by Roger Russell
Washington - The American Institute of CPAs, the Tax Section of the American Bar Association, and the American Association of Attorney-CPAs chipped in with some advice for the Internal Revenue Service in its handling of the Offer-in-Compromise program.
In testimony before the IRS Oversight Board, AAA-CPA president David De Jong charged that time for processing OICs has deteriorated. "One of our members reported that one of his clients who submitted an offer involving a modest amount of unpaid individual income tax liability gave up after more than three years of reassigned responsibility, multiple document requests and many broken promises as to the timeframe for completion. The client filed bankruptcy to discharge the liability," he said.
AAA-CPA IRS Liaison Committee chair Martin Davidoff, testifying before the Small Business Administration, said that, despite the decline in ending inventory and faster disposal time for offers, the actual dollars collected are down, the number of cases evaluated has fallen, and the number of cases returned without evaluation has doubled from nearly 27,000 cases to just over 50,000 cases.
"Add to this," said Davidoff, "the fact that the IRS does not keep any statistics or information whatsoever on returned or rejected cases to determine whether the IRS ultimately rejected an offer for more money than they ultimately collected or visa versa."
Davidoff suggested that the IRS "track how much is offered against how much of a liability in the same manner it does for accepted offers, and should also determine how much it ultimately collects from processible cases returned, withdrawn or rejected. It would be helpful to know, for example, that if the IRS disposed of some 80,000 cases through non-acceptance, how much money was represented by those cases."
According to Davidoff, the push to shorten time lines has a negative effect, resulting in a lower acceptance rate and a reduction in the number of offers evaluated. "Current policy requires the IRS to return an offer if an individual does not provide information requested in a 30-day period," he said.
"Generally, there will be no extensions granted unless reasonable cause is established," Davidoff continued. "Due to the pressure of Congress and the IRS Oversight Board, the IRS is often hesitant to find reasonable cause. Then, once the case is rejected, the taxpayer has to re-submit and go to the end of the line."
Robert McKenzie, division coordinator for the ABA Tax Section to the IRS Wage and Investment Division, told the board that despite recent efforts at liberalization in the OIC program, "We as tax practitioners have found that in practice the statutory and regulatory objectives of the OIC program are not being met. In fact, the effectiveness of the OIC program is being severely undermined in certain cases by the manner in which it is being implemented."
Although the new, centralized OIC processing system created in 2001 was designed to reduce backlog, McKenzie said that in some cases, the backlog is being reduced simply by the return of offer packets that have minor omissions in documentation. "For example," he said, "documentation sometimes is simply lost. Lost documentation is treated the same as documentation that was never submitted. Failure by the taxpayer to provide the missing documentation in a short timeframe results in the offer not being processed at all."
Moreover, according to McKenzie, many IRS employees below the appeals level refuse to consider individual facts and circumstances when computing allowable expense standards, even though failure to do so directly contravenes provisions in the 1998 Restructuring Act.
McKenzie recommended a return to a local system of processing offers, or a change in the centralized processing to permit offers with less documentation. He also suggested the assignment of experienced revenue officers to review each incoming OIC, and directing IRS employees to exercise more discretion when evaluating the sufficiency of documentation.
Robert Zarzar and James Dougherty, the chairs of two AICPA tax-related committees, opposed the IRS proposal to charge a $150 user fee for OIC filings. "Most user fees," they said, "involve voluntary requests for advice from the service, such as private letter rulings and determination letters."
In contrast, according to Zarzar and Dougherty, "filing an Offer-in-Compromise is not a voluntary request for IRS administrative guidance. Rather, an Offer is a request of last resort for administrative relief; one that provides the taxpayer with a possibility of making a fresh start financially."
Moreover, they noted, "Administering a new user fee program is not cost-free. Systems must be created to determine who is required to pay, and when refunds or exemptions from payment are appropriate."
As an alternative, Zarzar and Dougherty suggested that "consideration be given to a broadening in the scope of the frivolous filing penalty to cover frivolous Offers. We view this penalty proposal as potentially a more effective means of addressing problems with administering the Offer program."
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