Tax Administration:

Changes Needed to Cope With Growth in Offer in Compromise Program

GGD-94-47: Published: Dec 23, 1993. Publicly Released: Jan 25, 1994.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Offer in Compromise Program, focusing on: (1) IRS emphasis on the program as a collection tool and a means to encourage future compliance; (2) the variability in program use among IRS district offices; and (3) changes IRS needs to make in light of the program's fast growth.

GAO found that: (1) IRS has not demonstrated that the Offer in Compromise Program will increase collections and improve taxpayer compliance; (2) IRS needs reliable data to measure the effectiveness of the program; (3) IRS must improve the efficiency of the program to make the best use of its collection resources; (4) IRS must ensure that the program is being implemented consistently in its district offices; (5) IRS needs better indicators of the program's effectiveness, such as the program's yield, revenues collected, the extent that noncompliant taxpayers are brought back into the tax system, and the extent that participating taxpayers remain compliant in subsequent years; (6) IRS administrative costs are increased by the requirement to obtain a legal opinion on all offers with tax liabilities of $500 or more; (7) IRS should have discretionary authority to decide when offers need legal review; (8) IRS could improve its efficiency by automating the monitoring process; (9) IRS should consider the effect that settling for less than the full tax liability might have on taxpayers who pay their taxes in full; and (10) IRS needs to determine the causes for variability in offer acceptance rates among its district offices.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: A provision that raises the review threshold from $500 to $50,000 and provides for continuing quality reviews by the IRS was included in H.R. 2337, the Taxpayer Bill of Rights 2. The legislation was signed into law by President Clinton on July 30, 1996.

    Matter: Congress should consider amending Section 7122 of the Internal Revenue Code to remove the requirement that the Treasury General Counsel or his delegate review all offers of $500 or more and widen IRS' discretionary authority to decide which offers require review.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The IRS revamped its offer in compromise program in 2001 by centralizing the processing of offers. The IRS also developed a series of indicators to track the timeliness of offer processing and to monitor the age of the program's inventory. In September 2004, the IRS conducted an evaluation of various aspects of the OIC program including analysis of compliance by taxpayers with accepted offers and collection results of offers that were rejected and/or returned.

    Recommendation: To improve administration of the offer program, the Commissioner of Internal Revenue should develop the indicators necessary to evaluate the Offer in Compromise Program as a collection and compliance tool. The indicators should be based on accurate data, resolving the errors GAO identified, and include: (1) the yield of the program in terms of costs expended and amounts collected; (2) the amount of revenues collected that would not have been collected through other collection means; (3) a measure of noncompliant taxpayers who returned to the tax system; and (4) a measure of participating taxpayers who remained compliant in future years.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: The Collection Quality Measurement System has been revised to include identified measurements for the Offer in Compromise Program. IRS management conducted focus groups in selected districts to assist in identifying inconsistent treatment of taxpayers and issued a final report in December 1994.

    Recommendation: To improve administration of the offer program, the Commissioner of Internal Revenue should determine the causes of variability in district office acceptance rates and, where appropriate, take steps to mitigate any inconsistent treatment of taxpayers.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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