 

would be less costly to deal once with a taxpayer rather than have to process

repeat offers. IRS also has not analyzed whether the decrease in offers 

accepted since fiscal year 2003 reflects a decrease in program accessibility, 

or whether the efforts to improve the compliance of program participants 

have been successful. 

IRS’s regulations for exceptional circumstance offers, intended for taxpayers

who can fully pay, are consistent with statute. However, most exceptional

circumstance offers are granted to taxpayers who cannot fully pay. These 

offers are not meaningfully distinct from the more common offers based on 

inability to fully pay. The lack of distinction causes unnecessary program 

complexity and confusion. Taxpayers are faced with the paradoxical process 

of proving that they can pay their tax liability and then explaining why they 

cannot. 

Repeat Offers Compared to Total Offers Received, Fiscal Years 2000-2005 

Number of offers received 

Fiscal year

Original offers (onetime

offers and initial offers)

Source: GAO analysis of IRS’s AOIC database.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2001 2002 2003 2004 2005

40%

44%

15% 19% 30%

39%

Repeat offers (second

and subsequent offers)
Page i GAO-06-525 IRS Offers in Compromise

Contents

Letter 1

Results in Brief 3

Background 6

The OIC Program Has Decreased in Size, and Repeat Offers Have 

Increased 11

OIC Program Performance Has Been Mixed, and IRS Has Not 

Researched the Reasons for Some Performance Trends 14

Limited Evidence Suggests Offer Mills’ Effect on OIC Processing 

May Not Be Large 28

IRS Notifies Taxpayers of Their Appeal Rights through Various 

Channels 31

ETA Regulations Are Consistent with Statute, but Hardship ETA and 

DATC Offers Are Not Meaningfully Distinct and Non-Hardship 

ETA Offers Are Rare 33

Partial Payment Proposal Raises Questions 38

Conclusions 39

Recommendations for Executive Action 40

Matter for Congressional Consideration 41

Agency Comments and Our Evaluation 41

Appendixes

Appendix I: Scope and Methodology 44

Appendix II: Scope and Methodology on Detailed Analysis of IRS’s AOIC 

Database 48

Appendix III: Comments from the Internal Revenue Service 55

Appendix IV: GAO Contact and Staff Acknowledgments 60

Tables Table 1: OIC Program Statistics, Fiscal Years 2000-2005 12

Table 2: Numbers of Repeat Offers Received in Fiscal Year 2005 14

Table 3: Average Processing Times for Onetime and Repeat Offers 

by Year Case Was Closed, Fiscal Years 2000-2005 16

Table 4: Distribution of Elapsed Calendar Time for All Offers 

Accepted in Fiscal Year 2005 17

Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal 

Year 2005 19

Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal 

Years 2002-2005 20
Contents

Page ii GAO-06-525 IRS Offers in Compromise

Table 7: Percentage of Individual Taxpayers in Collection Statuses 

by Offer Disposition from 1998 to 2003 25

Table 8: Productivity of COIC Processing by Offers Closed, Fiscal 

Years 2002-2005 27

Table 9: Productivity of Field Processing by Offers Closed, Fiscal 

Years 2002-2005 27

Table 10: Number and Percentage of Rejected Offers That Taxpayers 

Appealed, Fiscal Years 2000-2005 32

Table 11: Number of Accepted Hardship ETA and Non-Hardship ETA 

Offers, Fiscal Years 2000-2005 34

Table 12: GAO-Derived OIC Program Disposition Types 50

Table 13: IRS OIC Program Disposition Types 51

Figures Figure 1: Simplified OIC Process 9

Figure 2: Number and Percentage of Repeat Offers Compared to 

Total Offers Received, Fiscal Years 2000-2005 13

Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005 22

Figure 4: How IRS Determines Whether an Offer Is Considered for 

DATC or ETA 35

Figure 5: Conceptual Process for Determining Offer Amounts 35

Figure 6: Hardship ETA: Qualify Because of Dependent Care 

Expenses 36

Figure 7: Hardship ETA: Qualify Because of Basic Living 

Expenses 37

This is a work of the U.S. government and is not subject to copyright protection in the 

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other material, permission from the copyright holder may be necessary if you wish to 

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Page 1 GAO-06-525 IRS Offers in Compromise

United States Government Accountability Office

Washington, D.C. 20548

A

April 20, 2006 Letr

The Honorable Charles E. Grassley

Chairman 

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance 

United States Senate

In fiscal year 2005, the Internal Revenue Service’s (IRS) Offer in 

Compromise (OIC) Program reached agreements with taxpayers to accept 

over 14,000 offers. An OIC is an agreement in which IRS and a taxpayer 

agree to settle or compromise the taxpayers’ federal tax liability for less 

than the full amount owed. Generally, IRS accepts offers in cases in which 

taxpayers cannot afford to pay their full tax liability. In 2005, the OIC 

Program accepted offers in which taxpayers paid on average 16 percent of 

their tax liability. IRS wrote off the rest of the liability, about $1 billion, for 

those taxpayers. 

For years, Congress has been concerned about the performance of the OIC 

Program. In 2002, we issued a report that you requested on the inventory of 

OIC cases and the quality and timeliness of decisions.1

 Since that time, 

concerns about performance, including the timeliness of offer processing, 

the quality of offer decisions, and the accessibility of the program to 

taxpayers, have persisted. Other concerns include whether offer mills (tax 

practitioners that consistently use negligent or deceptive practices to 

exploit taxpayers and the OIC Program by making misleading claims and 

submitting unrealistic offers) have been affecting program performance, 

whether taxpayers have been accorded their appeal rights granted in 

statute, and whether IRS has been using its authority to grant offers for 

exceptional circumstances as Congress intended. Offers are most 

commonly accepted when taxpayers cannot pay the full amounts they owe. 

These offers are called doubt as to collectibility (DATC) offers. According 

to IRS regulations, offers for exceptional circumstances, called effective 

tax administration (ETA) offers, are granted in cases where taxpayers can 

fully pay their tax liabilities but where collecting the full amount would 

create economic hardship or where compelling public policy or equity 

reasons provide sufficient basis for compromise. Because of these 

1

GAO, Tax Administration: IRS Should Evaluate the Changes to Its Offer in Compromise 

Program, GAO-02-311 (Washington, D.C.: Mar. 15, 2002).
Page 2 GAO-06-525 IRS Offers in Compromise

concerns about the program, IRS instituted a number of initiatives intended 

to reduce unrealistic offers from taxpayers and improve program 

performance, including centralized processing of less complex cases, a 

revised application form, an offer application fee of $150, and increased 

emphasis on taxpayer communication. 

Because of your continuing interest in ensuring that IRS is administering 

the OIC Program as efficiently and effectively as possible, you requested 

this review. As agreed, the objectives of our review were to (1) describe the 

trends in OIC program size; (2) describe the trends in program 

performance and assess the extent to which IRS has researched the 

reasons for the trends; (3) assess whether offer mills affect taxpayers and 

OIC processing; (4) assess how well IRS ensures that taxpayers are 

provided the right to appeal a rejected offer; and (5) determine whether 

Treasury’s ETA regulations are consistent with the provision of the IRS 

Restructuring and Reform Act of 1998 (Restructuring Act).2

 Near the end of 

our review, your staff asked that we comment on a legislative proposal that 

would require OIC applicants requesting an offer in compromise to make a 

partial payment.3

To address these objectives, we reviewed the Internal Revenue Manual 

(IRM) and an IRS policy statement4

 to determine the OIC Program’s 

objectives; obtained a copy of IRS’s Automated Offer in Compromise 

(AOIC) database, the primary management information system for the 

program; and used that database to develop trend data on the program. We 

performed various data reliability analyses and determined that the AOIC 

database was sufficiently reliable for the purposes of our work. We also 

obtained data from IRS on its program staffing levels and the results of its 

OIC case quality reviews. We interviewed program officials at IRS’s Small 

Business/Self-Employed Operating Division headquarters in Washington, 

D.C., IRS’s centralized OIC processing center in Brookhaven, New York, 

and IRS’s Austin Compliance Center in Texas, which houses key OIC 

managerial operations and maintains the AOIC database. We also obtained 

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.
Page 3 GAO-06-525 IRS Offers in Compromise

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.
Page 4 GAO-06-525 IRS Offers in Compromise

• 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
Page 5 GAO-06-525 IRS Offers in Compromise

the number of full-time equivalent staff (FTE)5 assigned to those cases 

declined from 362 to 320. This represented a productivity decline of 251 

cases closed per FTE to 165 and an increase in cost per case. For more 

complex offers, the productivity decline during these years was smaller, 

from 156 cases closed per FTE to 152. If IRS had maintained fiscal year 

2003 productivity levels in fiscal year 2005, it would have needed about 

117 fewer FTEs that could have been reallocated to other work.

Evidence of offer mills’ impact on OIC processing and on taxpayers is 

limited because offers mills cannot easily be distinguished from legitimate 

practitioners. The available evidence suggests that the impact is not large. 

For example, an IRS study published in 2004,6

 while subject to limitations, 

found that a small number of offers submitted with the assistance of 

professional practitioners were abusive and concluded that offer mills 

were not driving abuse in the system. 

IRS notifies taxpayers whose offers are rejected of their appeal rights 

through various channels, including the offer form instructions, the 

rejection letter, and the IRS Web site. In fiscal year 2004, more than half of 

the taxpayers whose offers were rejected by the OIC Program submitted 

appeals, indicating that many taxpayers were aware of their appeal rights. 

IRS’s ETA regulations are consistent with the provisions of the 

Restructuring Act, which are broadly written. The regulations were 

intended to expand the basis on which IRS would grant compromises and 

created two forms of ETA offers—hardship and non-hardship. From fiscal 

year 2001 to 2005, IRS accepted more than 400 ETA offers annually. In fiscal 

year 2005, IRS accepted 30 non-hardship ETA offers, up from 1 in fiscal 

year 2004. Hardship ETA offers are not meaningfully distinct from DATC 

offers. In both cases, the decision to accept the offer is based on taxpayers’ 

assets, future income, and reasonable living expenses. The lack of 

distinction between hardship ETA offers and DATC offers causes 

unnecessary program complexity and confusion to taxpayers and tax 

practitioners. For example, taxpayers applying for hardship ETA offers are 

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).
Page 6 GAO-06-525 IRS Offers in Compromise

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 nonhardship ETA offers are meaningfully distinct from DATC offers. Because 

of the broad language in the Restructuring Act, whether the number of nonhardship 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 
Page 7 GAO-06-525 IRS Offers in Compromise

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.
Page 8 GAO-06-525 IRS Offers in Compromise

• Effective Tax Administration (ETA)—No doubt exists that the taxpayer 

can fully pay the taxes owed, but exceptional circumstances 

nonetheless lead IRS to compromise. 

IRS has two categories of ETA offers, hardship and non-hardship. 

According to IRS’s regulations, hardship ETA offers are those that IRS 

grants because collecting the full liability would create economic hardship 

for the taxpayer, while non-hardship ETA offers are granted on a basis of 

equity and public policy. (How economic hardship qualifies a taxpayer for 

an ETA offer will be addressed later in the report.) According to IRS, equity 

and public policy considerations may be used to accept an offer when 

doing so would not adversely affect voluntary compliance for taxpayers in 

general.

While an offer is being reviewed, the statute of limitations for collection 

and collection actions7

 are suspended. The statute of limitations for 

collection generally restricts the time IRS has to collect delinquent taxes to 

10 years from the date of assessment. The statute of limitations for 

collection and collection actions continues to be suspended if IRS rejects 

an offer through the 30-day period that a taxpayer has to make a decision 

on whether to appeal the rejection decision. If a taxpayer appeals, the 

suspensions continue through the end of the appeal process. 

IRS’s Process for Making 

Offer Determinations

As illustrated in figure 1, the offer process starts when an offer application 

is submitted by a taxpayer. The application package, Form 656, consists of 

over 50 pages that include detailed instructions on determining eligibility 

for filing an offer and a worksheet for calculating the offer amount for 

individual and business taxpayers. The offer8

 must be supported by a 

current statement of the taxpayer’s financial condition, including data on 

assets, liabilities, and monthly income and expenses. 

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.
Page 9 GAO-06-525 IRS Offers in Compromise

Figure 1: Simplified OIC Process 

Taxpayer submits

offer application

Collection exam 

unit

Returned to 

taxpayer

Is offer

DATL?

no

yes

yes

yes

yes

Does

offer pass

processability 

criteria?

no

yes

yes

COIC sorts by 

complexity

Can 

taxpayer 

full pay?

Can 

financial 

analysis be 

completed?

Can 

offer be 

accepted 

under 

DATC?

Can 

offer be 

accepted 

under 

ETA?

Does

taxpayer 

provide 

additional

info?

no

Simple remain

at COIC

Complex

to field

no

no

yes

no

no

Appeals

decides

case

yes

no

Rejected

Case closed

Accepted

Case closed

START

END

Source: GAO analysis of IRS data.

END

Does

taxpayer

appeal?
Page 10 GAO-06-525 IRS Offers in Compromise

IRS typically receives and begins the processing of offers in one of two 

COICs. The first step is screening out offers based on DATL. DATL offers 

involving trust fund recovery penalties9

 and personal liability for excise 

taxes are processed by the OIC Program and all others are referred to IRS 

examination staff. IRS then screens the remaining offers for processability, 

using five criteria: 

1. current version of OIC application form used,

2. $150 application fee included,10

3. all required federal tax returns filed,

4. employment taxes current,11 and

5. taxpayer not in bankruptcy proceeding. 

Generally, if any of the five requirements are not met, the application is 

returned to the taxpayer as “not processable.” According to IRS officials, 

since fiscal year 2003, the requirement to use the current application form 

has not been enforced although it remains part of IRS’s processability 

criteria. Program officials said that they do not want to return offer 

applications to taxpayers solely because the most current form was not 

used. 

Next, IRS screens out taxpayers who, based on their self-reported financial 

data, can fully pay their tax debts. The financial data include income, 

assets, and living expenses. If, after subtracting the taxpayers self-reported 

living expenses from their income and assets, IRS determines taxpayers 

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.

10The $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.

11Taxpayers 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.
Page 11 GAO-06-525 IRS Offers in Compromise

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. 
Page 12 GAO-06-525 IRS Offers in Compromise

Table 1: OIC Program Statistics, Fiscal Years 2000-2005

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.

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 

Fiscal year 2000 2001 2002 2003 2004 2005

Offers received 109,818 118,893 122,405 126,466 103,106 73,301

Offers accepteda 31,609 37,071 27,692 18,340 14,636 14,526

End of year inventory 88,982 92,324 68,187 54,326 35,882 18,500

Amount of delinquent tax liability (in 

billions) $2.43 $2.45 $2.25 $1.32 $1.32 $1.49 

Amount of accepted offers (in billions) $0.28 $0.31 $0.27 $0.19 $0.19 $0.24 

Amount of tax liabilities written off as a 

result of OIC (in billions) $2.15 $2.14 $1.98 $1.13 $1.13 $1.25 

Percentage of total tax liability 

accepted in compromise 12 13 12 14 15 16
Page 13 GAO-06-525 IRS Offers in Compromise

the number of offers received also declined, the percentage stayed about 

the same. In fiscal year 2005, 40 percent (or 29,527) of the offers received 

were repeat offers. 

Figure 2: Number and Percentage of Repeat Offers Compared to Total Offers 

Received, Fiscal Years 2000-2005

Note: Some taxpayers make only one effort to compromise a tax liability. We call these offers “onetime 

offers.” Other taxpayers make multiple attempts to compromise a tax liability. We call the first of these 

attempts an “initial offer” and each subsequent attempt a “repeat offer.”

Thousands of offers were multiple repeats. Of the 29,527 repeat offers 

received in fiscal year 2005, table 2 shows that for example 17,511 (or 59 

percent) were second offers and 6,901 were third offers12 (see table 2). 

12Some 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. 

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2001 2002 2003 2004 2005

Number of offers received 

Fiscal year

Original offers (onetime offers and initial offers)

Repeat offers (second and subsequent offers)

Source: GAO analysis of IRS’s AOIC database.

15% 19%

30%

39% 44%

40%
Page 14 GAO-06-525 IRS Offers in Compromise

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

 Source: GAO analysis of IRS’s AOIC database.

IRS has not analyzed the reasons for the proportion of repeat offers, the 

substantial increase since fiscal year 2000 shown in figure 2, or the number 

of multiple repeats shown in table 2. There are a range of possible reasons. 

On the one hand, repeat offers could be the product of IRS attempts to 

reduce inventory and close offer cases more quickly. Closing cases quickly 

could leave some taxpayers still wanting to negotiate over the amount of 

their offers—they would have to submit repeat offers. On the other hand, 

repeat offers could be the result of taxpayer confusion or a tactic to delay 

collection action.

OIC Program 

Performance Has Been 

Mixed, and IRS Has 

Not Researched the 

Reasons for Some 

Performance Trends

Based on our analysis of OIC data, program performance has been mixed 

relative to five objectives—timeliness, quality, accessibility, compliance, 

and cost. We identified these objectives by reviewing the IRM and an IRS 

policy statement. IRS’s performance in one measure of timeliness has 

improved, and the program has met its quality goals. However, some 

taxpayers wait more than 2 years to get an offer accepted, and cost per 

offer has increased. Some of IRS’s measures mask this performance 

because IRS measures performance by offer and not by taxpayer. 

Furthermore, IRS has not researched the causes of some performance 

trends.

Order of offer Number of offers

2nd 17,511

3rd 6,901

4th 2,908

5th 1,214

6th 525

7th 247

8th 103

9th 52

10th or greater 66 

Total 29,527 
Page 15 GAO-06-525 IRS Offers in Compromise

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) 
Page 16 GAO-06-525 IRS Offers in Compromise

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

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.

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. 

Fiscal year

 Average processing times in months

Onetime offers Repeat offersa

2000 8.4 23.3

2001 9.6 25.8

2002 9.8 23.9

2003 7.9 20.7

2004 7.2 21.4

2005 5.6 22.4
Page 17 GAO-06-525 IRS Offers in Compromise

Table 4: Distribution of Elapsed Calendar Time for All Offers Accepted in Fiscal Year 

2005 

Source: GAO analysis of IRS data.

Note: Times represent OIC Program processing times and do not include time in Appeals for appealed 

cases.

Even though IRS may be meeting its timeliness targets for processing most 

offers, measuring timeliness by offer masks the elapsed calendar time 

between receipt of a first offer and disposition of a final offer for taxpayers 

filing repeat offers. Furthermore, IRS has not analyzed the effect of the 

number and growth of repeat offers on timeliness. An analysis of the extent 

timeliness could be improved, if at all, by reducing repeat offers could help 

program managers make decisions about whether program changes to 

improve timeliness would be justified. For example, it might be less costly 

for IRS to deal once with a taxpayer, even if it takes more time to work the 

single case, rather than have to process repeat offers.13

Another issue is that IRS does not have a rationale for its numeric goals for 

processing times. In 2002, after we recommended that IRS set a timeliness 

goal for the offer program based on taxpayer needs, other benefits such as 

compliance, and program cost, IRS retained its old goal of 6 months for 

COIC offers and established a separate goal of 9 months for field offers. 

However, the two current goals still are not based on a documented 

analysis of taxpayer needs, other benefits, and program costs.

Without measuring timeliness from the perspective of the taxpayer and 

without a rationale for timeliness goals set for taxpayers, IRS may be 

missing an opportunity to effectively drive program improvements from a 

taxpayer’s perspective. As we discussed in other reports, industry guidance 

for customer service recommended setting goals based on how long 

0 to 6 months

>6 to 12 

months

>12 to 24 

months

More than 24 

months

Numbers of offers 

closed by elapsed 

time

4,427 

(30.5 percent)

4,176 

(28.8 percent)

3,240

(22.3 percent)

2,683

(18.5 percent)

13Our 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. 
Page 18 GAO-06-525 IRS Offers in Compromise

customers were willing to wait for the service, the value of the service to 

the organization, and the costs of providing the service.14 Measuring 

timeliness from the perspective of taxpayers and setting goals based on 

taxpayer needs would inform IRS management of any gaps between actual 

timeliness and the goal providing a better basis for making decisions about 

program improvements. 

IRS officials expressed concern about whether setting timeliness goals by 

taxpayer would be feasible or desirable. In terms of feasibility, the officials 

said because it does not know whether or when a taxpayer whose offer is 

not accepted would submit another offer, it would be difficult to develop a 

timeliness goal from the perspective of taxpayers. While it may be difficult 

to predict individual taxpayers’ behavior, IRS has historical data that may 

be helpful for establishing timeliness goals from the perspective of 

taxpayers. For example, average timeliness for taxpayers from previous 

years might be a benchmark useful for setting goals for future average 

timeliness. In terms of desirability, IRS officials said a measure of 

timeliness from the perspective of taxpayers might be interpreted by some 

as an indication that offer policies might be compromised in order to meet 

the goal. IRS has quality measures intended to ensure that appropriate 

decisions are made in offer processing. Furthermore, IRS currently sets 

timeliness goals for offers despite the fact that the same incentives to 

compromise quality seem to apply. 

IRS’s Data Show That 

Quality Goals Have Been 

Met

Measured by both IRS’s internal customer accuracy measures and 

decisions by the Appeals function (Appeals), IRS has met its quality goals 

for the OIC Program (see table 5). 

14GAO, 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).
Page 19 GAO-06-525 IRS Offers in Compromise

Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal Year 2005

Source: IRS.

In the COICs, IRS measures the customer accuracy rate using the 

embedded quality measurement system (EQMS) that was implemented in 

fiscal year 2004. IRS exceeded its goal of 94 percent for fiscal year 2005. For 

the OIC Program, EQMS measures how well employees follow offer 

processing procedures. Quality is measured by the sample of cases 

reviewed that met the standards for following the required steps, such as 

contacting the taxpayer or getting managerial review to process cases. IRS 

believes that offer examiners make more consistent decisions when they 

follow all the required processing steps. According to the OIC Program 

Manager, EQMS is better than the system previously used in the centralized 

processing centers, the collection quality measurement system (CQMS). 

CQMS is still being used in field offices but is to be phased out in fiscal year 

2006 as EQMS is being phased in. IRS also met its field quality goal of 84 

percent using CQMS for fiscal year 2005. According to the OIC Program 

Manager, IRS plans to set a field goal using EQMS after collecting and 

analyzing data for field cases during the first year that EQMS is 

implemented in field offices. 

Appeals data offer some additional evidence about the quality of OIC 

Program decisions, although the data are a limited quality indicator 

because only rejected offers can be appealed. Of rejected offers appealed, 

in fiscal year 2005, Appeals sustained 65 percent of rejection decisions 

while deciding to accept offers in 24 percent of the cases, as shown in table 

6 (11 percent were withdrawn). A decision by Appeals to accept an offer is 

not always the same as overruling the OIC Program. Appeals accepted 

some offers that the OIC Program had rejected because taxpayers provided 

Appeals with new financial information. An IRS study of 113 cases where 

offers were accepted in Appeals concluded that 38 percent of offers were 

Location OIC work type

Accuracy rate

achieved (percentage)

Brookhaven Preliminary screening 100

Financial analysis and offer decision 97.7

Average 98.9

Memphis Preliminary screening 95.0

Financial analysis and offer decision 95.6

Average 95.3

Field offices Financial analysis and offer decision 84.4
Page 20 GAO-06-525 IRS Offers in Compromise

accepted by Appeals based on taxpayers providing new financial 

information rather than Appeals disagreeing with the OIC Program 

decisions.15 Table 6 also shows some improvement in the sustention rate 

from fiscal years 2002 through 2005.

Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal Years 2002-2005 

Source: GAO analysis of IRS’s AOIC database.

Declines in OIC Program 

Size Combined with Trends 

in IRS’s Other Collection 

Programs Raise Questions 

about OIC Program 

Accessibility 

Declines in OIC participation rates since fiscal year 2000 raise questions 

about whether accessibility has decreased. We define accessibility as how 

easy it is for potentially eligible taxpayers to participate in the OIC 

Program. IRS officials agreed with this definition but said that they do not 

measure accessibility and do not monitor changes in accessibility over 

time. Tracking accessibility could provide information about the 

effectiveness of efforts to reduce barriers to program participation for 

taxpayers wishing to make legitimate offers. For example, IRS recently 

made changes to the offer application form intended to make the offer 

application process easier for taxpayers to understand. 

Furthermore, the Taxpayer Advocate, the American Institute of Certified 

Public Accountants, and the National Association of Enrolled Agents have 

raised concerns about barriers to OIC Program access. They cited 

confusion about the offer requirements and procedures, the lengthy time 

needed to get offers resolved, and the difficulty in getting what they believe 

are reasonable offers accepted as deterrents to taxpayers’ ability to 

participate in the program. The Taxpayer Advocate stated that some 

practitioners are often not willing to recommend the program to their 

15In 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. 

Disposition 2002 2003 2004 2005

OIC rejection accepted in Appeals 

(percentage) 29.0 29.6 28.2 23.5

OIC rejection sustained in Appeals 

(percentage) 57.6 57.3 62.0 65.1

Offer withdrawn in Appeals 

(percentage) 13.5 13.1 9.7 11.4
Page 21 GAO-06-525 IRS Offers in Compromise

clients because of these issues. A small number of practitioners we spoke 

with, as well as the practitioner organizations we contacted, made the point 

that the OIC process is too burdensome for taxpayers. Without a measure 

of accessibility, it is difficult to assess the merits of these concerns.

Measuring access, or ease of participation, may require questioning 

taxpayers about why they did or did not participate in the program. Such 

direct evidence does not currently exist. However, it is possible to measure 

participation with readily available data. While not the same as 

accessibility, trends in participation rates might be an indicator of whether 

changes in accessibility have occurred. A measure of participation would 

compare OIC Program participation to the pool of potentially eligible 

taxpayers. 

Over the years 2000 to 2004, the number of accepted offers declined by 

more than half, as shown in figure 3. Over the same years, one proxy 

measure of potentially eligible taxpayers, the number of delinquent 

taxpayers, stayed roughly constant at 5.9 million delinquent taxpayer 

accounts in fiscal year 2000 and 6.0 million in 2004.16 It seems likely that the 

number of potentially eligible taxpayers is correlated with the number of 

delinquent taxpayers. Not all delinquent taxpayers are eligible for the OIC 

Program, but it seems likely that an increase in delinquent taxpayers would 

also increase the number of taxpayers potentially eligible for an offer. 

16Delinquent 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.
Page 22 GAO-06-525 IRS Offers in Compromise

Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005

Note: Because many of the offers received in fiscal year 2005 have not been disposed of, the numbers 

of accepted and rejected offers shown in the table will grow.

The fact that accepted offers declined by more than half at the same time 

that the number of delinquent taxpayers was staying roughly constant 

raises the question of whether something has happened to reduce the 

program’s accessibility.17 The two trends do not demonstrate that 

accessibility has declined because they do not directly measure ease of use. 

It is possible that taxpayers decided for reasons unrelated to accessibility 

to reduce their participation in the program. However, it is possible that 

17Other 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.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2001 2002 2003 2004 2005

Offers received

Fiscal year

Open

Withdrawn/terminated

Returned

Not processable

Rejected

Accepted

Source: GAO analysis of IRS’s AOIC database.
Page 23 GAO-06-525 IRS Offers in Compromise

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 selfselect 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.
Page 24 GAO-06-525 IRS Offers in Compromise

IRS Monitors Taxpayer 

Compliance with the Terms 

of Their Accepted Offers, 

but Does Not Routinely 

Track Aggregate 

Compliance Trends for 

Program Participants

IRS Policy Statement P-5-100 and the IRM state that by accepting offers, the 

OIC Program should provide taxpayers a fresh start toward future 

voluntary compliance with their filing and payment requirements. IRS 

rejects offers on the basis of a financial analysis of taxpayers’ assets, 

expected income, and reasonable living expenses—an analysis that IRS 

uses to show whether taxpayers have the ability to pay more of their tax 

debt than they offered to pay in their OIC applications. 

In accordance with the compliance objective for accepted offers, IRS has a 

unit called Monitoring OIC (MOIC), which monitors the compliance of 

taxpayers with accepted offers for 5 years, and possibly beyond 5 years in 

cases of deferred payment offers, where payments are made over the 

remaining life of the collection statute. MOIC, however, does not routinely 

report to OIC management its aggregate data on taxpayer compliance, 

which would show trends on the compliance of taxpayers with accepted 

offers. In 2004, IRS completed a study that addressed several aspects of the 

OIC Program, including compliance.18 According to the study, about 80 

percent of individual taxpayers with accepted offers from calendar years 

1995 and 2001 remained in compliance with filing and payment 

requirements, excluding taxpayers who had received only one collection 

notice. 

The study also examined the compliance of taxpayers whose offers were 

rejected, withdrawn, or returned. The study found that follow-up collection 

actions had not been completed in many cases, even though the taxpayers 

had submitted offer applications stating a willingness and ability to pay 

part of their delinquent tax debt and even though IRS had concluded for 

rejected offers that the taxpayers could pay more than the amount they 

offered. For example, 42 percent of rejected offers during the study period, 

calendar years 1998 to September, 8, 2003, were pending collection action, 

and 15.7 percent had been declared currently not collectible (see table 7).19

18Department of the Treasury, Internal Revenue Service SB/SE Payment Compliance and 

Office of Program Evaluation and Risk Analysis.

19Although 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. 
Page 25 GAO-06-525 IRS Offers in Compromise

Table 7: Percentage of Individual Taxpayers in Collection Statuses by Offer 

Disposition from 1998 to 2003

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.

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 HandOff 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 

Collection statusa Withdraw Reject Return

Full pay 30.6 19.4 10.6

Other resolutionb 8.4 8.3 4.6

Currently not collectible 16.7 15.7 18.6

Installment 15.8 14.6 9.2

Pending action 28.4 42.0 57.2

Totalc 100.0 100.0 100.0
Page 26 GAO-06-525 IRS Offers in Compromise

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 compliancebenefit information the 2004 study provided, although such alternatives 

exist and some are lower cost. For example, IRS could repeat only the 

compliance portion of its OPERA study or use the existing status reports 

collected by MOIC, which cover taxpayers who default on their offers but 

are not routinely aggregated for OIC managers, to monitor trends on the 

compliance of taxpayers with accepted offers. The only additional costs to 

use the MOIC reports would be aggregating the data. The Treasury 

Inspector General for Tax Administration (TIGTA) also conducted a file 

review of accepted offers to assess aggregate compliance performance, 

which the OIC Program could use as a model. According to a TIGTA audit 

manger, the TIGTA study was something IRS should be able to do at a 

lower cost than the OPERA report. Using the MOIC data that are already 

available or employing the TIGTA approach would not yield as elaborate a 

study as IRS’s 2004 study, but the alternative methods would provide 

information more useful to managers than having no information at all.

We previously concluded that having the proper performance measures in 

place is critical for successful program adjustments and in assessing 

achievement of objectives.20 Because aggregate compliance trends are not 

tracked and analyzed periodically, IRS does not know the effects that 

recent program changes have had on taxpayer compliance; furthermore, 

IRS will have greater difficulty determining what additional program 

changes may be needed to ensure its best performance on achieving its 

compliance objective.

Trend information on compliance also is necessary to assess the 

performance of IRS’s new Hand-Off Unit. In our 2002 report,21 we said that 

IRS should develop evaluation plans before starting new initiatives; it did 

not do so in this case.

20See 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. 

21GAO-02-311, 37.
Page 27 GAO-06-525 IRS Offers in Compromise

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

Sources: IRS data and GAO analysis of IRS’s AOIC database.

Table 9: Productivity of Field Processing by Offers Closed, Fiscal Years 2002-2005

Sources: IRS data and GAO analysis of IRS’s AOIC database.

If IRS had maintained productivity at fiscal year 2003 levels, the agency 

would have had the flexibility to reallocate a substantial number of FTEs to 

other areas. In fiscal year 2005, IRS would have been able to reassign 110 

FTEs in COICs and 7 FTEs in field offices. As the inventory of offers, which 

affects the number of offer closures, declined in fiscal years 2004 and 2005, 

IRS did reduce FTEs, particularly in the field. However, the number of 

offers closed declined more rapidly than the number of FTEs, hence the 

Fiscal year

Closed offer 

cases FTEs Closed offers per FTE

2002 66,217 380 174

2003 90,888 362 251

2004 80,107 340 236

2005 52,831 320 165

Fiscal year

Closed offer 

cases FTEs Closed offers per FTE

2002 80,325 448 179

2003 49,439 316 156

2004 41,443 305 136

2005 37,852 249 152
Page 28 GAO-06-525 IRS Offers in Compromise

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. 
Page 29 GAO-06-525 IRS Offers in Compromise

For purposes of this report, an offer mill is a professional tax practitioner 

that consistently uses negligent or deceptive practices to exploit taxpayers 

and the OIC Program by making misleading claims and submitting 

unrealistic offers. For example, an offer mill might use deceptive 

advertising, creating a false expectation that the recipient of the 

advertisement would qualify for an offer or save as much as the 

advertisement suggests. An offer mill also might file incomplete or repeat 

offers to exploit the rule that suspends collection proceedings while offers 

are being considered. 

IRS does collect two types of information about professional practitioners 

on the OIC application, but this information is not always submitted with 

the application. First, the OIC application asks enrolled agents22 to identify 

themselves on the form and to submit a power of attorney (POA) Form 

2848 with the taxpayer’s application. In addition, the form asks taxpayers to 

identify anyone who helped prepare the application.However, non-enrolled 

agents are not required to sign the offer application. A manager at the 

Brookhaven COIC said that IRS has had cases in which it has learned that a 

professional practitioner was used but not identified in the offer 

application. 

IRS designates some offers as solely to delay the payment of taxes, which 

IRS tracks in the AOIC. The definition of solely to delay applies to any 

offer—whether submitted by the taxpayer alone or with the assistance of a 

POA. IRS considers an offer submitted solely to delay as one that is not 

substantially different from a previous offer that IRS rejected or returned. 

Solely to delay offers could be linked to POA or other practitioner data in 

the AOIC, but that data’s usefulness is limited because professional tax 

practitioners are not always identified on OIC applications. Additionally, 

because determining whether an offer is submitted solely to delay is 

subjective and may require enough submissions to notice a pattern, IRS 

may not always detect when an offer has been submitted solely to delay.

22Enrolled 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.
Page 30 GAO-06-525 IRS Offers in Compromise

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 study23 published in 2004 found that a small number of offers 

submitted with the assistance of professional practitioners were abusive 

and concluded that offer mills were not driving abuse24 in the system. 

• 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 

23Department of the Treasury, Internal Revenue Service SB/SE Payment Compliance and 

Office of Program Evaluation and Risk Analysis.

24IRS 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.
Page 31 GAO-06-525 IRS Offers in Compromise

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. 
Page 32 GAO-06-525 IRS Offers in Compromise

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

Source: GAO analysis of IRS’s AOIC database.

a

Fiscal year in which the OIC Program rejected the offer.

Fiscal yeara

Number of offers 

rejected by OIC 

Program

Number of rejected offers 

appealed by taxpayers

Percentage of rejected 

offers appealed

Number of offers accepted 

by Appeals function

2000 13,071 3,976 30 1,393

2001 18,568 6,819 37 1,953

2002 22,287 8,129 36 2,334

2003 35,721 15,376 43 4,464

2004 30,874 15,888 51 3,928

2005 27,409 10,224 37 1,221
Page 33 GAO-06-525 IRS Offers in Compromise

ETA Regulations Are 

Consistent with 

Statute, but Hardship 

ETA and DATC Offers 

Are Not Meaningfully 

Distinct and NonHardship ETA Offers 

Are Rare

IRS’s ETA regulations are consistent with the provisions of the 

Restructuring Act, which were broadly written. While IRS has annually 

accepted hundreds of offers based on ETA, non-hardship ETA offers 

accepted have been rare. However, hardship ETA offers are not 

meaningfully distinct from DATC offers. The lack of distinction between 

DATC and hardship ETA offers causes unnecessary program complexity 

and confusion for taxpayers and tax practitioners. 

Regulations on ETA Are 

Consistent with the 

Restructuring Act

IRS’s ETA regulations are consistent with the changes made to the OIC 

provisions by the Restructuring Act. The law required IRS to develop 

guidelines for determining when an OIC is adequate and should be 

accepted to resolve a dispute.25

The OIC provisions in the Restructuring Act were written broadly and did 

not specify criteria for what constitutes an adequate offer or when an offer 

was appropriate for resolving a dispute. IRS and Treasury staff who drafted 

the regulations incorporated language from the Restructuring Act’s 

conference report. According to the conference report, the existing OIC 

regulations should be expanded to permit IRS to consider factors beyond 

DATL or DATC in determining whether to accept a compromise. The 

conference report also stated that it was anticipated that IRS would take 

into account factors such as equity, hardship, and public policy where a 

compromise of an individual taxpayer’s income tax liability would promote 

ETA. Although the term “effective tax administration” was not defined or 

addressed in the Restructuring Act, IRS sought to incorporate the 

conference report’s ETA language into its regulations. The conference 

report also did not specifically define what was meant by effective tax 

administration. 

In addition to using the ETA language from the conference report, IRS’s 

regulations created two categories of ETA offers—non-hardship, which 

25Section 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.
Page 34 GAO-06-525 IRS Offers in Compromise

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

Source: GAO analysis of IRS data.

Note: IRS did not compile separate statistics on non-hardship ETA acceptances before 2004. 

The low number of non-hardship ETA acceptances is consistent with IRS 

guidance, which says that IRS should accept non-hardship ETA offers only 

in rare instances. IRS officials said that non-hardship ETA acceptances 

should be infrequent to keep the OIC Program from becoming an insurer of 

last resort. For example, an IRS official said that IRS would be wary of 

compromising with a business that could afford to pay its taxes but whose 

payroll manager embezzled company funds if the company were negligent 

in monitoring the manager because compromising might lead other 

businesses to become less diligent in protecting against such losses. 

On the other hand, the Taxpayer Advocate has said that making nonhardship 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. 

Fiscal year 2000 2001 2002 2003 2004 2005

Hardship ETA offers 

accepted 177 479 466 498 428 437

Non-hardship ETA offers 

accepted - - - - 1 30
Page 35 GAO-06-525 IRS Offers in Compromise

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

Sources: GAO analysis of IRS Internal Revenue Manual and Treasury regulations.

Once IRS determines that it will consider an offer as DATC or ETA, it 

calculates acceptable offer amounts following the procedure in figure 5. 

Figure 5: Conceptual Process for Determining Offer Amounts

Sources: GAO analysis of IRS Internal Revenue Manual and Treasury regulations.

If ... ... then

Equity in assets + future income <= tax liability Taxpayer may be considered for DATC

Equity in assets + future income > tax liability Taxpayer may be considered for ETA

Equity in assets + future income – living expenses = acceptable offer
Page 36 GAO-06-525 IRS Offers in Compromise

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 

Source: IRS’s ETA regulations.

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.
Page 37 GAO-06-525 IRS Offers in Compromise

Figure 7: Hardship ETA: Qualify Because of Basic Living Expenses

Source: IRS’s ETA regulations.

IRS officials said that although overlap exists between DATC and hardship 

ETA, taxpayers who qualify for hardship ETA today would not have 

qualified for DATC before the Restructuring Act because IRS did not have 

the authority to compromise when taxpayers' equity and income exceeded 

their tax liability. However, in light of the additional legal authority granted 

by the Restructuring Act that IRS acknowledges, the distinction IRS makes 

in its rules and guidance between current DATC and hardship ETA offers is 

not meaningful. Based on our review, only ETA cases accepted on nonhardship 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.

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.
Page 38 GAO-06-525 IRS Offers in Compromise

Because of the wording of the instructions, taxpayers applying for hardship 

ETA also are faced with the paradoxical process of proving that they can 

pay the tax liability and then explaining in writing why they cannot afford 

to pay it. According to the definition in the instructions, ETA offers have no 

“doubt as to collectibility,” but the instructions also say that the applicant 

must explain the circumstances that would justify an offer—circumstances 

equivalent to inability to pay. 

The National Association of Enrolled Agents said that IRS's ETA rules were 

complex and difficult to understand, and the American Institute of 

Certified Public Accountants has said that ETA regulations do not provide 

sufficient guidance for determining which OICs qualify as ETA offers. The 

Taxpayer Advocate and other professionals also have said that it is difficult 

to know what types of offers will qualify for ETA based on the ETA 

regulations and guidance. 

Partial Payment 

Proposal Raises 

Questions 

Proposed legislation, originally introduced in the Senate,26 would require 

taxpayers to make a partial payment with their offer applications. 

Taxpayers seeking a lump-sum offer would be required to pay 20 percent of 

the amount of the offer as a nonrefundable down payment. The term “lumpsum 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 

26This 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.
Page 39 GAO-06-525 IRS Offers in Compromise

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 
Page 40 GAO-06-525 IRS Offers in Compromise

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
Page 41 GAO-06-525 IRS Offers in Compromise

• 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 
Page 42 GAO-06-525 IRS Offers in Compromise

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 
Page 43 GAO-06-525 IRS Offers in Compromise

of any gaps between actual timeliness and the goal of providing a better 

basis for making decisions about program improvements. 

The commissioner agreed to analyze the causes of the growth in repeat 

offers. 

He also agreed to study how repeat offers affect timeliness.

As already noted, the Commissioner agreed to study accessibility using a 

customer satisfaction survey of taxpayers who participated in the OIC 

Program. While such a survey may be informative, its benefits may be 

limited because it does not question nonparticipants. As the report states, 

measuring access may require questioning taxpayers about why they did 

not participate in the program.

The Commissioner agreed to study the effectiveness of the Hand-Off Unit. 

As agreed with your offices, unless you publicly release the contents earlier 

we plan no further distribution of this report until 30 days from its date. At 

that time, we will send copies to interested congressional committees, the 

Secretary of the Treasury, the Commissioner of Internal Revenue, and other 

interested parties. The report will also available at no charge on the GAO 

Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 

at (202) 512-9110 or 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.

James R. White

Director, Tax Issues

Strategic Issues
Page 44 GAO-06-525 IRS Offers in Compromise

Appendix I

Scope and Methodology AAppenednxidexiIs

To identify recent trends in Offer in Compromise (OIC) Program 

performance, we analyzed information and program statistics in the 

Internal Revenue Service’s (IRS) Automated OIC database (AOIC). 

Specifically, we developed independent statistical trend analyses for four of 

five key performance objectives—timeliness of case processing, quality, 

accessibility, and cost. We reviewed OIC Program data primarily from fiscal 

years 2000 through 2005. To determine how well IRS understands the 

reasons for the trends, we interviewed key officials in IRS’s SB/SE Division 

responsible for collection policy and the OIC Program. We also reviewed 

available evaluations IRS had conducted in examining these trends.

To develop trend information on the timeliness of case processing, we

(1) separated offers disposed by the OIC Program from those disposed by 

the Appeals function (Appeals),1

 and (2) identified the number of onetime 

and repeat offers and developed statistics on processing times for those 

offers. Some taxpayers make only one effort to compromise a tax liability. 

We call these offers onetime offers. Other taxpayers make multiple 

attempts to compromise a tax liability. We call the first of these attempts an 

initial offer and each subsequent attempt a repeat offer. To generate 

statistics on processing times for the various disposition types, we 

developed disposition categories by aggregating disposition categories 

from the AOIC database. For more information about how we developed 

repeat offers and disposition categories, see appendix II.

To assess trends in the quality of the OIC Program, we collected 

information and interviewed IRS officials on the accuracy rates from IRS’s 

embedded quality measurement system (EQMS) for the centralized 

processing centers. Field locations only recently implemented EQMS; 

consequently, we used accuracy rates from IRS’s collection quality 

measurement system for the field locations. We compared the program’s 

accuracy rates against accuracy goals to assess the extent to which IRS 

staff followed procedures and made appropriate decisions. We also 

compiled and analyzed data on offer decisions by Appeals from the AOIC 

database to determine trends by year. 

Regarding the OIC Program’s accessibility, we compiled statistics on offer 

receipts and the dispositions of these receipts from the AOIC database. To 

1

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.
Appendix I

Scope and Methodology

Page 45 GAO-06-525 IRS Offers in Compromise

develop information on the pool of potentially eligible taxpayers for the 

program, we obtained data on IRS taxpayer delinquent accounts. We 

interviewed IRS officials about the measures they used to determine 

accessibility and also interviewed representatives of tax practitioner 

organizations and the National Taxpayer Advocate of the Taxpayer 

Advocate Service for their views about the program’s accessibility. 

To assess IRS’s efforts to measure compliance, we reviewed IRS’s reports 

on compliance by IRS’s Office of Program Evaluation and Risk Assessment 

(OPERA). We used IRS policy statement P-5-100 and information on the 

OIC Program objectives from the Internal Revenue Manual as criteria for 

defining compliance, which the OIC Program Director generally confirmed. 

We also drew on our 2002 study2

 of IRS’s OIC program, in which we 

recommended that IRS make plans to conduct evaluations of initiatives 

that affect the program’s performance. To learn about possible alternatives 

for measuring compliance, we consulted an official with the Treasury 

Inspector General for Tax Administration to learn about its methods for 

studying compliance in one of its reports. We interviewed IRS officials who 

were knowledgeable about the Monitoring OIC (MOIC) Unit and with the 

OIC Hand-Off Unit to gather information about how post-OIC compliance 

was tracked. 

We developed data on the productivity of the OIC Program by obtaining 

information from IRS on the number of full-time equivalent staff working in 

the OIC Program and compared this to the number of case closures from 

the AOIC database. We also interviewed IRS officials regarding any IRS 

analysis on productivity and reasons for productivity trends. 

To estimate the extent of offer mills’ participation in the OIC Program, we 

derived the number of offers designated solely to delay in the AOIC 

database that also were submitted with power of attorney forms. Also 

using the AOIC database, we measured how long IRS took to process those 

cases. We interviewed IRS officials with the OIC Program in Austin, Texas, 

and in Brookhaven, New York, and officials at the Office of Professional 

Responsibility (OPR), who investigate practitioner misconduct, in 

Washington, D.C. We also interviewed officials with OPERA about its work 

on abuse of the OIC Program. We reviewed reports on potential OIC abuse 

by IRS and internal IRS guidance on handling suspected cases of 

2

GAO, Tax Administration: IRS Should Evaluate the Changes to Its Offer in Compromise 

Program, GAO-02-311 (Washington, D.C.: Mar. 15, 2002).
Appendix I

Scope and Methodology

Page 46 GAO-06-525 IRS Offers in Compromise

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, 
Appendix I

Scope and Methodology

Page 47 GAO-06-525 IRS Offers in Compromise

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.
Page 48 GAO-06-525 IRS Offers in Compromise

Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database ApendxiI

To examine various measures of timeliness, quality, accessibility, and cost, 

we obtained a copy of portions of IRS’s AOIC database as of September 30, 

2005. The AOIC database contains processing information on offers 

submitted by taxpayers and related tax liability information since the OIC 

Program’s inception to the current day.1

 The AOIC database is a relational 

database, and we limited our analysis to selected tables relevant to our 

objectives.

To ensure the reliability of the computer-based data provided to us, we 

conducted interviews with key agency personnel to ascertain the types of 

program edits and controls used to ensure the accuracy of data entry and 

data migration into the AOIC database from IRS’s Master File. We also 

conducted various reliability analyses on data fields used in our analysis 

and reproduced reports prepared for program officials for their day-to-day 

management activities. We concluded that data in the AOIC database are 

sufficiently reliable for purposes of our engagement.

We concentrated our OIC Program analyses in two main areas: (1) the 

length of time it takes IRS to process offers by type of offer disposition (for 

example, accepted or rejected dispositions) and (2) the number of times 

taxpayers “repeat” offer submissions when a prior submission is not 

accepted and the length of time this processing of multiple offers takes. We 

also developed statistics on offer program inventory levels, the amount and 

percentages of tax debt compromised, and the number of offers processed 

under ETA regulations. In addition, we identified the number of offers 

returned to taxpayers because IRS believed a principal reason for the offer 

submission was to delay collection activities, and we determined how 

many of these offers had been prepared by professional practitioners. In 

general, we reported statistics for the 6 most recent fiscal years beginning 

in fiscal year 2000.

1

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.
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 49 GAO-06-525 IRS Offers in Compromise

Establishing GAO-Derived 

Dates and Disposition 

Codes

In examining reports IRS prepares from AOIC data, we determined IRS 

does not produce offer program statistics in a way that would allow us to 

answer our objectives. For example, IRS’s analyses aggregates offer 

disposition statistics from both IRS’s Collections function (i.e., the offer 

program) and its Appeals function. We wanted to separate these data in 

order to examine the OIC Program’s performance.

We separated offer processing time between the Collection and Appeals 

functions by examining available date fields in the AOIC database and 

creating our own starting and ending processing dates. For our Collections 

function start date, we used the earlier of the dates IRS received an offer 

from a taxpayer, the IRS Received Date, or the date the offer was initially 

entered into the AOIC database, the Area Office Opening Date.2

 For our 

Collections function end date, we used the Area Office Closing Date except 

for rejected offers. For rejected offers, we checked to see if a rejection 

letter had been generated and the date on which this occurred. If this date 

was earlier than the Area Office Closing Date, then we used the rejection 

letter date.3

 Offers that were still being processed in the Collections 

function are considered open offers and do not have ending dates.

The Appeals function start date was also based on the earlier of two dates: 

(1) the date in the AOIC database, known as the Sent to Appeals Date, 

when it was present, or (2) our Collections function ending date plus 30 

days when the Sent to Appeals date was not available or succeeded this 

date on offers known to have been appealed. The Collections ending date 

plus 30 days is the legal limit on the amount of time given a taxpayer to 

appeal a rejected offer.4

 The Appeals function ending date was always the 

official Area Office Closing date.

2

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.

3

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.

4

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.
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 50 GAO-06-525 IRS Offers in Compromise

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 GAOderived Collections function dispositions and three Appeals function 

dispositions. For example, we collapsed all of the offers contained in five of 

the program’s disposition types, as well as certain offers still open on AOIC, 

into our “Rejected” offers disposition category. This showed the 

Collections function had rejected 247,780 offers during the program’s 

history. These offers were as follows: (1) the 25,054 offers accepted by 

IRS’s Appeals function, (2) the 43,511 offers where the Appeals Function 

sustained the Collections function, (3) the 42,880 offers rejected by the 

Collections function without appeal rights, (4) the 116,787 offers rejected 

by the Collections function where the taxpayer did not exercise appeal 

rights, (5) the 7,955 offers withdrawn in Appeals, and (6) the 11,593 offers 

rejected by the Collections function but not yet closed on AOIC pending 

possible Appeals function activities. We combined all of these offers to 

demonstrate that the Collections function had rejected 247,780 offers over 

the history of the OIC program. Tables 12 and 13 reflect this roll-up and 

compare other GAO-derived disposition types for the Collections and 

Appeals functions to IRS’s disposition types. We have also included offers 

currently open in AOIC to balance offers between the two disposition sets.

Table 12: GAO-Derived OIC Program Disposition Types

GAO disposition types and offers Number of offers Related IRS disposition type

Collections function

1. Not-processable 421,086 IRS #7

2. Processable return 192,881 IRS #10

3. Withdrawn/terminated 94,849 IRS #6 and #8

4. Rejected 247,780 IRS #2, #3, #4, #5, #9, and #A

5. Accepted 264,500 IRS #1

A. Open in Collections 18,500 IRS #A

Total on the AOIC database 1,239,596

Appeals function

1. Accepted by Appeals 25,054 IRS #2

2. Reject sustained by Appeals 43,511 IRS #3

3. Withdrawn in Appeals 7,955 IRS #9
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 51 GAO-06-525 IRS Offers in Compromise

Source: GAO analysis of IRS’s AOIC database.

Table 13: IRS OIC Program Disposition Types

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.

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

A. Open in Appeals 7,417 IRS #A

Total on the AOIC database 83,937

(Continued From Previous Page)

GAO disposition types and offers Number of offers Related IRS disposition type

IRS disposition types (or open offers) Number of offers Related GAO disposition type

1. Accepted 264,500 Collections #5

2. Accepted by Appeals 25,054 Collections #4, Appeals #1

3. Rejection sustained by Appeals 43,511 Collections #4, Appeals #2

4. Rejected without appeal rightsa 42,880 Collections #4

5. Rejected taxpayer did not exercise appeal rights 116,787 Collections #4

6. Withdrawn 93,311 Collections #3

7. Returned not processable 421,086 Collections #1

8. Termination of consideration 1,538 Collections #3

9. Withdrawn in Appeals 7,955 Collections #4 and Appeals #3

10. Processable return 192,881 Collections #2

A. Open on the AOIC databaseb 30,093 Collections #4 and #A, Appeals #A 

Total on the AOIC database 1,239,596
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 52 GAO-06-525 IRS Offers in Compromise

average (1) number of offers taxpayers submitted on the same tax liability,5

(2) time it took IRS to process all of these offers, and (3) calendar time 

duration between the date the first in a series of offers was submitted and 

the date the last in the series was closed. In order to track these multiple 

offer submissions, we coined the term offer sets. Offer sets may contain 

one or many offers. We defined an offer set with only one offer as a onetime 

offer. For offer sets containing two or more offers, we defined the first offer 

in the set as an initial offer and the second and subsequent offers in the set 

as repeat offers. An offer set with two or more offers was also known as a 

repeat offer set.

Our criteria for calling a subsequent offer a repeat offer depended on 

whether tax liability information was available for comparison between 

two offers. For cases where tax liability information for one or both of two 

chronological offer dispositions had not been migrated from IRS’s Master 

File to the AOIC database, a common occurrence when offers were closed 

not processable, we set a 1-year time limit for designating the subsequent 

offer as a repeat offer. Where the tax liability information was available for 

two offers, we compared it to see if any one tax liability matched. If it did, 

we called the subsequent offer a repeat and the length of time between 

offer submissions did not matter. Finally, any time an offer that was part of 

a repeat offer set was accepted, we assumed that offer was the last offer in 

the offer set. Any subsequent attempt by a taxpayer to compromise the 

same tax liabilities started a new offer set.

We believe a 1-year time limit is reasonable as a criterion for establishing 

repeat offers because most tax modules are 1 year in length corresponding 

with a taxpayer’s annual filing requirement (for example, a tax module for 

an individual or corporate taxpayer would represent a calendar year period 

that they were required to file an income tax return). Taxpayers submitting 

offers must include all outstanding tax liabilities in the offer submissions, 

and we believe taxpayers who have not successfully compromised tax 

liability are not likely to have fully paid that tax liability and at the same 

5

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.
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 53 GAO-06-525 IRS Offers in Compromise

time incurred a new tax liability, which they attempt to compromise within 

that 1-year period.

The actual number of repeat offers and the average duration of time it takes 

taxpayers to compromise tax liabilities are estimates because (1) taxpayers 

continue to submit offers in the future for current tax liabilities for which 

prior offers were not accepted, (2) some taxpayers may fully pay 

outstanding tax liabilities then immediately incur new liabilities, and 

(3) some taxpayers filing jointly simultaneously attempt to compromise 

separate tax liabilities,6

 and it was not always possible to separately 

identify the two sets of offers. In the first situation, we underestimated the 

average time it takes to compromise tax liabilities when taxpayers extend 

that period by making future attempts to compromise their liabilities. In the 

second situation, we overestimated the number of repeat offers and the 

average time, but we believe such occurrences are rare. In the third 

situation, scenarios existed where we could have either underestimated or 

overestimated the actual number of repeat offers or the average duration 

times. On balance, we believe the first situation is the most common and 

that our estimates of the actual number of repeat offers and the average 

time duration are conservative.

Generating Other OIC 

Program Statistics

We also used our GAO-derived dates and disposition types to develop 

additional statistics using the AOIC database. For example, when OIC 

Program staff believe one of the reasons a taxpayer submitted an offer was 

an attempt to delay the collections process, they will enter one of several 

codes designating the offer as such in the AOIC database and return the 

offer to the taxpayer. We analyzed AOIC data by these codes and 

determined how frequently offers were returned for each code, the 

percentages of all offers submitted that were solely to delay collection 

activities, and how many offers involved professional practitioners. We also 

determined how long it took the OIC Program to return solely to delay 

offers involving professional practitioners.

In addition, we used the AOIC database to estimate how many ETA offers 

were processed over time. Before October 2005, IRS did not make a 

6

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. 
Appendix II

Scope and Methodology on Detailed Analysis 

of IRS’s AOIC Database

Page 54 GAO-06-525 IRS Offers in Compromise

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.
Page 55 GAO-06-525 IRS Offers in Compromise

Appendix III

Comments from the Internal Revenue Service ApendxiI
Appendix III

Comments from the Internal Revenue Service

Page 56 GAO-06-525 IRS Offers in Compromise
Appendix III

Comments from the Internal Revenue Service

Page 57 GAO-06-525 IRS Offers in Compromise
Appendix III

Comments from the Internal Revenue Service

Page 58 GAO-06-525 IRS Offers in Compromise
Appendix III

Comments from the Internal Revenue Service

Page 59 GAO-06-525 IRS Offers in Compromise
Page 60 GAO-06-525 IRS Offers in Compromise

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

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)
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