CONGRESSIONAL BUDGET OFFICE

U.S. Congress

Washington, DC 20515

www.cbo.gov

May 25, 2006

Honorable Max Baucus

Ranking Democratic Member

Committee on Finance

United States Senate

Washington, DC 20510

Dear Senator:

I am pleased to respond to your letter of May 18, which poses questions regarding CBO’s

cost estimate for the conference agreement on H.R. 4297, the Tax Increase Prevention and

Reconciliation Act of 2005. Specifically, the letter asks why CBO concluded that there

was no outlay effect from section 509 (which involves partial payments required with

submission of offers-in-compromise) and what experts CBO consulted in arriving at its

conclusion.

Under present procedures, offers-in-compromise from taxpayers must be accompanied by

a $150 filing fee. That payment is in addition to the actual settlement that may be agreed

upon, and it is not refundable in the event the offer is rejected. Nonetheless, in order to

delay collection of liability, a number of taxpayers make offers-in-compromise even

though they expect them to be rejected. More important, a significant fraction of offers fail

to generate fees because they are returned as unprocessable. The income that is generated

from the fees is treated as negative outlays in the budget, and the Internal Revenue Service

is allowed to spend those sums without appropriation action.

Section 509 makes two changes. First, it requires taxpayers making an offer-incompromise to make a partial payment of their tax liability in addition to paying the

existing filing fee. Second, the section provides for the filing fee to be credited toward the

final settlement. Because the partial payment of tax liability is also nonrefundable, the

first change could result in fewer fee-generating offers intended primarily to delay

collection. However, the crediting of the fee reduces the cost of making serious offers and

could result in more offers from taxpayers who might otherwise have been reluctant to

make them. Both of those effects are small; the first because the reduction in offers 
Honorable Max Baucus

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would come largely from offers that would not have generated fees because they would

have been unprocessable; the second because the filing fee is typically a small fraction of

the final settlement. The net outcome of those two offsetting effects on the volume of feegenerating offers, and thus the amount of fees collected, is not certain.

As you are aware, CBO shares responsibility with the Joint Committee on Taxation (JCT)

in generating estimates of the costs of legislation; CBO is required to use JCT’s estimates

of revenue effects in all instances of changes in the Internal Revenue Code (2 U.S.C.

§601(f)). As a result, CBO maintains limited in-house expertise in certain fields of tax

analysis—such as tax compliance and administration—in which JCT is knowledgeable. 

In cases such as this, when CBO must estimate effects on outlays that stem from tax code

changes affecting tax compliance and administration, we consult with JCT to obtain its

expert judgment. Such consultation reduces duplication of effort and helps make CBO’s

outlay estimates consistent with JCT’s revenue assumptions. In this matter, JCT’s analysts

estimated that section 509 will produce no change in income from fees. On the basis of

JCT’s understanding of the underlying tax compliance and administration issue, we

accepted their judgment and incorporated it into CBO’s cost estimate. Because there is no

estimated effect on the amount of fees collected, there is also no estimated effect on IRS

spending of those fees. 

I hope this information is helpful to you. If you have further questions, I would be happy

to discuss them with you.

Sincerely,

Donald B. Marron

Acting Director

cc: Honorable Charles E. Grassley

Chairman

Thomas A. Barthold

Joint Committee on Taxation