A recent bill could make it easier for taxpayers who owe the IRS significant amounts of money to make and Offers in Compromise (OIC). The bipartisan legislation would remove the requirement that taxpayers make a mandatory, nonrefundable payment as part of their OIC application. The Tax Compromise Improvement Act of 2009 was introduced by Ways and Means Oversight Subcommittee Chair John Lewis, D-Ga., and ranking member Charles W. Boustany Jr., R-La., on May 12.
In written testimony, Linda Stiff, Deputy Commissioner for Services and Enforcement at the IRS Shulman reminded the committee of IRS Commission Shulman’s commitment:
“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today. We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”
Current OIC Payment Requirements
Taxpayers can apply for an OIC agreement with the IRS to settle their unpaid taxes. Since 2006, taxpayers requesting a lump sum OIC had to submit a nonrefundable payment equal to 20% of the proposed offer amount. Taxpayers who opted for the installment plan had to submit the first proposed installment payment with the application. If the OIC is denied, the down payment is not refunded.
Many taxpayers seeking to enter into OIC agreements have recently lost jobs or are experiencing financial difficulties. The payments have made it more difficult for taxpayers to take advantage of the OIC program, which was designed to be a “safety valve” within the IRS process. Those who have relied on borrowed money to fund the initial payment have been hit especially hard.
OIC Applications Down
At the February meeting of the Ways and Means Subcommittee on Oversight. National Taxpayer Advocate Nina E. Olson testified that the number of OICs received by the IRS fell by 21% Fiscal Year 2006 to Fiscal Year 2007 as the down payment requirement took effect. Ms. Olson testified that the decline can be attributed in part to difficulty in obtaining funds to make the required payment. She also stated that less than one in four offers is actually accepted, resulting in federal taxes that could be collected left unpaid.
The program has been rendered ineffective by the partial payment requirement. Olson wrote:
As a result of the administrative and legislative obstacles that have been erected, I hear regularly from tax practitioners who say they have given up on the offer-in compromise program as essentially a dead letter. Moreover, tax professionals tell me that given the low possibility of the IRS accepting an offer, they are advising their clients to file for bankruptcy. When that happens, the IRS generally will collect less than through the offer-in-compromise.
Removing the partial payment requirement is thought to increase the usage of OIC agreements in situations of economic hardship and therefore help taxpayers, as well as the federal government.
You can read Nina Olson’s full testimony here.