Tax Lawyer's Blog

About a year ago we questioned the sincerity of the IRS’s Offer in Compromise program in a post titled Is IRS Offer in Compromise Program a Sham? 

We said then that it was our experience and the experience of other tax professionals that the program as currently operated was someone of a bait and switch: The IRS entices taxpayers to come forward and make good faith offers which require that they disclose the amount and location of their assets. Then, after it has this valuable information, it denies the offer on some technical ground and proceeds to use the information provided to seize assets.

Stephen Ohlemacher of the Associated Press reports the IRS has changed the OIC rules to make the program more accessible to struggling taxpayers:

IRS Commissioner Doug Shulman announced that the agency is loosening its rules for negotiating tax settlements for less than the amount owed.

Shulman said new rules for negotiating tax settlements, known as offers in compromise, better reflect the economic problems many taxpayers face. IRS agents can only accept settlements for less than the full amount owed if they determine there is little chance the taxpayer will be able to pay.

Under the old rules, agents calculated a taxpayer’s ability to pay based on past income. However, many people who were laid off in the past year don’t make nearly as much money as they did in previous years. Under new rules, agents will be able to use current income to calculate a taxpayer’s ability to pay, Shulman said. If their incomes increase in the near future, the IRS will rework the settlement.

“It’s really part of the ongoing effort of making sure taxpayers out there know that we want to collect the money that’s due, but if you want to work with us, you should give us a call,” Shulman said.

Shulman said the IRS wants to keep struggling taxpayers in the system, rather than having them fall behind on payments and drop out, which would put them at risk for bigger penalties, including property seizures.

Not So Fast Kowalski

But before you get your hopes up¹ delinquent taxpayers and non-filers, read this:

The IRS will continue to go after taxpayers who ignore notices or stop making payments altogether. For example, the number of IRS liens filed last year increased by 26 percent over the previous year, to 965,600, according to IRS statistics.

Shulman cautioned that those seeking help will have to demonstrate their inability to pay. Those who fail to file tax returns, or who simply ignore collection notices, will not be eligible for help.

My Skepticism

Nothing I’ve read in Shulman’s announcement² or the media coverage of it gives me reason to believe that the OIC program has changed at all. The program has historically been promoted by the IRS on precisely the same grounds Mr. Shulman is proffering now as if they were a revelation.

The problem with the OIC program has not been its stated goals³, but rather, that it has been implemented in a manner wholly inconsistent with those goals.

Footnotes:

¹  In my 20 years plus of tax practice I have seen the IRS alternate several times between encouraging taxpayers to file Offers in Compromise and discouraging their filing. It is hard for me to not be cynical about this. I truly believe that the IRS occasionally pumps up the OIC program as a means of getting delinquent taxpayers to voluntarily provide financial information that can then be used to enforce collection. Think about it: First, the IRS get’s 20% of the offer amount without having to lift a finger. Second, it gets detailed information about the nature and location of the taxpayers assets and sources of income without having to lift a finger. Consequently, even unreasonable and ultimately rejected offers are a good deal for the IRS.

²  If Mr. Shulman were serious about wanting to encourage more good faith offers, he would eliminate the 20% downpayment requirement.

³  From IRS Policy Statement P-5-1:

The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government

The ultimate goal [0f the Offer in Compromise program] is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.

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