The Internal Revenue Service has released proposed regulations that would increase the user fees for both offers in compromise and installment agreements for the first time since 2007.

The proposal comes after years of successive budget cuts for the embattled agency, but the IRS has nevertheless managed to hold down the fees for paying off outstanding tax debts. Back in 2011, then-commissioner Doug Shulman announced the IRS Fresh Start program, which aimed to help individual taxpayers and small businesses struggling with tax liens and other collection tactics (see IRS Overhauls Tax Lien System). The effort included easier access to installment agreements and a streamlined offer in compromise program.

Agencies such as the IRS are allowed to charge user fees, but the fees need to be fair and must be based on the costs to the government, the value of the service to the recipient, the public policy or interest served, and other relevant facts. The federal Office of Management and Budget encourages agencies to charge user fees for government-provided services that confer benefits on identifiable recipients over and above those benefits received by the general public. According to an OMG regulatory circular, an agency that seeks to impose a user fee for government-provided services must calculate the full cost of providing those services. In general, the amount of a user fee should recover the cost of providing the service, unless the OMB grants an exception.

The IRS currently charges $105 for entering into an installment agreement, except that the fee is $52 for a direct debit installment agreement, in which the taxpayer authorizes the IRS to request the monthly electronic transfer of funds from the taxpayer's bank account to the IRS. The fee is $43 if the taxpayer is a low-income taxpayer. The IRS currently charges $45 for restructuring or reinstating an installment agreement that is in default. The fees have not changed since 2007.

The IRS said it recently completed a routine review of the installment agreement program and determined that the full cost of an installment agreement is $282, except that the cost is only $122 for a direct debit installment agreement. The IRS also determined that the full cost of restructuring or reinstating an installment agreement is $85.

After discussions with the OMB, the IRS has proposed to raise the fee for entering into an installment agreement to $120, and to increase the proposed fee for restructuring or reinstating an installment agreement to $50. The fee for a direct debit installment agreement would remain $52, and low-income taxpayers would continue to pay $43 for any new installment agreement, including a direct debit installment agreement.

The proposed regulations would not increase the fee for direct debit installment agreements because these agreements have a significantly higher completion rate, the IRS pointed out. The proposed fee hikes aim to balance the need to recover costs with the goals of encouraging the use of installment agreements in general and direct debit installment agreements in particular.

The IRS currently charges $150 for processing an offer to compromise, except that no fee is charged if an offer is based solely on doubt as to liability, or made by a low-income taxpayer. The fee is generally applied to the unpaid taxes if the offer is accepted to promote effective tax administration or accepted based on doubt as to collectability. In the latter case, a determination must be made that collection of an amount greater than the amount offered would create economic hardship. The amount of the fee has not changed since 2003, the IRS noted. As required by the OMB Circular, the IRS recently completed a routine review of the offer to compromise program and determined that the full cost of an offer to compromise is $2,718.

After discussions with OMB, the IRS has proposed to raise the fee for processing an offer to compromise to $186. Low-income taxpayers and taxpayers making offers based solely on doubt as to liability would continue to pay no fee. As now, the fee is generally applied to the unpaid taxes if the offer is accepted to promote effective tax administration or accepted based on doubt as to collectability. In the latter case, a determination must be made that collection of an amount greater than the amount offered would create economic hardship. “The proposed fee balances the need to recover costs with the goal of encouraging offers in compromise,” said the IRS.

The new fee rate for both installment agreements and offers in compromise would take effect on Jan. 1, 2014.

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