The New IRS Offers in Compromise Policy

Will the IRS be able to' collect the staggering amount of taxes it is owed? Since the early 1930s, Congress has allowed the Internal Revenue Service to settle delinquent accounts at reduced amounts. This settlement procedure has been conducted under the strict guidelines of the IRS's offers compromise (OIC) policy. Under these guidelines, a tax liability could be compromised on one or both of two grounds: doubt as to liability and doubt as to collectibility. With the infrequent number of OIC settlements over the years, and the significant rise receivables, the IRS has changed its policy. Earlier this year, a new policy statement made sweeping changes: An offer also will be accepted the best interest of the Will the new OIC policy solve the growing receivables problem or will it create new problems for the IRS? This article explores this question by addressing * Significant policy changes intended to help resolve the accounts receivable problem. * New OIC procedures. * Potential problems stemming from these changes. MOUNTING RECEIVABLES In 1989, over 175 million tax returns were filed and the IRS carried $66 billion accounts receivable, $8 billion of which was rendered uncollectible. By 1991, the accounts receivable balance grew by $44 billion, or 67%, to an alarmingly high $110 billion. Some of this increase is mitigated by the November 1990 change statutory limitations whereby Congress added four years to the six years previously granted the IRS to collect an assessed tax. Despite the immense accounts receivable amount, taxpayers proposed fewer than 9,000 offers to settle tax claims 1991. This remarkably low figure is attributable to two factors: * Revenue officers assigned to delinquent accounts were neither informing taxpayers of the OIC option nor advising them on how to complete the forms. * More than 80% of offers actually submitted during the 1980s were rejected, leaving taxpayers little incentive to explore this option. In a November 5, 1981, report, the Government Accounting Office noted the negligible OIC volume and concluded the IRS lacked a uniform policy to help revenue officers decide when to suggest and when to accept offers. It recommended the IRS undertake a study on the most effective use of OIC. Almost 10 years later, new changes are taking effect. POLICY CHANGES The objective of the Internal Revenue Code compromise provision remains unchanged: to effect maximum collection with the least possible loss or cost to the government. However, a new meaning to this objective is circulating through IRS district offices: to achieve collection of what is potentially collectible in the shortest time possible. The new policy was released February 26, 1992, under Internal Revenue Manual 57(10). To illustrate the new policy, assume the IRS assesses a $10,000 tax on John Doe. Doe has no assets, but his earning capacity may enable him to accumulate $2,000 each year after necessary expenses. Under prior policy, no basis for compromising Doe's liability was available to the IRS because the assessed amount was collectible over time through an installment, direct debit or payroll deduction agreement. Such agreements, however, are not always an effective solution to collections since they require continual IRS monitoring and run a high default risk. In the absence of compromise, Doe's liability might be included IRS accounts receivable for as long as 10 years from the assessment date. Under the new policy, the IRS will settle with taxpayers at a smaller amount under certain circumstances. If Doe borrows say, $5,000 from outside sources to settle the claim, the revenue officer would evaluate not only Doe's financial condition but also his medical condition and other factors. If Doe is poor health, the revenue officer may recommend accepting $5,000 or even a lower amount, if offered. …