IRS Offers in Compromise:

Performance Has Been Mixed; Better Management Information and Simplification Could Improve the Program

GAO-06-525: Published: Apr 20, 2006. Publicly Released: May 23, 2006.

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Taxpayers unable to fully pay their tax liabilities may apply for an offer in compromise (OIC), an agreement with IRS to pay what they can afford. IRS writes off the rest of the liability. In 2005, IRS accepted over 14,000 offers. Because of concerns about program performance and a new category of offers based on exceptional circumstances, GAO was asked to (1) describe the trends in program's performance and their causes and (2) determine whether IRS's regulations for exceptional circumstance offers are consistent with statute. GAO examined five program objectives: timeliness, quality, accessibility, compliance, and cost.

OIC Program performance has been mixed. Timeliness improved for taxpayers making one offer to 5.8 months in 2005 but stayed constant, at an average of two years, for those making repeat offers. Quality goals have been met but IRS does not routinely track compliance and accessibility. Further, cost per offer has increased in that IRS has not decreased staffing since fiscal year 2003 in proportion to declines in offers. Improving the program depends on how well IRS management understands the reasons for the program's performance. One step in understanding performance is measuring it. However, IRS does not measure timeliness from the perspective of the taxpayer--for taxpayers with repeat offers IRS measures the time to decide each offer but not the overall time to resolve the taxpayer's liability. IRS lacks compliance and accessibility trend data useful for assessing performance. Another step in understanding performance is setting goals. IRS set numeric goals for timeliness and quality, but IRS's timeliness goals do not have a rationale and are not based on taxpayer needs or other benefits. A third step in understanding performance is analysis. While IRS has done some analyses that led to program changes, IRS has not analyzed the effect of repeat offers on timeliness to determine whether it would be less costly to deal once with a taxpayer rather than have to process repeat offers. IRS also has not analyzed whether the decrease in offers accepted since fiscal year 2003 reflects a decrease in program accessibility, or whether the efforts to improve the compliance of program participants have been successful. IRS's regulations for exceptional circumstance offers, intended for taxpayers who can fully pay, are consistent with statute. However, most exceptional circumstance offers are granted to taxpayers who cannot fully pay. These offers are not meaningfully distinct from the more common offers based on inability to fully pay. The lack of distinction causes unnecessary program complexity and confusion. Taxpayers are faced with the paradoxical process of proving that they can pay their tax liability and then explaining why they cannot.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: As of May 2 2010, the Congress had not taken any action related to it. It is not expected that any action will occur.

    Matter: If Congress's intent regarding the number of ETA non-hardship offers has not been bet to date, Congress may wish to provide IRS with more specific guidance on the criteria for such offers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS agreed with our recommendation stating that staffing levels should be adjusted in response to changing program needs and that realignment of staff working offer in compromise cases in field locations would be done. As of August 2006, IRS had reassigned 112 field offer staff to other collection work. Also, IRS information showed that the number of new cases added to its offer in compromise inventory in fiscal year 2006 continued the prior years' trend by declining sharply. By reassigning the 112 staff, IRS improved the offer in compromise program's productivity, reduced cost per offer, and over a period of 2 years will save about $20.5 million in staff costs to be allocated to other collection work. The savings are based on IRS supplied estimates of the average salary and benefit costs for the 112 staff who were transferred from the offer in compromise program. A March 2007 report by the Treasury Inspector General for Tax Administration showed, on average, IRS spent less time processing offers in fiscal year 2006 compared to fiscal year 2005, which reduced per offer cost.

    Recommendation: To immediately improve the OIC program, the Commissioner of Internal Revenue should adjust staffing levels to increase productivity and reduce cost per offer, unless IRS can demonstrate that case complexity has increased and eliminate the distinctions between hardship effective tax administration (ETA) and doubt as to collectibility in the application, instructions, and procedures to simplify the program.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS has taken actions to implement this recommendation. Regarding developing meaningful measures of performance for processing timeliness for taxpayers, IRS completed studies of repeat offers in June and July 2008 and found that repeat offers can best be reduced by getting taxpayers to submit a processable offer initially. According to an analysis by IRS as of June 2008, a vast majority of offers were meeting IRS's timeliness goals. As an added step, IRS also plans to work more closely with taxpayers during offer processing to help ensure that offer processing timeliness is at a minimum. Regarding developing meaningful measures of performance for accessibility, IRS used the results of a 2006 customer satisfaction survey to identified improvements for accessibility relating to alternative resolutions and incorporated these procedures into the Internal Revenue Manual in October 2007. Regarding developing meaningful measures of performance for compliance, IRS developed new reports to monthly monitor post-acceptance compliance starting in June 2007. The reports show measures such as the number of defaulted offers compared to all accepted offers, and information on reasons for defaults such as failure to adhere to the 5-year compliance rule and failure to make agreed upon payments.

    Recommendation: The Commissioner of Internal Revenue should develop meaningful measures of performance, including a measure of processing timeliness for taxpayers, a measure of accessibility that gauges ease of participation in the programs, and a measure of compliance for all program participants.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS agreed with this recommendation and stated that it takes taxpayer needs and other benefits into consideration as part of the basis for setting timeliness goals. In particular, IRS stated that it used the results of a 2006 customer satisfaction survey of taxpayers who participated in the offer in compromise (OIC) program in setting processing timeliness goals.

    Recommendation: The Commissioner of Internal Revenue should set processing timeliness goals for taxpayers that are based on an assessment of taxpayer needs and other benefits.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS conducted two studies to help determine reasons for performance trends, the causes of the growth in repeat offers, how repeat offers affect timelines, and used results of a 2006 customer satisfaction survey to help assess trends in accessibility. Office of Program Evaluation and Risk Analysis (OPERA) completed a study of repeat offers in June 2008. Small Business/Self Employed conducted an independent representative sample of repeat offers in September 2007 to analyze their effect on timeliness. Based on the studies, IRS found that the key to reducing repeat offers is getting taxpayers to submit processable offers initially. IRS also stated that the new process-ability criteria implemented in July 2006, along with increased outreach and education efforts and the revised offer application should help to reduce repeat offers, meet timeliness goals, and not impede accessibility to the program. IRS also used the results of a 2006 customer satisfaction survey to identify five action items that address both accessibility and timeliness and will revise the IRM accordingly. Also, in December 2006, IRS completed a pilot study of the hand-off unit and determined that it could use other procedures to more efficiently expedite the handling of rejected and withdrawn offer cases to ACS and field processing. As a result, the hand-off unit is disbanded.

    Recommendation: The Commissioner of Internal Revenue should conduct analyses of the reasons for performance trends in order to determine causes of the growth in repeat offers; determine how repeat offers affect timelines and, if justified based on the results, take action to meet timeliness goals; determine the reasons for trends in accessibility; and determine the effectiveness of the Hand-Off Unit.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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