Making Offers in Compromise Really Public

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The IRS must publicly display accepted offers in compromise (OIC). In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs.  Prior to 2000, these public inspection sites existed in each IRS district and districts generally followed state lines.  At some point the IRS consolidated the inspection sites into seven “conveniently” located sites around the country. These sites are depicted in Figure 1 of the recent Treasury Inspector General of Tax Administration (TIGTA) report entitled “The Offer in Compromise Public Inspection Files Should Be Modernized.”  For example, if I want to view the publicly available OIC records for someone in Boston, all I need to do is head over to Buffalo within a year after the offer becomes public and find the IRS public reading room.

In the 1950s when the IRS first started making OICs public and up until about 1992, the IRS only approved a handful of offers each year. I do not know if it was the prosecution of the IRS official for accepting offers or a general feeling that offers were not worth the trouble but the IRS did not like to accept OICs.  In the Richmond district during the 1980s, one revenue officer had the duty of examining offers.  From my observation, he would carefully research all of the finances of the person or business submitting an OIC before saying no.  The taxpayer seeking the OIC received plenty of attention but had a very low chance of the revenue officer accepting the offer.  For the one offer a year that was accepted in the Richmond District, the procedure was cumbersome and led to a document that was then usually ignored in many respects.  I provide some additional background on why the IRS decided to begin accepting OICs in an earlier post.  As TIGTA notes in its report, though without explaining the reason for the significant increase, the number of offers accepted today greatly exceeds the number of offers accepted at the time of the creation of the current system.  The dramatic increase occurred because in the early 1990s the IRS was trying to combat the large uncollected receivables on its books and to counter the impact of the increase in the statute of limitations on collection from six to ten years.  To do this, the IRS decided to begin accepted OICs on a grand scale.  Yet, little has changed since the public display of OICs began.  It is a labor intensive, costly process that leads to public views of OICs by almost no one.  I picture these seven reading rooms as having lots of cobwebs.

TIGTA proposes to change the system of making offers public. It proposes to put them online.  I fully support their suggestion.  I have made a similar proposal previously with respect to the notice of federal tax lien (NFTL) and Tax Court filings.  Both of my suggestions raise significant policy questions about what can, because of identity issues with NFTLs, and should, because of privacy issues with Tax Court filings, be public.  TIGTA does not get into policy considerations of how putting OICs online will change the very private nature of the current nominally public process of displaying OICs.  For the reasons I discuss below, I think it will have little impact on the individuals but may have an impact of our view of the system.

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TIGTA’s report first finds a number of flaws in the way the IRS administers the current system. In the normal style of a TIGTA report it reviews how the IRS handles the public inspection of offers and bangs the IRS for its mistakes.  One common mistake concerns whether the OIC gets publicly displayed at all.  TIGTA found a number of OICs that never made it to the allegedly public reading rooms.  I was not surprised by this news and it does point to a significant flaw in a system even if it is a system that no one cared about anyway because of the way it operates.

Another mistake TIGTA found concerned the public display of the OIC in the wrong regional reading room. This type of mistake occurred regularly with the largest example cited involving almost 300 OICs that were intended for display in California which instead were displayed in Colorado.  The more serious mistake concerns the display of un-redacted information.  TIGTA found numerous instances of information being displayed that should not have.  Since almost no one goes to these reading rooms, I do not think that the taxpayers had their information compromised, but the concern is legitimate and correction appropriate.  The most interesting of the flaws TIGTA found concerns the lack of guidance to IRS employees about the public display of OICs.  It cites several examples.  The one I liked the best was the rules employees at the reading rooms imposed upon individuals looking to read the public OICs.  Some let visitors look at the entire year of OIC acceptances, some a few months and one employee limited visitors to looking at the public OICs only if they could give “a specific taxpayer’s name.”  This view changes the nature of public even more than locating the files in seven places around the country.

After going through the obligatory litany of IRS failures, the TIGTA report gets to the meat of the report where it points out that “we believe that the infrequent inspections could be the results of the combination of inconvenient file locations, limited information available in the files, and the unsearchable paper based format.” Yes, Yes and Yes.  In December, 2009, the Office of Management and Budget issued the Open Government Directive.  The directive “instructs agencies to respect the presumption of openness by publishing information online in order to increase accountability and to promote informed participation by the public.”  TIGTA also cites internal IRS directives with a similar bent.  It points to the significant cost of running the little used paper system.  In this section, it uses a cost per viewing that surprises me and I think the viewings are very low.  It says that “it costs approximately $455,000 annually to administer the program, equating to around $15 per offer and more than $100,000 per viewing.”  I interpret that as saying only four OICs were viewed in the average year.  Wow.

The report does not talk about what you would actually view if you drove or flew to Buffalo on a fine winter’s day. It would have been helpful to the discussion to see a sample of a publicly displayed OIC.  It has been a long time since I saw a publicly displayed OIC but, if the IRS properly does the redactions it is instructed to do, I do not think you get to see much more than the taxpayer’s name and the accepted amount of the OIC.  You do not get to see how much was written off, how old the taxes were, whether the fraud or other penalties existed as a part of the forgiven liability, etc.  The dearth of information on the publicly displayed OIC not only protects the privacy of the individual but it protects the IRS from criticism since it is hard to criticize what you do not know.  I think a useful part of the discussion about publicly displaying OICs during the discussion of how should a system change that has been frozen in time for a long period, is what information should be public in order to allow it to make an informed decision on whether an OIC was appropriate. The file contains redacted Forms 7249 and a related redacted transcript(s) of account. Several provisions of the Internal Revenue Manual (IRM) address the public display of offers and provide good background for anyone embarking on a quest for information from accepted offer.  Before you go, look at IRM 11.3.11.8 (describing a host of public tax information and IRM 11.3.11.8 for OICs specifically) and  IRM 5.8.8.8 (describing what the IRS displays publicly from the OIC file).   Notice that if you try to take a picture of the offer displayed for public inspection, the on-site IRS employee is directed to call local security or the police.  So bring a pencil and paper if you want to take notes.  If President Truman wanted to make this information public in order to avoid another instance of bad taxpayers getting OICs from bad IRS employees, his idea is totally frustrated by the current amount of information made available.

TIGTA’s suggestion to put the information online deserves attention. The IRS apparently agrees with the suggestion.  Congratulations to them both.  Now, talk about what you are going to put online in the spirit of President Truman and the whole idea anyway.

Comments

  1. David L. Rice says:

    It is most unfortunate that this is another example of where the IRS whipsaws taxpayers. I have had at least 5 cases (all involving criminal matters) where the IRS has rejected the OIC based on public policy grounds and has always used the excuse that the reason they are rejecting it is that OICs are open to the public. It is time for more transparency from the Service, especially in light of the smoke and mirrors we saw with respect the to 501(c)(4) scandal.

    • Eric Rasmusen says:

      Why do they say it is an excuse that the OIC would be open to the public? Is it just that they are trying to maintain a reputation for never giving in, even when their case is weak?

      • I think that most people at the IRS know that offers are available for public viewing but have no idea that so few people actually view them or the obstacles to doing so. Of course, it also provides a nice excuse for denying an offer and not having to discuss the merits.

  2. Eric Rasmusen says:

    This issue is potentially very important. Suppose we had a corrupt Commissioner or Chief Counsel who wanted to help friendly corporations or individuals. He could just refrain from auditing them or attempting to collect taxes owed, of course. But if the opposite political party wins the next election, that won’t stick unless the statute of limitations has run. What would work better is to make a collusive settlement OIC. If that is confidential, then even the new Commissioner can’t reveal it to the public. I would guess that it would be just as hard for him to get a court to reverse it on grounds of favoritism, however outrageous it was, particularly if the judge was of the opposite party (Tax Court judges are less political than other federal judges, but the taxpayer gets to choose the court).

    So it would be very useful to have publicity about OIC’s, including how much was in dispute.

  3. Ronald J. Cappuccio, J.D., LL.M.(Tax) says:

    The reason OICs increased in the early 1990’s was President George H W Bush. He made a decision with the Treasury Director to simply and unify the process. Prior to that, some States, such as NJ, had practically no OICs accepted. Other State Districts had them routinely accepted. The idea was to great a National Standard.

  4. Bracket Creep says:

    Why does the IRS expose themselves (and taxpayers) to the risk of disclosing sensitive taxpayer information by including the account transcript with the Form 7249? Treas. Reg. § 601.702 (d)(8), which mandates public inspection and copying of accepted OICs, only requires the Form 7249 to be available. The IRS acknowledged in the March 2016 TIGTA report on the PIF that majority of the estimated 654 SSN/EIN redaction errors appeared on the account transcripts. And Keith, here’s a link to the March 2016 TIGTA report that provides selected samples of what would be available at the PIF sites.

    https://www.treasury.gov/tigta/iereports/2016reports/2016ier006fr.pdf

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