by Roger Russell

M ost businesses consider accounts receivable an asset, but the Internal Revenue Service doesn’t see them that way.

The IRS has more than $280 million in delinquent federal tax outstanding, and is considering tough new strategies, such as using private collection agencies, to help collect some accounts.

The proposed use of private collection agencies — designated as CCS, or collection contract support initiative — is not out of line with what is already going on in other jurisdictions, according to Brady Bennett, director of strategy and finance for the IRS Small Business/Self-Employed Division. 

“The proposal is consistent with what’s used in both the state and federal sectors,” he noted. “Forty-two states use private collection agencies to help collect their state tax, and both the Department of Education and Financial Management Services use private collection agencies to collect federal non-tax debt. And we have modeled the proposal after the best practices both in the federal and the state sector.”

Although the proposal is pending in different forms in both the House and the Senate, it would be 15 to 18 months from the passage of the legislation before the plan would go into effect, according to Bennett, who spoke at a recent IRS-sponsored Tax Talk Today panel discussion. 

The IRS is pursuing two tracks — hiring more people for its permanent staff and contracting out to private collection agencies — because relying simply on additional internal staff would entail taking people offline to train the new hires, said Cheryl Sherwood, director of payment compliance for the Small Business Division.

The “other” collection option — offers in compromise — has been the subject of stinging criticism over the past several years. Two years ago, the IRS centralized and streamlined its offer-in-compromise program into two service centers in Brookhaven, N.Y., and Memphis,Tenn. While progress has been made, some observers still see weaknesses in the way the program is administered. 

Responses to a recent survey by the American Institute of CPAs indicated that most practitioners feel that the IRS is losing its commitment to the OIC program. 

Robert Zarzar, chair of the AICPA Tax Executive Committee, wrote to Dale Hart, commissioner of the Small Business Division that, “the nearly unanimous opinion is that the IRS intentionally looks for reasons to reject an OIC. We strongly urge the IRS to take immediate steps to counteract this perception.”

Marty Davidoff, chairman of the IRS Tax Liaison Committee of the American Association of Attorney-CPAs, agreed. “If you look at their statistics for the last couple of years, “you see that the reason they got their backlog down is that they were returning tons of cases. The number of returned offers has nearly doubled.”

One of the problems that the OIC program has encountered is the sheer volume of offers.  Observers blame this in part on the OIC mills that dangle the prospect of settling “for 10 cents on the dollar” to taxpayers.

“The program has been oversold by both practitioners and the IRS as a cure-all,” said Houston tax attorney David Allie. “It is not a cure-all.”

Of the potential clients that come to his office seeking an OIC, “probably less than 50 percent are going to qualify,” said Allie. “A lot of work needs to be done up front to see whether or not a person stands a good chance of it being a successful offer in compromise.”

“There’s a lot of misunderstanding about negotiation, that offers are a cents-on-the-dollar program that we negotiate,” said the Small Business Division’s Sherwood. “It is a mathematical calculation. There should and can be discussion about the valuation of assets, and the calculation on equity in assets, but reasonable collection potential is the amount that the IRS is authorized to accept for an offer, and that’s a mathematical calculation.”

The ads that say “I can get you 12 cents on the dollar for whatever you owe” create a lot of problems, agreed Bennett.  “What they don’t tell you is that it can be quite costly for a taxpayer to prepare for an offer in compromise,” he said. “If, for instance, a taxpayer is several years behind on returns, and then you have to put together all the information for an offer, they could be talking $2,000 to $4,000 in accounting fees, with no guarantee that the offer is even going to be accepted.”

Despite the negative feedback from many tax practitioners, some observers appreciate the IRS’s efforts. Michael Grace, a tax attorney with the Washington-based law firm Jackson & Campbell PC, found that “the IRS personnel in the OIC program have been very reasonable and as flexible as they can be within the guidelines that have been dictated to them.”

“I’ve found people who are willing to listen consciously to a particular taxpayer’s situation and a willingness to structure the terms of the compromise that both protect the interest of government and acknowledge the taxpayer’s realistic ability to pay,” he said.

“The IRS bears a very heavy burden in trying to manage the deluge of OICs it has been receiving in recent years,” continued Grace. “They still have knowledgeable personnel around the country with whom you can discuss the terms of an offer, so when you do submit it, you’ve already set the stage for the central location to process it and understand where the offer is coming from.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access