by Roger Russell
Washington — The Internal Revenue Service continues to have difficulty in administering the Offer-in-Compromise program, charged National Taxpayer Advocate Nina Olson in her Fiscal Year 2005 Objectives Report to Congress.
“This is due, in part, to the service’s underlying uneasiness about permitting a taxpayer to be relieved of a legally due tax debt,” she said. “The IRS appears to have difficulty with the exercise of discretion inherent in this determination, and is extremely fearful of ‘opening the floodgates’ so that taxpayers en masse will stop paying taxes.”
Her observations resonated with practitioners who regularly prepare offers. “It’s true,” said Dayton, N.J.-based CPA and attorney E. Martin Davidoff, tax liaison chair for the American Association of Attorney-CPAs.
“As recently as January, people in the higher echelons at the IRS thought the program was going well,” he said. “They thought that offers were getting through much quicker, but the reason for this is they were returning offers, often unjustifiably, without appeal rights.”
“One of the problem areas is the fact that the people doing these offers are not reviewing them in an objective sense,” he explained. “They’re saying ‘What can I do to reject this?’ rather than, ‘How can I reasonably accept this?’”
Many cases are returned rather than rejected, often for simply leaving out one piece of information.
“When this happens, it cannot be appealed,” said Davidoff. “You have to start all over. It helps their statistics because they look at how many cases they have disposed of. It decreases their back inventory.”
“The taxpayer advocate has nailed this right on the head,” said Mark VanDeveer, CPA, chair of the IRS Practice and Procedures Committee of the American Institute of CPAs. “The opinions we’ve gotten back are that the service is looking for ways to reject, rather than accept, offers, contrary to the IRS and congressional goals for the program.”
“Our impression is that while case inventory is down and therefore it looks like its being moved along, practitioners say cases are being returned before they’re being worked,” he continued. “It doesn’t appear that there’s any difference in the amount of acceptance, and it looks like central processing has been too rigid, looking to a formula approach to reject or return cases.”
One of the problems the program has encountered is the sheer volume of offers. Observers blame this in part on the OIC mills — firms that focus on getting a retainer without following through toward an IRS acceptance, dangling prospects of settling “for 10 cents on the dollar” in front of taxpayers.
“The IRS does have a legitimate problem with these mills,” said Davidoff. “They send in an offer without proper documentation and charge a retainer. Once they get that, they don’t do anything,” he said.
VanDeVeer noted that the IRS has been concerned about “offer mills” for some time. “The offer gets rejected and they send back the same offer, for a fee. The IRS is looking for ways to control that, but in the meantime they’re stifling other legitimate offers,” he said.
The offer mills are harming the OIC program, agreed Les Shapiro, an enrolled agent and attorney. In a statement before the IRS Oversight Board on behalf of the National Association of Enrolled Agents, he voiced “bewilderment by the absence of any apparent concern or action by the government against organizations and individuals engaged in false, fraudulent, deceitful or misleading advertising and solicitation.”
They are “compromising the integrity of the tax system” and “unduly harming the OIC program,” he charged.
Shapiro also described a lack of IRS buy-in to the program. “The IRS must buy into it and administer the program in a fair and even manner,” he said. “Administrative procedures seem to be either unknown or overlooked. Internal directives that have come to the attention of our members indicate that national office policy is being ignored.”
Charlie Jones, executive vice president for operations at JK Harris & Co. and a former IRS assistant regional commissioner for collection, agreed that there is a cultural bias against offers at the IRS. “The first offer I ever heard accepted was from [former heavyweight boxing champion] Joe Louis, in the late 1940s,” he said. “It was before my time, but I was told there weren’t many people that were happy about it.”
“That poison still permeates the IRS,” Jones said. “The people who foster it don’t even know who Joe Louis was, but they work on the assumption that offers are not meant to be accepted. They get just as much credit for sending back an offer as they would had they accepted it.”
The move by the IRS to centralize the OIC program into two service centers has not enhanced the flexibility needed in the program, say observers.
“Most experienced field agents are reasonable,” said Davidoff. “But in the OIC centers in Brookhaven [N.Y.] and Nashville [Tenn.], they’re very tough. Statistics show that a higher percent are rejected or returned from the centralized locations, and these are the simpler ones.”
One of the bases for an acceptance under the 1998 legislation is effective tax administration, which includes “public policy grounds,” noted Davidoff. These would include the case of taxpayers who had taxable income from the exercise of stock options but the value of the stock went down, leaving the taxpayer without any real income or the means to pay tax on the phantom income.
“Under public policy concerns, it should be unconscionable to hold a taxpayer liable for the full amount of tax in this situation, yet not a single public policy offer has been accepted,” he said.
Olson agreed. “The IRS’s processing of these ‘effective tax administration’ offers is also troubling,” she stated. “For example, the IRS generally believes that ETA is not an appropriate vehicle for compromising penalties or interest where relief is not available under the code’s specific interest or penalty relief provisions.”
If the IRS reasoning is accepted, she said, “ETA relief will never be available to compromise interest or penalties under any circumstances, notwithstanding express legislative history to the contrary.”
Olson said that the IRS needs to re-evaluate its policy of summarily rejecting “doubt as to collectibility” offers if, based on its projections, the taxpayer’s future income will fully pay the liability over the original collection statute of limitations period plus five years.
The IRS Office of Program Evaluation, Research and Analysis is studying the outcome of rejected offers. “When this information is available,” said Olson, “it is likely to reveal that, by rejecting OICs, the IRS is in many cases missing opportunities to collect at the earliest possible time and at the least cost to the government.”
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