IRS Offers in Compromise: Performance Has Been Mixed; Better Management Information and Simplification Could Improve the Program
Published: 2006-04-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. Since that time,  concerns about performance, including the timeliness of offer processing,  the quality of offer decisions, and the accessibility of the program to  taxpayers, have persisted. Other concerns include whether offer mills (tax  practitioners that consistently use negligent or deceptive practices to  exploit taxpayers and the OIC Program by making misleading claims and  submitting unrealistic offers) have been affecting program performance,  whether taxpayers have been accorded their appeal rights granted in  statute, and whether IRS has been using its authority to grant offers for  exceptional circumstances as Congress intended. Offers are most  commonly accepted when taxpayers cannot pay the full amounts they owe.  These offers are called doubt as to collectibility (DATC) offers. According  to IRS regulations, offers for exceptional circumstances, called effective  tax administration (ETA) offers, are granted in cases where taxpayers can  fully pay their tax liabilities but where collecting the full amount would  create economic hardship or where compelling public policy or equity  reasons provide sufficient basis for compromise. Because of these  concerns about the program, IRS instituted a number of initiatives intended  to reduce unrealistic offers from taxpayers and improve program  performance, including centralized processing of less complex cases, a  revised application form, an offer application fee of $150, and increased  emphasis on taxpayer communication.
Because of your continuing interest in ensuring that IRS is administering  the OIC Program as efficiently and effectively as possible, you requested  this review. As agreed, the objectives of our review were to (1) describe the  trends in OIC program size; (2) describe the trends in program  performance and assess the extent to which IRS has researched the  reasons for the trends; (3) assess whether offer mills affect taxpayers and  OIC processing; (4) assess how well IRS ensures that taxpayers are  provided the right to appeal a rejected offer; and (5) determine whether  Treasury’s ETA regulations are consistent with the provision of the IRS  Restructuring and Reform Act of 1998 (Restructuring Act). 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.
To address these objectives, we reviewed the Internal Revenue Manual  (IRM) and an IRS policy statement to determine the OIC Program’s  objectives; obtained a copy of IRS’s Automated Offer in Compromise  (AOIC) database, the primary management information system for the  program; and used that database to develop trend data on the program. We  performed various data reliability analyses and determined that the AOIC  database was sufficiently reliable for the purposes of our work. We also  obtained data from IRS on its program staffing levels and the results of its  OIC case quality reviews. We interviewed program officials at IRS’s Small  Business/Self-Employed Operating Division headquarters in Washington,  D.C., IRS’s centralized OIC processing center in Brookhaven, New York,  and IRS’s Austin Compliance Center in Texas, which houses key OIC  managerial operations and maintains the AOIC database. We also obtained  information from IRS’s Office of the Chief Counsel, Office of Professional  Responsibility (OPR), Office of Program Evaluation and Risk Analysis  (OPERA), and the National Taxpayer Advocate (Taxpayer Advocate) of the  Taxpayer Advocate Service, in Washington, D.C., and interviewed  representatives from several tax practitioner organizations, the Federation  of Tax Administrators, and an official from a state attorney general’s office.  Appendix I provides a more detailed description of the scope and  methodology for this review, and appendix II provides technical details on  how we analyzed the AOIC database. We performed our work from  February 2005 through February 2006 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: Section 7122 of the Internal Revenue Code authorizes the Secretary of the  Treasury to compromise tax delinquencies. The purpose of the OIC  Program is to (1) collect what can be fairly and reasonably collected from  taxpayers who cannot fully pay their delinquent tax liability, (2) collect the  tax in a timely and cost-effective manner, and (3) provide taxpayers with a  fresh start toward complying with all future tax filing and payment  requirements. Generally, IRS views the OIC Program as a last resort after  taxpayers have explored all other available voluntary payment options,  such as installment agreements. IRS resolves less than 1 percent of all  balance due accounts through the OIC Program.
In recent years, the OIC Program underwent numerous program changes  intended to reduce the number of inappropriate offers submitted by  taxpayers and improve its operations. The changes include the following.  In 2001, IRS established the centralized OIC (COIC) processing centers in  Brookhaven, New York, and Memphis, Tennessee, to reduce inventory and  processing times and reduce costs. Process examiners, lower-grade staff at  the COICs, perform the initial processing of new offer applications, which  includes determining whether taxpayers’ applications meet IRS’s  processability criteria. Offer examiners, higher-grade staff at these COICs,  process less complex offers to completion by reviewing taxpayers’  financial information and making decisions about whether to accept the  offers. COICs primarily examine offers involving wage and investment  income. Based on a pilot test, IRS plans to have COIC staff work some  offers from taxpayers with self-employment income starting in the summer  of 2006. More complex offers are sent to IRS field offices around the  country where offer specialists, who are higher graded than offer  examiners, work the offers to completion. These offers take longer to  investigate and may require face-to-face meetings with the taxpayers. In  2003, IRS implemented an offer application fee requirement. Taxpayers  submitting offer applications must include a $150 fee unless they qualify for  a fee waiver. In 2004, IRS revised the OIC application form to make it more  user-friendly to taxpayers. In that same year, IRS management put more  emphasis on communicating with taxpayers while processing offers. In  addition to these program changes, the Restructuring Act also mandated a  new basis for accepting offers ETA.
Three Types of Compromise According to IRS regulations and guidance, compromises can be granted  for one of the following three reasons:  Doubt as to liability (DATL)—Doubt exists that the assessed tax liability  is correct.
DATC—Doubt exists that the taxpayer could ever pay the full amount of  tax owed.
Effective Tax Administration (ETA)—No doubt exists that the taxpayer  can fully pay the taxes owed, but exceptional circumstances  nonetheless lead IRS to compromise.
IRS has two categories of ETA offers, hardship and non-hardship.  According to IRS’s regulations, hardship ETA offers are those that IRS  grants because collecting the full liability would create economic hardship  for the taxpayer, while non-hardship ETA offers are granted on a basis of  equity and public policy. (How economic hardship qualifies a taxpayer for  an ETA offer will be addressed later in the report.) According to IRS, equity  and public policy considerations may be used to accept an offer when  doing so would not adversely affect voluntary compliance for taxpayers in  general.
While an offer is being reviewed, the statute of limitations for collection  and collection actions 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.
subsections: section_title: IRS’s Process for Making Offer Determinations
paragraphs: As illustrated in figure 1, the offer process starts when an offer application  is submitted by a taxpayer. The application package, Form 656, consists of  over 50 pages that include detailed instructions on determining eligibility  for filing an offer and a worksheet for calculating the offer amount for  individual and business taxpayers. The offer must be supported by a  current statement of the taxpayer’s financial condition, including data on  assets, liabilities, and monthly income and expenses.
IRS typically receives and begins the processing of offers in one of two  COICs. The first step is screening out offers based on DATL. DATL offers  involving trust fund recovery penalties 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,3. all required federal tax returns filed, 4. employment taxes current, and 5. taxpayer not in bankruptcy proceeding.
Generally, if any of the five requirements are not met, the application is  returned to the taxpayer as “not processable.” According to IRS officials,  since fiscal year 2003, the requirement to use the current application form  has not been enforced although it remains part of IRS’s processability  criteria. Program officials said that they do not want to return offer  applications to taxpayers solely because the most current form was not  used.
Next, IRS screens out taxpayers who, based on their self-reported financial  data, can fully pay their tax debts. The financial data include income,  assets, and living expenses. If, after subtracting the taxpayers self-reported  living expenses from their income and assets, IRS determines taxpayers  can fully pay their tax debt and no exceptional circumstances exist, the  offers are rejected without further processing.
IRS then sorts offers by complexity. Complex offers, such as those that are  business related or those from individual taxpayers required to file  Schedule C (Profit or Loss from Business), are generally sent to field  offices. The less complex offers remain in COIC for processing. Next, IRS  reviews each offer to determine whether the taxpayer provided enough  financial information for a decision to be made about whether to accept the  offer. If not, IRS requests more information from the taxpayer. If the  taxpayer does not provide the information, the offer is returned and the  offer is closed. A returned offer has not been rejected.
When IRS has sufficient financial information to make a decision, it first  determines whether an offer can be accepted on the basis of DATC. If not,  IRS considers the offer under ETA rules. At any point during the process,  taxpayers may withdraw their applications.
The step of rejecting an offer includes an administrative review. When OIC  staff propose rejecting an offer, IRS is required by the Restructuring Act to  conduct an independent administrative review. If the offer is rejected, the  taxpayer has the right to appeal the decision. Offers that are returned,  withdrawn, or deemed unprocessable do not have appeals rights. If IRS  accepts the offer, it monitors the taxpayer for 5 years to ensure that the  taxpayer remains compliant with the agreement and future tax obligations.
section_title: The OIC Program Has Decreased in Size, and Repeat Offers Have Increased
paragraphs: 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.
subsections: section_title: In Recent Years, IRS’s OIC Program Has Decreased in Size
paragraphs: 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.
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.
section_title: Repeat Offers Have Grown Significantly
paragraphs: Repeat offers, as a percentage of offers received, grew significantly from  fiscal year 2000 to 2005. Repeat offers occur when a taxpayer submits an  offer that IRS does not accept, IRS closes the case, and then the taxpayer  submits another offer covering at least some of the same tax liability. Some  taxpayers submit several repeat offers.
The number and percentage of repeat offers more than doubled from fiscal  year 2000 to 2003 (see fig. 2). After that, the number declined, but because  the number of offers received also declined, the percentage stayed about  the same. In fiscal year 2005, 40 percent (or 29,527) of the offers received  were repeat offers.
Thousands of offers were multiple repeats. Of the 29,527 repeat offers  received in fiscal year 2005, table 2 shows that for example 17,511 (or 59  percent) were second offers and 6,901 were third offers (see table 2).
Taxpayers whose repeat offers were received in 2005 submitted 2.8 offers  on average.
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.
section_title: OIC Program Performance Has Been Mixed, and IRS Has Not Researched the Reasons for Some Performance Trends
paragraphs: 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.
subsections: section_title: OIC Performance Can Be Measured Relative to Five Objectives
paragraphs: 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   accessibility—ease that taxpayers eligible for offers have participating   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.
section_title: Timeliness Has Improved for Some Taxpayers but Remains Mixed, and IRS’s Timeliness Goals Are Set for Offers, Not Taxpayers
paragraphs: The OIC Program measures timeliness based on how long it takes to make  a decision about an offer and not how long it has taken taxpayers, some of  whom have repeat offers, to get their tax liabilities finally resolved. IRS has  a 6-month target for making decisions on offers in COICs and a 9-month  target for making a decision on offers in the field. Measured on an offer  basis, IRS met its COIC 6-month target for 94 percent of offers and its field  9-month target for 62 percent of offers in fiscal year 2005.
The picture looks different when timeliness is measured by how long it  takes taxpayers to have their tax liabilities ultimately resolved—the  elapsed calendar time from when IRS first receives an offer to when IRS  makes a decision on a taxpayer’s final offer. In fiscal year 2005, IRS took  about 6 months on average to process onetime offers (both COIC and field)  but took far longer to resolve the tax liabilities of taxpayers with repeat  offers. The timeliness of onetime offers has improved from an average of  8.4 months in fiscal year 2000 to an average of 5.6 months in fiscal year  2005, as shown in table 3.
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.
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.
Another issue is that IRS does not have a rationale for its numeric goals for  processing times. In 2002, after we recommended that IRS set a timeliness  goal for the offer program based on taxpayer needs, other benefits such as  compliance, and program cost, IRS retained its old goal of 6 months for  COIC offers and established a separate goal of 9 months for field offers.  However, the two current goals still are not based on a documented  analysis of taxpayer needs, other benefits, and program costs.
Without measuring timeliness from the perspective of the taxpayer and  without a rationale for timeliness goals set for taxpayers, IRS may be  missing an opportunity to effectively drive program improvements from a  taxpayer’s perspective. As we discussed in other reports, industry guidance  for customer service recommended setting goals based on how long  customers were willing to wait for the service, the value of the service to  the organization, and the costs of providing the service. 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.
section_title: IRS’s Data Show That Quality Goals Have Been Met
paragraphs: 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).
In the COICs, IRS measures the customer accuracy rate using the  embedded quality measurement system (EQMS) that was implemented in  fiscal year 2004. IRS exceeded its goal of 94 percent for fiscal year 2005. For  the OIC Program, EQMS measures how well employees follow offer  processing procedures. Quality is measured by the sample of cases  reviewed that met the standards for following the required steps, such as  contacting the taxpayer or getting managerial review to process cases. IRS  believes that offer examiners make more consistent decisions when they  follow all the required processing steps. According to the OIC Program  Manager, EQMS is better than the system previously used in the centralized  processing centers, the collection quality measurement system (CQMS).  CQMS is still being used in field offices but is to be phased out in fiscal year  2006 as EQMS is being phased in. IRS also met its field quality goal of 84  percent using CQMS for fiscal year 2005. According to the OIC Program  Manager, IRS plans to set a field goal using EQMS after collecting and  analyzing data for field cases during the first year that EQMS is  implemented in field offices.
Appeals data offer some additional evidence about the quality of OIC  Program decisions, although the data are a limited quality indicator  because only rejected offers can be appealed. Of rejected offers appealed,  in fiscal year 2005, Appeals sustained 65 percent of rejection decisions  while deciding to accept offers in 24 percent of the cases, as shown in table  6 (11 percent were withdrawn). A decision by Appeals to accept an offer is  not always the same as overruling the OIC Program. Appeals accepted  some offers that the OIC Program had rejected because taxpayers provided  Appeals with new financial information. An IRS study of 113 cases where  offers were accepted in Appeals concluded that 38 percent of offers were  accepted by Appeals based on taxpayers providing new financial  information rather than Appeals disagreeing with the OIC Program  decisions. Table 6 also shows some improvement in the sustention rate  from fiscal years 2002 through 2005.
section_title: Declines in OIC Program Size Combined with Trends in IRS’s Other Collection Programs Raise Questions about OIC Program Accessibility
paragraphs: Declines in OIC participation rates since fiscal year 2000 raise questions  about whether accessibility has decreased. We define accessibility as how  easy it is for potentially eligible taxpayers to participate in the OIC  Program. IRS officials agreed with this definition but said that they do not  measure accessibility and do not monitor changes in accessibility over  time. Tracking accessibility could provide information about the  effectiveness of efforts to reduce barriers to program participation for  taxpayers wishing to make legitimate offers. For example, IRS recently  made changes to the offer application form intended to make the offer  application process easier for taxpayers to understand.
Furthermore, the Taxpayer Advocate, the American Institute of Certified  Public Accountants, and the National Association of Enrolled Agents have  raised concerns about barriers to OIC Program access. They cited  confusion about the offer requirements and procedures, the lengthy time  needed to get offers resolved, and the difficulty in getting what they believe  are reasonable offers accepted as deterrents to taxpayers’ ability to  participate in the program. The Taxpayer Advocate stated that some  practitioners are often not willing to recommend the program to their  clients because of these issues. A small number of practitioners we spoke  with, as well as the practitioner organizations we contacted, made the point  that the OIC process is too burdensome for taxpayers. Without a measure  of accessibility, it is difficult to assess the merits of these concerns.
Measuring access, or ease of participation, may require questioning  taxpayers about why they did or did not participate in the program. Such  direct evidence does not currently exist. However, it is possible to measure  participation with readily available data. While not the same as  accessibility, trends in participation rates might be an indicator of whether  changes in accessibility have occurred. A measure of participation would  compare OIC Program participation to the pool of potentially eligible  taxpayers.
Over the years 2000 to 2004, the number of accepted offers declined by  more than half, as shown in figure 3. Over the same years, one proxy  measure of potentially eligible taxpayers, the number of delinquent  taxpayers, stayed roughly constant at 5.9 million delinquent taxpayer  accounts in fiscal year 2000 and 6.0 million in 2004. 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.
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. The two trends do not demonstrate that  accessibility has declined because they do not directly measure ease of use.  It is possible that taxpayers decided for reasons unrelated to accessibility  to reduce their participation in the program. However, it is possible that  concerns like those expressed by the Taxpayer Advocate explain the  decline. IRS has not done an analysis to determine whether the ease of  using the program has changed, and, if so, why.
IRS officials told us that the reason they do not measure accessibility is that  the program is available to all eligible taxpayers and that taxpayers self- select their participation. They also said that IRS has not measured the  decline in the size of the program relative to changes in the pool of  potentially eligible taxpayers. On the other hand, IRS has taken steps, such  as requiring a $150 offer application fee and revising the offer application  form, intended to reduce the number of unrealistic offers without reducing  the accessibility of the program to potentially eligible taxpayers. In  addition, the OIC Program Manager told us that to determine whether there  are eligible taxpayers who do not participate in the program, IRS is  considering studying whether some taxpayers with delinquent accounts are  eligible for offers.
Without a measure of accessibility that gauges ease of use, IRS does not  know whether accessibility has changed over time. As a consequence, IRS  does not know whether the declines in participation rates indicate a  decline in accessibility, nor does IRS know whether the concerns raised by  the Taxpayer Advocate and others about a decline in accessibility are  correct. Furthermore, IRS would be unable to evaluate whether its efforts  to reduce inappropriate offers, without reducing accessibility by eligible  taxpayers, have been successful.
There may be more than one way to measure accessibility. One way would  be to measure program participation rates and, if participation is changing,  do follow-up questioning of taxpayers about whether ease of use had  changed. Potentially eligible taxpayers could be asked, for example, about  whether they perceived barriers to their participating in the program. If  accessibility is found to be declining, then analysis of what IRS did to cause  the decline would be useful for making decisions about whether and how  to address the decline.
section_title: IRS Monitors Taxpayer Compliance with the Terms of Their Accepted Offers, but Does Not Routinely Track Aggregate Compliance Trends for Program Participants
paragraphs: 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. 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).
IRS created a new unit called the Hand-Off Unit partly because the 2004  study concluded that rejected offers languished without further collection  action. The Hand-Off Unit takes the rejected or withdrawn cases and  initiates appropriate collection procedures with taxpayers using the  financial information gained during the OIC process. Like MOIC, the Hand- Off Unit currently does not analyze compliance trends on a routine basis,  although officials told us that IRS would eventually have that capability but  has not set a date. To properly assess IRS performance on achieving its  compliance objective, IRS also would need to collect and assess such trend  information on a periodic basis.
The 2004 study represents a useful assessment of OIC’s compliance  benefits for one time and uses an appropriate measurement unit—the  taxpayer. However, it is no longer useful for ongoing management  decisions because the data in the study are now about 3 to 11 years old. The  study period predated many of IRS’s recent program changes, which might  affect the program’s performance with respect to compliance. For example,  the new Hand-Off Unit, which was started after the 2004 report, may help  achieve greater compliance of taxpayers with rejected or withdrawn offers,  but IRS will not know whether it works if it does not track overall  compliance trends.
The OIC Program Manager said that IRS found the 2004 study too costly to  repeat, requiring thousands of staff hours from the OIC Program and  expertise from OPERA. However, only a portion of the work for the 2004  study was devoted to studying compliance; the Program Manager said that  he did not know how much it would cost to repeat the compliance portions  alone. Further, IRS does not use alternatives for the kind of compliance- benefit information the 2004 study provided, although such alternatives  exist and some are lower cost. For example, IRS could repeat only the  compliance portion of its OPERA study or use the existing status reports  collected by MOIC, which cover taxpayers who default on their offers but  are not routinely aggregated for OIC managers, to monitor trends on the  compliance of taxpayers with accepted offers. The only additional costs to  use the MOIC reports would be aggregating the data. The Treasury  Inspector General for Tax Administration (TIGTA) also conducted a file  review of accepted offers to assess aggregate compliance performance,  which the OIC Program could use as a model. According to a TIGTA audit  manger, the TIGTA study was something IRS should be able to do at a  lower cost than the OPERA report. Using the MOIC data that are already  available or employing the TIGTA approach would not yield as elaborate a  study as IRS’s 2004 study, but the alternative methods would provide  information more useful to managers than having no information at all.
We previously concluded that having the proper performance measures in  place is critical for successful program adjustments and in assessing  achievement of objectives. 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, we said that  IRS should develop evaluation plans before starting new initiatives; it did  not do so in this case.
section_title: Offers Closed Declined Faster Than FTEs, Resulting in Productivity Declines and Increased Costs per Offer
paragraphs: 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.
If IRS had maintained productivity at fiscal year 2003 levels, the agency  would have had the flexibility to reallocate a substantial number of FTEs to  other areas. In fiscal year 2005, IRS would have been able to reassign 110  FTEs in COICs and 7 FTEs in field offices. As the inventory of offers, which  affects the number of offer closures, declined in fiscal years 2004 and 2005,  IRS did reduce FTEs, particularly in the field. However, the number of  offers closed declined more rapidly than the number of FTEs, hence the  decline in productivity. In January 2006, IRS officials told us that they  anticipate making additional staff reductions in fiscal year 2006.
OIC officials provided some possible reasons for the decline in  productivity, including an increase in offer complexity and a plan to keep  more staff working on offers than might have been necessary to ensure that  service to taxpayers was maintained. Over the fiscal years 2003 to 2005,  however, there is some evidence that offers have not grown more complex.  Figure 3 does not show a noticeable change in case complexity. For  example, the percentage of not processable offers, the simplest and fastest  cases to close, was somewhat higher in fiscal year 2005 than in fiscal year  2003. With respect to the desire to maintain service to taxpayers, IRS has  shifted collections staff from one type of case to another. Thus, IRS has  flexibility to move staff to maintain service in the face of an unexpected  upswing in offer submissions, especially since a pool of experienced OIC  processors would be available.
OIC officials told us that since fiscal year 2001, they have substantially  reduced the OIC Program’s costs, particularly in field offices. Based on IRS  information, the number of revenue officers assigned to OIC cases have  declined from 1,078 as of April 2001 to 267 in April 2006—a reduction of   811 revenue officers. In March 2006, IRS’s OIC Program Manager told us  that because IRS will start processing offers from taxpayers filing simpler  Schedule C forms at the COICs later in the year, it will further reduce the  number of revenue officers in field offices by 100.
section_title: Limited Evidence Suggests Offer Mills’ Effect on OIC Processing May Not Be Large
paragraphs: 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.
subsections: section_title: Offer Mills Cannot Be Easily Distinguished from Legitimate Practitioners
paragraphs: IRS collects some information about professional tax practitioners, who  assist taxpayers making offers, but the data are not sufficient for  distinguishing offer mills from legitimate practitioners.
For purposes of this report, an offer mill is a professional tax practitioner  that consistently uses negligent or deceptive practices to exploit taxpayers  and the OIC Program by making misleading claims and submitting  unrealistic offers. For example, an offer mill might use deceptive  advertising, creating a false expectation that the recipient of the  advertisement would qualify for an offer or save as much as the  advertisement suggests. An offer mill also might file incomplete or repeat  offers to exploit the rule that suspends collection proceedings while offers  are being considered.
IRS does collect two types of information about professional practitioners  on the OIC application, but this information is not always submitted with  the application. First, the OIC application asks enrolled agents 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.
section_title: Best Available Evidence, Though Incomplete, Suggests That Offer Mills Do Not Have a Large Effect on OIC Processing but That They Might Harm Taxpayers
paragraphs: The best available information on offer mills from IRS—although limited by  the same factors described in the previous section—suggests that offer  mills do not have a large effect on OIC processing.
An IRS study published in 2004 found that a small number of offers  submitted with the assistance of professional practitioners were abusive  and concluded that offer mills were not driving abuse in the system.
The OIC Program can make referrals to OPR regarding suspected  practitioner abuse but rarely does so. In November 2005, OPR was  investigating only 36 cases involving OIC and practitioners.
An official with the Maryland OIC program told us that the state  program has had no significant problems with offer mills or other  practitioners in processing OIC applications there. Furthermore, a  representative of the Federation of Tax Administrators, an organization  of state tax officials, said that problems state OIC programs have with  tax practitioners generally have more to do with consumer rights issues  than with tax collection.
In fiscal year 2005, there were 972 offers with POAs that were returned  as “solely to delay.” This was about 1 percent of all cases closed in 2005.  The effect of these cases on processing may have been small. IRS  returned 83 percent of the offers deemed solely to delay that had POAs  in 6 months or less.
Anecdotal evidence also indicates that misconduct by offer mills may have  harmed some taxpayers even though there was no effect on OIC  processing. For example, the Connecticut Attorney General’s Office  investigated one company offering OIC preparation services because the  company charged taxpayers for submitting offers but then did not send the  offers to IRS. In 2005, the state of Missouri settled with a firm over  deceptive advertising tactics and for failing to complete OIC services as  promised. OIC processing was not adversely affected in these cases. The  Taxpayer Advocate also told us about one case in which an offer mill  charged such a large fee that the taxpayer ended up filing for bankruptcy,  rather than compromising with IRS.
section_title: IRS Has Implemented Procedures Designed to Reduce the Impact of Offer Mill Abuse
paragraphs: 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.
section_title: IRS Notifies Taxpayers of Their Appeal Rights through Various Channels
paragraphs: IRS has established formal means to notify taxpayers of their appeal rights,  including providing information about appeal rights on the offer  application form and in the offer rejection letter that IRS sends taxpayers.  In addition, IRS’s Web site and some IRS publications contain information  for taxpayers on rights and responsibilities in appealing rejected offers.
The offer application package (Form 656) contains information on  taxpayers’ rights to appeal rejected offers. Under step 7 of the application  process, “What to Expect after the IRS Receives Your Offer,” is information  on what a taxpayer can expect if IRS rejects an offer. Specifically, the  application states that taxpayers will be sent a letter explaining why their  offers were rejected and their right to submit an appeal.
IRS’s Web site also provides information on appealing rejected offers,  including links to information about appeal rights and how IRS reviews  appeals. The Web site’s resources include Tax Topic 204, Offers in  Compromise; the Collection Appeal Rights link; IRS Publication 5, Your  Appeal Rights and How to Prepare a Protest If You Don’t Agree; and a video  clip on the offer process with information on how to appeal a rejected  offer.
The IRS AOIC database contains entries intended to document the sending  of rejection letters, with information on how to appeal, to taxpayers. We  tested the AOIC database to ascertain whether such entries were made.  Our limited review did not indicate any problems in documenting whether  rejection letters and appeals instructions were being sent as required. We  did not contact taxpayers to determine whether they actually received the  letters.
The percentage of rejected offers that were appealed indicates that many  taxpayers were aware of their appeal rights. The percentage of offers  appealed ranged from 30 percent to 51 percent (see table 10).
section_title: ETA Regulations Are Consistent with Statute, but Hardship ETA and DATC Offers Are Not Meaningfully Distinct and Non- Hardship ETA Offers Are Rare
paragraphs: 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.
subsections: section_title: Regulations on ETA Are Consistent with the Restructuring Act
paragraphs: 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.
The OIC provisions in the Restructuring Act were written broadly and did  not specify criteria for what constitutes an adequate offer or when an offer  was appropriate for resolving a dispute. IRS and Treasury staff who drafted  the regulations incorporated language from the Restructuring Act’s  conference report. According to the conference report, the existing OIC  regulations should be expanded to permit IRS to consider factors beyond  DATL or DATC in determining whether to accept a compromise. The  conference report also stated that it was anticipated that IRS would take  into account factors such as equity, hardship, and public policy where a  compromise of an individual taxpayer’s income tax liability would promote  ETA. Although the term “effective tax administration” was not defined or  addressed in the Restructuring Act, IRS sought to incorporate the  conference report’s ETA language into its regulations. The conference  report also did not specifically define what was meant by effective tax  administration.
In addition to using the ETA language from the conference report, IRS’s  regulations created two categories of ETA offers—non-hardship, which  includes offers granted for reasons of equity and public policy, and  hardship, which are granted for cases in which full payment would cause  financial strain for the taxpayer.
section_title: IRS Has Accepted Hundreds of ETA Offers Annually since Fiscal Year 2001 but Non-Hardship ETA Offers Are Rare
paragraphs: 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.
The low number of non-hardship ETA acceptances is consistent with IRS  guidance, which says that IRS should accept non-hardship ETA offers only  in rare instances. IRS officials said that non-hardship ETA acceptances  should be infrequent to keep the OIC Program from becoming an insurer of  last resort. For example, an IRS official said that IRS would be wary of  compromising with a business that could afford to pay its taxes but whose  payroll manager embezzled company funds if the company were negligent  in monitoring the manager because compromising might lead other  businesses to become less diligent in protecting against such losses.
On the other hand, the Taxpayer Advocate has said that making non- hardship ETA acceptances difficult to accept may erode taxpayers’ faith in  the fairness of the income tax system. The Taxpayer Advocate and  representatives of tax practitioner groups also have said that the low  number of non-hardship ETA acceptances violates Congress’s intent in  passing the Restructuring Act, which was to make compromises easier for  taxpayers to reach by expanding the basis on which compromises would be  made.
As already noted, the provisions of the Restructuring Act on offers are  broadly written and IRS’s ETA regulations are consistent with the  Restructuring Act. The act did not define criteria for accepting offers.  Consequently, whether the number of non-hardship ETA offers IRS  accepted satisfied Congress’s intent is not clear.
section_title: No Meaningful Distinction Exists between Hardship ETA and DATC Offers
paragraphs: 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.
Once IRS determines that it will consider an offer as DATC or ETA, it  calculates acceptable offer amounts following the procedure in figure 5.
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.
IRS officials said that although overlap exists between DATC and hardship  ETA, taxpayers who qualify for hardship ETA today would not have  qualified for DATC before the Restructuring Act because IRS did not have  the authority to compromise when taxpayers' equity and income exceeded  their tax liability. However, in light of the additional legal authority granted  by the Restructuring Act that IRS acknowledges, the distinction IRS makes  in its rules and guidance between current DATC and hardship ETA offers is  not meaningful. Based on our review, only ETA cases accepted on non- hardship grounds are meaningfully distinct from DATC offers because the  criteria for accepting them are different.
section_title: ETA Rules Have Created Complexity and Confusion in the OIC Application Process, According to Tax Professionals
paragraphs: Instructions on applying for ETA also cause unnecessary program  complexity, while ETA rules and regulations cause confusion among  taxpayers and professionals, according to the Taxpayer Advocate,  practitioner organizations, and individual tax professionals with whom we  consulted.
The OIC Program Manager said that it does not matter whether taxpayers  check ETA, DATC, or DATL on their applications because each offer is  evaluated for all three. Yet taxpayers still must check a box on the OIC  application form (Form 656) indicating which type of offer they seek.  Having to determine which box to check adds complexity to the process  for taxpayers and tax practitioners. The choice among offer types also adds  complexity for IRS, which determines which type of offer the taxpayer has  made (i.e., DATC, DATL, or ETA). One professional tax practitioner told us  that in filling out an OIC application for a client, she checked more than  one box even though, according to IRS definitions, the types are mutually  exclusive. Confusion and complexity may increase the burden for some  taxpayers—the time and costs needed to prepare an offer application.  Furthermore, as was discussed earlier, the Taxpayer Advocate has said that  confusion about offer requirements and program procedures may reduce  the program's accessibility.
Because of the wording of the instructions, taxpayers applying for hardship  ETA also are faced with the paradoxical process of proving that they can  pay the tax liability and then explaining in writing why they cannot afford  to pay it. According to the definition in the instructions, ETA offers have no  “doubt as to collectibility,” but the instructions also say that the applicant  must explain the circumstances that would justify an offer—circumstances  equivalent to inability to pay.
The National Association of Enrolled Agents said that IRS's ETA rules were  complex and difficult to understand, and the American Institute of  Certified Public Accountants has said that ETA regulations do not provide  sufficient guidance for determining which OICs qualify as ETA offers. The  Taxpayer Advocate and other professionals also have said that it is difficult  to know what types of offers will qualify for ETA based on the ETA  regulations and guidance.
section_title: Partial Payment Proposal Raises Questions
paragraphs: Proposed legislation, originally introduced in the Senate, would require  taxpayers to make a partial payment with their offer applications.  Taxpayers seeking a lump-sum offer would be required to pay 20 percent of  the amount of the offer as a nonrefundable down payment. The term “lump- sum offer” means any offer of payments made in five or fewer installments.  Alternatively, a periodic payment offer would have to be accompanied by  the payment of the amount of the first proposed installment. The new  provision also gives the Secretary of the Treasury authority to issue  regulations waiving any such payment. Finally, no user fee would be  imposed on any offer accompanied by a payment. IRS would have 60 days  from enactment to implement the changes.
The legislative proposal that would require taxpayers to make a partial  payment with their offer applications raises several questions for IRS. One  is how the partial payment would apply in the case of repeat offers. For  second and subsequent offers, would another partial payment be required?  Is the payment nonrefundable for every disposition category? Should the  rules for partial payments be consistent with the current rules for  processing fees? Currently, if an offer fails to meet IRS’s processability  criteria, IRS returns the $150 processing fee to taxpayers along with their  offer applications.
Another question is whether the proposal might affect the program’s  accessibility. Would a partial payment requirement discourage eligible  taxpayers from submitting offers? As discussed earlier, IRS does not  monitor accessibility. Without a measure of accessibility, the impact of a  partial payment on accessibility might not be easily determined.
Another question is whether 60 days are enough time to implement the  partial payment requirements. IRS officials stated that computer systems  would require changes to accommodate the imposition of partial payments.  We did not determine how long it would take IRS to make the changes.
section_title: Conclusions
paragraphs: Because some delinquent taxpayers will always be unable to fully pay their  tax debts, IRS's OIC Program is necessary to ensure that taxpayers pay  what they can and have a “fresh start” toward complying with their future  obligations. The performance of the program is important because factors  like the timeliness of offer decisions can have a large impact on taxpayers  in difficult financial straits and because the IRS resources devoted to the  program are significant.
Opportunities exist to make immediate improvements to the program and  lower costs. First, staffing adjustments have not kept pace with declines in  cases in recent years, resulting in lower productivity. Reducing staffing to  increase productivity to its recent levels would lower program costs.  Second, because the distinction between DATC and ETA hardship offers is  not meaningful, the program is unnecessarily complex. Practitioners and  others have complained about the resulting confusion and burden on  taxpayers, which may discourage taxpayers from using the program. Costs  to taxpayers and IRS could be reduced by eliminating the distinction.
The success of the program also depends on how well IRS management  understands the reasons for the program’s performance. One step in  understanding performance is measuring it. IRS’s measurement of  timeliness on an offer basis masks how long it takes to make a final  decision for taxpayers to get their liabilities resolved. IRS’s tracking of  accessibility is also incomplete because it is not done relative to the size of  the pool of potentially eligible taxpayers. IRS’s tracking of the future  compliance of program participants is also incomplete because it does not  routinely measure compliance.
Another step in understanding performance is setting goals. Numeric goals  provide objective criteria for assessing performance. The numeric goals for  OIC timeliness still are not based on an analytical assessment of taxpayer  needs and other benefits, and the goals are set for each case rather than for  taxpayers.
A third step in understanding performance is analysis that determines the  causes of performance. By understanding the causes of performance, IRS  management can make better-informed decisions about how to improve  performance. IRS’s 2004 compliance study is an example—it led to the  creation of the Hand-Off Unit. Because IRS has implemented several recent  improvement initiatives, such as the Hand-Off Unit, additional analysis is  necessary to understand their impact on compliance. Further, IRS has not  analyzed other trends. IRS has not determined the causes of the large  growth in repeat offers since 2000, despite their impact on timeliness from  a taxpayer’s perspective. In addition, IRS has not analyzed factors that  affect trends in the OIC Program’s accessibility. Without such an analysis,  IRS will not know whether the declining OIC participation rate is an  indication of a decrease in accessibility.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue: 1. Take the following steps to immediately improve the OIC Program:  adjust staffing levels to increase productivity and reduce cost per  offer, unless IRS can demonstrate that case complexity has increased  and  eliminate the distinctions between hardship ETA and DATC in the  application, instructions, and procedures to simplify the program. 2. Develop meaningful measures of performance, including  a measure of processing timeliness for taxpayers,  a measure of accessibility that gauges ease of participation in the  programs, and  a measure of compliance for all program participants. 3. Set processing timeliness goals for taxpayers that are based on an  assessment of taxpayer needs and other benefits.  4. Conduct analyses of the reasons for performance trends in order to  determine causes of the growth in repeat offers;   determine how repeat offers affect timelines and, if justified based on  the results, take action to meet timeliness goals;  determine the reasons for trends in accessibility; and  determine the effectiveness of the Hand-Off Unit.
section_title: Matter for Congressional Consideration
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: In his April 14, 2006, letter the Commissioner of Internal Revenue (see app.  III) said that he partially agrees with our recommendations. IRS provided  separate technical comments, which we incorporated into our report  where appropriate.
The Commissioner indicated that IRS believed that eliminating the  distinction between economic hardship and doubt as to collectibility offers  may not be the best approach but said that IRS is open to suggestions to  clarify offer instructions and will consult with practitioner groups and the  Taxpayer Advocate on whether more clarity is needed. The Commissioner  said that the distinction is important because the Restructuring Act gave  IRS additional authority to accept offers. The Commissioner further stated  that the distinction has meaning for potential program participants.  However, as we stated in the report, the regulations and guidance for  reviewing hardship ETA offers are so similar to rules and guidance for  determining acceptable DATC offers that the two types of offers are  effectively indistinguishable from each other. IRS’s examples of acceptable  hardship ETA offers (see pp. 36 and 37 of this report), further illustrate that  they are not meaningfully distinct from DATC offers because they  demonstrate that there is doubt that such taxpayers could provide for their  living expenses, which IRS authorizes for all offers, and pay their tax  liabilities. This makes the offers in the examples similar to DATC offers.  Considering this, the OIC Program could be simplified by eliminating the  differences between hardship ETA and doubt as to collectibility offers.
The Commissioner agreed with our recommendation that IRS adjust  staffing levels to increase productivity and reduce cost.
The Commissioner said that IRS does not agree that timeliness measured  by taxpayer rather than by individual offer would be an effective measure  of performance. IRS said that its existing timeliness measure by OIC case  closure is sufficient, but it did agree to analyze the affect of repeat offers on  timeliness. An analysis of the extent that timeliness could be improved, if at  all, by reducing repeat offers could help program managers make decisions  about whether program changes to improve timeliness would be justified.  However, as the report states, it might be less costly for IRS to deal once  with a taxpayer, even if it takes more time to work the single case, rather  than have to process repeat offers.
IRS agreed that it could do a better job of compiling information on OIC  Program compliance and will explore methods for doing so.
With respect to measuring accessibility, the Commissioner said that IRS is  concerned about the perception that the OIC Program is less accessible  than in the past. He said that IRS would use a customer satisfaction survey  to gain insights into accessibility and might do additional research about  barriers to entering the program. As we stated in the report, tracking  accessibility could provide information about the effectiveness of efforts to  reduce barriers to program participation for taxpayers wishing to make  legitimate offers.
With respect to setting timeliness goals for taxpayers based on an  assessment of taxpayers’ needs and other benefits, the Commissioner said  that IRS’s current timeliness goals are based in part on such considerations  but also said that IRS would consider whether taxpayer feedback reveals  additional taxpayer needs. However, as the report states, IRS was unable to  provide any analytical support for its 6- and 9-month processing goals.  Furthermore, IRS does not set goals from the perspective of taxpayers. We  continue to believe measuring timeliness from the perspective of taxpayers  and setting goals based on taxpayer needs would inform IRS management  of any gaps between actual timeliness and the goal of providing a better  basis for making decisions about program improvements.
The commissioner agreed to analyze the causes of the growth in repeat  offers.
He also agreed to study how repeat offers affect timeliness.
As already noted, the Commissioner agreed to study accessibility using a  customer satisfaction survey of taxpayers who participated in the OIC  Program. While such a survey may be informative, its benefits may be  limited because it does not question nonparticipants. As the report states,  measuring access may require questioning taxpayers about why they did  not participate in the program.
The Commissioner agreed to study the effectiveness of the Hand-Off Unit.
As agreed with your offices, unless you publicly release the contents earlier  we plan no further distribution of this report until 30 days from its date. At  that time, we will send copies to interested congressional committees, the  Secretary of the Treasury, the Commissioner of Internal Revenue, and other  interested parties. The report will also available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-9110 or 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.
section_title: Scope and Methodology
paragraphs: 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), and (2) identified the number of onetime  and repeat offers and developed statistics on processing times for those  offers. Some taxpayers make only one effort to compromise a tax liability.  We call these offers onetime offers. Other taxpayers make multiple  attempts to compromise a tax liability. We call the first of these attempts an  initial offer and each subsequent attempt a repeat offer. To generate  statistics on processing times for the various disposition types, we  developed disposition categories by aggregating disposition categories  from the AOIC database. For more information about how we developed  repeat offers and disposition categories, see appendix II.
To assess trends in the quality of the OIC Program, we collected  information and interviewed IRS officials on the accuracy rates from IRS’s  embedded quality measurement system (EQMS) for the centralized  processing centers. Field locations only recently implemented EQMS;  consequently, we used accuracy rates from IRS’s collection quality  measurement system for the field locations. We compared the program’s  accuracy rates against accuracy goals to assess the extent to which IRS  staff followed procedures and made appropriate decisions. We also  compiled and analyzed data on offer decisions by Appeals from the AOIC  database to determine trends by year.
Regarding the OIC Program’s accessibility, we compiled statistics on offer  receipts and the dispositions of these receipts from the AOIC database. To  develop information on the pool of potentially eligible taxpayers for the  program, we obtained data on IRS taxpayer delinquent accounts. We  interviewed IRS officials about the measures they used to determine  accessibility and also interviewed representatives of tax practitioner  organizations and the National Taxpayer Advocate of the Taxpayer  Advocate Service for their views about the program’s accessibility.
To assess IRS’s efforts to measure compliance, we reviewed IRS’s reports  on compliance by IRS’s Office of Program Evaluation and Risk Assessment  (OPERA). We used IRS policy statement P-5-100 and information on the  OIC Program objectives from the Internal Revenue Manual as criteria for  defining compliance, which the OIC Program Director generally confirmed.  We also drew on our 2002 study of IRS’s OIC program, in which we  recommended that IRS make plans to conduct evaluations of initiatives  that affect the program’s performance. To learn about possible alternatives  for measuring compliance, we consulted an official with the Treasury  Inspector General for Tax Administration to learn about its methods for  studying compliance in one of its reports. We interviewed IRS officials who  were knowledgeable about the Monitoring OIC (MOIC) Unit and with the  OIC Hand-Off Unit to gather information about how post-OIC compliance  was tracked.
We developed data on the productivity of the OIC Program by obtaining  information from IRS on the number of full-time equivalent staff working in  the OIC Program and compared this to the number of case closures from  the AOIC database. We also interviewed IRS officials regarding any IRS  analysis on productivity and reasons for productivity trends.
To estimate the extent of offer mills’ participation in the OIC Program, we  derived the number of offers designated solely to delay in the AOIC  database that also were submitted with power of attorney forms. Also  using the AOIC database, we measured how long IRS took to process those  cases. We interviewed IRS officials with the OIC Program in Austin, Texas,  and in Brookhaven, New York, and officials at the Office of Professional  Responsibility (OPR), who investigate practitioner misconduct, in  Washington, D.C. We also interviewed officials with OPERA about its work  on abuse of the OIC Program. We reviewed reports on potential OIC abuse  by IRS and internal IRS guidance on handling suspected cases of  practitioner misconduct. We interviewed officials with the Federation of  Tax Administrators (FTA), the state of Maryland OIC Program, and the  Connecticut Attorney General’s Office and compared their experiences  with practitioner and offer mill misconduct with those cited by IRS  officials. We selected FTA because its membership includes tax  administration officials from states that have OIC programs. An FTA  official referred us to the Maryland OIC Program. OPR cited the state of  Connecticut’s involvement with investigating offer mills during an  interview. Finally, we conducted literature reviews for information about  offer mills.
To assess how well IRS ensures that taxpayers are provided the right to  appeal rejected offers, we analyzed the AOIC database to determine  whether these taxpayers were sent the rejection letter notifying them of  their appeal right. We reviewed IRS publications containing information  about taxpayers’ rights to appeal rejected offers and searched the IRS Web  site for similar information. We performed limited testing of the AOIC  database to determine whether appropriate entries were being made that  ensured that a computer-generated rejection letter with appeals  information had been sent to each taxpayer whose offer was rejected from  fiscal years 2000 to 2005. We did not contact taxpayers to determine  whether they actually received the letters. We interviewed OIC Program  officials about the offer appeals process and followed up with Appeals  officials, including Appeals staff at the Brookhaven, New York, campus  who review and process rejected offers.
To determine whether IRS’s regulations on effective tax administration  (ETA) were consistent with the IRS Restructuring and Reform Act of 1998  (Restructuring Act), we reviewed the Restructuring Act, its legislative  history, OIC regulations that were in place before the Restructuring Act,  and the regulations issued to address the Restructuring Act changes. We  met with representatives of the IRS Chief Counsel’s Office who were  involved in drafting the new and revised regulations on ETA offers. In  addition, we reviewed their project files to gather documentation on how  the ETA regulations evolved. The files contain documentation, such as  internal memorandums, early draft of the regulations circulated to internal  stakeholders, and public comments received after the proposed regulations  were issued. In addition, we compared IRS’s internal guidance on ETA and  doubt as to collectibility (DATC) and IRS’s regulations on ETA to determine  whether they were distinct. We discussed ETA and DATC procedures,  guidance, and rules with OIC Program officials and staff in Austin, Texas  and staff in IRS’s centralized processing center in Brookhaven, New York,  who processes offer applications. To gain perspective from some external  OIC Program stakeholders on how IRS implemented ETA rules, we  interviewed professional tax practitioners and representatives of the  National Association of Enrolled Agents (NAEA) and the American  Institute of Certified Public Accountants (AICPA). We selected NAEA and  AICPA because they had previously testified or commented about IRS’s  OIC Program. We also conducted a literature review on ETA.
To comment on the legislative proposal requiring partial payments with  offer applications, we drew on the results of our work relating to repeat  offers and trends in OIC Program performance. Our review was conducted  in accordance with generally accepted government auditing standards from  February 2005 through February 2006.
section_title: Scope and Methodology on Detailed Analysis of IRS’s AOIC Database
paragraphs: 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. 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.
subsections: section_title: Establishing GAO-Derived Dates and Disposition Codes
paragraphs: 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. 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. 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. The Appeals function ending date was always the  official Area Office Closing date.
We also segregated offer disposition types between the Collection and  Appeals functions. The AOIC database contains 10 disposition types, of  which 3 represent Appeals function dispositions. Offers that are appealed  by taxpayers remain open on the AOIC database pending Appeals function  disposition decisions. We segregated the dispositions by creating five GAO- derived Collections function dispositions and three Appeals function  dispositions. For example, we collapsed all of the offers contained in five of  the program’s disposition types, as well as certain offers still open on AOIC,  into our “Rejected” offers disposition category. This showed the  Collections function had rejected 247,780 offers during the program’s  history. These offers were as follows: (1) the 25,054 offers accepted by  IRS’s Appeals function, (2) the 43,511 offers where the Appeals Function  sustained the Collections function, (3) the 42,880 offers rejected by the  Collections function without appeal rights, (4) the 116,787 offers rejected  by the Collections function where the taxpayer did not exercise appeal  rights, (5) the 7,955 offers withdrawn in Appeals, and (6) the 11,593 offers  rejected by the Collections function but not yet closed on AOIC pending  possible Appeals function activities. We combined all of these offers to  demonstrate that the Collections function had rejected 247,780 offers over  the history of the OIC program. Tables 12 and 13 reflect this roll-up and  compare other GAO-derived disposition types for the Collections and  Appeals functions to IRS’s disposition types. We have also included offers  currently open in AOIC to balance offers between the two disposition sets.
section_title: Distinguishing between Multiple Offers Submitted by Taxpayers
paragraphs: Because many taxpayers submit more than one offer in an effort to  compromise tax liabilities, and because IRS does not track multiple offers  from the same taxpayer, we independently developed estimates of the average (1) number of offers taxpayers submitted on the same tax liability,  (2) time it took IRS to process all of these offers, and (3) calendar time  duration between the date the first in a series of offers was submitted and  the date the last in the series was closed. In order to track these multiple  offer submissions, we coined the term offer sets. Offer sets may contain  one or many offers. We defined an offer set with only one offer as a onetime  offer. For offer sets containing two or more offers, we defined the first offer  in the set as an initial offer and the second and subsequent offers in the set  as repeat offers. An offer set with two or more offers was also known as a  repeat offer set.
Our criteria for calling a subsequent offer a repeat offer depended on  whether tax liability information was available for comparison between  two offers. For cases where tax liability information for one or both of two  chronological offer dispositions had not been migrated from IRS’s Master  File to the AOIC database, a common occurrence when offers were closed  not processable, we set a 1-year time limit for designating the subsequent  offer as a repeat offer. Where the tax liability information was available for  two offers, we compared it to see if any one tax liability matched. If it did,  we called the subsequent offer a repeat and the length of time between  offer submissions did not matter. Finally, any time an offer that was part of  a repeat offer set was accepted, we assumed that offer was the last offer in  the offer set. Any subsequent attempt by a taxpayer to compromise the  same tax liabilities started a new offer set.
We believe a 1-year time limit is reasonable as a criterion for establishing  repeat offers because most tax modules are 1 year in length corresponding  with a taxpayer’s annual filing requirement (for example, a tax module for  an individual or corporate taxpayer would represent a calendar year period  that they were required to file an income tax return). Taxpayers submitting  offers must include all outstanding tax liabilities in the offer submissions,  and we believe taxpayers who have not successfully compromised tax  liability are not likely to have fully paid that tax liability and at the same  time incurred a new tax liability, which they attempt to compromise within  that 1-year period.
The actual number of repeat offers and the average duration of time it takes  taxpayers to compromise tax liabilities are estimates because (1) taxpayers  continue to submit offers in the future for current tax liabilities for which  prior offers were not accepted, (2) some taxpayers may fully pay  outstanding tax liabilities then immediately incur new liabilities, and   (3) some taxpayers filing jointly simultaneously attempt to compromise  separate tax liabilities, 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.
section_title: Generating Other OIC Program Statistics
paragraphs: We also used our GAO-derived dates and disposition types to develop  additional statistics using the AOIC database. For example, when OIC  Program staff believe one of the reasons a taxpayer submitted an offer was  an attempt to delay the collections process, they will enter one of several  codes designating the offer as such in the AOIC database and return the  offer to the taxpayer. We analyzed AOIC data by these codes and  determined how frequently offers were returned for each code, the  percentages of all offers submitted that were solely to delay collection  activities, and how many offers involved professional practitioners. We also  determined how long it took the OIC Program to return solely to delay  offers involving professional practitioners.
In addition, we used the AOIC database to estimate how many ETA offers  were processed over time. Before October 2005, IRS did not make a  distinction between ETA offers on the AOIC database and offers accepted  based on doubt as to collectability with special circumstances. These offers  were commingled and categorized as offers where an alternative basis was  used for compromise. However, an agency official told us that we could use  all offers designated as alternative basis offers as a proxy for the number of  ETA offers processed by IRS. The agency added a data field beginning in  October 2005 to specifically track ETA offers.
Furthermore, we calculated the Collections function’s inventory levels for  fiscal years 2000 through 2005. In addition, we used the tax liability and  offer amount fields in the AOIC database to determine the percentage of  tax debt compromised by IRS’s Collection function.
section_title: Comments from the Internal Revenue Service
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: 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.