Additional OIC Comments Not Specifically Related to the Mason Case

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When Bryan was writing his post, we had an exchange about OICs.  Some of the comments I provided to him I might have provided in posts over the years, but I will state them here in case we have new readers or old readers with memories like mine.  Most of these comments relate to the history of OIC provisions or the IRS administration of the OIC.

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The Current OIC Program

Although Congress authorized the IRS to compromise collection cases in the 1860s, the IRS very rarely did so.  In Virginia when I started working in Chief Counsel’s office in 1980, one RO in the state was assigned to work offers.  He would travel the state working the offers and reject every offer after careful consideration.  I think what was happening in Virginia was happening across the US.  Then in 1990, Congress extended the statute of limitations on collection from 6 to 10 years.  I was working in the National Office at the time in the group of attorneys specializing in collection matters.  I watched firsthand the reaction to the change in the statute of limitations, which came as a surprise to the IRS.

The extension from 6 to 10 years was an idea that Congress had to collect more money without having to say they raised taxes.  They could score this as something which would bring in dollars and use that score to reduce taxes elsewhere or spend more money and have it look as though the event was revenue-neutral.  We see the same discussion today as Congress debates whether to give the IRS more money so it can collect billions of additional dollars.  While I think the IRS could use more money, the amount it will collect as a result of receiving more money is tricky to predict.

When Congress changed the statute of limitations on collection in 1990, it did not consult with Treasury or the IRS.  Had they been consulted, Congress would have learned that the IRS collects very little money after the first two years.  The bill got passed at a time when Congress, and therefore the IRS, was very concerned with the Accounts Receivable due to the IRS and was asking lots of questions about how the IRS could reduce the ARDI (I can’t remember all of the acronym.)  The IRS even had an executive whose only job was to reduce accounts receivable. 

The IRS knew that the extended statute of limitations was going to cause the ARDI to balloon because of the uncollectable accounts that were going to stay on the books four years longer.  So, it started casting about looking for fresh ideas to reduce it and one of them was to actually accept offers instead of rejecting them.  It was the wild west for the first few years as the IRS tried to get its policy completely lined up.  In the mid-1990s an excellent attorney, now an IRS executive, Carol Campbell, created the income and expense guidelines as well as the exempt asset guidelines based on IRC 6334.  In 1998, Congress came behind and codified some of the things going on, including requiring the IRS to have income and expense guidelines which it had already created.  So, the current OIC program is less than 30 years old and resulted not from a change in the statute but from a change in administration because Congress gives the IRS almost complete discretion in OICs.

OICs for Low-Income Taxpayers

One of the few restrictions placed upon the IRS as the IRS codified additional OIC provisions in 1998 was the requirement that it not reject OICs simply because the taxpayer did not offer some minimum amount.  This restriction is located in IRC 7122(c)(3).  You can give credit for that code section primarily to Nina Olson and partially to me.  Nina had a Tax Court case with my office back when she directed the Community Tax Law Project in Richmond, Virginia.  The IRS had determined that the taxpayer owed a lot of money.  The case had a messy factual background that was going to require a lengthy and difficult trial. 

If the IRS won, it was unlikely to collect anything from the taxpayer, whose business had ended and who had spent time in prison.  I suggested that, instead of a trial, she concede the liability and we compromise the debt.  Nina liked the idea, but we fought over the compromise because I wanted a minimum amount to make the effort worthwhile.  Subsequent to the case but not long thereafter, Nina was asked to testify before Congress.  In her testimony to Congress leading up to the 1998 changes, she convinced Congress that requiring a minimum amount to compromise the debt of a low-income taxpayer was wrong.  Her testimony resulted in the passage of IRC 7122(c)(3), for which I claim partial credit since I was the person at the IRS who “inspired” her testimony.

OIC Stats

For those who can peek behind the paywall, David Van Den Berg recently wrote an article for Law 360 building on the current National Taxpayer Advocate’s comments regarding OICs in the mid-year report.  In her report, she provides stats on the declining number of OICs over the past decade. According to the NTA, fiscal year 2020 marked the seventh consecutive year of decline in OIC receipts, and total OIC receipts for FY 2020 were the lowest they had been since 2008.  She states that TAS is looking for ways to increase the number of successful OICs.  Unemployment is a big driver of receipts.  Perhaps the unemployment situation caused by the pandemic will cause many more OICs. 

In his article, David mentions that the IRS is considering investing in robotics and exploring digitization of the OIC forms as well as creating an ability to submit the OIC online.  I mentioned to him when he contacted me about the article that I would like to see the IRS articulate its goals for the OIC program as part of deciding whether it has too many or too few OICs.  It started the modern program over 30 years ago as a reaction to a surprise change in the statute.  It started the program to reduce accounts receivable rather than to necessarily benefit collection or benefit taxpayers as a whole.  With a tightly crafted goal for the program, it would be easier to determine if it was meeting the goal for accepting offers rather than just saying a goal exists to increase the number of offers.

Comments

  1. Bob Kamman says

    As Oliver Wendell Holmes wrote in 1921’s New York Trust Co. v. Eisner: “a page of history is worth a volume of logic.”

  2. Sandra Mertens says

    Excellent and informative post, thank you. The history of OICs is helpful for those of us who started practicing in the 2000s (after the current framework for OICs was put into place). In my opinion, the reason for the decline in OICs is due to a reversion to pre-1990s thinking and discouraging policies and practices by the IRS. On the one hand, OICs are expensive and time consuming, and are therefore impractical for most taxpayers with nominal tax liabilities. The fact that it could take a year or more to even hear back on an OIC application means that all the work done up-front in putting together the required documentation has limited value as new financial information will need to be provided at a later date. If the taxpayer’s finances have improved, they may be out of luck. If the taxpayer’s finances have declined even further, the IRS typically will not agree to decrease the offered amount despite the passage of time and change in circumstances. Moreover, changes to the framework of OICs over the years has made it more difficult to get an Offer through and for taxpayers to fund it. The allowable expense amounts do not comport with realistic costs of living and disallow expenses some taxpayers feel morally or religiously obligated to pay. For example, proving private education expenses are necessary when in a bad school district or for a learning disability is an almost impossible hurdle. Many Offer Specialists or Appeals Officers are similarly unrealistic when it comes to retirement. Most of our clients have no retirement accounts and are approaching retirement with no prospects but to work until they die or receive government aid, both of which negate the very purpose of the OIC which is for a “fresh start.” Finally, in practice it seems like Offer Specialists’ sole duty is to investigate an Offer until they find some reason to reject it, forcing the taxpayer to either give up or try again with IRS Appeals. In my decade of practice in this area, I can recall only a handful of Offers that were accepted at the Specialist level despite good facts and thorough documentation. Offers are a great way for the IRS to collect income and also give taxpayers a fresh start; alas, in practice the policies and procedures make OICs a Herculean task for any taxpayer, discouraging new applications and wasting precious IRS resources.

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