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MSP #20: Offers In Compromise

Despite Congressional Actions, the IRS Has Failed to Realize the Potential of Offers in Compromise

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #20-1

Increase staffing in the OIC program to 2001 levels and train employees to evaluate complex offers.  Staffing available to work offers can be increased by allowing all Revenue Officers to review and accept OICs as part of working their inventory.

IRS RESPONSE TO RECOMMENDATION: One of the primary reasons that we centralized the Offer-In-Compromise (OIC) process in 2001 is that it provides more control and consistency in processing OICs.  Decentralizing the process will significantly increase training costs, decrease the effectiveness of specialized training, increase the chance that a taxpayer’s offer is processed by an employee with limited exposure to the offer program, require revenue officers to reprioritize their work to ensure that offer decisions are made within the statutorily mandated 24-month period and generally increase the risk that there will be inconsistencies in OIC processing.  The recent realignment of the Collection program within the Small Business/Self-Employed Division further centralized the offer program under one executive.  We expect to get additional efficiencies with this new leadership structure.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate remains concerned that without sufficient staffing, the IRS will not be able to encourage a flexible use of the OIC program, which is what Congress intended in RRA 98.  Since the revenue officers working these cases are already conducting the financial analysis to determine CNC status, the National Taxpayer Advocate believes that a flexible approach to OIC consideration prior to putting a case in CNC status could further Congress’s intent and protect taxpayer rights.  Increasing OIC staff levels would allow for an efficient resolution of the case for both the taxpayer and the IRS and it would encourage flexible use of the OIC program as a collection alternative. 

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #20-2

Expand use of the Effective Tax Administration offer for both individual and business taxpayers with an emphasis on flexibility in evaluation of the taxpayer’s circumstances.

IRS RESPONSE TO RECOMMENDATION: IRM 5.8 and interim guidance currently provide for the use of Effective Tax Administration (ETA) offers and flexibility in evaluating the taxpayer’s situation when these offers are submitted.  In late FY14, we conducted ETA training for COIC offer examiners and Independent Administrative Reviewers (IARs). ETA training was also included as a FY13 Revenue Officer/ Offer Specialist (RO/OS) Continuing Professional Education (CPE) module. Additionally, Tax Topic 204, Offers In Compromise, which is available to taxpayers on the IRS webpage, provides a description of the three grounds on which the IRS may accept an offer in compromise, including ETA offers. 

CORRECTIVE ACTION: N/A

TAS RESPONSE: Employee training is important for increasing awareness and education around ETA offers.  However, some specific guidance within the IRM may prohibit flexible analysis of the taxpayer’s facts and circumstances.  For instance, IRM section 5.8.11.2.2(4) requires that it should not appear to other taxpayers that a non-hardship ETA  OIC places the taxpayer in a better position than if they had complied with their tax obligations.  This may lead to subjective determinations by IRS employees who may have differing standards of what other taxpayers’ attitudes are.  The National Taxpayer Advocate believes that this guidance should be revised in order to ensure it encourages a flexible analysis of the taxpayer’s particular facts and circumstances, which is the intent of Congress. 

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #20-3

Proactively identify cases that would be viable candidates for offers and reach out to those taxpayers prior to placing accounts in currently not collectible status, the Queue, or shelved status.

IRS RESPONSE TO RECOMMENDATION: With the assistance of OPERA, we completed similar tests in Fiscal Year 2013 that resulted in little or no success.  At this time, we do not plan to perform any additional tests. We are, however, working to change our balance due notices to identify OICs as a payment alternative. We are including the OIC reference in these notices in an effort to provide taxpayers information about OICs earlier in the process. We expect the OIC reference to be included in the CP501, CP503, CP504 and CP504B letters beginning in January 2016.

Update: The above referenced CP letters have been updated to include a paragraph that discusses Offers in Compromise. These letters are now in use. Copies of the letters are attached.

CORRECTIVE ACTION: We will update the CP501, CP503, CP504 and CP504B letters to include an OIC reference in an effort to provide taxpayers information about OICs earlier in the process.

TAS RESPONSE: The National Taxpayer Advocate commends IRS efforts to increase information offered to taxpayers regarding the OIC program. Educating taxpayers early in the collection process may help to promote the OIC program. However, given the large growth of accounts in CNC, the Queue, and Shelved status, an analysis prior to putting the account in a different status could resolve cases efficiently. This would require education of staff and a change in procedure.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #20-4

Increase the information and training about the OIC program provided to the Automated Collection System so employees can identify good offer candidates; and share more information with the Stakeholder Partnerships, Education and Communication unit, the Low Income Taxpayer Clinics, and the Volunteer Income Tax Assistance program.

IRS RESPONSE TO RECOMMENDATION: Our ACS employees have a Probe and Response Guide on offers in compromise available to them to assist taxpayers with questions about OIC.  The Probe and Response guide was recently updated and is available to our employees through our Servicewide Electronic Research Program (SERP). It was developed specifically for non-OIC employees. Additionally, we developed a Pre-Qualifier Tool that provides information that can assist taxpayers determine whether they may be eligible for an OIC. The Pre-Qualifier Tool is available to internal and external stakeholders. Finally, we held an OIC training session with TAS employees and another is planned in March.

Update: Contact was made with VITA Coordinator, and options discussed. It was agreed that the best way to share information about the OIC program was to include a section about the OIC program in Document 4012, VITA/TCE Volunteer Resource Guide. Information will be included in the next revision of Document 4012.

SERP Decision Tool: The Decision Tool (Probe and Response Guide) was developed for internal, non-OIC employees. No formal training was delivered on the use of the Decision Tool found on SERP. Once the program was finalized and delivered, it was announced through a SERP Alert. However, during development it was tested using employees in ACS. It received overwhelming positive feedback by the employees. Overall the employee feedback was the guide was easy to use. They liked the fact that it provided information on when an offer would be denied or possibly accepted. The test was from 12/6/2010 through 3/23/2011. The program was fully deployed on July 1, 2011.

A SERP alert was issued on7/13/11 providing information on the OIC Decision Tool. The Alert stated, “The Offer in Compromise (OIC) Decision Tool is available to assist in the interview process with taxpayers and/or Power of Attorneys when discussing the possibility of submitting an Offer in Compromise (OIC). It answers critical questions concerning the OIC process and guides the assistor through a series of questions to determine if OIC is an appropriate collection alternative.”

The training was delivered through a CENTRA session with an overall overview of the OIC process. The CENTRA session was made a mandatory CPE topic for Accounts Management in 2011. It was eventually established through ELMS so the employees could receive credit for the training. The class was held under “OIC CENTRA Class ELMS 42485”.

Pre-Qualifier Tool: As with the Decision Tool (Probe and Response Guide), no formal training is planned for use of the Pre-Qualifier: Tool (PQT). This tool was developed more for use by the taxpayer and/or the Power of Attorney than internal use, although we understand it is being used by internal customers as well as external.

CORRECTIVE ACTION: Two additional training sessions with the LITCs are scheduled for March 2015. We will reach out to SPEC and the VITA coordinator to discuss options to conduct an OIC workshop to SPEC and/or VITA volunteers.

TAS RESPONSE: Currently, ACS employees get little training on OICs and how to identify taxpayers who would be good candidates for an OIC. ACS employees merely have a Probe and Response Guide (i.e., an electronic ACS employee handbook that explains the OIC process) made available to them. However, typically, ACS employees will only share the OIC information in the guide if taxpayers specifically ask about OICs, and a number of taxpayers may not know the option of an OIC exists. This means that taxpayers with cases in ACS may never learn about the possibility of resolving their case by submitting an OIC. It is critical that the IRS train ACS employees to identify good OIC candidates, rather than placing the burden on the taxpayer to know and ask about an OIC. Since ACS deals with many cases that could potentially go into CNC status or the Queue, providing such training to ACS employees on how to proactively identify strong candidates for an OIC would be an efficient way to encourage use of the OIC program.

Although the IRS has made minor efforts to better educate its ACS employees on OICs, it has not provided any OIC training to LITCs. The IRS has conducted a webinar on payment alternatives, which is the March 2015 training referenced by the IRS in its response, but OICs were not the focus of this webinar and it was for the general public not just for LITCs. Further, even though the IRS asserts it has provided OIC training to TAS,  TAS has no record of any such training. However, the National Taxpayer Advocate herself has conducted extensive collection training to TAS employees over the years. In fact, several years ago all TAS employees were required to complete a training entitled “A Roadmap to a Tax Controversy.” On several occasions, the National Taxpayer Advocate has offered to conduct collection training, including training on OICs, to IRS collection employees, but her offer has never been accepted. The National Taxpayer Advocate is pleased that the IRS has agreed to develop OIC training for SPEC and VITA volunteers. TAS, along with the LITCs, would like to be included in the development of this training.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #20-5

Revise IRM 5.8.11.2.2(4) to remove the economic competition argument as it is irrelevant and violates the taxpayer’s right to a fair and just tax system.

IRS RESPONSE TO RECOMMENDATION: IRM 5.8.11, Effective Tax Administration, is being revised is currently in clearance to remove “competitive advantage” and is currently in clearance.

Update: IRM 5.8.11, Effective Tax Administration, was revised and published on 08/05/2015. OIC Collection Policy cleared and updated this section with TAS and received a signed F2061 approving the changes. IRM 5.8.11.2.2(4) now reads, “The circumstances of the case must be such that the result of the compromise does not place the taxpayer in a better position than they would occupy had they timely and fully met their obligations, unless special circumstances justifying the compromise are present. This language was agreed to by TAS.

CORRECTIVE ACTION: In coordination with TAS, we will review evaluate whether the examples currently in IRM 5.8.11 can be read to violate a taxpayer’s rights. Any examples that we determine can be read to violate a taxpayer’s rights will be removed or replaced.

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS has agreed to review and revise IRM 5.8.11. TAS will review the changes to this section in collaboration with the IRS. The portion of the IRM that requires the offer be viewed as fair by other taxpayers is not present in the tax code or regulations. It may lead to subjective determinations by IRS employees who are not in a position to be aware of broad taxpayer views; therefore, the National Taxpayer Advocate recommends this requirement be eliminated. The IRS has not responded to this aspect of our recommendation. However, if the IRS is planning to keep this requirement, then the National Taxpayer Advocate, as the voice of taxpayers, should make this determination.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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6.

TAS RECOMMENDATION #20-6

In the case of non-economic hardship ETA offers, if the IRS persists in requiring the subjective assessment of whether other taxpayers would view the compromise as a fair and equitable result, it should revise its procedures to have the National Taxpayer Advocate, as the voice of taxpayers within the IRS, determine whether other taxpayers would view the compromise as fair and equitable.

IRS RESPONSE TO RECOMMENDATION: Allowing the NTA to determine whether a non-economic hardship Effective Tax Administration (ETA) offer is fair and equitable to taxpayers generally is inconsistent with the Commissioner’s responsibility to administer the Internal Revenue Code. Additionally, because IRC 7122(e) requires that the taxpayer be permitted to appeal any rejection of the offer to the IRS Office of Appeals, a rejection of the offer made by the NTA would be subject to review by an IRS Appeals Officer.  Review of an NTA action by an IRS Appeals Officer is inconsistent with the role of the NTA as set forth in IRC 7803. Where the NTA does not agree with the IRS determination, the NTA can issue a Taxpayer Assistance Order (TAO).

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is not an abrogation of the Commissioner’s responsibility. Administratively, the Commissioner of the Internal Revenue Service has the ability to delegate his authority to the National Taxpayer Advocate. However, the responsibility for the determination would be non-delegable, so Appeals could not override it. The National Taxpayer Advocate is in a unique position to speak as the “voice of taxpayers,” given the authority under IRC §§ 7803 and 7811. The National Taxpayer Advocate is able to resolve problems with the IRS on behalf of taxpayers and issue Taxpayer Assistance Orders. As such, the National Taxpayer Advocate is in a better position to have a pulse on broad taxpayer beliefs compared to individual IRS employees.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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