The Internal Revenue Service is having trouble coping with an enormous backlog of requests for offers in compromise from taxpayers who are struggling with the tough economy.

A new report from the Treasury Inspector General for Tax Administration found that the combination of the weak economy, and efforts by the IRS to promote its OIC program for helping taxpayers pay off a portion of their outstanding tax debts, has increased the number of requests for offers by 28 percent between fiscal years 2007 and 2011. At the same time, the resources available to work on the offers have decreased, creating an inventory backlog and delaying responses to taxpayers.

An offer in compromise is an agreement between a taxpayer and the IRS to settle a tax liability for payment of less than the full amount owed. TIGTA undertook the audit to assess the effectiveness of the IRS’s OIC program at processing requests in a timely manner, consistently apply OIC guidelines, accurately measure program results, and effectively promote the program.

“TIGTA’s review found that the Internal Revenue Service has taken positive steps to improve and promote the offer in compromise program,” said TIGTA Inspector General J. Russell George in a statement. “Now, current backlogs in the program make it imperative that the IRS implement needed improvements.”

TIGTA reviewed a statistically valid sample of offers and found that the IRS did not process all of the offers on a timely basis. In 73 of the 99 offers studied, that is, 74 percent of them, the IRS failed to contact the taxpayer by the promised date. The report estimates that 9,509 taxpayers who submitted offers between July 1 and Dec. 31, 2010, may not have been contacted when promised.

Not only that, but as of Oct. 25, 2011, there were 7,472 unassigned offers in holding queues awaiting assignment to OIC staff. TIGTA found that one processing site had more than four times as many unassigned offers from self-employed taxpayers compared with the other site, and 37 percent of those offers were more than six months old.

TIGTA auditors also determined that an incorrect date was used when offers were returned to the IRS because of some IRS processing errors. The report estimates that the wrong date may have been used for 712 taxpayers who submitted offers between July 1, 2010, and Dec. 31, 2010.

Finally, the IRS does not have formal performance measures for the streamlined offer process, which allows IRS employees to make taxpayer contact by phone rather than by mail so they can quickly make a determination on an OIC request.

TIGTA recommended that the IRS revise its OIC processing procedures, train employees, and add a formal performance measure for the streamlined offers or apply the streamlined process to all offers.

IRS officials agreed with TIGTA's recommendations and the report's outcome measures and plan to take appropriate corrective actions.

“We concur that the weak economy and efforts to promote the OIC program have resulted in a 28 percent increase in receipts since 2007,” wrote Faris R. Fink, commissioner of the IRS’s Small Business/Self-Employed Division. “This increase, along with resource limitations, has led to a backlog of inventory.”

The IRS plans to better inform taxpayers by lengthening the time by which they will be contacted or issued an interim letter, initiate reassignment of offers between IRS sites as needed, and apply most aspects of the streamlined process to the remainder of the OIC cases.