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entitled 'Tax Administration: IRS Should Evaluate the Changes to Its 
Offer in Compromise Program' which was released on March 15, 2002. 

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United States General Accounting Office: 
GAO: 

Report to the Chairman and Ranking Minority Member, Committee on 
Finance, U.S. Senate: 

March 200: 

Tax Administration: 

IRS Should Evaluate the Changes to Its Offer in Compromise Program: 

GAO-02-311: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Objectives, Scope, and Methodology: 

Inventory and Processing Times Grew because Staffing Increases Were 
Outpaced by Program Changes: 

The Extent to Which IRS’s Current Initiatives Would Reduce Offer 
Inventory and Processing Time Is Uncertain: 

IRS Fulfilled Certain Requirements of the Restructuring Act: 

IRS Lacked Data and Written Plans for Partial Payment Installment 
Agreements: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Total Tax Liability Compromised: 

Appendix II: IRS’s Partial Payment Installment Agreement Proposal: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: Comments from the Taxpayer Advocate Service: 

Tables: 

Table 1: Number of Direct Collection Field Staff Hours Charged to the 
OIC Program and Total Direct Collection Field Staff Hours (Fiscal 
Years 1997–2001): 

Table 2: Comparison of Direct Field Collection Staff Hours Charged to 
the OIC Program, by Category of Staff (Fiscal Years 1997 and 2001): 

Table 3: IRS’s Projected Results for Centralized and Fast Track 
Processing (As of January 2002): 

Table 4: IRS’s Other Initiatives, Expected Results, and Status (As of 
December 2001): 

Table 5: Total Tax Liability Compromised (Fiscal Years 1991-2001): 

Figures: 

Figure 1: Simplified Overview of the Offer Process: 

Figure 2: End-of-Year Offer Inventory (Fiscal Years 1997–2001): 

Figure 3: Age of Cases at Disposition (Fiscal Years 1997–2001): 

Figure 4: Offer Applications and Workable Offers Received (Fiscal 
Years 1997–2001): 

Figure 5: Workable Offers and Offer Dispositions (Fiscal Years 1997–
2001): 

Figure 6: Overview of Centralized and Fast Track Offer Processing: 

Abbreviations: 

ETA: effective tax administration: 

FTE: full-time equivalent: 

GPRA: Government Performance and Results Act: 

IRS: Internal Revenue Service: 

OIC: offer in compromise: 

OPERA: Office of Program Evaluation and Risk Analysis: 

TIGTA: Treasury Inspector General for Tax Administration: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

March 15, 2002 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

A growing backlog of cases and longer processing times have prompted 
concern on the part of taxpayers, Congress, and other stakeholders 
about the management of the Internal Revenue Service’s (IRS) Offer in 
Compromise (OIC) Program. An offer in compromise is an agreement 
between a taxpayer and the IRS to settle or “compromise” the taxpayer’
s tax liability for less than the full amount owed. Generally, IRS 
considers offers in cases in which taxpayers cannot afford to pay the 
full tax liability. In recent years, particularly since the enactment 
of the Internal Revenue Service Restructuring and Reform Act of 1998 
(Restructuring Act), the demand for offers has increased 
significantly. Even though IRS added staff to the program, the 
inventory of unresolved offers and the processing times have grown. 
IRS now takes about 10 months, on average, to make an offer 
determination. 

Because of your concern about the growing inventory and processing 
times, you asked us to review IRS’s administration of the program. 
Specifically, you asked us to (1) determine why the inventory of cases 
and case processing times have continued to grow; (2) assess whether 
IRS’s current initiatives for managing the OIC Program will reduce 
inventory and processing times; and (3) determine whether IRS is 
fulfilling the requirements of the Restructuring Act in terms of 
independently reviewing all proposed rejections of offers, considering 
the facts and circumstances of each case, and not rejecting offers 
from low-income taxpayers solely on the basis of the amount offered. 

You also asked us to review a recent change to IRS’s installment 
agreement program. An installment agreement allows taxpayers to pay 
their tax liability over time. In 1998, IRS counsel determined that 
IRS did not have the authority to enter into an installment agreement 
that would not fully pay the tax liability within the time allowed by 
law. Because of concern that this decision would leave some taxpayers 
unable to qualify for either an installment agreement or an offer, you 
asked us to determine the extent to which IRS has information on how 
the counsel decision affects taxpayers and to evaluate IRS’s 
legislative proposal for a new partial payment installment agreement 
program. 

To address these objectives, we reviewed and analyzed program data 
from IRS statistical reports and program documents and reviewed offer 
policies and procedures and studies by an outside contractor and the 
Treasury Inspector General for Tax Administration (TIGTA). We focused 
on fiscal years 1997 through 2001 because this was a period of 
enormous change in the OIC Program. We also interviewed IRS officials, 
including officials responsible for the OIC and installment agreement 
programs. Our scope and methodology are discussed in greater detail in 
a separate section of this report. 

Results in Brief: 

OIC inventory and processing time have grown, largely because IRS was 
unable to keep pace with the effects of program changes, despite 
significant increases in program staff. Between fiscal years 1997 and 
2001, the ending inventory of unresolved offers almost tripled to 
about 95,000 and the percentage of cases that were closed within 6 
months dropped from 64 to 32 percent. Program changes, some initiated 
by IRS and some mandated by the Restructuring Act, increased the 
demand for offers, the number of processing steps, and the number of 
staff hours needed to process a case. During the same period, staff 
hours charged to the OIC Program more than doubled, growing to 18 
percent of total staff hours charged to all of IRS’s programs for 
collecting tax debts. Yet, the demand for offers exceeded staff’s 
capacity to process them. 

The extent to which IRS’s current initiatives would reduce the OIC 
Program inventory and processing time is uncertain. Generally, the 
current initiatives are intended to separate the processing of less 
complex and more complex offers, with lower-grade staff using 
standardized procedures to process less complex offers and higher-
grade staff specializing in more complex offers. IRS projects that the 
initiatives will stabilize the inventory and keep up with the flow of 
new offers by the end of fiscal year 2002. More specifically, IRS 
projects that in fiscal year 2004, it will close 40 percent more 
cases, using 10 percent fewer and lower-grade staff than in fiscal 
year 2001. IRS’s projections depend on a series of assumptions such as 
the number of staff hours needed per case. Many of the assumptions 
have little empirical basis, however; in some cases, offer program 
officials had no choice but to rely on professional judgment. They 
acknowledge that the projections are uncertain and said that because 
of the escalating inventory, processing time, and staffing costs, they 
felt that they had to take a “calculated risk” and begin implementing 
the initiatives. 

The uncertainty about the projected results, combined with the costs 
of staffing the program, underscores the importance of evaluation 
plans, timely performance data, and goals for improving the program. 
As of January 2002, IRS had not completed plans for evaluating the 
effectiveness of most of the initiatives, had not completed plans for 
a performance data system in light of the initiatives, and had not set 
goals for processing time based on an evaluation of taxpayer needs, 
other benefits, and costs. Such information would give program 
managers, who are likely to face divergences between actual and 
projected results, a better understanding of the factors affecting the 
initiatives’ performance and options for improving their performance. 

IRS fulfilled the requirements of the Restructuring Act in terms of 
independently reviewing all proposed offer rejections, considering the 
facts and circumstances of each taxpayer when determining allowances 
for monthly living expenses, and not rejecting offers from low-income 
taxpayers solely on the basis of the amount offered. TIGTA reported in 
June 2000 that IRS was carrying out the act’s requirements in these 
three areas. In discussions with TIGTA, the National Taxpayer 
Advocate, and other IRS officials, we found no evidence indicating 
that IRS was not following the new procedures. 

IRS lacks data on the effect on taxpayers of its 1998 counsel decision 
that IRS did not have the authority to enter into partial payment 
installment agreements. According to IRS officials, the policy change 
created a situation in which taxpayers who were willing to pay some of 
their tax liability might not qualify for either an installment 
agreement or an offer. Instead, according to these officials, the only 
option was to put such taxpayers’ accounts into inactive status. IRS’s 
legislative proposal gives IRS broad discretion over how to implement 
a partial payment installment agreement program. IRS has not prepared 
written documentation describing eligibility, procedures, staffing 
needs, information system needs, projected costs, or evaluation plans. 
Such written documentation would provide outside stakeholders, 
including Congress, useful information about the impact of the 
legislative proposal and IRS’s capacity to manage the new program. 
Evaluations would give IRS managers a better understanding of program 
performance and a better basis for considering changes to improve 
performance. 

In this report, we are recommending that the Commissioner of Internal 
Revenue (1) develop plans for evaluating the various offer initiatives 
and move no new initiative into implementation without a finalized 
evaluation plan; (2) determine which OIC Program performance and cost 
data should be collected; (3) set goals for offer processing time that 
are based on taxpayer needs, other benefits, and costs; and (4) 
prepare documentation describing its proposed partial payment 
installment agreement program in more detail. 

Background: 

The OIC Program is one of IRS’s collection programs to resolve 
delinquent tax accounts. Taxpayers who do not pay their taxes in full 
when they file their tax returns or when IRS determines that they owe 
additional taxes are subject to IRS’s collection process. The 
collection process begins when IRS sends the taxpayer a bill demanding 
full payment. For taxpayers who are unwilling or unable to pay, IRS 
may take enforcement action through liens, levies, or seizures of 
property; place the account in a temporary inactive status; or refer 
the case to IRS counsel for litigation. By law, IRS has 10 years from 
the date of assessment to collect delinquent taxes from a taxpayer. 
Taxpayers who are willing to pay may qualify for an installment 
agreement, which allows payments to be made over time; taxpayers who 
cannot afford to pay their full liability may be eligible for an offer 
in compromise. 

Section 7122 of the Internal Revenue Code gives IRS authority to 
settle tax debts through compromises, that is, by accepting less than 
full payment. Historically, IRS’s compromise authority has been 
limited to cases where there was doubt as to liability or doubt as to 
collectibility. In July 1999, IRS issued temporary regulations 
allowing for a third type of compromise when there is no doubt as to 
liability or collectibility but when compromising the taxes would 
promote effective tax administration. IRS can accept the following 
types of compromise. 

* A compromise based on doubt as to liability can be accepted when 
there is a dispute that the tax liability is correct. 

* A compromise based on doubt as to collectibility can be accepted 
when (1) it is unlikely that the tax liability can be collected in 
full and (2) the amount of the taxpayer’s offer reasonably reflects 
collection potential—the net equity of the taxpayer’s assets plus the 
amount that IRS could collect from the taxpayer’s future income. 
Because IRS’s policy is to allow taxpayers sufficient resources to 
provide for necessary living expenses, if special circumstances exist, 
such as advanced age or serious illness of the taxpayer, IRS may 
accept an offer for an amount that is less than what could be 
collectible based on the taxpayer’s financial condition. 

* A compromise based on effective tax administration can be accepted 
only when (1) there is no dispute about the tax liability and (2) the 
taxpayer has sufficient resources to fully pay the tax but collection 
of the liability in full would either create an economic hardship or 
be detrimental to voluntary compliance. 

As illustrated in figure 1, the offer process starts when an offer 
application is submitted by a taxpayer or his or her representative. 
The offer must be supported by a current statement of the taxpayer’s 
financial condition, including data on assets and liabilities and a 
monthly income and expense analysis. If the taxpayer has not filed all 
required federal tax returns or is in bankruptcy, the offer is not 
considered workable and will be returned to the taxpayer. If the offer 
is eligible for consideration and the offer package is incomplete, IRS 
will contact the taxpayer and attempt to obtain the missing 
information. If the taxpayer does not provide the requested 
information, the offer application will be returned to the taxpayer. 

Figure 1: Simplified Overview of the Offer Process: 

[Refer to PDF for image: process map] 

1) Taxpayer submits application and financial information: 

2) IRS determines whether taxpayer is eligible: 
* filed all income tax returns; 
* not in bankruptcy; 
If no: IRS returns application to taxpayer. 
If Yes: continue. 

3) IRS determines whether offer is acceptable based on ability to pay: 
If yes, go to #9; 
In no, continue. 

4) Taxpayer raises offer to acceptable level; 
If yes, go to #9; 
In no, continue. 

5) IRS proposes rejection. 

6) IRS’s independent review determines whether the correct decision 
was made; 
If yes, go to #7; 
If no, go to #8. 

7) IRS sends rejection letter to taxpayer. 

8) IRS reconsiders offer acceptability. 

9) Counsel review when tax liability exceeds $50,000. 

10) IRS accepts offer. 

Source: Review of IRS’s written procedures and discussions with IRS 
officials. 

[End of figure] 

Once an offer package is complete, IRS determines whether the offer is 
acceptable by reviewing and verifying the taxpayer’s financial data. 
The verification includes a review of prior-year tax returns as well 
as records showing the taxpayer’s assets, bank accounts, and personal 
and real property. The taxpayer may be asked to provide additional 
documentation to verify financial or other information. If the 
financial statement becomes older than 12 months while the offer is 
being processed, the taxpayer must be contacted to update the 
information. 

When an offer is unacceptable, IRS gives the taxpayer the opportunity 
to submit an amended offer, withdraw the offer application, or seek an 
alternative resolution to the case. When an offer is rejected, the 
taxpayer will be notified in writing after an independent 
administrative review of the proposed rejection. The letter will 
explain the reason for the decision and give instructions on how the 
taxpayer may appeal the decision. If an offer application is returned 
because the taxpayer did not provide all requested financial 
information, IRS’s policy is to conduct an independent administrative 
review of the offer application before returning it to the taxpayer. 

After an offer is accepted by IRS,[Footnote 1] the taxpayer will be 
notified in writing and given instructions on how to make the agreed 
payments. IRS allows taxpayers three payment options-—an immediate 
payment (within 90 days of acceptance); a short-term deferred payment 
plan (after more than 90 days but within 2 years of acceptance); or a 
deferred payment plan (during the remaining statutory period for 
collecting the tax). 

Another way that IRS collects delinquent taxes is through installment 
agreements. Under an installment agreement, the taxpayer remains 
obligated to pay the entire tax liability and agrees to do so in 
installments over a period of time not to exceed the remaining 
statutory period allowed IRS by law to collect the tax liability, plus 
a 5-year extension. Interest continues to accrue on the unpaid 
balance. IRS may periodically review a taxpayer’s financial condition 
and pursue further collection action if the taxpayer’s ability to pay 
increases in the future. 

Objectives, Scope, and Methodology: 

To determine why the inventory of cases and case processing times have 
continued to grow, we reviewed and analyzed OIC Program data from IRS 
statistical reports; reviewed OIC policies and procedures, program 
documents, and changes mandated by the Restructuring Act; and 
interviewed IRS officials. Since offers based on doubt as to liability 
are not processed by collection staff and represent less than one 
percent of all offers, we omitted them from our review. We did not 
check the reliability of IRS’s program data in the automated OIC 
system, the collection time reporting system, and the OIC quality 
measurement system. 

To assess whether IRS’s current initiatives for managing the OIC 
Program will reduce inventory and processing times, we analyzed IRS’s 
bases for the assumptions underlying the initiatives. As part of our 
evaluation, we interviewed IRS officials and reviewed relevant program 
documents, data, and studies by an outside contractor. Because the 
success of the initiatives depends in part on how well they are 
managed, we assessed IRS’s goals and evaluation plans. For criteria 
for this assessment, we relied on past GAO reports on performance 
management and IRS’s guidance on program evaluation. 

To determine whether IRS is fulfilling the requirements of the 
Restructuring Act in terms of independently reviewing all proposed 
offer rejections, considering the facts and circumstances of each 
case, and not rejecting offers from low-income taxpayers solely on the 
basis of the amount offered, we reviewed relevant laws, regulations, 
and program guidance; studies by TIGTA; and reports by the OIC quality 
review program, IRS’s appeals office, and the National Taxpayer 
Advocate. We also interviewed IRS officials. 

To determine the extent to which IRS has information on how the policy 
change eliminating partial payment installment agreements affects 
taxpayers and to evaluate IRS’s plan for a new partial payment 
installment agreement program, we interviewed installment agreement 
program officials and officials with responsibility for developing 
IRS’s legislative proposal relating to installment agreements. We also 
reviewed installment agreement policies and procedures, program 
documents and data, IRS’s legislative proposal, and examples of 
circumstances in which taxpayers may not qualify for either an 
installment agreement or an offer. 

We performed our investigation at IRS’s national headquarters and its 
Small Business and Self-Employed headquarters; IRS offices in Oakland 
and Fresno, California, and in Austin, Texas; IRS centers in Fresno 
and Austin; IRS’s appeals office; the National Taxpayer Advocate’s 
office; and the OIC quality review program in Atlanta, Georgia. The 
offices and centers in California and Texas were subjectively selected 
because of their location and experience with offers. We also reviewed 
a subjectively selected sample of accepted, rejected, and returned 
offers in the offices we visited. 

We did our work from May 2001 through January 2002 in accordance with 
generally accepted government auditing standards. We requested 
comments on a draft of this report from the Commissioner of Internal 
Revenue. His written comments are discussed near the end of this 
report and are reprinted in appendix III. In addition, the National 
Taxpayer Advocate provided written comments, which are reprinted in 
appendix IV. 

Inventory and Processing Times Grew because Staffing Increases Were 
Outpaced by Program Changes: 

OIC inventory and processing times grew, largely because increases in 
staffing were outpaced by the effects of program changes. Between 
fiscal years 1997 and 2001, the inventory of unresolved offers almost 
tripled and the percentage of offers processed within 6 months dropped 
from 64 percent to 32 percent. Program changes, some initiated by IRS 
and some mandated by the Restructuring Act, contributed to increases 
in the demand for offers, the number of processing steps, and the 
number of staff hours needed to process a case. Despite significant 
increases in the staff devoted to the OIC Program, IRS was unable to 
close as many cases as it received. 

Inventory and Processing Times Have Grown: 

During fiscal years 1997 through 2001, IRS’s ending inventory of 
offers, or the number of cases still unresolved at the end of the 
fiscal year, grew from about 32,300 to about 94,900 offers. As figure 
2 shows, most of the growth occurred during fiscal years 1999 and 
2000, when the inventory rose by almost 50,000 offer cases. 

Figure 2: End-of-Year Offer Inventory (Fiscal Years 1997–2001): 

[Refer to PDF for image: vertical bar graph] 

Fiscal Year 1997: 32,279 

Fiscal Year 1998: 37,941 

Fiscal Year 1999: 62,551 

Fiscal Year 2000: 87,456 

Fiscal Year 2001: 94,931. 

Source: Unpublished IRS data on OIC activity for fiscal years 1997—
2001 (IRS rept. no. 5000-108). 

[End of figure] 

IRS measures its timeliness in processing offers by the percentage of 
offers completed within 6 months of the date that the offer is 
accepted for investigation. Our analysis of IRS data showed that from 
fiscal years 1997 through 2001, the percentage of cases that were 
closed within 6 months dropped from 64 to 32 percent, the percentage 
that were closed within 6 to 12 months grew from 29 to 43 percent, and 
the percentage closed after more than 12 months rose from 7 to 25 
percent, as illustrated by figure 3. 

Figure 3: Age of Cases at Disposition (Fiscal Years 1997–2001): 

[Refer to PDF for image: vertical bar graph] 

Percentage indicated for the following: 

Fiscal Years 1997-2001: 
0–6 months; 
6–12 months;
12 or more months. 

Note: “Disposition” means closed as accepted, rejected, or withdrawn. 

Source: Unpublished IRS data on OIC activity for fiscal years 1997—
2001 (IRS rept. no. 5000-108). 

[End of figure] 

Although IRS does not routinely report the average number of days it 
takes to close a case, data from an IRS sample of closed offer cases 
[Footnote 2] showed that, on average, it took about 292 days to close 
an offer case[Footnote 3] during fiscal year 2000 and about 312 days 
to close an offer case during fiscal year 2001. 

Other data describing the results of the OIC Program are included in 
appendix I. The data include the dollar amount accepted in compromise 
and the amount of the total tax liability compromised. 

Program Changes Contributed to the Growth in Demand, Processing Steps, 
and Staff Hours Per Case: 

Program changes contributed to the growth in inventory and processing 
times. First, program changes increased the demand for offers, as 
measured by the number of workable offers, or new offers that meet IRS’
s criteria for processing.[Footnote 4] Second, some changes increased 
the complexity of the offer process, resulting in more processing 
steps and staff hours to process a case. 

Our analysis of IRS’s data showed that the number of workable offers 
doubled over the last 5 years, from about 51,700 offers in fiscal year 
1997 to about 104,500 in fiscal year 2001, as illustrated by figure 4. 

Figure 4: Offer Applications and Workable Offers Received (Fiscal 
Years 1997–2001) 

[Refer to PDF for image: vertical bar graph] 

Number indicated for the following: 

Fiscal Years 1997-2001: 
Offer applications; 
Workable offers. 

Note: Workable offers were calculated by subtracting from the number 
of offer applications received during the fiscal year the sum of the 
number of offers transferred to another IRS office and the number of 
offers returned to taxpayers as not eligible for consideration. 

Source: Unpublished IRS data on OIC activity for fiscal years 1997—
2001 (IRS rept. no. 5000-108). 

[End of figure] 

According to IRS officials, the following program changes, some 
initiated by IRS and some mandated by the Restructuring Act, increased 
the demand for offers. 

* Increase in publicity. In response to a Restructuring Act 
requirement that IRS inform taxpayers about the availability of offers 
in compromise as an option for resolving tax debts, the agency 
undertook outreach and education efforts. According to IRS officials, 
these efforts, along with media coverage, brought the revised program 
to the attention of taxpayers and practitioners who represent 
taxpayers. IRS officials told us that practitioners, in turn, have 
extensively marketed the revised OIC Program as a way for taxpayers to 
settle their tax debts for “cents on the dollar.” 

* Change in processability criteria. Before 1999, IRS would not 
process an offer application that was incomplete. In 1999, IRS made 
all offer applications eligible for processing, except those from 
taxpayers in bankruptcy proceedings or from taxpayers who had not 
filed all required federal tax returns. Instead of returning an 
incomplete offer to the taxpayer, IRS started working with taxpayers 
to obtain the information needed to process the offer. This change in 
processability criteria increased the number of workable offers. 

* Elimination of partial payment installment agreements. Prior to 
1998, IRS allowed partial payment installment agreements with payment 
periods that could last 15 years and longer. In 1998, IRS counsel 
determined that IRS did not have the authority to enter into 
installment agreements that would not fully pay the liability within 
the 10-year statutory collection period plus a 5-year extension. IRS 
officials stated that as a result of this decision, more taxpayers 
turned to the OIC Program. However, IRS officials told us they could 
not quantify the impact that this policy change has had on the demand 
for offers. 

* Expanded bases for accepting offers to include effective tax 
administration. In response to the Restructuring Act, IRS expanded the 
bases for considering offers to include effective tax administration 
(ETA), which requires considering such factors as equity and hardship. 
Although the expansion had the potential to increase the demand for 
offers, IRS officials told us that they do not track the number of 
offers submitted on the basis of these factors. However, IRS data on 
the number of offers accepted by type showed that there were 261 ETA 
offers in fiscal year 2000 and 272 ETA offers in fiscal year 2001, 
suggesting that the impact on demand may have been small. 

* More payment options. In 1999, IRS made available a long-term 
deferred payment option that allows taxpayers to pay the offer amount 
over the remaining statutory collection period. This change had the 
potential to increase demand, but IRS officials could not quantify the 
impact. 

Three of the program changes that increased demand also increased the 
number of processing steps and staff hours needed per case. Changing 
the processability criteria resulted in IRS staff’s spending time to 
work with taxpayers to complete offer applications. Expanding the 
bases for accepting offers means that before rejecting an offer based 
on doubt as to liability or doubt as to collectibility, IRS must 
determine whether the factors considered under ETA or special 
circumstances criteria apply.[Footnote 5] Making more payment options 
available increased the amount of staff time required to calculate 
offer amounts. However, IRS could not quantify the impact of these 
changes. 

According to IRS officials, other program changes also added the 
following steps to the process and increased staff hours per case. 

* Independent administrative review. The Restructuring Act required 
that IRS establish procedures for an independent administrative review 
of any proposed offer rejection before notifying the taxpayer. IRS 
extended the review to include offers to be returned for failure to 
provide requested financial information. Consequently, the independent 
administrative reviews increased staff hours per case and added a step 
to the offer process for rejected offers and returned offers. However, 
IRS does not currently track the time spent on offers by the 
independent reviewers. 

* Revised offer form. IRS had to revise the offer form to reflect 
changes required by the Restructuring Act.[Footnote 6] Since an offer 
in compromise is a legal contract between the taxpayer and IRS, the 
form had to be revised so that the offer contract and the acceptance 
letter would have the same terms. Form revisions added a step to the 
offer process for taxpayers who had to resubmit their offers on 
current forms. 

Increased Staffing Outpaced by Growth in Demand, Processing Steps, and 
Hours Needed to Process a Case: 

Between fiscal years 1997 and 2001, IRS took several actions to manage 
the growing inventory and processing time, including shifting 
significant numbers of staff to the OIC Program from other field 
collection activities. However, the growth in staffing was outpaced by 
the increases in demand and complexity of case processing in terms of 
processing steps and hours needed to process a case. Despite more than 
doubling direct staff time and taking other actions, IRS was unable to 
reduce inventory and processing times. 

Staff hours grew. IRS officials told us that as the demand for offers 
grew, the cost of staffing the program grew as well. IRS reassigned 
staff to the OIC Program from other collection programs, such as 
delinquent account and tax return investigations. As table 1 shows, 
the number of direct collection field staff hours charged to the OIC 
Program[Footnote 7] more than doubled, from about 728,000 hours in 
fiscal year 1997 to about 1.6 million hours in fiscal year 2001. At 
the same time, the number of direct hours charged to all field 
collection activities declined by about 30 percent, from about 12.7 
million hours in fiscal year 1997 to about 8.9 million hours in fiscal 
year 2001. With the growth in OIC Program hours and the decrease in 
total collection hours, the share of total direct field collection 
staff hours devoted to the OIC Program grew from about 6 percent in 
fiscal year 1997 to 18 percent in fiscal year 2001. IRS officials told 
us that having devoted such a large proportion of collection resources 
to the OIC Program may be negatively impacting other collection 
programs. 

Table 1: Number of Direct Collection Field Staff Hours Charged to the 
OIC Program and Total Direct Collection Field Staff Hours (Fiscal 
Years 1997–2001) 

Fiscal year: 1997 
Direct field staff hours: 
OIC Program: 727,682 
Total collection: 12,684,232 
Offer hours as a percentage of total collection hours: 5.7%. 

Fiscal year: 1998 
Direct field staff hours: 
OIC Program: 741,143 
Total collection: 11,412,249 
Offer hours as a percentage of total collection hours: 6.5%. 

Fiscal year: 1999 
Direct field staff hours: 
OIC Program: 860,125 
Total collection: 9,426,813 
Offer hours as a percentage of total collection hours: 9.1%. 

Fiscal year: 2000 
Direct field staff hours: 
OIC Program: 1,287,046 
Total collection: 8,556,527 
Offer hours as a percentage of total collection hours: 15.0%. 

Fiscal year: 2001 
Direct field staff hours: 
OIC Program: 1,600,074 
Total collection: 8,892,385 
Offer hours as a percentage of total collection hours: 18.0%. 

Source: GAO analysis of unpublished IRS data on the Collection Time 
Reporting System for fiscal years 1997—2001 (IRS rept. no. 5000-23). 

[End of table] 

As shown in table 2, while the percentage of OIC Program staff 
categorized as professionals has decreased slightly between fiscal 
years 1997 and 2001, they continued to account for about three-
quarters of offer staff. These staff, generally revenue officers at 
the GS-11 and GS-12 grade levels,[Footnote 8] investigate offers, 
negotiate with taxpayers, and make the decision to reject or accept an 
offer. During the same time period, the percentage of lower-grade 
paraprofessional staff increased slightly. These staff, generally tax 
examiners at the GS-4, GS-5, and GS-6 grade levels, perform less 
complex tasks, such as working with taxpayers to prepare a complete 
offer application. 

Table 2: Comparison of Direct Field Collection Staff Hours Charged to 
the OIC Program, by Category of Staff (Fiscal Years 1997 and 2001) 

Category: Professional; 
FY 1997: 564,666; 
Percentage: 78%; 
FY 2001: 1,173,531; 
Percentage: 73%. 

Category: Paraprofessional; 
FY 1997: 119,587; 
Percentage: 16%; 
FY 2001: 333,272; 
Percentage: 21%. 

Category: Clerical; 
FY 1997: 43,429; 
Percentage: 6%; 
FY 2001: 93,271; 
Percentage: 6%. 

Category: Total; 
FY 1997: 727,682; 
Percentage: 100%; 
FY 2001: 1,600,074; 
Percentage: 100%. 

Source: GAO analysis of unpublished IRS data on the Collection Time 
Reporting System for fiscal years 1997—2001 (IRS rept. no. 5000-23). 

[End of table] 

In addition to increasing staff, IRS took other actions to improve the 
efficiency of the program. These actions included creating an offer 
specialist position for revenue officers to exclusively process offers 
and make the program more consistent; revising offer processing 
procedures, including streamlining investigations of certain offers 
with liabilities of $50,000 or less; and revising the offer 
application package so that taxpayers can better understand what 
documents must be submitted for IRS to consider an offer. In addition, 
IRS used an outside contractor to conduct a review of the OIC Program 
to find ways to improve the offer process and reduce the inventory of 
unresolved offers. Some of the initiatives resulting from these 
efforts will be discussed later. 

Demand exceeded the number of offer cases closed by staff. As shown in 
figure 5, there was a large increase in offer dispositions after 
fiscal year 1999. However, in spite of the increases in offer staffing 
and dispositions, the demand for offers, as measured by the number of 
workable offers received each year, generally exceeded the number of 
cases staff closed. Increases in staff hours per case, caused in part 
by additional processing steps, contributed to the inability of staff 
to keep up with demand. 

Figure 5: Workable Offers and Offer Dispositions (Fiscal Years 1997–
2001: 

[Refer to PDF for image: vertical bar graph] 

Graph depicts: 
Workable offers; 
Offer dispositions. 

For Fiscal Years 1997-2001. 

Note: “Dispositions” mean cases closed as accepted, rejected, or 
withdrawn. 

Source: GAO analysis of unpublished IRS data on OIC activity for 
fiscal years 1997—2001 (IRS rept. no. 5000-108). 

[End of figure] 

The Extent to Which IRS’s Current Initiatives Would Reduce Offer 
Inventory and Processing Time Is Uncertain: 

IRS has begun implementing a new strategy for processing offers, 
consisting of several separate initiatives intended to reduce 
inventory and processing time. Less complex offers will be processed 
centrally using standardized procedures intended to reduce staff hours 
per case and allow processing by lower-grade staff, while more complex 
offers will continue to be processed by higher-grade professional 
staff. Overall, IRS is projecting that standardization will allow 
fewer, lower-grade staff to process more cases. The accuracy of IRS’s 
projected results for the initiatives is uncertain. Many of the 
underlying assumptions have little empirical basis—in some cases, 
program managers had no choice but to rely on their professional 
judgment. This uncertainty underscores the importance of timely 
program performance data and evaluations. However, as of January 2002, 
IRS had not completed plans for either a performance data system or 
evaluations for most of the initiatives making up the new strategy. 

Centralized and Fast Track Processing Allow for Standardization and 
Lower-Grade Staff, but Results Are Uncertain: 

IRS has two key initiatives under way to reduce inventory and 
processing times—centralized processing and fast track processing. 
Centralized processing will use lower-grade staff to process new, less 
complex cases centrally and free up higher-grade staff for other field 
collection activities. Fast track processing will use both higher- and 
lower-grade field staff to close all less complex cases in the 
existing field inventory[Footnote 9] during fiscal year 2002. 

Figure 6: Overview of Centralized and Fast Track Offer Processing: 

[Refer to PDF for image: process map] 

1) New offers: 

2) Centralized initial processing: 
Less complex offers: Centralized processing; 
More complex offers: Field processing. 

3) Existing field inventory: 
More complex offers: Field processing; 
Less complex offers: Fast track processing in the field. 

Source: Discussions with IRS officials. 

[End of figure] 

IRS centralized the locations where all offers are received and 
initially processed into two IRS centers—-Brookhaven and Memphis-—in 
August 2001. The new process is illustrated in figure 6. Lower-grade 
staff, known as process examiners (GS-4, GS-5, and GS-6), initially 
process new offer applications, determining eligibility for 
consideration and assembling case files. Other lower-grade staff, 
known as offer examiners (GS-7 and GS-9), work the less complex offers 
to completion using standardized procedures. The criteria for 
centralized processing include a tax liability of less than $50,000; 
wage or self-employment income; no employees; personal income tax, 
penalty assessment, or employment tax liability; and simple assets 
such as a personal residence. More complex new offers are sent to the 
field where higher-grade offer specialists (generally GS-11 and GS-12) 
work the cases to completion. These cases take longer to investigate 
and may require face-to-face meetings with the taxpayer. 

IRS began using fast track processing in January 2002. Fast track 
cases must meet essentially the same criteria as cases processed 
centrally. However, IRS has designed fast track processing to take 
less time than centralized processing. Under fast track, field staff 
[Footnote 10] would spend less time verifying a taxpayer’s financial 
information and taxpayers would not be required to provide supporting 
documentation. Instead, IRS would rely on electronically available 
data[Footnote 11] to verify financial information. 

IRS expects to stabilize inventory and keep up with the flow of new 
cases by the end of fiscal year 2002. As table 3 shows, IRS is 
projecting that centralized and fast track processing would reduce 
fiscal year 2002 ending inventory to 48,000 cases-—a level that IRS 
expects to maintain through fiscal year 2004. IRS projects that it can 
maintain this inventory level while reducing total full-time 
equivalent positions (FTE)[Footnote 12] and using lower-grade staff. 
More specifically, IRS projects that in fiscal year 2004 it will close 
40 percent more cases using 10 percent fewer FTEs and lower-grade FTEs 
than in fiscal year 2001. 

Table 3: IRS’s Projected Results for Centralized and Fast Track 
Processing (As of January 2002): 

Fiscal year: 2001 [Actual]; 
Submissions: 125,390; 
Field FTEs[A]: 1,507;
Centralized FTEs: [Empty]; 
Closures[B]: 117,915; 
Ending inventory: 94,931. 

Fiscal year: 2002 [Projected]; 
Submissions: 138,000; 
Field FTEs[A]: 1,168; 
Centralized FTEs: 650[C]; 
Closures[B]: 185,000; 
Ending inventory: 48,000. 

Fiscal year: 2003 [Projected]; 
Submissions: 151,000; 
Field FTEs[A]: 574; 
Centralized FTEs: 650; 
Closures[B]: 151,000; 
Ending inventory: 48,000. 

Fiscal year: 2004 [Projected]; 
Submissions: 166,000; 
Field FTEs[A]: 631; 
Centralized FTEs: 715; 
Closures[B]: 166,000; 
Ending inventory: 48,000. 

[A] Field FTEs include offer specialists and tax examiners, as well as 
trainers and coaches at the centralized sites. 

[B] Closures include cases closed, cases returned as unprocessable, 
and cases transferred to another IRS office. 

[C] Staff would be phased in during the first year of operation. 

Source: IRS. 

[End of table] 

IRS’s projections for centralized processing and fast track processing 
were based on a series of assumptions regarding offer submissions, 
percentage of offers meeting centralized criteria, number of cases 
meeting fast track criteria, direct staff hours needed per case, and 
staffing levels. Specifically, IRS made the following assumptions. 

* Offer submissions, or new offer applications, would grow at a rate 
of 10 percent a year from fiscal years 2002 through 2004. 

* Fifty-one percent of the submissions would meet the criteria for 
centralized processing, but the percentage would increase to 70 
percent in fiscal year 2003. 

* Thirty-three thousand cases in the field inventory at the beginning 
of fiscal year 2002 would meet fast track criteria. 

* Staff in the centralized sites would take an average of 2 hours to 
determine processability and assemble each new case and an average of 
6 hours to close those cases meeting the centralized criteria. 

* Staff in the field would take an average of 4 hours to close cases 
in the existing field inventory that meet fast track criteria. 

* Six hundred fifty FTEs would be needed in the centralized sites in 
fiscal years 2002 and 2003. These FTEs would be phased in during 
fiscal year 2002 as new staff received formal and on-the-job training. 

* Approximately 225 offer specialists and tax examiners could close 
all fast track cases in the field during fiscal year 2002. 

Whether these projections accurately predict IRS’s future performance 
is uncertain. While the future is always uncertain, the extent of the 
uncertainty about the projections may be significant. As discussed 
below, some of the underlying assumptions were based on the experience 
of a pilot program,[Footnote 13] others lacked a basis that could be 
verified, and some have changed over time. For many of the 
assumptions, there was little empirical basis—in many cases, program 
managers had no choice but to rely on their professional judgment. 
Program officials acknowledged the uncertainty. They said that because 
of escalating inventory, processing time, and costs, they felt they 
had to take a 
“calculated risk” and begin implementing the initiatives. 

* Projecting offer submissions. According to OIC Program officials, 
IRS’s projections for the number of offer submissions that it expects 
to receive through fiscal year 2004 are based on a 10 percent growth 
rate. IRS has revised its projections for offer submissions several 
times. Because the growth rate can fluctuate, and because offer 
submissions can be affected by factors beyond the control of IRS-—such 
as changes in the economy—-the accuracy of the current projections is 
uncertain. 

* Projecting the percentage of offers meeting centralized criteria. 
IRS based its assumption for the percentage of cases meeting 
centralized criteria on a profile of the automated offer in compromise 
database. On the basis of that profile, IRS estimated that 51 percent 
of the cases involved liabilities of $50,000 or less. In fiscal year 
2003, IRS plans to replace its dollar-based criteria with complexity-
based criteria. IRS estimates that as a result of this change, 70 
percent of the new offer submissions in fiscal year 2003 will meet the 
centralized processing criteria. IRS officials said that this 
percentage was based on professional judgment and would be revised 
when there is agreement on a definition of “complexity.” As a result, 
it is difficult to project with any certainty the percentage of offers 
that would meet the revised criteria. 

* Projecting the number of fast track cases in the field inventory. 
IRS based its assumption for the number of fast track cases on a 
qualitative review of a 1-week sample of closed cases selected for its 
OIC quality review program in April 2001. 

* Projecting direct staff hours per case for centralized processing. 
IRS based its projections for direct staff hours per case on its 
centralized pilot experience. However, IRS was unable to provide any 
data from its pilot that would support the number of direct staff 
hours needed to assemble and close cases at the centralized sites. • 
Projecting direct staff hours per case for fast track processing. IRS 
based its projections for direct staff hours per case on OIC data and 
professional judgment. 

* Projecting staffing levels for centralized processing. IRS projected 
centralized staffing of 650 FTEs based on professional judgment and 
assumed a 20 percent productivity improvement over that of the pilot. 
IRS officials told us that the level of staffing for centralized 
processing was selected to result in processing less complex cases 
within 6 months. 

* Projecting staffing levels for fast track processing. IRS based its 
staffing levels for fast track processing on the number of cases 
meeting fast track criteria and the number of staff hours needed to 
close a case. 

Other Initiatives Aim to Limit New Submissions and Improve Processing 
Efficiency, But Results Are Uncertain: 

IRS has several other initiatives under way or under consideration 
that are intended to limit the number of new offer submissions, reduce 
staff hours per case for certain categories of cases, and remove cases 
from existing inventory. These initiatives include the use of overtime 
in the field and the centralized sites, procedure and policy changes, 
and legislative and regulatory proposals. IRS’s projected results for 
these other initiatives were generally based on the professional 
judgment of OIC Program officials and their experiences. Because IRS 
has not had experience with some of these initiatives, IRS officials 
said they could not project results with any certainty. The possible 
effects of these other initiatives were not considered in IRS’s 
projections for centralized or fast track processing. 

Table 4 summarizes the expected results and status of IRS’s other 
initiatives. Following the table, we provide more detail on each of 
the initiatives. 

Table 4: IRS’s Other Initiatives, Expected Results, and Status (As of 
December 2001): 

Initiative: Overtime; 
Expected Results: 
* Reduce inventory—-how much depends on amount of overtime approved; 
Status: Planned for fiscal year 2002. 

Initiative: Expanded Return Authority; 
Expected Results: 
* Reduce inventory by up to 15,000 cases in FY 2002; 
* Reduce new submissions by up to 10 percent; 
* Close 4 percent of new submissions more quickly; 
Status: Implemented in September 2001. 

Initiative: Quick Hits; 
Expected Results: 
* Reduce inventory by 4,600 cases in FY 2002; 
* Reduce new submissions by up to 5 percent; 
* Close 5% of new cases more quickly; 
Status: Under counsel review. 

Initiative: Frivolous Offers; 
Expected Results: 
* Reduce new submissions by up to 15 percent; 
* Close 5 percent of new submissions more quickly; 
Status: Legislative proposal pending. 

Initiative: Statutory Period; 
Expected Results: 
* Reduce new submissions—-how much depends on the number of taxpayers 
who submit offers to delay collection activity' 
Status: Legislative proposal pending. 

Initiative: Counsel Review; 
Expected Results: 
* Reduce processing time for all offers for liabilities between 
$50,000 and $250,000; 
Status: Legislative proposal pending. 

Initiative: User Fee; 
Expected Results: 
* Reduce new submissions by up to 3 percent; 
Status: Legislative proposal pending. 

Source: IRS. 

[End of table] 

Overtime in field and centralized sites. IRS used 74,000 hours of 
overtime for offer work in the field during fiscal year 2001. In 
fiscal year 2002, IRS plans to continue the use of overtime in both 
the field and the centralized sites to ensure that projected staffing 
levels are reached. At the time of our review, the number of hours had 
not yet been determined and approved. 

Expanded return authority. To reduce the time that staff spend 
processing submissions that are not serious offers, IRS expanded its 
criteria for returning offers to taxpayers. Previously, IRS would make 
at least two attempts to request additional documentation to verify 
financial or other information from a taxpayer before an offer would 
be returned for failure to provide the requested information. As of 
September 2001, IRS makes only one attempt to request information from 
a taxpayer before returning the offer. Further, IRS may reject an 
offer if a taxpayer (1) resubmits an offer that is not materially 
different from a previous offer that was either rejected with appeal 
rights or returned; (2) resubmits an offer within 1 year of having 
defaulted and received a termination letter; or (3) filed an offer 
solely to delay enforcement action after being notified of IRS’s 
intent to levy or seize. 

As a result of its expanded return authority, IRS estimated that as 
many as 15,000 of the cases in its existing inventory would be closed 
in fiscal year 2002; future submissions would be reduced by as much as 
10 percent; and 4 percent of the new offers would be closed more 
quickly, primarily in the centralized sites. IRS officials told us 
that these projections were based on professional judgment and that 
the results would depend on when practitioners and taxpayers learn 
about IRS’s new procedures. IRS officials told us that they are 
tracking returned offers and would be able to tell in the future 
whether these are good estimates. As of late November 2001, IRS told 
us that 700 offers or about 2 percent of submissions had been closed 
under the expanded return authority. 

Quick hits. To reduce offer submissions, IRS may change its procedures 
to allow taxpayers with multiple delinquencies to enter into an 
installment agreement for one or more of their delinquencies rather 
than place all of them in a currently-not-collectible status. This 
initiative is currently under counsel review. According to IRS, this 
initiative would accomplish, in some cases, the same results as the 
legislative proposal to change Internal Revenue Code Section 6159 to 
allow for partial payment installment agreements (discussed below). 
For example: 

A taxpayer owes $20,000 for 2 years of delinquencies—-$5,000 for one 
year and $15,000 for the other-—but he cannot full pay within the 73 
months remaining before the collection statute expires. However, the 
taxpayer can pay $200 a month, for a total of $14,600. Under quick 
hits, IRS would take an installment agreement for $5,000 and put the 
other year of delinquency or $15,000 in a currently not collectible 
status. The taxpayer would be expected to make payments on the 
installment agreement but not on the separate delinquency that was put 
in a currently not collectible status. 

Based on installment agreement data and professional judgment, IRS 
estimated that under quick hits, 4,600 cases could be closed from the 
existing inventory in fiscal year 2002 and future offer submissions 
could be reduced by up to 5 percent, primarily in the centralized 
sites. Also, IRS estimated that 5 percent of the future inventory 
could be closed more quickly, primarily in the centralized sites. 

Frivolous offers. To discourage offers aimed at delaying collection 
action, IRS is requesting legislative authority to establish a $5,000 
penalty for frivolous offers. IRS developed its legislative proposal 
for frivolous offers to supplement its expanded return procedures 
(also discussed above). Based on professional judgment and offer 
experience, IRS estimates that this proposal, if approved, would 
generally discourage most abuse, reduce new offer submissions by as 
much as 15 percent, and close 5 percent of new cases more quickly, 
primarily in the centralized sites. 

Statutory period. IRS is also requesting legislative authority for the 
collection statute to be suspended when an offer is submitted. As 
discussed above, by law IRS has 10 years from the date of assessment 
to collect the delinquent taxes from the taxpayer. However, when a 
taxpayer files an offer, the collection statute does not stop while 
the offer is pending. This has encouraged some taxpayers to file 
offers as an attempt to delay collection action while the statutes of 
limitation on collecting their tax debts continue to expire. IRS 
officials believe this proposal would reduce the number of new 
submissions. However, IRS cannot quantify the potential reduction of 
future submissions that may have been submitted in order to delay 
collection action. 

Counsel review. To reduce processing time, IRS is requesting 
legislative authority to change the threshold for counsel review of 
offers. Section 7122(b) of the Internal Revenue Code requires counsel 
review in all cases where the total liability is $50,000 or more. 
According to IRS’s quality review of a sample of closed offer cases, 
it took an average of 57.2 days for cases to be sent to and returned 
from counsel during fiscal year 2001. IRS questioned the added value 
of the counsel review for offers for liabilities less than $250,000 
and has proposed that the threshold be raised from $50,000 to 
$250,000. If this authority is granted, it would reduce processing 
time for offers for liabilities between $50,000 and $250,000. An IRS 
official told us that 31.2 percent of the offers closed in fiscal year 
2000 were for tax liabilities between $50,000 and $250,000 and 4.8 
percent were for tax liabilities of $250,000 or more. 

User fee. To offset the cost of the direct staff hours used to process 
offers, IRS is requesting legislative authority to charge taxpayers a 
user fee. Although offers from low-income taxpayers and offers based 
on effective tax administration would be exempt, the taxpayer would 
need to pay a user fee when the offer is submitted and would be 
reimbursed later. Based on IRS’s best guess, this proposal, if 
approved, would reduce new offers by as much as 3 percent. 

Plans for Evaluations and Data Collection Are Incomplete, and the Goal 
for Processing Time Has Not Been Verified: 

As of January 2002, IRS had not completed plans for evaluating the 
effectiveness of most of its offer initiatives, had not completed 
plans for a performance data system, and had not set program goals 
based on an evaluation of taxpayer needs, other benefits, and costs. 
Without such plans and goals, IRS may not be able to determine the 
effectiveness of the initiatives. 

Program officials said that they intend to evaluate centralized 
processing. IRS’s Office of Program Evaluation and Risk Analysis 
(OPERA) has agreed to conduct an evaluation, but a plan for the 
evaluation had not yet been developed. Program officials told us, 
however, that they had put in place measures for centralized 
processing and that program managers were continually collecting data 
and making changes as centralized processing was being implemented. 
Officials said that such monitoring would enable them to know whether 
centralized processing was meeting IRS’s goals for closing cases 
within 6 months and for the percentage of cases closed within 6 months. 

An evaluation plan for the fast track program has been developed by 
OPERA. According to OPERA officials, the plan is designed to assess 
fast track as it has been implemented in the field and also to assess 
whether the offer program database includes sufficient information for 
effective program management. The planned evaluation is also intended 
to provide some information useful for deciding whether to expand fast 
track processing. OIC Program officials stated that they are 
considering whether to expand fast track processing to cover new, less 
complex cases, which are processed centrally. It is not clear whether 
centralized fast track would be the same as the fast track currently 
being implemented in the field. For example, the mix of high- and low-
grade staff used in the field is different from the mix of staff being 
used centrally. In addition, the data being verified electronically in 
the field is not the same as the data being submitted in new cases. 
According to OPERA officials, the planned fast track evaluation is 
also intended to determine whether program results differ because of 
such variables. 

OIC Program officials said that they do not plan to develop evaluation 
plans for their other initiatives. Without such plans, it may be 
difficult to distinguish the impact of one initiative from that of 
another. 

Because actual inventory and processing time could be greater or less 
than projected, IRS managers may need to decide whether and how to 
make additional changes to the OIC Program. For example, if results 
are better than the projections, IRS may have opportunities to 
reassign some offer staff. If results are worse than projected, other 
approaches to managing inventory and processing time may need to be 
considered. Such decision-making would benefit from reliable, timely 
performance and cost data and evaluations. The Government Performance 
and Results Act (GPRA) of 1993 and IRS guidance both stress the 
benefits of first gathering and then evaluating data to help managers 
understand the factors that influence performance. While reliable, 
timely performance data and evaluations are always beneficial, the 
uncertainty about both the results and the costs of the offer 
initiatives highlights the importance of tracking and evaluating the 
initiatives’ performance. 

Planning for data collection and evaluation is also important. 
Systematic attention to the design of data collection and evaluation 
efforts can help assure the usefulness of the efforts and safeguard 
against using time and resources ineffectively. Before information is 
collected, an evaluation plan should specify details, including the 
data to be collected, data sources, data collection methods, basis for 
comparing outcomes, and an analysis plan. 

We recognize that collecting performance data and conducting 
performance evaluations have costs. Consequently, the amount of data 
to collect and the scope and depth of evaluations should be based on 
the resources required and the benefits of the information. 

As noted earlier in this report, IRS did not track some data that 
might be useful for managing the OIC Program or determining the 
effectiveness of the initiatives. These data might include, for 
example, the total staff time devoted to the OIC Program, the time 
taken by the independent administrative review, and the percentage of 
taxpayers who failed to comply with the terms of their offer, by year 
of acceptance. Whether such data are worth collecting depends on the 
extent to which they contribute to better program management or to a 
better evaluation of the effectiveness of the offer initiatives. As 
noted earlier, OPERA’s evaluation of fast track field processing 
includes an assessment of data needed for effective program 
management. Similar assessments of performance data needs for 
centralized processing and the other initiatives would also contribute 
to better program management. 

IRS measures processing time relative to a standard of six months, but 
empirical information has never been used to verify that standard as 
an appropriate measure of program performance. IRS officials said that 
the 6month standard was based on their professional judgment about 
what IRS could achieve and what taxpayers would accept. 

In two recent reports, we discussed the benefits of setting service 
goals after evaluating taxpayer or customer needs, other benefits, and 
costs.[Footnote 14] More specifically, we discussed industry guidance 
for customer service that recommended setting goals based on how long 
customers are willing to wait for the service, the value of the 
service to the organization, and the costs of providing the service. 
Without goals for offer processing time based on such factors, IRS 
lacks a yardstick for measuring the effectiveness of the initiatives 
and lacks criteria for making strategic decisions about issues such as 
staffing levels. 

IRS Fulfilled Certain Requirements of the Restructuring Act: 

IRS has implemented the following provisions mandated by the 
Restructuring Act: (1) independently reviewing all proposed offer 
rejections before notifying taxpayers; (2) considering the facts and 
circumstances of each taxpayer when determining allowances for monthly 
living expenses; and (3) not rejecting offers from low-income 
taxpayers solely on the basis of the amount offered. The Treasury 
Inspector General for Tax Administration (TIGTA) reviewed IRS’s 
implementation of these Restructuring Act provisions and reported in 
June 2000 that IRS had modified its offer procedures to carry out the 
act’s requirements. Further, TIGTA, IRS officials, and the National 
Taxpayer Advocate found no evidence to indicate that IRS was not 
following the new procedures. 

IRS Independently Reviewed All Proposed Offer Rejections Before 
Notifying Taxpayers: 

The Restructuring Act required that IRS establish procedures for an 
independent review of any rejection of a proposed offer before the 
rejection is communicated to the taxpayer. The Restructuring Act also 
stipulated that these procedures should allow taxpayers to appeal the 
offer rejection to IRS’s Office of Appeals. To implement the 
requirement, IRS established an independent administrative review 
process. IRS went beyond the requirements of the Restructuring Act by 
expanding the review process to include offers being returned because 
the taxpayer did not provide requested financial information.[Footnote 
15] IRS also modified its internal guidance by adding criteria for the 
independent review and delivered a 16hour training course to all 
independent reviewers. 

In June 2000 TIGTA reported that IRS had implemented the Restructuring 
Act requirements for establishing an independent administrative 
review. TIGTA based its finding on a survey of IRS field office 
directors and a review of a random sample of rejected offers submitted 
after enactment of the Restructuring Act. The survey of field office 
directors showed that the independent administrative review had been 
implemented in all field offices. In its review of rejected offers, 
TIGTA found no evidence that any offer had been rejected without 
undergoing the administrative review before IRS notified taxpayers of 
the rejections and their rights to appeal them. 

In 2001, IRS officials from the Small Business and Self-Employed 
headquarters and the appeals office told us that they had seen no 
evidence to suggest that the independent reviews were not taking 
place. Furthermore, an OIC Program official told us that IRS had added 
internal controls to its management information system to ensure that 
an independent administrative review occurs before the taxpayer is 
notified of the rejection and his or her appeal rights. As a result of 
these controls, IRS’s letter notifying taxpayers of rejections cannot 
be system generated until the independent review has been completed 
and a reason code has been entered into the automated OIC information 
system. 

Although TIGTA found no evidence suggesting that the required reviews 
of rejected offers were not taking place, TIGTA did raise an issue 
about withdrawn offers. In its June 2000 report and in another report 
issued in May 2001, TIGTA expressed concern about IRS’s procedures 
that allow taxpayers to withdraw their offers. If an offer cannot be 
given favorable consideration, IRS allows the taxpayer to withdraw the 
offer and advises him or her that in withdrawing the offer, he or she 
loses any appeal rights. TIGTA believed that taxpayers would be better 
served were the proposed offer rejection to proceed through the 
independent administrative review process, because the taxpayer would 
retain the right to appeal the proposed rejection. In response to 
TIGTA’s concern, IRS stated that it believed that allowing for 
withdrawals serves the interest of both the government and the 
taxpayer by avoiding unnecessary costs to both parties. 

IRS Considered the Facts and Circumstances of Each Taxpayer When 
Determining Allowances for Monthly Living Expenses: 

IRS reviewed the reasonableness of an offer based on the amount the 
taxpayer is willing to pay given, among other things, the taxpayer’s 
necessary living expenses. In 1995, IRS published national and local 
schedules that set limits on allowable monthly living expenses. In 
1998, Congress directed IRS, in the Restructuring Act, to consider the 
facts and circumstances of a particular taxpayer’s case in determining 
whether the national and local schedules were adequate. If the facts 
and circumstances indicated that the use of schedule allowances would 
be inadequate, the taxpayer should not be limited by the national and 
local allowances. 

IRS acted as follows to address the Restructuring Act requirement 
regarding facts and circumstances. 

* Issued temporary regulations in July 1999 providing that the 
applicability of the allowable expense standards would be determined 
by the facts and circumstances of each taxpayer’s case. 

* Revised the Internal Revenue Manual to provide that the national and 
local standards would serve as the starting point in evaluating the 
taxpayer’s financial condition. If, however, the facts indicated that 
use of the scheduled allowances would be inadequate under the 
circumstances, IRS will allow the taxpayer adequate basic living 
expenses. 

* Established criteria to be used by the independent reviewers in 
determining whether the decision to reject an offer is appropriate. 
According to the criteria, reviewers must determine whether the offer 
investigator considered the facts and circumstances of the taxpayer in 
deciding whether the national and local expense standards were 
appropriately applied. 

* Initiated a separate review of a sample of closed offer cases as 
part of its collection quality review program in March 2000. According 
to IRS officials, in the past, few offers had been selected for review 
in the collection quality review program, because the numbers of 
offers were small in relation to other types of collection cases. 

In its June 2000 report, TIGTA found that IRS was considering the 
facts and circumstances of taxpayers when determining how much should 
be allowed for monthly living expenses. TIGTA reviewed a random sample 
of rejected offers to determine whether it appeared that any offer was 
rejected in which the taxpayer claimed that IRS’s allowable living 
expense schedules were insufficient. Also, based on TIGTA’s findings, 
IRS updated its procedures by adding clarifying guidelines for the way 
that equity in assets necessary for the production of income or health 
and welfare of the taxpayer’s family should be treated in analyzing a 
taxpayer’s offer. 

As mentioned above, IRS’s independent administrative reviewers are 
responsible for reviewing proposed offer rejections to determine, 
among other things, whether the facts and circumstances were 
considered in determining whether the national and local expense 
standards were appropriately applied. Reviewers told us that when they 
did not agree with a proposed rejection, it was generally because the 
decision was not fully documented. 

IRS Did Not Reject Offers from Low-Income Taxpayers Solely on the 
Basis of the Amount Offered: 

To ensure that offers from low-income taxpayers are considered, the 
Restructuring Act required that IRS not reject offers from low-income 
taxpayers solely on the basis of the amount offered. In response, IRS 
revised its internal guidance to provide that an offer may not be 
rejected solely on the basis of the offer amount. In its review of a 
sample of rejected offers, TIGTA found no indication that IRS had 
rejected any offer solely based on the low dollar amount of the offer. 
In addition, OIC Program officials, an appeals official, and the 
National Taxpayer Advocate told us that they had seen no evidence that 
offers from low-income taxpayers were being rejected solely on the 
basis of the amount offered.[Footnote 16] 

IRS Lacked Data and Written Plans for Partial Payment Installment 
Agreements: 

IRS could not produce reliable data on the effects of the 1998 IRS 
counsel determination that IRS did not have the authority to enter 
into installment agreements that would not fully pay the tax liability 
before the collection statute expired. IRS’s legislative proposal that 
would expressly allow IRS to enter into partial payment installment 
agreements is broadly worded and leaves considerable discretion to 
IRS. As of December 2001, IRS did not have a business case, 
implementation plan, or other written documentation describing 
features of the new program, including eligibility requirements, 
potential number of such agreements, monitoring process, staffing 
needs, information system needs, projected costs, and evaluation plans. 

IRS Lacked Data on the Effect of Prohibiting Partial Payment 
Installment Agreements: 

In April 1998, IRS counsel determined that IRS did not have the 
authority to enter into installment agreements that would not provide 
for full payment of the taxpayer’s liability before the collection 
statute expired. According to IRS officials, this policy change 
created a situation in which some taxpayers who were willing to pay 
some amount would not qualify for either an installment agreement or 
an offer. Instead, the only option for IRS was to put the account in 
inactive status, creating, according to IRS officials, a new group of 
cases for which there was no resolution. An apparent “procedural gap” 
existed, because offers in compromise or enforcement actions, such as 
the seizure of assets, were not practical alternatives for some cases 
in which IRS previously would have accepted a partial payment 
installment agreement. 

As of December 2001, IRS lacked reliable data on how the prohibition 
of partial payment installment agreements affected taxpayers. IRS 
attempted to count the number of taxpayers who entered into partial 
payment agreements in the past, but sufficiently reliable data were 
not available to complete the analysis. IRS developed some general 
data on the potential effects that the policy change had on the 
installment agreement program in terms of changes in the volumes of 
cases and tax dollars collected through installments, but it was 
unable to measure actual effects. IRS officials told us that since 
1998, some taxpayers who were denied a partial payment installment 
agreement might have submitted an offer application. However, IRS 
cannot quantify the number of such taxpayers, the outcome of their 
offers, or the increase in the number of submissions that the OIC 
Program may have received as a result of the installment agreement 
policy change. 

Nor was IRS able to provide a sample of actual cases that fell into 
the procedural gap. For example, in following up on the collection 
procedural gap, IRS’s Small Business and Self-Employed headquarters’ 
officials reviewed 23 cases that the field staff believed had no 
resolution. The officials concluded that all of the cases could be 
resolved using existing enforcement authorities. 

IRS’s Proposed Legislative Change Allows Broad Discretion and Lacks an 
Implementation Plan: 

In 2001, IRS drafted a legislative proposal that would amend the 
Internal Revenue Code to expressly allow IRS to enter into partial 
payment installment agreements. Under IRS’s proposal, section 6159 
would be amended to allow IRS to enter into written agreements in 
which a taxpayer would be allowed to make payment on any tax in 
installments if IRS determines that such agreement will facilitate 
full or partial collection of the liability. IRS officials said that 
the new authority to accept partial payment installment agreements 
would be used only in those narrow circumstances in which IRS’s only 
other option would be to assign the case an inactive status. (See 
appendix II for a copy of IRS’s proposal and examples of what would be 
accepted as a partial payment installment agreement.) 

Officials also said that acceptance of partial payment installment 
agreements would not prevent IRS from pursuing other collection 
actions against taxpayers. Specifically, they said that IRS would 
monitor a taxpayer’s income and assets over the life of a partial 
payment installment agreement. If a taxpayer’s income increased, or if 
assets were accumulated to allow for larger payments, then IRS would 
demand such payments from the taxpayer. IRS officials said the ability 
to monitor a taxpayer’s income and assets and to demand additional 
payments was a key difference between the proposed partial payment 
installment agreement program and the OIC Program. Under the OIC 
Program, a contractual agreement compromises a taxpayer’s liability. 
The unpaid portion is written off and IRS agrees to take no further 
collection action after the taxpayer meets all terms of the offer. 

IRS’s legislative proposal is broadly worded, granting considerable 
discretion to IRS to tailor the provision’s use through regulation. 
According to IRS officials, although it is their intention to use the 
provision narrowly, the proposal was intentionally written broadly so 
that IRS would not have to request a legislative change in order to 
make policy improvements. 

As noted by the National Taxpayer Advocate, the lack of specific 
guidance regarding the appropriate circumstances under which IRS would 
accept a partial payment installment agreement leaves open the 
possibility of abuse. The taxpayer advocate endorsed the proposal but 
suggested that Congress provide guidance as to what factors IRS should 
consider when entering into partial payment installment agreements. 
The advocate expressed concern that the availability of partial 
payment installment agreements provided the opportunity for certain 
taxpayers to abuse the system by allowing them to continue living in 
an affluent lifestyle encumbered by debt. The advocate also cautioned 
that taxpayers should not be allowed to enter into partial payment 
agreements until they demonstrate the willingness and ability to 
retire their tax debt. 

Although IRS officials state that the proposed authority to grant 
partial payment agreements is intended to be used only in narrow 
circumstances, the legislative proposal, as currently written, offers 
no provisions to ensure that these agreements are entered into only 
under appropriate circumstances. IRS has not described how it will 
evaluate agreements to ensure that revenue officers are not using the 
partial payment installment agreement when a seizure or an offer is, 
in fact, a viable alternative. IRS officials said, however, that the 
collection process leaves little discretion to revenue officers as to 
when a partial payment installment agreement would be appropriate. 

As of December 2001, IRS had not developed a business case, 
implementation plan, or other written documentation describing the 
features of the proposed partial payment installment agreement 
program. Specifically, IRS did not have written documentation on key 
program design issues, such as eligibility requirements for a partial 
payment installment agreement, the potential number of taxpayers who 
might request such agreements, or procedures for accepting, rejecting, 
reviewing, and monitoring agreements. Nor did IRS have documentation 
on the resources that would be required for the program, including 
staffing, information systems, and projected costs. Business cases, 
which would include such information, are commonly used management 
tools that provide a basis for making resource allocation decisions 
and for monitoring and evaluating a project’s performance. Such 
written documentation would provide outside stakeholders, including 
Congress, useful information about the impact of the legislative 
proposal and IRS’s capacity to manage the new program. 

Particularly important is the fact that IRS has not developed an 
evaluation plan to monitor and assess the performance of its proposed 
partial payment installment agreement program. As noted earlier, both 
GPRA and IRS guidance emphasize the importance of collecting 
performance data and analyzing such data to understand the factors 
that affect performance. Without a mechanism to track performance and 
evaluate the program, IRS would not have information to guide informed 
decision-making regarding resource allocations to the program, 
appropriate staffing levels, and staff productivity or to determine 
whether the program is operating as intended. As was the case with the 
OIC initiatives, the lack of information about partial payment 
installment agreements underscores the importance of program 
evaluation. Evaluations would give IRS managers a better understanding 
of program performance and a better basis for considering changes to 
improve performance. 

Conclusions: 

IRS’s Offer in Compromise Program is a necessary element of the agency’s
overall collection effort. Because some taxpayers will inevitably be 
unable to fully pay their tax liabilities, IRS must have a program 
that can timely and fairly compromise such tax debts. However, a 
continued increase in the inventory of cases, processing time, and 
costs would put the effectiveness of the OIC Program at risk. 

Whether IRS’s initiatives for improving the OIC Program will succeed 
in reducing inventory and processing time while holding costs at a 
sustainable level is uncertain. Because of the uncertainty, program 
managers will likely have to make adjustments to the program as actual 
performance diverges from projected performance in unpredictable ways. 
Several steps, if taken now, could better prepare offer program 
managers for making such decisions. Goals based on an evaluation of 
taxpayer needs, other benefits, and costs could provide criteria for 
judging the effectiveness of the initiatives. Timely data could allow 
program managers to routinely track progress. Evaluations could 
determine the effectiveness of the initiatives and the reasons for 
their effectiveness. Armed with such an understanding, program 
managers would have a better basis for making future adjustments to 
the program. 

The uncertainty about the effect of the initiatives on program 
performance also means that the future costs of the program could be 
higher than projected. OIC Program costs, measured by the numbers of 
staff or as a proportion of collection resources, have risen 
significantly in recent years. IRS recognizes that the proportion of 
collection resources devoted to the OIC Program may be negatively 
affecting other collection programs. Consequently, IRS’s centralized 
and fast track processing initiatives are intended to increase the 
involvement of lower-grade collection staff in the OIC Program and to 
eventually free up higher-grade field staff for other collection 
activities. If projected results are not realized and costs continue 
to rise, however, Congress and IRS may need to address the question of 
the affordability of the OIC Program as it is presently constituted. 
The uncertainty about the costs of the present initiatives means that 
it may be premature to reconsider the program now. However, 
uncertainty about future program costs reinforces the importance of 
timely performance data and program evaluations. Such information will 
be critical for ongoing congressional oversight. 

IRS’s proposal for a partial payment installment agreement program 
suffers from weaknesses similar to those in the OIC Program 
initiatives. Little reliable information exists now about the likely 
effects of the program, and there is no written plan for evaluating 
the success of the program if the proposal is passed. Managers of such 
a program would benefit from timely performance data and evaluations 
that provide a more informed basis for making decisions about how to 
manage and improve the program. 

Recommendations for Executive Action: 

As IRS makes changes to its OIC Program, we recommend that the 
Commissioner of Internal Revenue 

* develop evaluation plans for the various offer initiatives that 
include details on data to be collected, data collection methods, 
basis for comparing outcomes, quality of decisions, and an analysis 
plan and move no new initiatives into implementation without a 
finalized evaluation plan; 

* determine which OIC Program performance and cost data should be 
collected to monitor program performance, given resource constraints, 
and ensure that such data are collected in a timely and reliable 
manner; and; 

* set goals for offer processing time that are based on taxpayer 
needs, other benefits, and costs. 

In addition, we recommend that the Commissioner of Internal Revenue 
prepare documentation for its proposal to allow partial payment 
installment agreements. The documentation should describe key features 
of the proposal, including the benefits to taxpayers; the processes 
for accepting, rejecting, reviewing and monitoring the agreements; 
resource needs; the number of taxpayers that could be affected; and 
plans for evaluating the impact of the program. 

Agency Comments and Our Evaluation: 

On March 13, 2002, we received written comments on a draft of this 
report from the Commissioner of Internal Revenue (see app. III). The 
commissioner generally concurred with our recommendations and stated 
that our report is comprehensive and accurately accounts for the 
factors that influence the offer inventory. 

The National Taxpayer Advocate also provided comments, which are 
reprinted in appendix IV. The advocate agreed with our findings and 
expressed support for IRS’s proposal to allow partial payment 
installment agreements. 

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from its issue date. We will then send copies of this 
report to the Commissioner of Internal Revenue and other interested 
parties. We will also make copies available to others who request them. 

If you have any questions or would like additional information, please 
call me or Charlie Daniel at (202) 512-9110. Key contributors to this 
report are Susan Malone and Sharon K. Caporale. 

Signed by: 

James R. White: 
Director, Tax Issues: 

[End of section] 

Appendix I: Total Tax Liability Compromised 

Table 5: Total Tax Liability Compromised (Fiscal Years 1991-2001): 

Fiscal year: 1991; 
Amount accepted: $37.1 million; 
Total tax liability: $139.8 million; 
Percent of total tax liability: 27%. 

Fiscal year: 1992; 
Amount accepted: $106.2 million; 
Total tax liability: $661.1 million; 
Percent of total tax liability: 16%. 

Fiscal year: 1993; 
Amount accepted: $209.6 million; 
Total tax liability: $1.377 billion; 
Percent of total tax liability: 15%. 

Fiscal year: 1994; 
Amount accepted: $280.8 million; 
Total tax liability: $1.634 billion; 
Percent of total tax liability: 17%. 

Fiscal year: 1995; 
Amount accepted: $297.1 million; 
Total tax liability: $1.856 billion; 
Percent of total tax liability: 16%. 

Fiscal year: 1996; 
Amount accepted: $286.8 million; 
Total tax liability: $2.17 billion; 
Percent of total tax liability: 13%. 

Fiscal year: 1997; 
Amount accepted: $295.0 million; 
Total tax liability: $1.987 billion; 
Percent of total tax liability: 15%. 

Fiscal year: 1998; 
Amount accepted: $290.1 million; 
Total tax liability: $1.971 billion; 
Percent of total tax liability: 15%. 

Fiscal year: 1999; 
Amount accepted: $311.6 
Total tax liability: $2.356 billion; 
Percent of total tax liability: 13%. 

Fiscal year: 2000; 
Amount accepted: $316.2 
Total tax liability: $2.587 billion; 
Percent of total tax liability: 12%. 

Fiscal year: 2001; 
Amount accepted: $340.8 
Total tax liability: $2.689 billion; 
Percent of total tax liability: 13%. 

Source: GAO analysis of unpublished IRS data on OIC activity for 
fiscal years 1997—2001 (IRS rept. no. 5000-108). 

[End of table] 

[End of section] 

Appendix II: IRS’s Partial Payment Installment Agreement Proposal 

Provide The Secretary Flexibility In Granting Installment Agreements 
That Will Not Fully Pay Tax Liabilities: 

Summary of Proposal: 

Grant the Secretary authority to enter into installment agreements 
that are in the best interest of the government and taxpayers, 
regardless of whether full payment of the taxpayers liabilities is 
anticipated. 

Purpose of Proposal: 

This change will provide a payment option for taxpayers who can not 
fully pay their liability over the term of an installment agreement, 
but for whom an offer in compromise is not a viable alternative. This 
option will permit these taxpayers to reduce their liabilities while 
also enabling the government to maximize the collection on their tax 
liabilities. 

Supporting Analysis: 

It is common for IRS collection employees to encounter taxpayers who 
cannot pay their full liability under an installment agreement. Under 
current law, it is not legal for the IRS to accept such an installment 
agreement. 

An offer in compromise may not be a practical alternative in these 
situations for any of the following reasons: 

* The taxpayer has no assets or wage income against which enforcement 
action can be taken and the taxpayer is unwilling or unable to submit 
an offer. 

* The taxpayer has limited assets, such as a modest amount of equity 
in a home or business that he cannot or will not liquidate and the 
taxpayer cannot afford the monthly payments of a deterred offer 
equivalent to the equity value of the asset. The low amount of the 
equity or the circumstances of the taxpayer are such that seizure of 
the asset is not a practical option. 

In these situations the only option available is to turn down the 
installment agreement and put the case in inactive status. This has 
the effect of telling the taxpayer that the IRS is simply rejecting 
payments the taxpayer is willing to make while deferring further 
action on the case. Taxpayers, employees, and practitioners view this 
outcome as inexplicable and as undermining respect for the tax law 
and/or IRS policy. 

As a result, there is a gap in the Service's ability to collect on 
certain liabilities. We have attempted to quantify this gap using FY 
1998 as a baseline. The IRS estimates that approximately $XX million 
in annual collections is being lost due to the inability to enter into 
partial pay installment agreements. 

Acceptance of partial pay installment agreements would not prevent the 
IRS from pursuing further collection options, if the taxpayer's income 
or assets increase in the future, or from filing notices of federal 
tax lien to preserve the IRS's priority among creditors. Accordingly, 
the IRS would monitor such agreements. 

Finally, in the past, installment agreements were stretched out for 
many years beyond the expiration of the collection statute in an 
attempt to fully collect the liability. This was perceived as unfair 
to taxpayers. Accordingly, the IRS will not extend the term for 
partial pay installment agreements beyond the current maximum term of 
five years beyond the expiration of the collection statute. 

Examples of how cases would be treated under this proposal are 
attached at Tab A. 

Present Law: 

(1) Installment agreements must fully pay tax liabilities (IRC 6159). 

A. Legislative Background for Present Law: In 1988 P.L. 100-647, Sec. 
6234(a), added Code Section 6159, effective for agreements entered 
into after 11/10/88, titled: Sec. 6159. Agreements for payment of tax 
liability in installments. The sub-section to which the requested 
legislation applies states: 

(a) Authorization of agreements. 

The Secretary is authorized to enter into written agreements with any 
taxpayer under which such taxpayer is allowed to satisfy liability for 
payment of any tax in installment payments if the Secretary determines 
that such agreement will facilitate collection of such liability. 

Suggested Legislative Language: 

Addition of the following language [in bold and italic] and the 
striking of other language [bold-and-struck] in subsection 6159(a) of 
the Internal Revenue Code. 

Section 6159 amended language: 

Sec. 6159. Agreements for payment of tax liability in installments. 
(a) Authorization of agreements.
The Secretary is authorized to enter into written agreements with any 
taxpayer under which such taxpayer is allowed to [in bold and italic: 
make payment on] [bold-and-struck: satisfy liability for payment of] 
any tax in installment payments if the secretary determines that such 
agreement will facilitate [in bold and italic: full or partial] 
collection of such liability. 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

March 12, 2002: 

Mr. James R. White: 
Director, Tax Issues: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Mr. White: 

I reviewed your draft report titled "IRS Should Evaluate the Changes 
to Its Offer in Compromise Program". 

Your report is comprehensive and accurately accounts for the factors 
that influence our Offer in Compromise (OIC) inventory. We have 
addressed the increasing demand for OIC services by reallocating 
resources and employing new initiatives, such as the centralized OIC 
processing (COIC). Our goals for the program are to reduce inventory 
and processing time. 

I agree with your assessment that success of our goals to reduce 
inventory and processing time may be uncertain. Regulatory, 
legislative and policy changes that complicate the process, as well as 
increasing demand, can impact our success. Changes in these factors 
can increase processing time and strain our limited resources. 
Taxpayers who submit an OIC mainly to delay actions further strain our 
OIC resources. 

Many of our planning assumptions regarding productivity were based on 
our observation of similar processes in the field campuses. The 
business decision to deploy resources for COIC was driven by our need 
to address the current OIC inventory. We decided OIC processing could 
be simplified, streamlined, and operated more efficiently in a batch 
processing, service center environment. 

Your report acknowledges that the scope and depth of evaluation of 
initiatives should be weighed against the resources required and the 
benefits of the information derived from the evaluation. We have found 
that special evaluation techniques such as those we use for the Fast 
Track and the COIC initiatives are appropriate for significant OIC
improvement initiatives. For example, pending changes, such as re-
engineering of the installment agreement program or the use of 
regulatory authority to charge an OIC user fee, will have more of an 
impact than can be determined through the existing Management 
Information System (MIS). For smaller initiatives we will use other 
evaluation methods to help measure their effectiveness. For example, 
the "expanded return authority" initiative for OIC cases is being 
measured through the Automated OIC system. 

Our strategy for enhanced automation initiatives for the OIC programs 
will improve customer service, employee satisfaction, and our ability 
to track program performance. As part of our ongoing oversight of the 
programs, we will continue to visit our COIC sites. In addition, our 
dialogue with the COIC management teams will help to create an 
environment for continued process improvement. 

We are committed to maintaining a viable and credible OIC program for 
taxpayers who are serious about compromise. Our comments on your 
recommendations follow: 

Recommendation: Develop evaluation plans for the various offer 
initiatives that includes details on data to be collected, data 
collection methods, basis for comparing outcomes, quality of 
decisions, and an analysis plan, and move no new initiatives into 
implementation without a finalized evaluation plan. 

We agree evaluation plans are beneficial. We developed an evaluation 
plan for Fast Track, and we are creating one for COIC. These plans are 
commensurate with the costs and benefits to be derived from both 
initiatives. When the costs of such a complex plan cannot be justified 
(procedural or policy changes of limited impact), we will continue the 
implementation of additional OIC initiatives. 

Recommendation: Determine which OIC Program performance and cost data 
should be collected to monitor program performance, given resources 
constraints; and ensure that such data are collected in a timely and 
reliable manner. 

For several years we have tracked the general performance of the OIC 
program. We are now taking steps to integrate OIC performance with 
balanced measures. We are also working on the OIC automation process 
to improve customer service, employee satisfaction, and our ability to 
monitor program performance. 

Recommendation: Set goals for offer processing time that are based on 
the needs of taxpayers, other benefits, and costs. 

We will re-examine our six-month processing time goal and consider the 
needs of taxpayers, other benefits, and costs in determining the goal. 
We also will balance these factors with the needs of all stakeholders 
and determine how any changes would affect tax administration. 

Recommendation: We recommend that the Commissioner of Internal Revenue 
prepare documentation for its proposal to allow partial payment 
installment agreements. The documentation should describe key features 
of the proposal, including the benefits to taxpayers; the processes 
for accepting, rejecting, reviewing and monitoring the agreements; 
resources needs; the number of taxpayers potentially affected; and 
plans for evaluating the impact of the program. 

Our proposal to allow partial payment installment agreements will 
provide a payment avenue for many taxpayers who currently do not 
qualify for an installment agreement. Moreover, many of the actions 
necessary to implement the proposed program will be very 
straightforward and will involve simply modifying the current process. 
However, once the legislation is passed, we will develop an 
appropriate program evaluation plan for partial payment installment 
agreements. We also will ensure that our implementation plan for the 
legislation addresses the processes for accepting, rejecting, 
reviewing and monitoring the agreements as well as the impact on our 
resources. 

If you have any questions, please contact me or Martha Sullivan, 
Director, Compliance, Small Business/Self-Employed, at (202) 283-2180. 

Sincerely, 

Signed by: 

Bob Wenzel, for: 
Charles O. Rossotti 

[End of section] 

Appendix IV: Comments from the Taxpayer Advocate Service 

Department of the Treasury: 
Internal Revenue Service: 
Taxpayer Advocate Service: 
Washington, DC 20224: 

February 21, 2002: 

Memorandum For Chief, Communications And Liaison: 

From: [Signed by] Nina E. Olson: 
National Taxpayer Advocate: 

Subject: Response to GAO Draft Audit Report - Taxpayer Advocate
Service Comments to the GAO report "IRS Should Evaluate the Changes to 
Its Offer in Compromise Program" (GA0-02-311). 

The National Taxpayer Advocate (NTA) agrees with GAO that the Offer in 
Compromise (OIC) process takes too long and the backlog of cases needs 
to be addressed. The NTA provided input to GAO during this audit and 
identified OIC delays in the National Taxpayer Advocate's 2001 Report 
to Congress as one of the top problems faced by taxpayers. 

The GAO report identifies several IRS initiatives underway to limit 
new offer submissions and improve processing efficiency. The NTA 
believes that IRS is making changes that should reduce the OIC 
inventory. For example, we are hopeful that the backlog will be 
lessened by the strategy of separating offers by complexity to better 
utilize the skills of offer specialists and allow relatively simple 
offers to be handled by a trained group of employees at two 
centralized sites. In addition, policy and procedural changes to 
reduce the number of frivolous offers should also decrease the 
inventory. As IRS becomes more current with OIC inventory, the need 
for taxpayers to resubmit outdated financial information should also 
diminish. 

The Taxpayer Advocate Service (TAS) agrees with GAO that IRS is not 
rejecting OICs from low-income taxpayers solely based on the amount 
offered. We do have some concerns about how the proposed user fees 
might affect these taxpayers. We have voiced our concerns about the 
user fee proposals and how they might affect low-income taxpayers. The 
Director of Business Advocacy in TAS will monitor the implementation 
of the user fee and its impact on the ability of low-income taxpayers 
to have their OICs given fair consideration. 

The IRS has recommended a legislative change to raise the threshold 
for counsel review of offers to reduce processing time. The NTA 
believes that the requirement for Counsel review should be eliminated 
entirely, regardless of the offer amount. Employees often take counsel 
"advice" as a decision or directive. Therefore, Counsel advice can 
effectively kill an offer. IRS personnel should seek offer guidance 
during the process and then articulate their position, acceptance or 
denial, in writing. 

We agree with the IRS recommendation regarding extending the statutory 
period for collections while an OIC is under consideration in an 
effort to reduce frivolous offers. Statutory periods are extended for 
Tax Court cases and in bankruptcy filings. The NTA believes that IRS 
should take a similar administrative approach by suspending the 
statutory period and continuing efforts to reduce OIC processing 
timeframes. 

Effective Tax Administration (ETA) offers have expanded the basis for 
accepting offers. However, in our view the Service has interpreted too 
narrowly the situations when an ETA OIC might be applicable. The 
proposed regulations generally do a good job of explaining a hardship 
situation where an ETA OIC might be appropriate. The Taxpayer Advocate 
Service has been working with Chief Counsel's office, the 
Commissioner's office, and the Small Business/Self Employed Operating 
Division to expand the proposed regulations to include a clearer 
description and more examples of other situations where an ETA OIC 
would be appropriate. 

We share some of TIGTA's concern (outlined in this GAO report) about 
allowing the Internal Revenue Service to process 01Cs as withdrawn. We 
agree that it saves the government resources and many times it allows 
the taxpayer to avoid necessary costs where the 01Cs are not 
acceptable. However, we are concerned that some taxpayers may be 
withdrawing their OICs to accommodate the Internal Revenue Service or 
because they do not understand the process or the consequences of 
withdrawal. In addition, those who withdraw are not given the 
opportunity to have a different employee consider their offer and 
either accept it or suggest some acceptable revision. 

As GAO indicates, the IRS does not have data to provide to 
stakeholders regarding the proposal to allow for partial pay 
installment agreements. However, the Service formerly accepted these 
types of agreements and many taxpayers opted for this type of a 
resolution. Therefore, we are hopeful that the ability to accept these 
types of installment agreements will increase dollars collected.
In the National Taxpayer Advocate's FY 2001 Annual Report to Congress 
I recommended that Congress amend Internal Revenue Code section 6159 
to allow IRS to enter into installment agreements that do not provide 
for full payment of the tax liability over the statutory limitations 
period for collection of tax where it appears to be in the best 
interests of the taxpayer and the Service. This change, if adopted, 
will enable the IRS to enter into agreements with "gap" taxpayers, 
i.e., taxpayers who have some ability to make monthly payments and
who also have assets which for one reason or another the taxpayer 
cannot liquidate or borrow against and against which the Service would 
be unlikely to initiate collection action. 

We strongly believe the a legislative change to allow for partial 
payment installment agreements will not only help taxpayers who have 
assets but also will allow for payments from individuals who want to 
pay but cannot meet the required installment agreement amount. For 
example, a taxpayer may be willing and able to submit monthly 
payments, but the IRS lacks the authority to enter into an installment 
agreement that will not full pay the liability. 

Thank you for the opportunity to comment on this draft report. If you 
need additional information please contact Rena Girinakis at 202-622-
4321. 

[End of section] 

Footnotes: 

1. The tax code requires that legal counsel review an offer involving 
liabilities of $50,000 or more before IRS can accept the offer. 

2. The sample consists of offers that were closed as accepted, 
rejected, or withdrawn and that were reviewed by the OIC quality 
review program between March 1, 2000, and September 30, 2001. 

3. The number of days required to close a case was measured from the 
date that the offer was received by the offer program to the date that 
the case was closed. 

4. IRS accepts all offers for processing except those from taxpayers 
who have not filed all required federal tax returns or are in 
bankruptcy. 

5. In addition, all ETA offers must first be considered under doubt as 
to liability or doubt as to collectibility before being considered 
under ETA. 

6. These requirements included informing the taxpayer of their rights 
and IRS’s obligations, eliminating the statutory waiver provision, 
providing for severability in the event of default by jointly liable 
taxpayers with joint offers, and expanding the bases of compromise to 
include ETA offers. 

7. IRS does not routinely measure total staff time devoted to the OIC 
Program. Direct staff time does not include time spent on processing 
offers by management, service center employees, district counsel, and 
the independent reviewers. It also does not include time spent by 
revenue officers explaining or soliciting offers and working with 
taxpayers to complete offer applications. 

8. “Grade level” means the level of classification that an employee 
has under a position classification system (i.e., referring to the 
duties, tasks, and functions he or she performs). 

9. The field inventory is located in IRS offices throughout the 
country. 

10. These staff generally consist of revenue officers or offer 
specialists (GS-11 and GS-12) and tax examiners (GS-7). 

11. Sources of electronic data include databases maintained by IRS as 
well as contracted research sources that provide credit and property 
data. 

12. An FTE generally consists of one or more employed individuals who 
collectively complete 2,080 work hours in a given year. Therefore, 
either one full-time employee or two half-time employees equal one FTE. 

13. According to program officials, IRS had successfully used 
streamlined processes requiring less investigation and lower-grade 
staff (generally GS-4 through GS-7) to work some low-value cases. 
Because of this experience, IRS piloted the use of streamlined 
procedures and lower-grade staff to process less complex offers in two 
locations. Before the pilot could be completed, IRS officials made the 
decision to implement centralized processing nationwide. IRS could not 
provide supporting data, however, because it did not retain the data 
after the decision was made to centralize. 

14. U.S. General Accounting Office, IRS Telephone Assistance: 
Opportunities to Improve Human Capital Management, [hyperlink, 
http://www.gao.gov/products/GAO-01-144] (Washington, D.C.: Jan. 30, 
2001); U.S. General Accounting Office, IRS Telephone Assistance: 
Limited Progress and Missed Opportunities to Analyze Performance in 
the 2001 Filing Season, [hyperlink, 
http://www.gao.gov/products/GAO-02-212] (Washington, D.C.: Dec.7, 
2001). 

15. Withdrawn offers are not subject to IRS’s independent 
administrative review process. 

16. The National Taxpayer Advocate commented that some taxpayers and 
practitioners had incorrectly interpreted this provision to mean that 
IRS must accept all low-dollar offers, regardless of the facts and 
circumstances of the case. 

[End of section] 

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