Expect Lawmakers to Aid IRS
in Heavy-handed Tax Collection

The Offer in Compromise (OIC) program is the heart and soul of the IRS’s so-called “tax amnesty” strategy. Though the agency does not ( and never will) refer to the OIC as an amnesty program, that is exactly what it is.

The Offer in Compromise allows delinquent taxpayers to settle with the IRS for less than the assessed amount in one of three situations. They are:

  • When the citizen can prove that he doesn’t owe the assessed amount;
  • When the citizen can prove that he cannot pay the assessed amount; and
  • When the citizen can prove that if he does pay the assessed amount, he will be subject to financial hardship and will likely be unable to meet his necessary living expenses going forward in life.

Throughout the 1990s and into this 2000′s decade, Tax Attorney Jeff Fouts helped multiple hundreds and hundreds of people with tax problems and have filed many Offers in Compromise. The Offer in Compromise program used to be obscure and virtually unheard of negotiation strategy, but it has gained in popularity as Americans learn they can potentially be relieved of crushing assessments fo tax, interest and penalties they could never otherwise pay.

The Return of “Darth Vader” Tax Collection Techniques

But beginning in about 2001, the period immediately following the resurrection of the IRS, the agency began dealing with OIC offers in a more Draconian manner. The IRS is now less willing to make amicable settlements with taxpayers. The agency is returning to what I call the Darth Vader approach to tax collection, which is where they grab the taxpayer by the throat and squeeze him to within an inch of his financial life.

Unfortunately, lawmakers facilitate this attitude in two key ways. First, the newly revised bankruptcy code will dramatically change the way the IRS deals with delinquent citizens. The law will make it much more difficult and , in some cases, impossible to discharge taxes in bankruptcy. This is certainly going to have a chilling effect on the agency’s willingness to negotiate settlements. Why should the agency settle if the bankruptcy court is not going to protect the citizen from outrageous collection actions?

A Dangerous Tax Provision Was to be Hidden In the Federal Highway Bill

But perhaps even worse is a current, pending proposal that was contained in, of all things, the Transportation Equity Act of 2005, H.R. 3 B the federal highway bill. It is standard operating procedure for Congress to bury important tax and IRS provisions in such bills, hoping they never see the light of day.

Under current law, no deposit is required but a $150 filing fee is charged. If the offer is accepted, the $150 is applied against the offer amount. If the offer is rejected the fee is retained by the IRS. If a deposit is submitted with the offer, the deposit must be refunded unless the citizen agrees in writing to allow the IRS to retain it. In that case, the deposit must be applied against the tax debt.

The idea of requiring a deposit with an offer might seem reasonable on its face. After all, if the citizen is negotiating with the IRS n good faith , he should have no qualms about putting some money on the table to demonstrate that. This sounds fine in theory but there are serious problems in practice.

Beware of This Trap

First, many Offers in Compromise are based upon the value of property. For example, if your only asset is $50,000 equity your house, you can offer that in settlement of your debt and expect the IRS to accept it. But the IRS will have to release its liens before a lender will give you the $50,000 against the house. The liens will be released only if the IRS accepts the offer. But under the proposed rule, you’ll have to make a cash deposit of $10,000 when filing the offer. Where will the $10,000 come from if your only asset is the equity in the house?

The IRS might suggest that you borrow the money from a third party then repay it when the house loan closes. That sounds simple too, but what happens if the IRS rejects the offer? In that case, the third party lender has no way to recover his money since the IRS’s lien remains in a priority position against the house and the tax debt likely exceeds the value of the equity. Very few third-party lenders will be willing to take that risk.

Another problem arises in cases where the Offer in Compromise is based upon installment payments over time. The IRS can accept installments for up to sixty months for payment of an Offer in Compromise. Suppose your ability to pay is limited to $400 per month. If the IRS projects that payment for sixty months, the value of your offer is $24,000. Under the proposed rule, the IRS would required a cash deposit of $4,800 just to consider the offer. Where will that money come from?

If you answer “third-party lender,” we’re back to the same problem of lenders likely unwilling to risk the loan if the money will not be returned when the offer is rejected.

The Beginning of the End of Tax Amnesty?

The Offer in Compromise program is a vital tax administration tool. First, it raises revenue that the IRS might otherwise not get because many OICs are indeed funded through borrowed money. Secondly, it brings back into the system taxpayers who have dropped out chiefly due to their frustration with and fear of the collection process. Even if the IRS didn’t collect a dime in back taxes from these people, often the mere fact that the agency now collects current taxes makes the program even further.

But the IRS’s heavy handedness is risking the integrity of the program and these law changes will only make matters worse. In may, the IRS’s National Taxpayer Advocate Nina Olson also expressed concern that with this legislation, Congress could damage the program even further.

In a speech in Washington, Olson discussed some of theOffer in Compromise statistics from the first six months of fiscal year 2005, which began October 1. She said that the numbers were “particularly distressing.” New OICs from taxpayers were down 45 percent during the first six months of fiscal 2005, compared with the same period in 2004.

She reasoned that “people are basically making the conclusion that the offer in compromise process is not working.” She went on to say “I think that the numbers themselves show you that practitioners and taxpayers alike in many ways have given up, which saddens me greatly.”

You can be sure that if congress passed the highway act with this provision in it, it would only have made matters worse.

If the IRS is not checked by a meaningful bankruptcy code and the Offer in Compromise program is reduced to a hollow promise, you can expect the IRS to unleash the collection dogs in ways er haven’t seen in the past.

What You Can do Now

Make sure your Congressional and Senate representative know where you stand in regard to important issues regarding the IRS.  Let them know that you don’t want it made harder for the average taxpayer to their life back on track if they do have a tax problem.

You can write Senator as follows:
Senate Office Building
Washington, DC 20510

To email your Senator, use the following format:

[first name]-[last name]@senate.gov


If you have any other kind of IRS problem and are thinking about filing an Offer in Compromise, you need to deal with it sooner rather than later.  For a FREE Consultation with Tax Attorney Jeff Fouts call 1-800-509-770.