The passage of H.R. 3, the Safe, Accountable, Flexible and Efficient Transportation Act of 2005, will effectively destroy the Internal Revenue Service's offer-in-compromise program, according to both the American Association of Attorney-CPAs and the American Institute of CPAs.
A provision in the act would require partial payments of 20 percent with the submission of offers. Although Congress considers this a revenue-raiser, the proposal will lead to fewer offers being submitted, and, for offers that are submitted, to lower amounts being submitted, said E. Martin Davidoff, chair of the IRS Tax Liaison Committee of the AAA-CPA.
In a letter to the chairmen and minority leaders of the House Committee on Transportation & Infrastructure and the Senate Environment and Public Works Committee, Davidoff and AAA-CPA president Bernard Eizen noted that the provision would also increase the cost of collecting money from people no longer pursuing offers in compromise, and would reduce overall revenue collections.
"Fewer offers will be submitted, as attorneys, CPAs and other tax practitioners fear that submitting funds to the IRS at the outset of an offer will provide the IRS with even less incentive to accept offers," the letter stated.
Moreover, Davidoff pointed out, practitioners fear that their recommendation to submit any substantial offers in compromise might create a liability for them as practitioners. "How could we reasonably submit an offer with a 20 percent deposit when there is a five-in-six chance that the offer will be returned or rejected and the funds retained by the IRS?" he said.
"My jaw dropped when I heard about this one - I just couldn't believe it was true," he said. "It makes absolutely no sense. The IRS gets more revenue when OICs are accepted."
"As a rule we don't comment on pending legislation," said an IRS spokesperson.
In a similar letter to the Senate Finance and the House Ways and Means Committees, the institute charged that the revenue-raising aspect of the provision was misplaced.
"The AICPA has received numerous reports from practitioners that the IRS's offer-in-compromise program is not working, due in part to the service's continual classification of large numbers of offers as 'non-processable' and based on the agency's high rejection rate of offers being submitted," stated Thomas J. Purcell III, chair of the AICPA Tax Executive Committee and author of the letter.
Purcell, an associate professor at Creighton University's School of Law and College of Business Administration, said, "Based on the significant drop in the number of offer submissions, coupled with the IRS's high rejection and return rate, we believe this provision - while intended to be a revenue-raiser - will in actuality raise little or no revenue."
"Under these circumstances, a taxpayer who has a significant outstanding tax liability with the government is not likely to be able to afford a 20 percent up-front 'down-payment' on an offer, particularly if the payment is non-refundable," Purcell said. "In all likelihood, enactment of the up-front 20 percent payment is likely to shut down the program and, instead, increase the attractiveness of bankruptcy filings."
A separate OIC provision would require the submission of installment payments on tax liability while an offer is being considered.
"Basically, if you're paying $500 a month while your offer is being reviewed, and the IRS keeps the money if it rejects your offer, they'll be inclined to keep the offer under review for longer than necessary and keep collecting money. It gives them a disincentive to be efficient," Purcell observed.
The AICPA also commented on three other revenue-raisers - frivolous tax submissions, the CEO income tax return declaration, and codification of the economic substance doctrine. "These are 'pay-fors' that have been up on the shelf for a while," explained Tom Ochsenschlager, AICPA vice president for taxation. "They've been scored at an outlandish amount of revenue which no one actually believes, but the tendency is for them to keep popping up in proposed legislation to offset proposed expenditures."
"The OIC provision is new, however - it's never been used as a pay-for before," he said.
The bill would increase the frivolous filing penalty from $500 to $5,000 and would expand the penalty's scope to cover collection due process hearings, installment agreements, OICs and taxpayer assistance orders. Although Purcell said that he supports the increased penalty, he recommended that the legislation provide guidance regarding the meaning of "a desire to delay or impede the administration of federal tax laws." It is important that this language be restricted to truly frivolous positions, Purcell emphasized.
The bill also requires the chief executive officer of a corporation to sign a declaration that the corporation has proper procedures in place to ensure that the return complies with the Tax Code and that the CEO was provided reasonable assurance of the accuracy of all material aspects of the return.
The provision "will not measurably increase the accuracy of corporate tax returns," according to Purcell. "The AICPA believes it is impractical to hold CEOs responsible for every detail of a tax return."
The codification of the economic substance doctrine, part of a broader attempt to regulate tax shelters, would be difficult, he said. "In addition to introducing statutory complexity and traps for small businesses and a broad cross-section of taxpayers, codifying economic substance would deprive the tax system of the flexibility needed to keep pace with the changing economic environment."
"They did a revenue estimate, and scored this one as a $12 billion pick-up - that's why it appears over and over," said Ochsenschlager.
The answer to increasing IRS collections is to give it more money, Davidoff said. "Congress will never give the IRS enough money to collect everything it could," he said. "They're not even collecting a third of what they think they can collect ... . The OIC proposal clearly doesn't fall in the area of what can be collected - they're just killing the program."
While the bill is likely to pass with some or all of the revenue-raisers intact, it may not pass muster with the White House, according to AICPA technical manager Benson Goldstein.
"President Bush has threatened to veto this because of the pork - he agrees with the highway authorization program, but sees it as funded at a higher level than what he supports," said Goldstein.
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