Washington - Senate Finance Committee chair Chuck Grassley, R-Iowa, and ranking member Max Baucus, D-Mont., are calling for an independent investigation by the Government Accountability Office of the Offer in Compromise Program.In a letter to Treasury Secretary John Snow, the senators had questioned the Internal Revenue Service and Treasury implementation and administration of the OIC program. Based on the IRS response, the senators said that they have called for an investigation.
Grassley and Baucus specifically cited the "apparent failure to use the Effective Tax Administration provision enacted as part of the IRS Restructuring and Reform Act of 1998."
This provision was enacted to address offers made where collection would impose an economic hardship on the taxpayer due to illness or lack of financial resources. Prior to this provision, offers were considered only if there was doubt as to the taxpayer's liability for the tax or doubt as to the collectibility of the tax.
The IRS, in response to the senators' request for detailed information on ETA offers, said that it gives full consideration to ETA criteria regardless of whether an OIC request is specifically categorized by the taxpayer as ETA, and that therefore "we have not systemically tracked the number of OICs involving requests for ETA consideration."
The IRS admitted that in practice it has found few cases that meet the criteria of a non-hardship ETA offer. It describes the non-hardship ETA offer as a situation in which the taxpayer has the financial ability to pay the delinquency in full without creating an economic hardship, but where due to circumstances the inequity of requiring the payment of the entire liability would be so apparent that, as a matter of IRS policy, the IRS should allow the taxpayer to compromise the tax debt for less than the amount owed.
The processing of non-hardship ETA OICs was centralized into the Cincinnati field group in 2003 in order to ensure consistency and facilitate oversight of case processing, according to the IRS. Over the past summer, representatives from the IRS Counsel, Small Business Self Employed, Appeals and Taxpayer Advocate Service Divisions reviewed the process.
Although one of their charges was to identify examples of issues or factors that could warrant the acceptance of an ETA OIC, the representatives did not identify any one issue or factor that, standing alone, would routinely warrant acceptance, according to the IRS.
"The analysis indicates the most problematic component of the 'non-hardship' ETA OIC involves the requirement that the taxpayer have a clear ability to fully pay the tax liability without creating economic hardship. While the National Taxpayer Advocate has shared anecdotal and theoretical examples of such cases, they have not provided any actual cases where compromise on the basis of public policy or equity was clearly the appropriate resolution for the tax debt," the IRS said. "The examples they have provided as potential candidates, as well as many of the cases included in the joint review, would actually create the appearance of inequity if the IRS did accept the offers. Routine acceptance in such cases would have a detrimental impact on voluntary compliance."
E. Martin Davidoff, CPA, tax liaison chairman of the American Association of Attorney-CPAs, sees this attitude as part of the problem. "It appears to me that the IRS will never accept any non-hardship ETA offers," he said.
"I have submitted three of them and found that they did not even give them any serious consideration. And, in fact, it took well over a year to get a refection out of the Cincinnati centralized unit," he said. "These were individuals who had invested $5,000 to $10,000 in what they believed to be an economic investment and saved from $3,000 to $6,000 in taxes at the time. Twenty years later, they are faced with tax liabilities of $30,000 to $60,000, including interest and penalties, due to delays in the cases going to court via the partnerships. That's a horrific result for people now in their 60s and 70s."
For example, a couple who had invested $6,000 in jojoba beans in 1983 and saved $4,000 in tax, now owe more than $50,000 of taxes, interest and penalties.
"They are now in their 70s and face having to draw down a significant chunk of their lifetime savings to pay off this liability," Davidoff said. "This is all for an investment in a 'product of the future' that they believed had economic substance and for which they relied upon a trusted CPA and financial advisor."
However, the IRS said that it believes that cases that otherwise might be considered as non-hardship ETA offers are actually resolved through the OIC program earlier in the process.
"Generally, experience shows that the inequitable conditions that contribute to the tax delinquencies also tend to create economic hardship on the affected taxpayers," the agency said. "We routinely accept ETA OICs based on economic hardship, as well as doubt-as-to-collectibility OICs involving special circumstances. These OIC categories are worked within all OIC field groups, as well as COIC [Centralized Offer in Compromise]."
"Because DATC OICs with special circumstances do not involve situations where the taxpayers can clearly fully pay the tax debts," the IRS said, "the ETA group does not control them. Rather, we handle them as routine cases and local management has the authority to approve these case decisions."
In his response to the senators, IRS Commissioner Mark W. Everson stated, "While there remains room for improvement, we have made considerable progress in the OIC program."
"Your letter states you have received feedback from practitioners and other interested parties maintaining [that] the IRS has placed improving inventory management above quality casework," he wrote. "I can assure you we are maintaining a focus on quality casework while accomplishing improvements to inventory management and cycle time. The expectation is to efficiently and conscientiously evaluate each case based on its individual merits."
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