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Report to the Committee on Finance, U.S. Senate: 

April 2006: 

IRS Offers In Compromise: 

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

GAO-06-525: 

GAO Highlights: 

Highlights of GAO-06-525, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

Figure: Repeat Offers Compared to Total Offers Received, Fiscal Years 
2000-2005: 

[See PDF for Image] 

[End of Figure] 

What GAO Recommends: 

GAO recommends that IRS (1) measure accessibility, compliance, and 
timeliness by taxpayer; (2) set timeliness goals by taxpayer; (3) 
analyze causes of trends in repeat offers, timeliness, and 
accessibility; (4) adjust staffing to correspond with workload; and (5) 
eliminate the distinction between most exceptional circumstances offers 
and offers based on inability to fully pay. 

IRS partially agreed with our recommendations. IRS agreed to consider 
tracking compliance, study repeat offers, and reduce staffing. IRS did 
not agree to measuring or set goals for timeliness from the perspective 
of taxpayers. IRS said it will study whether our other recommended 
changes should be implemented. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-525]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact James R. White at (202) 
512-9110 or whitej@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The OIC Program Has Decreased in Size, and Repeat Offers Have 
Increased: 

OIC Program Performance Has Been Mixed, and IRS Has Not Researched the 
Reasons for Some Performance Trends: 

Limited Evidence Suggests Offer Mills' Effect on OIC Processing May Not 
Be Large: 

IRS Notifies Taxpayers of Their Appeal Rights through Various Channels 

ETA Regulations Are Consistent with Statute, but Hardship ETA and DATC 
Offers Are Not Meaningfully Distinct and Non-Hardship ETA Offers Are 
Rare: 

Partial Payment Proposal Raises Questions: 

Conclusions: 

Recommendations for Executive Action: 

Matter for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Scope and Methodology on Detailed Analysis of IRS's AOIC 
Database: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: OIC Program Statistics, Fiscal Years 2000-2005: 

Table 2: Numbers of Repeat Offers Received in Fiscal Year 2005: 

Table 3: Average Processing Times for Onetime and Repeat Offers by Year 
Case Was Closed, Fiscal Years 2000-2005: 

Table 4: Distribution of Elapsed Calendar Time for All Offers Accepted 
in Fiscal Year 2005: 

Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal Year 
2005: 

Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal 
Years 2002-2005: 

Table 7: Percentage of Individual Taxpayers in Collection Statuses by 
Offer Disposition from 1998 to 2003: 

Table 8: Productivity of COIC Processing by Offers Closed, Fiscal Years 
2002-2005: 

Table 9: Productivity of Field Processing by Offers Closed, Fiscal 
Years 2002-2005: 

Table 10: Number and Percentage of Rejected Offers That Taxpayers 
Appealed, Fiscal Years 2000-2005: 

Table 11: Number of Accepted Hardship ETA and Non-Hardship ETA Offers, 
Fiscal Years 2000-2005: 

Table 12: GAO-Derived OIC Program Disposition Types: 

Table 13: IRS OIC Program Disposition Types: 

Figures: 

Figure 1: Simplified OIC Process: 

Figure 2: Number and Percentage of Repeat Offers Compared to Total 
Offers Received, Fiscal Years 2000-2005: 

Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005: 

Figure 4: How IRS Determines Whether an Offer Is Considered for DATC or 
ETA: 

Figure 5: Conceptual Process for Determining Offer Amounts: 

Figure 6: Hardship ETA: Qualify Because of Dependent Care Expenses: 

Figure 7: Hardship ETA: Qualify Because of Basic Living Expenses: 

Letter: 
April 20, 2006: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

In fiscal year 2005, the Internal Revenue Service's (IRS) Offer in 
Compromise (OIC) Program reached agreements with taxpayers to accept 
over 14,000 offers. An OIC is an agreement in which IRS and a taxpayer 
agree to settle or compromise the taxpayers' federal tax liability for 
less than the full amount owed. Generally, IRS accepts offers in cases 
in which taxpayers cannot afford to pay their full tax liability. In 
2005, the OIC Program accepted offers in which taxpayers paid on 
average 16 percent of their tax liability. IRS wrote off the rest of 
the liability, about $1 billion, for those taxpayers. 

For years, Congress has been concerned about the performance of the OIC 
Program. In 2002, we issued a report that you requested on the 
inventory of OIC cases and the quality and timeliness of 
decisions.[Footnote 1] Since that time, concerns about performance, 
including the timeliness of offer processing, the quality of offer 
decisions, and the accessibility of the program to taxpayers, have 
persisted. Other concerns include whether offer mills (tax 
practitioners that consistently use negligent or deceptive practices to 
exploit taxpayers and the OIC Program by making misleading claims and 
submitting unrealistic offers) have been affecting program performance, 
whether taxpayers have been accorded their appeal rights granted in 
statute, and whether IRS has been using its authority to grant offers 
for exceptional circumstances as Congress intended. Offers are most 
commonly accepted when taxpayers cannot pay the full amounts they owe. 
These offers are called doubt as to collectibility (DATC) offers. 
According to IRS regulations, offers for exceptional circumstances, 
called effective tax administration (ETA) offers, are granted in cases 
where taxpayers can fully pay their tax liabilities but where 
collecting the full amount would create economic hardship or where 
compelling public policy or equity reasons provide sufficient basis for 
compromise. Because of these concerns about the program, IRS instituted 
a number of initiatives intended to reduce unrealistic offers from 
taxpayers and improve program performance, including centralized 
processing of less complex cases, a revised application form, an offer 
application fee of $150, and increased emphasis on taxpayer 
communication. 

Because of your continuing interest in ensuring that IRS is 
administering the OIC Program as efficiently and effectively as 
possible, you requested this review. As agreed, the objectives of our 
review were to (1) describe the trends in OIC program size; (2) 
describe the trends in program performance and assess the extent to 
which IRS has researched the reasons for the trends; (3) assess whether 
offer mills affect taxpayers and OIC processing; (4) assess how well 
IRS ensures that taxpayers are provided the right to appeal a rejected 
offer; and (5) determine whether Treasury's ETA regulations are 
consistent with the provision of the IRS Restructuring and Reform Act 
of 1998 (Restructuring Act).[Footnote 2] Near the end of our review, 
your staff asked that we comment on a legislative proposal that would 
require OIC applicants requesting an offer in compromise to make a 
partial payment.[Footnote 3] 

To address these objectives, we reviewed the Internal Revenue Manual 
(IRM) and an IRS policy statement[Footnote 4] to determine the OIC 
Program's objectives; obtained a copy of IRS's Automated Offer in 
Compromise (AOIC) database, the primary management information system 
for the program; and used that database to develop trend data on the 
program. We performed various data reliability analyses and determined 
that the AOIC database was sufficiently reliable for the purposes of 
our work. We also obtained data from IRS on its program staffing levels 
and the results of its OIC case quality reviews. We interviewed program 
officials at IRS's Small Business/Self-Employed Operating Division 
headquarters in Washington, D.C., IRS's centralized OIC processing 
center in Brookhaven, New York, and IRS's Austin Compliance Center in 
Texas, which houses key OIC managerial operations and maintains the 
AOIC database. We also obtained information from IRS's Office of the 
Chief Counsel, Office of Professional Responsibility (OPR), Office of 
Program Evaluation and Risk Analysis (OPERA), and the National Taxpayer 
Advocate (Taxpayer Advocate) of the Taxpayer Advocate Service, in 
Washington, D.C., and interviewed representatives from several tax 
practitioner organizations, the Federation of Tax Administrators, and 
an official from a state attorney general's office. Appendix I provides 
a more detailed description of the scope and methodology for this 
review, and appendix II provides technical details on how we analyzed 
the AOIC database. We performed our work from February 2005 through 
February 2006 in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

During fiscal years 2000 to 2005 the OIC Program decreased in size, 
according to a variety of measures, although the number of repeat 
offers--revised offers submitted by taxpayers after IRS closed their 
earlier cases--increased. IRS accepted over 14,000 offers in 2005, down 
by more than half from 2000. The amount of delinquent tax debt covered 
by accepted offers decreased to $1.5 billion in 2005 (of which $.24 
billion was accepted in the compromises) from $2.4 billion in 2000. 
During the same years, the number of repeat offers grew from about 
20,000 to 31,000 and the proportion of offers received by IRS that were 
repeats more than doubled. 

OIC Program performance relative to five objectives--timeliness, 
quality, accessibility, compliance, and cost--has been mixed. We 
identified the five objectives by reviewing the IRM and an IRS policy 
statement. IRS officials said that they track the program's performance 
for timeliness, quality, and cost and noted that although accessibility 
and compliance are not formally tracked, they are program aims. 

* Timeliness: For taxpayers who submitted one offer, case processing 
time improved from 8.4 months on average in fiscal year 2000 to 5.6 
months in 2005. For taxpayers who submitted repeat offers, processing 
time stayed at over 22 months from the first offer to the disposition 
of last offer. IRS does not measure or set goals for timeliness from 
the perspective of the taxpayer. It measures timeliness for each offer, 
but this masks the time taxpayers with repeat offers wait for a final 
disposition. In addition, IRS has not analyzed the reasons for the 
number or growth of repeat offers or their impact on timeliness. 
Without such an analysis IRS does not know whether it would be less 
costly to deal once with a taxpayer, even if it takes more time to work 
the single offer, than to process repeat offers. 

* Quality: According to its new quality measurement system, IRS met its 
case processing quality goals of 94 percent for less complex cases in 
fiscal year 2005, the first year for which data are available relative 
to a goal. IRS also met its quality goal of 84 percent for more complex 
cases, but is in the process of changing that measurement system. IRS 
measures quality according to whether case processing procedures are 
followed by the OIC Program staff. 

* Accessibility: Declines in OIC participation rates, combined with the 
concerns of outside observers, such as the Taxpayer Advocate and some 
tax practitioner organizations, raise questions about whether the offer 
program's accessibility has decreased. While not a direct measure of 
accessibility, which we define as the ease of participation in the OIC 
Program, participation rates might be an indicator of changes in 
accessibility. One measure of participation is the number of offers 
accepted relative to the number of delinquent taxpayers fiscal year. 
The number of accepted offers has gone down by more than half since 
fiscal year 2000 while the number of delinquent taxpayers has stayed 
roughly constant. IRS has not done an analysis of whether accessibility 
has changed and, if so, why. Without such an analysis, IRS will not 
know whether the questions raised by the declining participation rate 
should be of concern. 

* Compliance: While IRS monitors each accepted offer to determine if 
taxpayers fulfill the terms of their offer agreements and future tax 
filing and payment requirements, it does not routinely track overall 
compliance trends for all OIC program participants, including those 
whose offers were not accepted. IRS issued a study of compliance in 
2004 and cited costs as a reason for not repeating it. However, we 
identified several lower cost methods for measuring compliance, 
including aggregating individual offer information IRS already 
collects. Aggregate compliance data would be useful because, in 
response to its compliance study, IRS created a new unit called the 
Hand-Off Unit to pursue collection actions with taxpayers whose offers 
were rejected or withdrawn. Without compliance data, IRS would be 
unable to determine the effectiveness of its new Hand-Off Unit or other 
improvement initiatives. 

* Cost: Offers closed declined faster than program staffing since 
fiscal year 2003. For example, from fiscal years 2003 to 2005, the 
number of less complex offers closed declined from almost 91,000 to 
53,000 while the number of full-time equivalent staff (FTE)[Footnote 5] 
assigned to those cases declined from 362 to 320. This represented a 
productivity decline of 251 cases closed per FTE to 165 and an increase 
in cost per case. For more complex offers, the productivity decline 
during these years was smaller, from 156 cases closed per FTE to 152. 
If IRS had maintained fiscal year 2003 productivity levels in fiscal 
year 2005, it would have needed about 117 fewer FTEs that could have 
been reallocated to other work. 

Evidence of offer mills' impact on OIC processing and on taxpayers is 
limited because offers mills cannot easily be distinguished from 
legitimate practitioners. The available evidence suggests that the 
impact is not large. For example, an IRS study published in 
2004,[Footnote 6] while subject to limitations, found that a small 
number of offers submitted with the assistance of professional 
practitioners were abusive and concluded that offer mills were not 
driving abuse in the system. 

IRS notifies taxpayers whose offers are rejected of their appeal rights 
through various channels, including the offer form instructions, the 
rejection letter, and the IRS Web site. In fiscal year 2004, more than 
half of the taxpayers whose offers were rejected by the OIC Program 
submitted appeals, indicating that many taxpayers were aware of their 
appeal rights. 

IRS's ETA regulations are consistent with the provisions of the 
Restructuring Act, which are broadly written. The regulations were 
intended to expand the basis on which IRS would grant compromises and 
created two forms of ETA offers--hardship and non-hardship. From fiscal 
year 2001 to 2005, IRS accepted more than 400 ETA offers annually. In 
fiscal year 2005, IRS accepted 30 non-hardship ETA offers, up from 1 in 
fiscal year 2004. Hardship ETA offers are not meaningfully distinct 
from DATC offers. In both cases, the decision to accept the offer is 
based on taxpayers' assets, future income, and reasonable living 
expenses. The lack of distinction between hardship ETA offers and DATC 
offers causes unnecessary program complexity and confusion to taxpayers 
and tax practitioners. For example, taxpayers applying for hardship ETA 
offers are faced with the paradoxical process of proving that they can 
pay the tax liability and then explaining why they cannot afford to pay 
it. Only non-hardship ETA offers are meaningfully distinct from DATC 
offers. Because of the broad language in the Restructuring Act, whether 
the number of non-hardship ETA offers satisfies Congress's intent is 
not clear. 

A legislative proposal that would require taxpayers to make a partial 
payment with their offer applications raises several questions for IRS. 
For example, IRS would need to determine how the requirement would 
apply to taxpayers with repeat offers and whether it would affect the 
program's accessibility. 

To better manage and simplify the OIC Program, we are recommending that 
IRS develop a more meaningful measure of timeliness, accessibility, and 
compliance; set timeliness goals that measure timeliness from the 
perspective of the taxpayer; determine the reasons for the trends in 
repeat offers, timeliness, and accessibility; determine the 
effectiveness of the Hand-Off Unit to conduct follow-up collection 
efforts on taxpayers whose offers were rejected or withdrawn; eliminate 
the distinction between hardship ETA and DATC offers; and reduce staff 
to increase productivity and reduce cost per offer. In addition, if 
Congress's intent regarding the number of non-hardship ETA offers has 
not been met, Congress should provide IRS with more specific guidance 
on the criteria for such offers. 

In commenting on a draft of this report (see app. III), the 
Commissioner of Internal Revenue partially agreed with our 
recommendations. IRS agreed to explore methods for gathering compliance 
information, study repeat offers, and reduce staffing. IRS did not 
agree to measure or set goals for timeliness from the perspective of 
the taxpayer. In addition, IRS indicated that eliminating the 
distinction between economic hardship and doubt as to collectibility 
offers may not be the best approach but that it is open to suggestions 
on clarifying the offer instructions. The Commissioner said that IRS 
will study whether our other recommended changes should be implemented. 

Background: 

Section 7122 of the Internal Revenue Code authorizes the Secretary of 
the Treasury to compromise tax delinquencies. The purpose of the OIC 
Program is to (1) collect what can be fairly and reasonably collected 
from taxpayers who cannot fully pay their delinquent tax liability, (2) 
collect the tax in a timely and cost-effective manner, and (3) provide 
taxpayers with a fresh start toward complying with all future tax 
filing and payment requirements. Generally, IRS views the OIC Program 
as a last resort after taxpayers have explored all other available 
voluntary payment options, such as installment agreements. IRS resolves 
less than 1 percent of all balance due accounts through the OIC 
Program. 

In recent years, the OIC Program underwent numerous program changes 
intended to reduce the number of inappropriate offers submitted by 
taxpayers and improve its operations. The changes include the 
following. In 2001, IRS established the centralized OIC (COIC) 
processing centers in Brookhaven, New York, and Memphis, Tennessee, to 
reduce inventory and processing times and reduce costs. Process 
examiners, lower-grade staff at the COICs, perform the initial 
processing of new offer applications, which includes determining 
whether taxpayers' applications meet IRS's processability criteria. 
Offer examiners, higher-grade staff at these COICs, process less 
complex offers to completion by reviewing taxpayers' financial 
information and making decisions about whether to accept the offers. 
COICs primarily examine offers involving wage and investment income. 
Based on a pilot test, IRS plans to have COIC staff work some offers 
from taxpayers with self-employment income starting in the summer of 
2006. More complex offers are sent to IRS field offices around the 
country where offer specialists, who are higher graded than offer 
examiners, work the offers to completion. These offers take longer to 
investigate and may require face-to-face meetings with the taxpayers. 
In 2003, IRS implemented an offer application fee requirement. 
Taxpayers submitting offer applications must include a $150 fee unless 
they qualify for a fee waiver. In 2004, IRS revised the OIC application 
form to make it more user-friendly to taxpayers. In that same year, IRS 
management put more emphasis on communicating with taxpayers while 
processing offers. In addition to these program changes, the 
Restructuring Act also mandated a new basis for accepting offers ETA. 

Three Types of Compromise: 

According to IRS regulations and guidance, compromises can be granted 
for one of the following three reasons: 

* Doubt as to liability (DATL)--Doubt exists that the assessed tax 
liability is correct. 

* DATC--Doubt exists that the taxpayer could ever pay the full amount 
of tax owed. 

* Effective Tax Administration (ETA)--No doubt exists that the taxpayer 
can fully pay the taxes owed, but exceptional circumstances nonetheless 
lead IRS to compromise. 

IRS has two categories of ETA offers, hardship and non-hardship. 
According to IRS's regulations, hardship ETA offers are those that IRS 
grants because collecting the full liability would create economic 
hardship for the taxpayer, while non-hardship ETA offers are granted on 
a basis of equity and public policy. (How economic hardship qualifies a 
taxpayer for an ETA offer will be addressed later in the report.) 
According to IRS, equity and public policy considerations may be used 
to accept an offer when doing so would not adversely affect voluntary 
compliance for taxpayers in general. 

While an offer is being reviewed, the statute of limitations for 
collection and collection actions[Footnote 7] are suspended. The 
statute of limitations for collection generally restricts the time IRS 
has to collect delinquent taxes to 10 years from the date of 
assessment. The statute of limitations for collection and collection 
actions continues to be suspended if IRS rejects an offer through the 
30-day period that a taxpayer has to make a decision on whether to 
appeal the rejection decision. If a taxpayer appeals, the suspensions 
continue through the end of the appeal process. 

IRS's Process for Making Offer Determinations: 

As illustrated in figure 1, the offer process starts when an offer 
application is submitted by a taxpayer. The application package, Form 
656, consists of over 50 pages that include detailed instructions on 
determining eligibility for filing an offer and a worksheet for 
calculating the offer amount for individual and business taxpayers. The 
offer[Footnote 8] must be supported by a current statement of the 
taxpayer's financial condition, including data on assets, liabilities, 
and monthly income and expenses. 

Figure 1: Simplified OIC Process: 

[See PDF for image] 

[End of figure] 

IRS typically receives and begins the processing of offers in one of 
two COICs. The first step is screening out offers based on DATL. DATL 
offers involving trust fund recovery penalties[Footnote 9] and personal 
liability for excise taxes are processed by the OIC Program and all 
others are referred to IRS examination staff. IRS then screens the 
remaining offers for processability, using five criteria: 

1. current version of OIC application form used, 

2. $150 application fee included,[Footnote 10] 

3. all required federal tax returns filed, 

4. employment taxes current,[Footnote 11] and: 

5. taxpayer not in bankruptcy proceeding. 

Generally, if any of the five requirements are not met, the application 
is returned to the taxpayer as "not processable." According to IRS 
officials, since fiscal year 2003, the requirement to use the current 
application form has not been enforced although it remains part of 
IRS's processability criteria. Program officials said that they do not 
want to return offer applications to taxpayers solely because the most 
current form was not used. 

Next, IRS screens out taxpayers who, based on their self-reported 
financial data, can fully pay their tax debts. The financial data 
include income, assets, and living expenses. If, after subtracting the 
taxpayers self-reported living expenses from their income and assets, 
IRS determines taxpayers can fully pay their tax debt and no 
exceptional circumstances exist, the offers are rejected without 
further processing. 

IRS then sorts offers by complexity. Complex offers, such as those that 
are business related or those from individual taxpayers required to 
file Schedule C (Profit or Loss from Business), are generally sent to 
field offices. The less complex offers remain in COIC for processing. 
Next, IRS reviews each offer to determine whether the taxpayer provided 
enough financial information for a decision to be made about whether to 
accept the offer. If not, IRS requests more information from the 
taxpayer. If the taxpayer does not provide the information, the offer 
is returned and the offer is closed. A returned offer has not been 
rejected. 

When IRS has sufficient financial information to make a decision, it 
first determines whether an offer can be accepted on the basis of DATC. 
If not, IRS considers the offer under ETA rules. At any point during 
the process, taxpayers may withdraw their applications. 

The step of rejecting an offer includes an administrative review. When 
OIC staff propose rejecting an offer, IRS is required by the 
Restructuring Act to conduct an independent administrative review. If 
the offer is rejected, the taxpayer has the right to appeal the 
decision. Offers that are returned, withdrawn, or deemed unprocessable 
do not have appeals rights. If IRS accepts the offer, it monitors the 
taxpayer for 5 years to ensure that the taxpayer remains compliant with 
the agreement and future tax obligations. 

The OIC Program Has Decreased in Size, and Repeat Offers Have 
Increased: 

From fiscal years 2000 through 2005 the OIC Program decreased in size, 
according to measures such as the number of offers received by IRS, the 
number of offers accepted, and the dollar amount accepted in 
compromises. During the same years, repeat offers, as a percentage of 
offers received, grew significantly. 

In Recent Years, IRS's OIC Program Has Decreased in Size: 

According to a variety of summary measures, IRS's OIC Program has 
decreased in size. The number of offers received peaked in fiscal year 
2003, and in fiscal year 2005 was lower than any year since fiscal year 
2000 (see table 1). Offers accepted and the year-end inventory of open 
offers both peaked in fiscal year 2001 and were lower in 2005 than 
previous years. 

Table 1: OIC Program Statistics, Fiscal Years 2000-2005: 

Fiscal year: Offers received; 
2000: 109,818; 
2001: 118,893; 
2002: 122,405; 
2003: 126,466; 
2004: 103,106; 
2005: 73,301. 

Fiscal year: Offers accepted[A]; 
2000: 31,609; 
2001: 37,071; 
2002: 27,692; 
2003: 18,340; 
2004: 14,636; 
2005: 14,526. 

Fiscal year: End of year inventory; 
2000: 88,982; 
2001: 92,324; 
2002: 68,187; 
2003: 54,326; 
2004: 35,882; 
2005: 18,500. 

Fiscal year: Amount of delinquent tax liability (in billions); 
2000: $2.43; 
2001: $2.45; 
2002: $2.25; 
2003: $1.32; 
2004: $1.32; 
2005: $1.49. 

Fiscal year: Amount of accepted offers (in billions); 
2000: $0.28; 
2001: $0.31; 
2002: $0.27; 
2003: $0.19; 
2004: $0.19; 
2005: $0.24. 

Fiscal year: Amount of tax liabilities written off as a result of OIC 
(in billions); 
2000: $2.15; 
2001: $2.14; 
2002: $1.98; 
2003: $1.13; 
2004: $1.13; 
2005: $1.25. 

Fiscal year: Percentage of total tax liability accepted in compromise; 
2000: 12; 
2001: 13; 
2002: 12; 
2003: 14; 
2004: 15; 
2005: 16. 

Source: GAO analysis of IRS's AOIC database. 

[A] Acceptances are shown before any taxpayer appeals to the IRS 
Appeals function (Appeals). See table 10 for offers accepted by 
Appeals. 

[End of table] 

The amount of delinquent tax liability covered by accepted offers 
ranged annually from about $1.3 billion to $2.5 billion during fiscal 
years 2000 to 2005. The amount accepted in a compromise of annual 
delinquent tax liability increased from 12 percent in fiscal year 2000 
to 16 percent in fiscal year 2005. The amounts of delinquent tax 
liability covered by accepted offers, the amounts accepted, and amounts 
written off were lower at the end of the period than at the beginning 
but with some upswing over the last 3 years. While not a measure of 
program size, the percentage of delinquent tax liability covered by 
accepted offers increased to 16 percent in fiscal year 2005. 

IRS attributes the decline in inventory to a combination of factors, 
including the centralized processing established in August 2001 and the 
decrease in offers received. 

Repeat Offers Have Grown Significantly: 

Repeat offers, as a percentage of offers received, grew significantly 
from fiscal year 2000 to 2005. Repeat offers occur when a taxpayer 
submits an offer that IRS does not accept, IRS closes the case, and 
then the taxpayer submits another offer covering at least some of the 
same tax liability. Some taxpayers submit several repeat offers. 

The number and percentage of repeat offers more than doubled from 
fiscal year 2000 to 2003 (see fig. 2). After that, the number declined, 
but because the number of offers received also declined, the percentage 
stayed about the same. In fiscal year 2005, 40 percent (or 29,527) of 
the offers received were repeat offers. 

Figure 2: Number and Percentage of Repeat Offers Compared to Total 
Offers Received, Fiscal Years 2000-2005: 

[See PDF for image] 

Note: Some taxpayers make only one effort to compromise a tax 
liability. We call these offers "onetime offers." Other taxpayers make 
multiple attempts to compromise a tax liability. We call the first of 
these attempts an "initial offer" and each subsequent attempt a "repeat 
offer." 

[End of figure] 

Thousands of offers were multiple repeats. Of the 29,527 repeat offers 
received in fiscal year 2005, table 2 shows that for example 17,511 (or 
59 percent) were second offers and 6,901 were third offers[Footnote 12] 
(see table 2). Taxpayers whose repeat offers were received in 2005 
submitted 2.8 offers on average. 

Table 2: Numbers of Repeat Offers Received in Fiscal Year 2005: 

Order of offer: 2ND; 
Number of offers: 17,511. 

Order of offer: 3RD; 
Number of offers: 6,901. 

Order of offer: 4TH; 
Number of offers: 2,908. 

Order of offer: 5TH; 
Number of offers: 1,214. 

Order of offer: 6TH; 
Number of offers: 525. 

Order of offer: 7TH; 
Number of offers: 247. 

Order of offer: 8TH; 
Number of offers: 103. 

Order of offer: 9TH; 
Number of offers: 52. 

Order of offer: 10TH or greater; 
Number of offers: 66. 

Order of offer: Total; 
Number of offers: 29,527. 

Source: GAO analysis of IRS's AOIC database. 

[End of table] 

IRS has not analyzed the reasons for the proportion of repeat offers, 
the substantial increase since fiscal year 2000 shown in figure 2, or 
the number of multiple repeats shown in table 2. There are a range of 
possible reasons. On the one hand, repeat offers could be the product 
of IRS attempts to reduce inventory and close offer cases more quickly. 
Closing cases quickly could leave some taxpayers still wanting to 
negotiate over the amount of their offers--they would have to submit 
repeat offers. On the other hand, repeat offers could be the result of 
taxpayer confusion or a tactic to delay collection action. 

OIC Program Performance Has Been Mixed, and IRS Has Not Researched the 
Reasons for Some Performance Trends: 

Based on our analysis of OIC data, program performance has been mixed 
relative to five objectives--timeliness, quality, accessibility, 
compliance, and cost. We identified these objectives by reviewing the 
IRM and an IRS policy statement. IRS's performance in one measure of 
timeliness has improved, and the program has met its quality goals. 
However, some taxpayers wait more than 2 years to get an offer 
accepted, and cost per offer has increased. Some of IRS's measures mask 
this performance because IRS measures performance by offer and not by 
taxpayer. Furthermore, IRS has not researched the causes of some 
performance trends. 

OIC Performance Can Be Measured Relative to Five Objectives: 

Based on the IRM and an IRS policy statement, we identified five 
performance objectives for the OIC Program: 

* timeliness--time taken to make a decision on an offer application, 

* quality--extent to which IRS follows OIC Program procedures and makes 
appropriate determinations, 

* accessibility--ease that taxpayers eligible for offers have 
participating in the program, 

* compliance--extent to which taxpayers who submit offers pay their 
delinquent and future tax obligations, and: 

* cost--resources used to process offers. 

IRS officials said that they track the program's performance with 
respect to timeliness, quality, and cost. They also said that they do 
not measure the program's success by measuring compliance and 
accessibility but agreed these were aims of the program. IRS has 
numeric targets for timeliness and quality. The officials also view 
taxpayer service as another program objective. We agree that taxpayer 
service should be a program objective. In IRS's telephone assistance 
program, service is measured by a combination of timeliness, quality, 
and accessibility. While there may be other measures of service, we 
believe that service to taxpayers is covered by the above five 
objectives. 

Timeliness Has Improved for Some Taxpayers but Remains Mixed, and IRS's 
Timeliness Goals Are Set for Offers, Not Taxpayers: 

The OIC Program measures timeliness based on how long it takes to make 
a decision about an offer and not how long it has taken taxpayers, some 
of whom have repeat offers, to get their tax liabilities finally 
resolved. IRS has a 6-month target for making decisions on offers in 
COICs and a 9-month target for making a decision on offers in the 
field. Measured on an offer basis, IRS met its COIC 6-month target for 
94 percent of offers and its field 9-month target for 62 percent of 
offers in fiscal year 2005. 

The picture looks different when timeliness is measured by how long it 
takes taxpayers to have their tax liabilities ultimately resolved--the 
elapsed calendar time from when IRS first receives an offer to when IRS 
makes a decision on a taxpayer's final offer. In fiscal year 2005, IRS 
took about 6 months on average to process onetime offers (both COIC and 
field) but took far longer to resolve the tax liabilities of taxpayers 
with repeat offers. The timeliness of onetime offers has improved from 
an average of 8.4 months in fiscal year 2000 to an average of 5.6 
months in fiscal year 2005, as shown in table 3. 

Table 3: Average Processing Times for Onetime and Repeat Offers by Year 
Case Was Closed, Fiscal Years 2000-2005: 

Fiscal year: 2000; 
Average processing times in months: Onetime offers: 8.4; 
Average processing times in months: Repeat offers[A]: 23.3. 

Fiscal year: 2001; 
Average processing times in months: Onetime offers: 9.6; 
Average processing times in months: Repeat offers[A]: 25.8. 

Fiscal year: 2002; 
Average processing times in months: Onetime offers: 9.8; 
Average processing times in months: Repeat offers[A]: 23.9. 

Fiscal year: 2003; 
Average processing times in months: Onetime offers: 7.9; 
Average processing times in months: Repeat offers[A]: 20.7. 

Fiscal year: 2004; 
Average processing times in months: Onetime offers: 7.2; 
Average processing times in months: Repeat offers[A]: 21.4. 

Fiscal year: 2005; 
Average processing times in months: Onetime offers: 5.6; 
Average processing times in months: Repeat offers[A]: 22.4. 

Source: GAO analysis of IRS's AOIC database. 

Note: Times represent OIC Program processing times and do not include 
time in Appeals for appealed cases. 

[A] Elapsed calendar time between IRS receipt of first offer and 
disposition of final offer. 

[End of table] 

The average elapsed calendar time it takes for taxpayers with repeat 
offers to get their cases finally resolved was over 22 months in fiscal 
year 2005--close to the same elapsed time as in 2000. Taking almost 2 
years to resolve cases could result from the growth in the proportion 
of repeat offers or other factors, such as the time taxpayers wait 
before submitting repeat offers. 

Timeliness from the perspective of accepted offers is shown in table 4, 
which shows that 40 percent of offers accepted in fiscal year 2005 had 
elapsed calendar times of more than 12 months from IRS receipt of first 
offer to final disposition of the last offer, and over 18 percent had 
elapsed calendar times of more than 24 months. Over 91 percent of the 
accepted offers taking more than 24 months were repeats. 

Table 4: Distribution of Elapsed Calendar Time for All Offers Accepted 
in Fiscal Year 2005: 

Numbers of offers closed by elapsed time; 
0 to 6 months: 4,427; 
(30.5 percent); 
>6 to 12 months: 4,176; 
(28.8 percent); 
>12 to 24 months: 3,240; 
(22.3 percent); 
More than 24 months: 2,683; 
(18.5 percent). 

Source: GAO analysis of IRS data. 

Note: Times represent OIC Program processing times and do not include 
time in Appeals for appealed cases. 

[End of table] 

Even though IRS may be meeting its timeliness targets for processing 
most offers, measuring timeliness by offer masks the elapsed calendar 
time between receipt of a first offer and disposition of a final offer 
for taxpayers filing repeat offers. Furthermore, IRS has not analyzed 
the effect of the number and growth of repeat offers on timeliness. An 
analysis of the extent timeliness could be improved, if at all, by 
reducing repeat offers could help program managers make decisions about 
whether program changes to improve timeliness would be justified. For 
example, it might be less costly for IRS to deal once with a taxpayer, 
even if it takes more time to work the single case, rather than have to 
process repeat offers.[Footnote 13] 

Another issue is that IRS does not have a rationale for its numeric 
goals for processing times. In 2002, after we recommended that IRS set 
a timeliness goal for the offer program based on taxpayer needs, other 
benefits such as compliance, and program cost, IRS retained its old 
goal of 6 months for COIC offers and established a separate goal of 9 
months for field offers. However, the two current goals still are not 
based on a documented analysis of taxpayer needs, other benefits, and 
program costs. 

Without measuring timeliness from the perspective of the taxpayer and 
without a rationale for timeliness goals set for taxpayers, IRS may be 
missing an opportunity to effectively drive program improvements from a 
taxpayer's perspective. As we discussed in other reports, industry 
guidance for customer service recommended setting goals based on how 
long customers were willing to wait for the service, the value of the 
service to the organization, and the costs of providing the 
service.[Footnote 14] Measuring timeliness from the perspective of 
taxpayers and setting goals based on taxpayer needs would inform IRS 
management of any gaps between actual timeliness and the goal providing 
a better basis for making decisions about program improvements. 

IRS officials expressed concern about whether setting timeliness goals 
by taxpayer would be feasible or desirable. In terms of feasibility, 
the officials said because it does not know whether or when a taxpayer 
whose offer is not accepted would submit another offer, it would be 
difficult to develop a timeliness goal from the perspective of 
taxpayers. While it may be difficult to predict individual taxpayers' 
behavior, IRS has historical data that may be helpful for establishing 
timeliness goals from the perspective of taxpayers. For example, 
average timeliness for taxpayers from previous years might be a 
benchmark useful for setting goals for future average timeliness. In 
terms of desirability, IRS officials said a measure of timeliness from 
the perspective of taxpayers might be interpreted by some as an 
indication that offer policies might be compromised in order to meet 
the goal. IRS has quality measures intended to ensure that appropriate 
decisions are made in offer processing. Furthermore, IRS currently sets 
timeliness goals for offers despite the fact that the same incentives 
to compromise quality seem to apply. 

IRS's Data Show That Quality Goals Have Been Met: 

Measured by both IRS's internal customer accuracy measures and 
decisions by the Appeals function (Appeals), IRS has met its quality 
goals for the OIC Program (see table 5). 

Table 5: Accuracy Rates for COIC Cases and Field Cases, Fiscal Year 
2005: 

Location: Brookhaven; 
OIC work type: Preliminary screening; 
Accuracy rate: achieved (percentage): 100. 
OIC work type: Financial analysis and offer decision; 
Accuracy rate: achieved (percentage): 97.7. 
OIC work type: Average; 
Accuracy rate: achieved (percentage): 98.9. 

Location: Memphis; 
OIC work type: Preliminary screening; 
Accuracy rate: achieved (percentage): 95.0. 
OIC work type: Financial analysis and offer decision; 
Accuracy rate: achieved (percentage): 95.6. 
OIC work type: Average; 
Accuracy rate: achieved (percentage): 95.3. 

Location: Field offices; 
OIC work type: Financial analysis and offer decision; 
Accuracy rate: achieved (percentage): 84.4. 

Source: IRS. 

[End of table] 

In the COICs, IRS measures the customer accuracy rate using the 
embedded quality measurement system (EQMS) that was implemented in 
fiscal year 2004. IRS exceeded its goal of 94 percent for fiscal year 
2005. For the OIC Program, EQMS measures how well employees follow 
offer processing procedures. Quality is measured by the sample of cases 
reviewed that met the standards for following the required steps, such 
as contacting the taxpayer or getting managerial review to process 
cases. IRS believes that offer examiners make more consistent decisions 
when they follow all the required processing steps. According to the 
OIC Program Manager, EQMS is better than the system previously used in 
the centralized processing centers, the collection quality measurement 
system (CQMS). CQMS is still being used in field offices but is to be 
phased out in fiscal year 2006 as EQMS is being phased in. IRS also met 
its field quality goal of 84 percent using CQMS for fiscal year 2005. 
According to the OIC Program Manager, IRS plans to set a field goal 
using EQMS after collecting and analyzing data for field cases during 
the first year that EQMS is implemented in field offices. 

Appeals data offer some additional evidence about the quality of OIC 
Program decisions, although the data are a limited quality indicator 
because only rejected offers can be appealed. Of rejected offers 
appealed, in fiscal year 2005, Appeals sustained 65 percent of 
rejection decisions while deciding to accept offers in 24 percent of 
the cases, as shown in table 6 (11 percent were withdrawn). A decision 
by Appeals to accept an offer is not always the same as overruling the 
OIC Program. Appeals accepted some offers that the OIC Program had 
rejected because taxpayers provided Appeals with new financial 
information. An IRS study of 113 cases where offers were accepted in 
Appeals concluded that 38 percent of offers were accepted by Appeals 
based on taxpayers providing new financial information rather than 
Appeals disagreeing with the OIC Program decisions.[Footnote 15] Table 
6 also shows some improvement in the sustention rate from fiscal years 
2002 through 2005. 

Table 6: Disposition by IRS Appeals of OIC Rejected Offers, Fiscal 
Years 2002-2005: 

Disposition: OIC rejection accepted in Appeals (percentage); 
2002: 29.0; 
2003: 29.6; 
2004: 28.2; 
2005: 23.5. 

Disposition: OIC rejection sustained in Appeals (percentage); 
2002: 57.6; 
2003: 57.3; 
2004: 62.0; 
2005: 65.1. 

Disposition: Offer withdrawn in Appeals (percentage); 
2002: 13.5; 
2003: 13.1; 
2004: 9.7; 
2005: 11.4. 

Source: GAO analysis of IRS's AOIC database. 

[End of table] 

Declines in OIC Program Size Combined with Trends in IRS's Other 
Collection Programs Raise Questions about OIC Program Accessibility: 

Declines in OIC participation rates since fiscal year 2000 raise 
questions about whether accessibility has decreased. We define 
accessibility as how easy it is for potentially eligible taxpayers to 
participate in the OIC Program. IRS officials agreed with this 
definition but said that they do not measure accessibility and do not 
monitor changes in accessibility over time. Tracking accessibility 
could provide information about the effectiveness of efforts to reduce 
barriers to program participation for taxpayers wishing to make 
legitimate offers. For example, IRS recently made changes to the offer 
application form intended to make the offer application process easier 
for taxpayers to understand. 

Furthermore, the Taxpayer Advocate, the American Institute of Certified 
Public Accountants, and the National Association of Enrolled Agents 
have raised concerns about barriers to OIC Program access. They cited 
confusion about the offer requirements and procedures, the lengthy time 
needed to get offers resolved, and the difficulty in getting what they 
believe are reasonable offers accepted as deterrents to taxpayers' 
ability to participate in the program. The Taxpayer Advocate stated 
that some practitioners are often not willing to recommend the program 
to their clients because of these issues. A small number of 
practitioners we spoke with, as well as the practitioner organizations 
we contacted, made the point that the OIC process is too burdensome for 
taxpayers. Without a measure of accessibility, it is difficult to 
assess the merits of these concerns. 

Measuring access, or ease of participation, may require questioning 
taxpayers about why they did or did not participate in the program. 
Such direct evidence does not currently exist. However, it is possible 
to measure participation with readily available data. While not the 
same as accessibility, trends in participation rates might be an 
indicator of whether changes in accessibility have occurred. A measure 
of participation would compare OIC Program participation to the pool of 
potentially eligible taxpayers. 

Over the years 2000 to 2004, the number of accepted offers declined by 
more than half, as shown in figure 3. Over the same years, one proxy 
measure of potentially eligible taxpayers, the number of delinquent 
taxpayers, stayed roughly constant at 5.9 million delinquent taxpayer 
accounts in fiscal year 2000 and 6.0 million in 2004.[Footnote 16] It 
seems likely that the number of potentially eligible taxpayers is 
correlated with the number of delinquent taxpayers. Not all delinquent 
taxpayers are eligible for the OIC Program, but it seems likely that an 
increase in delinquent taxpayers would also increase the number of 
taxpayers potentially eligible for an offer. 

Figure 3: Disposition of Offers Received, Fiscal Years 2000-2005: 

[See PDF for image] 

Note: Because many of the offers received in fiscal year 2005 have not 
been disposed of, the numbers of accepted and rejected offers shown in 
the table will grow. 

[End of figure] 

The fact that accepted offers declined by more than half at the same 
time that the number of delinquent taxpayers was staying roughly 
constant raises the question of whether something has happened to 
reduce the program's accessibility.[Footnote 17] The two trends do not 
demonstrate that accessibility has declined because they do not 
directly measure ease of use. It is possible that taxpayers decided for 
reasons unrelated to accessibility to reduce their participation in the 
program. However, it is possible that concerns like those expressed by 
the Taxpayer Advocate explain the decline. IRS has not done an analysis 
to determine whether the ease of using the program has changed, and, if 
so, why. 

IRS officials told us that the reason they do not measure accessibility 
is that the program is available to all eligible taxpayers and that 
taxpayers self-select their participation. They also said that IRS has 
not measured the decline in the size of the program relative to changes 
in the pool of potentially eligible taxpayers. On the other hand, IRS 
has taken steps, such as requiring a $150 offer application fee and 
revising the offer application form, intended to reduce the number of 
unrealistic offers without reducing the accessibility of the program to 
potentially eligible taxpayers. In addition, the OIC Program Manager 
told us that to determine whether there are eligible taxpayers who do 
not participate in the program, IRS is considering studying whether 
some taxpayers with delinquent accounts are eligible for offers. 

Without a measure of accessibility that gauges ease of use, IRS does 
not know whether accessibility has changed over time. As a consequence, 
IRS does not know whether the declines in participation rates indicate 
a decline in accessibility, nor does IRS know whether the concerns 
raised by the Taxpayer Advocate and others about a decline in 
accessibility are correct. Furthermore, IRS would be unable to evaluate 
whether its efforts to reduce inappropriate offers, without reducing 
accessibility by eligible taxpayers, have been successful. 

There may be more than one way to measure accessibility. One way would 
be to measure program participation rates and, if participation is 
changing, do follow-up questioning of taxpayers about whether ease of 
use had changed. Potentially eligible taxpayers could be asked, for 
example, about whether they perceived barriers to their participating 
in the program. If accessibility is found to be declining, then 
analysis of what IRS did to cause the decline would be useful for 
making decisions about whether and how to address the decline. 

IRS Monitors Taxpayer Compliance with the Terms of Their Accepted 
Offers, but Does Not Routinely Track Aggregate Compliance Trends for 
Program Participants: 

IRS Policy Statement P-5-100 and the IRM state that by accepting 
offers, the OIC Program should provide taxpayers a fresh start toward 
future voluntary compliance with their filing and payment requirements. 
IRS rejects offers on the basis of a financial analysis of taxpayers' 
assets, expected income, and reasonable living expenses--an analysis 
that IRS uses to show whether taxpayers have the ability to pay more of 
their tax debt than they offered to pay in their OIC applications. 

In accordance with the compliance objective for accepted offers, IRS 
has a unit called Monitoring OIC (MOIC), which monitors the compliance 
of taxpayers with accepted offers for 5 years, and possibly beyond 5 
years in cases of deferred payment offers, where payments are made over 
the remaining life of the collection statute. MOIC, however, does not 
routinely report to OIC management its aggregate data on taxpayer 
compliance, which would show trends on the compliance of taxpayers with 
accepted offers. In 2004, IRS completed a study that addressed several 
aspects of the OIC Program, including compliance.[Footnote 18] 
According to the study, about 80 percent of individual taxpayers with 
accepted offers from calendar years 1995 and 2001 remained in 
compliance with filing and payment requirements, excluding taxpayers 
who had received only one collection notice. 

The study also examined the compliance of taxpayers whose offers were 
rejected, withdrawn, or returned. The study found that follow-up 
collection actions had not been completed in many cases, even though 
the taxpayers had submitted offer applications stating a willingness 
and ability to pay part of their delinquent tax debt and even though 
IRS had concluded for rejected offers that the taxpayers could pay more 
than the amount they offered. For example, 42 percent of rejected 
offers during the study period, calendar years 1998 to September, 8, 
2003, were pending collection action, and 15.7 percent had been 
declared currently not collectible (see table 7).[Footnote 19] 

Table 7: Percentage of Individual Taxpayers in Collection Statuses by 
Offer Disposition from 1998 to 2003: 

Collection status[A]: Full pay; 
Withdraw: 30.6; 
Reject: 19.4; 
Return: 10.6. 

Collection status[A]: Other resolution[B]; 
Withdraw: 8.4; 
Reject: 8.3; 
Return: 4.6. 

Collection status[A]: Currently not collectible; 
Withdraw: 16.7; 
Reject: 15.7; 
Return: 18.6. 

Collection status[A]: Installment; 
Withdraw: 15.8; 
Reject: 14.6; 
Return: 9.2. 

Collection status[A]: Pending action; 
Withdraw: 28.4; 
Reject: 42.0; 
Return: 57.2. 

Collection status[A]: Total[C]; 
Withdraw: 100.0; 
Reject: 100.0; 
Return: 100.0. 

Source: GAO analysis of IRS data. 

[A] In cases where the taxpayers had tax liabilities for more than one 
year or tax period, OPERA used IRS's most recent information on the 
taxpayer's collection status. 

[B] Includes cases that were "full pay" where the collection statute 
expiration date occurred or taxpayer filed bankruptcy. 

[C] Columns may not add up to 100 percent because of rounding. 

[End of table] 

IRS created a new unit called the Hand-Off Unit partly because the 2004 
study concluded that rejected offers languished without further 
collection action. The Hand-Off Unit takes the rejected or withdrawn 
cases and initiates appropriate collection procedures with taxpayers 
using the financial information gained during the OIC process. Like 
MOIC, the Hand-Off Unit currently does not analyze compliance trends on 
a routine basis, although officials told us that IRS would eventually 
have that capability but has not set a date. To properly assess IRS 
performance on achieving its compliance objective, IRS also would need 
to collect and assess such trend information on a periodic basis. 

The 2004 study represents a useful assessment of OIC's compliance 
benefits for one time and uses an appropriate measurement unit--the 
taxpayer. However, it is no longer useful for ongoing management 
decisions because the data in the study are now about 3 to 11 years 
old. The study period predated many of IRS's recent program changes, 
which might affect the program's performance with respect to 
compliance. For example, the new Hand-Off Unit, which was started after 
the 2004 report, may help achieve greater compliance of taxpayers with 
rejected or withdrawn offers, but IRS will not know whether it works if 
it does not track overall compliance trends. 

The OIC Program Manager said that IRS found the 2004 study too costly 
to repeat, requiring thousands of staff hours from the OIC Program and 
expertise from OPERA. However, only a portion of the work for the 2004 
study was devoted to studying compliance; the Program Manager said that 
he did not know how much it would cost to repeat the compliance 
portions alone. Further, IRS does not use alternatives for the kind of 
compliance-benefit information the 2004 study provided, although such 
alternatives exist and some are lower cost. For example, IRS could 
repeat only the compliance portion of its OPERA study or use the 
existing status reports collected by MOIC, which cover taxpayers who 
default on their offers but are not routinely aggregated for OIC 
managers, to monitor trends on the compliance of taxpayers with 
accepted offers. The only additional costs to use the MOIC reports 
would be aggregating the data. The Treasury Inspector General for Tax 
Administration (TIGTA) also conducted a file review of accepted offers 
to assess aggregate compliance performance, which the OIC Program could 
use as a model. According to a TIGTA audit manger, the TIGTA study was 
something IRS should be able to do at a lower cost than the OPERA 
report. Using the MOIC data that are already available or employing the 
TIGTA approach would not yield as elaborate a study as IRS's 2004 
study, but the alternative methods would provide information more 
useful to managers than having no information at all. 

We previously concluded that having the proper performance measures in 
place is critical for successful program adjustments and in assessing 
achievement of objectives.[Footnote 20] Because aggregate compliance 
trends are not tracked and analyzed periodically, IRS does not know the 
effects that recent program changes have had on taxpayer compliance; 
furthermore, IRS will have greater difficulty determining what 
additional program changes may be needed to ensure its best performance 
on achieving its compliance objective. 

Trend information on compliance also is necessary to assess the 
performance of IRS's new Hand-Off Unit. In our 2002 report,[Footnote 
21] we said that IRS should develop evaluation plans before starting 
new initiatives; it did not do so in this case. 

Offers Closed Declined Faster Than FTEs, Resulting in Productivity 
Declines and Increased Costs per Offer: 

Productivity of both COIC and field staff, measured by the ratio of 
offers closed per FTE, declined from fiscal years 2003 to 2005 (see 
tables 8 and 9). While productivity improved from fiscal years 2002 to 
2003, the productivity declines in the following years resulted from 
IRS reducing offer processing staff at a lower rate than the decline in 
offers closed. For example, the average number of closed offers per FTE 
in COIC decreased from 251 to 165 from fiscal years 2003 through 2005. 
Other factors equal, decreases in productivity increase cost per offer. 

Table 8: Productivity of COIC Processing by Offers Closed, Fiscal Years 
2002-2005: 

Fiscal year: 2002; 
Closed offer cases: 66,217; 
FTEs: 380; 
Closed offers per FTE: 174. 

Fiscal year: 2003; 
Closed offer cases: 90,888; 
FTEs: 362; 
Closed offers per FTE: 251. 

Fiscal year: 2004; 
Closed offer cases: 80,107; 
FTEs: 340; 
Closed offers per FTE: 236. 

Fiscal year: 2005; 
Closed offer cases: 52,831; 
FTEs: 320; 
Closed offers per FTE: 165. 

Sources: IRS data and GAO analysis of IRS's AOIC database. 

[End of table] 

Table 9: Productivity of Field Processing by Offers Closed, Fiscal 
Years 2002-2005: 

Fiscal year: 2002; 
Closed offer cases: 80,325; 
FTEs: 448; 
Closed offers per FTE: 179. 

Fiscal year: 2003; 
Closed offer cases: 49,439; 
FTEs: 316; 
Closed offers per FTE: 156. 

Fiscal year: 2004; 
Closed offer cases: 41,443; 
FTEs: 305; 
Closed offers per FTE: 136. 

Fiscal year: 2005; 
Closed offer cases: 37,852; 
FTEs: 249; 
Closed offers per FTE: 152. 

Sources: IRS data and GAO analysis of IRS's AOIC database. 

[End of table] 

If IRS had maintained productivity at fiscal year 2003 levels, the 
agency would have had the flexibility to reallocate a substantial 
number of FTEs to other areas. In fiscal year 2005, IRS would have been 
able to reassign 110 FTEs in COICs and 7 FTEs in field offices. As the 
inventory of offers, which affects the number of offer closures, 
declined in fiscal years 2004 and 2005, IRS did reduce FTEs, 
particularly in the field. However, the number of offers closed 
declined more rapidly than the number of FTEs, hence the decline in 
productivity. In January 2006, IRS officials told us that they 
anticipate making additional staff reductions in fiscal year 2006. 

OIC officials provided some possible reasons for the decline in 
productivity, including an increase in offer complexity and a plan to 
keep more staff working on offers than might have been necessary to 
ensure that service to taxpayers was maintained. Over the fiscal years 
2003 to 2005, however, there is some evidence that offers have not 
grown more complex. Figure 3 does not show a noticeable change in case 
complexity. For example, the percentage of not processable offers, the 
simplest and fastest cases to close, was somewhat higher in fiscal year 
2005 than in fiscal year 2003. With respect to the desire to maintain 
service to taxpayers, IRS has shifted collections staff from one type 
of case to another. Thus, IRS has flexibility to move staff to maintain 
service in the face of an unexpected upswing in offer submissions, 
especially since a pool of experienced OIC processors would be 
available. 

OIC officials told us that since fiscal year 2001, they have 
substantially reduced the OIC Program's costs, particularly in field 
offices. Based on IRS information, the number of revenue officers 
assigned to OIC cases have declined from 1,078 as of April 2001 to 267 
in April 2006--a reduction of 811 revenue officers. In March 2006, 
IRS's OIC Program Manager told us that because IRS will start 
processing offers from taxpayers filing simpler Schedule C forms at the 
COICs later in the year, it will further reduce the number of revenue 
officers in field offices by 100. 

Limited Evidence Suggests Offer Mills' Effect on OIC Processing May Not 
Be Large: 

Reliable and complete data on offer mills' involvement with the OIC 
Program do not exist, preventing firm assessments on the extent that 
offer mills affect OIC processing. However, limited evidence from IRS, 
states, and our own analysis, taken together, suggests that offer mills 
do not have a large effect on OIC processing. There is, however, 
anecdotal evidence that offer mills may harm taxpayers. IRS has created 
procedures and guidance designed to mitigate potential negative effects 
of offer mills on OIC processing, although the effectiveness of the 
procedures and guidance cannot be measured. 

Offer Mills Cannot Be Easily Distinguished from Legitimate 
Practitioners: 

IRS collects some information about professional tax practitioners, who 
assist taxpayers making offers, but the data are not sufficient for 
distinguishing offer mills from legitimate practitioners. 

For purposes of this report, an offer mill is a professional tax 
practitioner that consistently uses negligent or deceptive practices to 
exploit taxpayers and the OIC Program by making misleading claims and 
submitting unrealistic offers. For example, an offer mill might use 
deceptive advertising, creating a false expectation that the recipient 
of the advertisement would qualify for an offer or save as much as the 
advertisement suggests. An offer mill also might file incomplete or 
repeat offers to exploit the rule that suspends collection proceedings 
while offers are being considered. 

IRS does collect two types of information about professional 
practitioners on the OIC application, but this information is not 
always submitted with the application. First, the OIC application asks 
enrolled agents[Footnote 22] to identify themselves on the form and to 
submit a power of attorney (POA) Form 2848 with the taxpayer's 
application. In addition, the form asks taxpayers to identify anyone 
who helped prepare the application. However, non-enrolled agents are 
not required to sign the offer application. A manager at the Brookhaven 
COIC said that IRS has had cases in which it has learned that a 
professional practitioner was used but not identified in the offer 
application. 

IRS designates some offers as solely to delay the payment of taxes, 
which IRS tracks in the AOIC. The definition of solely to delay applies 
to any offer--whether submitted by the taxpayer alone or with the 
assistance of a POA. IRS considers an offer submitted solely to delay 
as one that is not substantially different from a previous offer that 
IRS rejected or returned. Solely to delay offers could be linked to POA 
or other practitioner data in the AOIC, but that data's usefulness is 
limited because professional tax practitioners are not always 
identified on OIC applications. Additionally, because determining 
whether an offer is submitted solely to delay is subjective and may 
require enough submissions to notice a pattern, IRS may not always 
detect when an offer has been submitted solely to delay. 

Best Available Evidence, Though Incomplete, Suggests That Offer Mills 
Do Not Have a Large Effect on OIC Processing but That They Might Harm 
Taxpayers: 

The best available information on offer mills from IRS--although 
limited by the same factors described in the previous section--suggests 
that offer mills do not have a large effect on OIC processing. 

* An IRS study[Footnote 23] published in 2004 found that a small number 
of offers submitted with the assistance of professional practitioners 
were abusive and concluded that offer mills were not driving 
abuse[Footnote 24] in the system. 

* The OIC Program can make referrals to OPR regarding suspected 
practitioner abuse but rarely does so. In November 2005, OPR was 
investigating only 36 cases involving OIC and practitioners. 

* An official with the Maryland OIC program told us that the state 
program has had no significant problems with offer mills or other 
practitioners in processing OIC applications there. Furthermore, a 
representative of the Federation of Tax Administrators, an organization 
of state tax officials, said that problems state OIC programs have with 
tax practitioners generally have more to do with consumer rights issues 
than with tax collection. 

* In fiscal year 2005, there were 972 offers with POAs that were 
returned as "solely to delay."This was about 1 percent of all cases 
closed in 2005. The effect of these cases on processing may have been 
small. IRS returned 83 percent of the offers deemed solely to delay 
that had POAs in 6 months or less. 

Anecdotal evidence also indicates that misconduct by offer mills may 
have harmed some taxpayers even though there was no effect on OIC 
processing. For example, the Connecticut Attorney General's Office 
investigated one company offering OIC preparation services because the 
company charged taxpayers for submitting offers but then did not send 
the offers to IRS. In 2005, the state of Missouri settled with a firm 
over deceptive advertising tactics and for failing to complete OIC 
services as promised. OIC processing was not adversely affected in 
these cases. The Taxpayer Advocate also told us about one case in which 
an offer mill charged such a large fee that the taxpayer ended up 
filing for bankruptcy, rather than compromising with IRS. 

IRS Has Implemented Procedures Designed to Reduce the Impact of Offer 
Mill Abuse: 

IRS officials said that current procedures reduce negative effects that 
offer mills might otherwise cause. For example, in 2004, IRS issued a 
consumer alert about abusive offer mills because of concerns about 
potentially deceptive advertising tactics used in the OIC preparation 
industry. The alert advises taxpayers to be wary of promoters making 
unrealistic claims about the OIC Program. According to the alert, "Some 
promoters are inappropriately advising indebted taxpayers to file an 
OIC application with the IRS. This bad advice costs taxpayers money and 
time." 

IRS also has given instructions to its OIC processing staff on 
identifying offer mills that might be violating IRS's rules for 
enrolled agents and on making referrals of potential violators to OPR. 
OIC process examiners and offer examiners sometimes work directly with 
taxpayers, rather than through offer mills. They do this because while 
taxpayers may be making good-faith efforts to pay what they can of 
their taxes by compromising, offer mills may not be making good-faith 
efforts to help the taxpayers. IRS officials also said that the $150 
OIC application fee discourages frivolous offers. 

IRS Notifies Taxpayers of Their Appeal Rights through Various Channels: 

IRS has established formal means to notify taxpayers of their appeal 
rights, including providing information about appeal rights on the 
offer application form and in the offer rejection letter that IRS sends 
taxpayers. In addition, IRS's Web site and some IRS publications 
contain information for taxpayers on rights and responsibilities in 
appealing rejected offers. 

The offer application package (Form 656) contains information on 
taxpayers' rights to appeal rejected offers. Under step 7 of the 
application process, "What to Expect after the IRS Receives Your 
Offer," is information on what a taxpayer can expect if IRS rejects an 
offer. Specifically, the application states that taxpayers will be sent 
a letter explaining why their offers were rejected and their right to 
submit an appeal. 

IRS's Web site also provides information on appealing rejected offers, 
including links to information about appeal rights and how IRS reviews 
appeals. The Web site's resources include Tax Topic 204, Offers in 
Compromise; the Collection Appeal Rights link; IRS Publication 5, Your 
Appeal Rights and How to Prepare a Protest If You Don't Agree; and a 
video clip on the offer process with information on how to appeal a 
rejected offer. 

The IRS AOIC database contains entries intended to document the sending 
of rejection letters, with information on how to appeal, to taxpayers. 
We tested the AOIC database to ascertain whether such entries were 
made. Our limited review did not indicate any problems in documenting 
whether rejection letters and appeals instructions were being sent as 
required. We did not contact taxpayers to determine whether they 
actually received the letters. 

The percentage of rejected offers that were appealed indicates that 
many taxpayers were aware of their appeal rights. The percentage of 
offers appealed ranged from 30 percent to 51 percent (see table 10). 

Table 10: Number and Percentage of Rejected Offers That Taxpayers 
Appealed, Fiscal Years 2000-2005: 

Fiscal year[A]: 2000; 
Number of offers rejected by OIC Program: 13,071; 
Number of rejected offers appealed by taxpayers: 3,976; 
Percentage of rejected offers appealed: 30; 
Number of offers accepted by Appeals function: 1,393. 

Fiscal year[A]: 2001; 
Number of offers rejected by OIC Program: 18,568; 
Number of rejected offers appealed by taxpayers: 6,819; 
Percentage of rejected offers appealed: 37; 
Number of offers accepted by Appeals function: 1,953. 

Fiscal year[A]: 2002; 
Number of offers rejected by OIC Program: 22,287; 
Number of rejected offers appealed by taxpayers: 8,129; 
Percentage of rejected offers appealed: 36; 
Number of offers accepted by Appeals function: 2,334. 

Fiscal year[A]: 2003; 
Number of offers rejected by OIC Program: 35,721; 
Number of rejected offers appealed by taxpayers: 15,376; 
Percentage of rejected offers appealed: 43; 
Number of offers accepted by Appeals function: 4,464. 

Fiscal year[A]: 2004; 
Number of offers rejected by OIC Program: 30,874; 
Number of rejected offers appealed by taxpayers: 15,888; 
Percentage of rejected offers appealed: 51; 
Number of offers accepted by Appeals function: 3,928. 

Fiscal year[A]: 2005; 
Number of offers rejected by OIC Program: 27,409; 
Number of rejected offers appealed by taxpayers: 10,224; 
Percentage of rejected offers appealed: 37; 
Number of offers accepted by Appeals function: 1,221. 

Source: GAO analysis of IRS's AOIC database. 

[A] Fiscal year in which the OIC Program rejected the offer. 

[End of table] 

ETA Regulations Are Consistent with Statute, but Hardship ETA and DATC 
Offers Are Not Meaningfully Distinct and Non-Hardship ETA Offers Are 
Rare: 

IRS's ETA regulations are consistent with the provisions of the 
Restructuring Act, which were broadly written. While IRS has annually 
accepted hundreds of offers based on ETA, non-hardship ETA offers 
accepted have been rare. However, hardship ETA offers are not 
meaningfully distinct from DATC offers. The lack of distinction between 
DATC and hardship ETA offers causes unnecessary program complexity and 
confusion for taxpayers and tax practitioners. 

Regulations on ETA Are Consistent with the Restructuring Act: 

IRS's ETA regulations are consistent with the changes made to the OIC 
provisions by the Restructuring Act. The law required IRS to develop 
guidelines for determining when an OIC is adequate and should be 
accepted to resolve a dispute.[Footnote 25] 

The OIC provisions in the Restructuring Act were written broadly and 
did not specify criteria for what constitutes an adequate offer or when 
an offer was appropriate for resolving a dispute. IRS and Treasury 
staff who drafted the regulations incorporated language from the 
Restructuring Act's conference report. According to the conference 
report, the existing OIC regulations should be expanded to permit IRS 
to consider factors beyond DATL or DATC in determining whether to 
accept a compromise. The conference report also stated that it was 
anticipated that IRS would take into account factors such as equity, 
hardship, and public policy where a compromise of an individual 
taxpayer's income tax liability would promote ETA. Although the term 
"effective tax administration" was not defined or addressed in the 
Restructuring Act, IRS sought to incorporate the conference report's 
ETA language into its regulations. The conference report also did not 
specifically define what was meant by effective tax administration. 

In addition to using the ETA language from the conference report, IRS's 
regulations created two categories of ETA offers--non-hardship, which 
includes offers granted for reasons of equity and public policy, and 
hardship, which are granted for cases in which full payment would cause 
financial strain for the taxpayer. 

IRS Has Accepted Hundreds of ETA Offers Annually since Fiscal Year 2001 
but Non-Hardship ETA Offers Are Rare: 

IRS accepted hundreds of ETA offers each fiscal year from 2001 to 2005. 
A small number of those acceptances were non-hardship ETA offers (see 
table 11). In fiscal year 2005, IRS accepted 467 offers on an ETA 
basis, with 30 being non-hardship ETA offers. 

Table 11: Number of Accepted Hardship ETA and Non-Hardship ETA Offers, 
Fiscal Years 2000-2005: 

Fiscal year: Hardship ETA offers accepted; 
2000: 177; 
2001: 479; 
2002: 466; 
2003: 498; 
2004: 428; 
2005: 437. 

Fiscal year: Non-hardship ETA offers accepted; 
2000: -; 
2001: -; 
2002: 
2003: -; 
2004: 1; 
2005: 30. 

Source: GAO analysis of IRS data. 

Note: IRS did not compile separate statistics on non-hardship ETA 
acceptances before 2004. 

[End of table] 

The low number of non-hardship ETA acceptances is consistent with IRS 
guidance, which says that IRS should accept non-hardship ETA offers 
only in rare instances. IRS officials said that non-hardship ETA 
acceptances should be infrequent to keep the OIC Program from becoming 
an insurer of last resort. For example, an IRS official said that IRS 
would be wary of compromising with a business that could afford to pay 
its taxes but whose payroll manager embezzled company funds if the 
company were negligent in monitoring the manager because compromising 
might lead other businesses to become less diligent in protecting 
against such losses. 

On the other hand, the Taxpayer Advocate has said that making non- 
hardship ETA acceptances difficult to accept may erode taxpayers' faith 
in the fairness of the income tax system. The Taxpayer Advocate and 
representatives of tax practitioner groups also have said that the low 
number of non-hardship ETA acceptances violates Congress's intent in 
passing the Restructuring Act, which was to make compromises easier for 
taxpayers to reach by expanding the basis on which compromises would be 
made. 

As already noted, the provisions of the Restructuring Act on offers are 
broadly written and IRS's ETA regulations are consistent with the 
Restructuring Act. The act did not define criteria for accepting 
offers. Consequently, whether the number of non-hardship ETA offers IRS 
accepted satisfied Congress's intent is not clear. 

No Meaningful Distinction Exists between Hardship ETA and DATC Offers: 

Although consistent with the law, regulations and guidance for 
reviewing hardship ETA offers are so similar to rules and guidance for 
determining acceptable DATC offers that the two types of offers are 
effectively indistinguishable from each other. For both types of 
offers, doubt exists that a taxpayer can afford to fully pay the tax 
liability owed. 

IRS differentiates ETA offers (both hardship and non-hardship) from 
DATC offers by comparing a taxpayer's equity in assets and future 
income with the taxpayer's tax liability (see fig. 4). If equity in 
assets and future income is less than or equal to tax liability, then 
IRS processes the offer as DATC. If the equity in assets and future 
income is greater than tax liability, then IRS processes the offer 
under ETA rules. IRS considers ETA only after it has determined DATC 
does not apply. According to IRS guidance, taxpayers are eligible for 
ETA offers only when they can "full pay" the liability out of their 
equity in assets and future income. 

Figure 4: How IRS Determines Whether an Offer Is Considered for DATC or 
ETA: 

If …: Equity in assets + future income <= tax liability; 
then: Taxpayer may be considered for DATC. 

If …: Equity in assets + future income > tax liability; 
then: Taxpayer may be considered for ETA. 

Sources: GAO analysis of IRS Internal Revenue Manual and Treasury 
regulations. 

[End of Figure] 

Once IRS determines that it will consider an offer as DATC or ETA, it 
calculates acceptable offer amounts following the procedure in figure 
5. 

Figure 5: Conceptual Process for Determining Offer Amounts: 

[See PDF for image] 

Sources: GAO analysis of IRS Internal Revenue Manual and Treasury 
regulations. 

[End of figure] 

Non-hardship ETA offers are distinguishable from DATC offers in IRS 
rules and guidance because the criteria used to evaluate non-hardship 
ETA do not overlap with DATC. However, allowable living expenses that 
reduce DATC offer amounts are similar to the criteria IRS uses to 
determine whether taxpayers qualify for hardship ETA offers, making the 
difference between these two types of offers unclear. For example, a 
taxpayer applying for a DATC offer with medical expenses would include 
the medical care costs in calculating an acceptable offer amount; 
however, the IRM also lists medical expenses as a factor that would 
lead to consideration for hardship ETA. 

Examples from IRS guidance and regulations do not add clarity to the 
distinction between an acceptable ETA hardship offer and an acceptable 
DATC offer. One example (see fig. 6) shows that taxpayers can qualify 
for ETA offers because of dependent care expenses; however, dependent 
care is also a factor that IRS considers as an allowable expense under 
DATC. Another example (see fig. 7) shows that taxpayers can qualify for 
a hardship ETA offer if fully paying their taxes would jeopardize their 
ability to pay basic living expenses; however, such expenses also 
comprise a group of factors that reduces a taxpayer's total income for 
determining the amount of an offer under DATC. 

Figure 6: Hardship ETA: Qualify Because of Dependent Care Expenses: 

The taxpayer has assets sufficient to satisfy the tax liability and 
provides full time care and assistance to a dependent child, who has a 
serious long-term illness. It is expected that the taxpayer will need 
to use the equity in assets to provide for adequate basic living 
expenses and medical care for the child. The taxpayers overall 
compliance history does not weigh against compromise. 

Source: IRS's ETA regulations. 

[End of figure] 

Figure 7: Hardship ETA: Qualify Because of Basic Living Expenses: 

The taxpayer is retired and his only income is from a pension. The 
taxpayer's only asset is a retirement account, and the funds in the 
account are sufficient to satisfy the liability. Liquidation of the 
retirement account would leave the taxpayer without an adequate means 
to provide for basic living expenses. The taxpayer's overall compliance 
history does not weigh against compromise. 

Source: IRS's ETA regulations. 

[End of figure] 

IRS officials said that although overlap exists between DATC and 
hardship ETA, taxpayers who qualify for hardship ETA today would not 
have qualified for DATC before the Restructuring Act because IRS did 
not have the authority to compromise when taxpayers' equity and income 
exceeded their tax liability. However, in light of the additional legal 
authority granted by the Restructuring Act that IRS acknowledges, the 
distinction IRS makes in its rules and guidance between current DATC 
and hardship ETA offers is not meaningful. Based on our review, only 
ETA cases accepted on non-hardship grounds are meaningfully distinct 
from DATC offers because the criteria for accepting them are different. 

ETA Rules Have Created Complexity and Confusion in the OIC Application 
Process, According to Tax Professionals: 

Instructions on applying for ETA also cause unnecessary program 
complexity, while ETA rules and regulations cause confusion among 
taxpayers and professionals, according to the Taxpayer Advocate, 
practitioner organizations, and individual tax professionals with whom 
we consulted. 

The OIC Program Manager said that it does not matter whether taxpayers 
check ETA, DATC, or DATL on their applications because each offer is 
evaluated for all three. Yet taxpayers still must check a box on the 
OIC application form (Form 656) indicating which type of offer they 
seek. Having to determine which box to check adds complexity to the 
process for taxpayers and tax practitioners. The choice among offer 
types also adds complexity for IRS, which determines which type of 
offer the taxpayer has made (i.e., DATC, DATL, or ETA). One 
professional tax practitioner told us that in filling out an OIC 
application for a client, she checked more than one box even though, 
according to IRS definitions, the types are mutually exclusive. 
Confusion and complexity may increase the burden for some taxpayers-- 
the time and costs needed to prepare an offer application. Furthermore, 
as was discussed earlier, the Taxpayer Advocate has said that confusion 
about offer requirements and program procedures may reduce the 
program's accessibility. 

Because of the wording of the instructions, taxpayers applying for 
hardship ETA also are faced with the paradoxical process of proving 
that they can pay the tax liability and then explaining in writing why 
they cannot afford to pay it. According to the definition in the 
instructions, ETA offers have no "doubt as to collectibility," but the 
instructions also say that the applicant must explain the circumstances 
that would justify an offer--circumstances equivalent to inability to 
pay. 

The National Association of Enrolled Agents said that IRS's ETA rules 
were complex and difficult to understand, and the American Institute of 
Certified Public Accountants has said that ETA regulations do not 
provide sufficient guidance for determining which OICs qualify as ETA 
offers. The Taxpayer Advocate and other professionals also have said 
that it is difficult to know what types of offers will qualify for ETA 
based on the ETA regulations and guidance. 

Partial Payment Proposal Raises Questions: 

Proposed legislation, originally introduced in the Senate,[Footnote 26] 
would require taxpayers to make a partial payment with their offer 
applications. Taxpayers seeking a lump-sum offer would be required to 
pay 20 percent of the amount of the offer as a nonrefundable down 
payment. The term "lump-sum offer" means any offer of payments made in 
five or fewer installments. Alternatively, a periodic payment offer 
would have to be accompanied by the payment of the amount of the first 
proposed installment. The new provision also gives the Secretary of the 
Treasury authority to issue regulations waiving any such payment. 
Finally, no user fee would be imposed on any offer accompanied by a 
payment. IRS would have 60 days from enactment to implement the 
changes. 

The legislative proposal that would require taxpayers to make a partial 
payment with their offer applications raises several questions for IRS. 
One is how the partial payment would apply in the case of repeat 
offers. For second and subsequent offers, would another partial payment 
be required? Is the payment nonrefundable for every disposition 
category? Should the rules for partial payments be consistent with the 
current rules for processing fees? Currently, if an offer fails to meet 
IRS's processability criteria, IRS returns the $150 processing fee to 
taxpayers along with their offer applications. 

Another question is whether the proposal might affect the program's 
accessibility. Would a partial payment requirement discourage eligible 
taxpayers from submitting offers? As discussed earlier, IRS does not 
monitor accessibility. Without a measure of accessibility, the impact 
of a partial payment on accessibility might not be easily determined. 

Another question is whether 60 days are enough time to implement the 
partial payment requirements. IRS officials stated that computer 
systems would require changes to accommodate the imposition of partial 
payments. We did not determine how long it would take IRS to make the 
changes. 

Conclusions: 

Because some delinquent taxpayers will always be unable to fully pay 
their tax debts, IRS's OIC Program is necessary to ensure that 
taxpayers pay what they can and have a "fresh start" toward complying 
with their future obligations. The performance of the program is 
important because factors like the timeliness of offer decisions can 
have a large impact on taxpayers in difficult financial straits and 
because the IRS resources devoted to the program are significant. 

Opportunities exist to make immediate improvements to the program and 
lower costs. First, staffing adjustments have not kept pace with 
declines in cases in recent years, resulting in lower productivity. 
Reducing staffing to increase productivity to its recent levels would 
lower program costs. Second, because the distinction between DATC and 
ETA hardship offers is not meaningful, the program is unnecessarily 
complex. Practitioners and others have complained about the resulting 
confusion and burden on taxpayers, which may discourage taxpayers from 
using the program. Costs to taxpayers and IRS could be reduced by 
eliminating the distinction. 

The success of the program also depends on how well IRS management 
understands the reasons for the program's performance. One step in 
understanding performance is measuring it. IRS's measurement of 
timeliness on an offer basis masks how long it takes to make a final 
decision for taxpayers to get their liabilities resolved. IRS's 
tracking of accessibility is also incomplete because it is not done 
relative to the size of the pool of potentially eligible taxpayers. 
IRS's tracking of the future compliance of program participants is also 
incomplete because it does not routinely measure compliance. 

Another step in understanding performance is setting goals. Numeric 
goals provide objective criteria for assessing performance. The numeric 
goals for OIC timeliness still are not based on an analytical 
assessment of taxpayer needs and other benefits, and the goals are set 
for each case rather than for taxpayers. 

A third step in understanding performance is analysis that determines 
the causes of performance. By understanding the causes of performance, 
IRS management can make better-informed decisions about how to improve 
performance. IRS's 2004 compliance study is an example--it led to the 
creation of the Hand-Off Unit. Because IRS has implemented several 
recent improvement initiatives, such as the Hand-Off Unit, additional 
analysis is necessary to understand their impact on compliance. 
Further, IRS has not analyzed other trends. IRS has not determined the 
causes of the large growth in repeat offers since 2000, despite their 
impact on timeliness from a taxpayer's perspective. In addition, IRS 
has not analyzed factors that affect trends in the OIC Program's 
accessibility. Without such an analysis, IRS will not know whether the 
declining OIC participation rate is an indication of a decrease in 
accessibility. 

Recommendations for Executive Action: 

We recommend that the Commissioner of Internal Revenue: 

1. Take the following steps to immediately improve the OIC Program: 

* 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 ETA and DATC in the 
application, instructions, and procedures to simplify the program. 

2. 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. 

3. Set processing timeliness goals for taxpayers that are based on an 
assessment of taxpayer needs and other benefits. 

4. 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. 

Matter for Congressional Consideration: 

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

Agency Comments and Our Evaluation: 

In his April 14, 2006, letter the Commissioner of Internal Revenue (see 
app. III) said that he partially agrees with our recommendations. IRS 
provided separate technical comments, which we incorporated into our 
report where appropriate. 

The Commissioner indicated that IRS believed that eliminating the 
distinction between economic hardship and doubt as to collectibility 
offers may not be the best approach but said that IRS is open to 
suggestions to clarify offer instructions and will consult with 
practitioner groups and the Taxpayer Advocate on whether more clarity 
is needed. The Commissioner said that the distinction is important 
because the Restructuring Act gave IRS additional authority to accept 
offers. The Commissioner further stated that the distinction has 
meaning for potential program participants. However, as we stated in 
the report, the regulations and guidance for reviewing hardship ETA 
offers are so similar to rules and guidance for determining acceptable 
DATC offers that the two types of offers are effectively 
indistinguishable from each other. IRS's examples of acceptable 
hardship ETA offers (see pp. 36 and 37 of this report), further 
illustrate that they are not meaningfully distinct from DATC offers 
because they demonstrate that there is doubt that such taxpayers could 
provide for their living expenses, which IRS authorizes for all offers, 
and pay their tax liabilities. This makes the offers in the examples 
similar to DATC offers. Considering this, the OIC Program could be 
simplified by eliminating the differences between hardship ETA and 
doubt as to collectibility offers. 

The Commissioner agreed with our recommendation that IRS adjust 
staffing levels to increase productivity and reduce cost. 

The Commissioner said that IRS does not agree that timeliness measured 
by taxpayer rather than by individual offer would be an effective 
measure of performance. IRS said that its existing timeliness measure 
by OIC case closure is sufficient, but it did agree to analyze the 
affect of repeat offers on timeliness. An analysis of the extent that 
timeliness could be improved, if at all, by reducing repeat offers 
could help program managers make decisions about whether program 
changes to improve timeliness would be justified. However, as the 
report states, it might be less costly for IRS to deal once with a 
taxpayer, even if it takes more time to work the single case, rather 
than have to process repeat offers. 

IRS agreed that it could do a better job of compiling information on 
OIC Program compliance and will explore methods for doing so. 

With respect to measuring accessibility, the Commissioner said that IRS 
is concerned about the perception that the OIC Program is less 
accessible than in the past. He said that IRS would use a customer 
satisfaction survey to gain insights into accessibility and might do 
additional research about barriers to entering the program. As we 
stated in the report, tracking accessibility could provide information 
about the effectiveness of efforts to reduce barriers to program 
participation for taxpayers wishing to make legitimate offers. 

With respect to setting timeliness goals for taxpayers based on an 
assessment of taxpayers' needs and other benefits, the Commissioner 
said that IRS's current timeliness goals are based in part on such 
considerations but also said that IRS would consider whether taxpayer 
feedback reveals additional taxpayer needs. However, as the report 
states, IRS was unable to provide any analytical support for its 6-and 
9-month processing goals. Furthermore, IRS does not set goals from the 
perspective of taxpayers. We continue to believe measuring timeliness 
from the perspective of taxpayers and setting goals based on taxpayer 
needs would inform IRS management of any gaps between actual timeliness 
and the goal of providing a better basis for making decisions about 
program improvements. 

The commissioner agreed to analyze the causes of the growth in repeat 
offers. 

He also agreed to study how repeat offers affect timeliness. 

As already noted, the Commissioner agreed to study accessibility using 
a customer satisfaction survey of taxpayers who participated in the OIC 
Program. While such a survey may be informative, its benefits may be 
limited because it does not question nonparticipants. As the report 
states, measuring access may require questioning taxpayers about why 
they did not participate in the program. 

The Commissioner agreed to study the effectiveness of the Hand-Off 
Unit. 

As agreed with your offices, unless you publicly release the contents 
earlier we plan no further distribution of this report until 30 days 
from its date. At that time, we will send copies to interested 
congressional committees, the Secretary of the Treasury, the 
Commissioner of Internal Revenue, and other interested parties. The 
report will also available at no charge on the GAO Web site at 
[Hyperlink, http://www.gao.gov].

If you or your staff have any questions about this report, please 
contact me at (202) 512-9110 or [Hyperlink, whitej@gao.gov]. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix IV. 

Signed by: 

James R. White: 
Director, Tax Issues: 
Strategic Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify recent trends in Offer in Compromise (OIC) Program 
performance, we analyzed information and program statistics in the 
Internal Revenue Service's (IRS) Automated OIC database (AOIC). 
Specifically, we developed independent statistical trend analyses for 
four of five key performance objectives--timeliness of case processing, 
quality, accessibility, and cost. We reviewed OIC Program data 
primarily from fiscal years 2000 through 2005. To determine how well 
IRS understands the reasons for the trends, we interviewed key 
officials in IRS's SB/SE Division responsible for collection policy and 
the OIC Program. We also reviewed available evaluations IRS had 
conducted in examining these trends. 

To develop trend information on the timeliness of case processing, we 
(1) separated offers disposed by the OIC Program from those disposed by 
the Appeals function (Appeals),[Footnote 27] and (2) identified the 
number of onetime and repeat offers and developed statistics on 
processing times for those offers. Some taxpayers make only one effort 
to compromise a tax liability. We call these offers onetime offers. 
Other taxpayers make multiple attempts to compromise a tax liability. 
We call the first of these attempts an initial offer and each 
subsequent attempt a repeat offer. To generate statistics on processing 
times for the various disposition types, we developed disposition 
categories by aggregating disposition categories from the AOIC 
database. For more information about how we developed repeat offers and 
disposition categories, see appendix II. 

To assess trends in the quality of the OIC Program, we collected 
information and interviewed IRS officials on the accuracy rates from 
IRS's embedded quality measurement system (EQMS) for the centralized 
processing centers. Field locations only recently implemented EQMS; 
consequently, we used accuracy rates from IRS's collection quality 
measurement system for the field locations. We compared the program's 
accuracy rates against accuracy goals to assess the extent to which IRS 
staff followed procedures and made appropriate decisions. We also 
compiled and analyzed data on offer decisions by Appeals from the AOIC 
database to determine trends by year. 

Regarding the OIC Program's accessibility, we compiled statistics on 
offer receipts and the dispositions of these receipts from the AOIC 
database. To develop information on the pool of potentially eligible 
taxpayers for the program, we obtained data on IRS taxpayer delinquent 
accounts. We interviewed IRS officials about the measures they used to 
determine accessibility and also interviewed representatives of tax 
practitioner organizations and the National Taxpayer Advocate of the 
Taxpayer Advocate Service for their views about the program's 
accessibility. 

To assess IRS's efforts to measure compliance, we reviewed IRS's 
reports on compliance by IRS's Office of Program Evaluation and Risk 
Assessment (OPERA). We used IRS policy statement P-5-100 and 
information on the OIC Program objectives from the Internal Revenue 
Manual as criteria for defining compliance, which the OIC Program 
Director generally confirmed. We also drew on our 2002 study[Footnote 
28] of IRS's OIC program, in which we recommended that IRS make plans 
to conduct evaluations of initiatives that affect the program's 
performance. To learn about possible alternatives for measuring 
compliance, we consulted an official with the Treasury Inspector 
General for Tax Administration to learn about its methods for studying 
compliance in one of its reports. We interviewed IRS officials who were 
knowledgeable about the Monitoring OIC (MOIC) Unit and with the OIC 
Hand-Off Unit to gather information about how post-OIC compliance was 
tracked. 

We developed data on the productivity of the OIC Program by obtaining 
information from IRS on the number of full-time equivalent staff 
working in the OIC Program and compared this to the number of case 
closures from the AOIC database. We also interviewed IRS officials 
regarding any IRS analysis on productivity and reasons for productivity 
trends. 

To estimate the extent of offer mills' participation in the OIC 
Program, we derived the number of offers designated solely to delay in 
the AOIC database that also were submitted with power of attorney 
forms. Also using the AOIC database, we measured how long IRS took to 
process those cases. We interviewed IRS officials with the OIC Program 
in Austin, Texas, and in Brookhaven, New York, and officials at the 
Office of Professional Responsibility (OPR), who investigate 
practitioner misconduct, in Washington, D.C. We also interviewed 
officials with OPERA about its work on abuse of the OIC Program. We 
reviewed reports on potential OIC abuse by IRS and internal IRS 
guidance on handling suspected cases of practitioner misconduct. We 
interviewed officials with the Federation of Tax Administrators (FTA), 
the state of Maryland OIC Program, and the Connecticut Attorney 
General's Office and compared their experiences with practitioner and 
offer mill misconduct with those cited by IRS officials. We selected 
FTA because its membership includes tax administration officials from 
states that have OIC programs. An FTA official referred us to the 
Maryland OIC Program. OPR cited the state of Connecticut's involvement 
with investigating offer mills during an interview. Finally, we 
conducted literature reviews for information about offer mills. 

To assess how well IRS ensures that taxpayers are provided the right to 
appeal rejected offers, we analyzed the AOIC database to determine 
whether these taxpayers were sent the rejection letter notifying them 
of their appeal right. We reviewed IRS publications containing 
information about taxpayers' rights to appeal rejected offers and 
searched the IRS Web site for similar information. We performed limited 
testing of the AOIC database to determine whether appropriate entries 
were being made that ensured that a computer-generated rejection letter 
with appeals information had been sent to each taxpayer whose offer was 
rejected from fiscal years 2000 to 2005. We did not contact taxpayers 
to determine whether they actually received the letters. We interviewed 
OIC Program officials about the offer appeals process and followed up 
with Appeals officials, including Appeals staff at the Brookhaven, New 
York, campus who review and process rejected offers. 

To determine whether IRS's regulations on effective tax administration 
(ETA) were consistent with the IRS Restructuring and Reform Act of 1998 
(Restructuring Act), we reviewed the Restructuring Act, its legislative 
history, OIC regulations that were in place before the Restructuring 
Act, and the regulations issued to address the Restructuring Act 
changes. We met with representatives of the IRS Chief Counsel's Office 
who were involved in drafting the new and revised regulations on ETA 
offers. In addition, we reviewed their project files to gather 
documentation on how the ETA regulations evolved. The files contain 
documentation, such as internal memorandums, early draft of the 
regulations circulated to internal stakeholders, and public comments 
received after the proposed regulations were issued. In addition, we 
compared IRS's internal guidance on ETA and doubt as to collectibility 
(DATC) and IRS's regulations on ETA to determine whether they were 
distinct. We discussed ETA and DATC procedures, guidance, and rules 
with OIC Program officials and staff in Austin, Texas and staff in 
IRS's centralized processing center in Brookhaven, New York, who 
processes offer applications. To gain perspective from some external 
OIC Program stakeholders on how IRS implemented ETA rules, we 
interviewed professional tax practitioners and representatives of the 
National Association of Enrolled Agents (NAEA) and the American 
Institute of Certified Public Accountants (AICPA). We selected NAEA and 
AICPA because they had previously testified or commented about IRS's 
OIC Program. We also conducted a literature review on ETA. 

To comment on the legislative proposal requiring partial payments with 
offer applications, we drew on the results of our work relating to 
repeat offers and trends in OIC Program performance. Our review was 
conducted in accordance with generally accepted government auditing 
standards from February 2005 through February 2006. 

[End of section] 

Appendix II: Scope and Methodology on Detailed Analysis of IRS's AOIC 
Database: 

To examine various measures of timeliness, quality, accessibility, and 
cost, we obtained a copy of portions of IRS's AOIC database as of 
September 30, 2005. The AOIC database contains processing information 
on offers submitted by taxpayers and related tax liability information 
since the OIC Program's inception to the current day.[Footnote 29] The 
AOIC database is a relational database, and we limited our analysis to 
selected tables relevant to our objectives. 

To ensure the reliability of the computer-based data provided to us, we 
conducted interviews with key agency personnel to ascertain the types 
of program edits and controls used to ensure the accuracy of data entry 
and data migration into the AOIC database from IRS's Master File. We 
also conducted various reliability analyses on data fields used in our 
analysis and reproduced reports prepared for program officials for 
their day-to-day management activities. We concluded that data in the 
AOIC database are sufficiently reliable for purposes of our engagement. 

We concentrated our OIC Program analyses in two main areas: (1) the 
length of time it takes IRS to process offers by type of offer 
disposition (for example, accepted or rejected dispositions) and (2) 
the number of times taxpayers "repeat" offer submissions when a prior 
submission is not accepted and the length of time this processing of 
multiple offers takes. We also developed statistics on offer program 
inventory levels, the amount and percentages of tax debt compromised, 
and the number of offers processed under ETA regulations. In addition, 
we identified the number of offers returned to taxpayers because IRS 
believed a principal reason for the offer submission was to delay 
collection activities, and we determined how many of these offers had 
been prepared by professional practitioners. In general, we reported 
statistics for the 6 most recent fiscal years beginning in fiscal year 
2000. 

Establishing GAO-Derived Dates and Disposition Codes: 

In examining reports IRS prepares from AOIC data, we determined IRS 
does not produce offer program statistics in a way that would allow us 
to answer our objectives. For example, IRS's analyses aggregates offer 
disposition statistics from both IRS's Collections function (i.e., the 
offer program) and its Appeals function. We wanted to separate these 
data in order to examine the OIC Program's performance. 

We separated offer processing time between the Collection and Appeals 
functions by examining available date fields in the AOIC database and 
creating our own starting and ending processing dates. For our 
Collections function start date, we used the earlier of the dates IRS 
received an offer from a taxpayer, the IRS Received Date, or the date 
the offer was initially entered into the AOIC database, the Area Office 
Opening Date.[Footnote 30] For our Collections function end date, we 
used the Area Office Closing Date except for rejected offers. For 
rejected offers, we checked to see if a rejection letter had been 
generated and the date on which this occurred. If this date was earlier 
than the Area Office Closing Date, then we used the rejection letter 
date.[Footnote 31] Offers that were still being processed in the 
Collections function are considered open offers and do not have ending 
dates. 

The Appeals function start date was also based on the earlier of two 
dates: (1) the date in the AOIC database, known as the Sent to Appeals 
Date, when it was present, or (2) our Collections function ending date 
plus 30 days when the Sent to Appeals date was not available or 
succeeded this date on offers known to have been appealed. The 
Collections ending date plus 30 days is the legal limit on the amount 
of time given a taxpayer to appeal a rejected offer.[Footnote 32] The 
Appeals function ending date was always the official Area Office 
Closing date. 

We also segregated offer disposition types between the Collection and 
Appeals functions. The AOIC database contains 10 disposition types, of 
which 3 represent Appeals function dispositions. Offers that are 
appealed by taxpayers remain open on the AOIC database pending Appeals 
function disposition decisions. We segregated the dispositions by 
creating five GAO-derived Collections function dispositions and three 
Appeals function dispositions. For example, we collapsed all of the 
offers contained in five of the program's disposition types, as well as 
certain offers still open on AOIC, into our "Rejected" offers 
disposition category. This showed the Collections function had rejected 
247,780 offers during the program's history. These offers were as 
follows: (1) the 25,054 offers accepted by IRS's Appeals function, (2) 
the 43,511 offers where the Appeals Function sustained the Collections 
function, (3) the 42,880 offers rejected by the Collections function 
without appeal rights, (4) the 116,787 offers rejected by the 
Collections function where the taxpayer did not exercise appeal rights, 
(5) the 7,955 offers withdrawn in Appeals, and (6) the 11,593 offers 
rejected by the Collections function but not yet closed on AOIC pending 
possible Appeals function activities. We combined all of these offers 
to demonstrate that the Collections function had rejected 247,780 
offers over the history of the OIC program. Tables 12 and 13 reflect 
this roll-up and compare other GAO-derived disposition types for the 
Collections and Appeals functions to IRS's disposition types. We have 
also included offers currently open in AOIC to balance offers between 
the two disposition sets. 

Table 12: GAO-Derived OIC Program Disposition Types: 

GAO disposition types and offers: Collections function. 

GAO disposition types and offers: 1. Not-processable; 
Number of offers: Collections function: 421,086; 
Related IRS disposition type: Collections function: IRS #7. 

GAO disposition types and offers: 2. Processable return; 
Number of offers: Collections function: 192,881; 
Related IRS disposition type: Collections function: IRS #10. 

GAO disposition types and offers: 3. Withdrawn/terminated; 
Number of offers: Collections function: 94,849;  
Related IRS disposition type: Collections function: IRS #6 and #8. 

GAO disposition types and offers: 4. Rejected; 
Number of offers: Collections function: 247,780;  
Related IRS disposition type: Collections function: IRS #2, #3, #4, #5, 
#9, and #A. 

GAO disposition types and offers: 5. Accepted; 
Number of offers: Collections function: 264,500; 
Related IRS disposition type: Collections function: IRS #1. 

GAO disposition types and offers: A. Open in Collections; 
Number of offers: Collections function: 18,500; 
Related IRS disposition type: Collections function: IRS #A. 

GAO disposition types and offers: Total on the AOIC database; 
Number of offers: Collections function: 1,239,596; 
Related IRS disposition type: Collections function: [Empty]. 

GAO disposition types and offers: Appeals function. 

GAO disposition types and offers: 1. Accepted by Appeals; 
Number of offers: Collections function: 25,054; 
Related IRS disposition type: Collections function: IRS #2. 

GAO disposition types and offers: 2. Reject sustained by Appeals; 
Number of offers: Collections function: 43,511;  
Related IRS disposition type: Collections function: IRS #3. 

GAO disposition types and offers: 3. Withdrawn in Appeals; 
Number of offers: Collections function: 7,955; 
Related IRS disposition type: Collections function: IRS #9. 

GAO disposition types and offers: A. Open in Appeals; 
Number of offers: Collections function: 7,417;  
Related IRS disposition type: Collections function: IRS #A. 

GAO disposition types and offers: Total on the AOIC database; 
Number of offers: Collections function: 83,937; 
Related IRS disposition type: Collections function: [Empty]. 

Source: GAO analysis of IRS's AOIC database. 

[End of table] 

Table 13: IRS OIC Program Disposition Types: 

IRS disposition types (or open offers): 1. Accepted; 
Number of offers: 264,500; 
Related GAO disposition type: Collections #5. 

IRS disposition types (or open offers): 2. Accepted by Appeals; 
Number of offers: 25,054; 
Related GAO disposition type: Collections #4, Appeals #1. 

IRS disposition types (or open offers): 3. Rejection sustained by 
Appeals; 
Number of offers: 43,511; 
Related GAO disposition type: Collections #4, Appeals #2. 

IRS disposition types (or open offers): 4. Rejected without appeal 
rights[A]; 
Number of offers: 42,880; 
Related GAO disposition type: Collections #4. 

IRS disposition types (or open offers): 5. Rejected taxpayer did not 
exercise appeal rights; 
Number of offers: 116,787; 
Related GAO disposition type: Collections #4. 

IRS disposition types (or open offers): 6. Withdrawn; 
Number of offers: 93,311; 
Related GAO disposition type: Collections #3. 

IRS disposition types (or open offers): 7. Returned not processable; 
Number of offers: 421,086; 
Related GAO disposition type: Collections #1. 

IRS disposition types (or open offers): 8. Termination of 
consideration; 
Number of offers: 1,538; 
Related GAO disposition type: Collections #3. 

IRS disposition types (or open offers): 9. Withdrawn in Appeals; 
Number of offers: 7,955; 
Related GAO disposition type: Collections #4 and Appeals #3. 

IRS disposition types (or open offers): 10. Processable return; 
Number of offers: 192,881; 
Related GAO disposition type: Collections #2. 

IRS disposition types (or open offers): A. Open on the AOIC 
database[B]; 
Number of offers: 30,093; 
Related GAO disposition type: Collections #4 and #A, Appeals #A. 

IRS disposition types (or open offers): Total on the AOIC database; 
Number of offers: 1,239,596; 
Related GAO disposition type: [Empty]. 

Source: GAO analysis of IRS's AOIC database. 

[A] No longer an available disposition category because all rejected 
offers may now be appealed. 

[B] Of the 30,093 offers open on the AOIC database as of September 30, 
2005, 18,500 were still being processed by the Collections function, 
while 11,593 had been rejected by the Collections function. Of the 
rejected offers, 7,417 had been appealed and were open in Appeals, and 
4,176 were awaiting a taxpayer's decision on whether to appeal. 

[End of table] 

Distinguishing between Multiple Offers Submitted by Taxpayers: 

Because many taxpayers submit more than one offer in an effort to 
compromise tax liabilities, and because IRS does not track multiple 
offers from the same taxpayer, we independently developed estimates of 
the average (1) number of offers taxpayers submitted on the same tax 
liability,[Footnote 33] (2) time it took IRS to process all of these 
offers, and (3) calendar time duration between the date the first in a 
series of offers was submitted and the date the last in the series was 
closed. In order to track these multiple offer submissions, we coined 
the term offer sets. Offer sets may contain one or many offers. We 
defined an offer set with only one offer as a onetime offer. For offer 
sets containing two or more offers, we defined the first offer in the 
set as an initial offer and the second and subsequent offers in the set 
as repeat offers. An offer set with two or more offers was also known 
as a repeat offer set. 

Our criteria for calling a subsequent offer a repeat offer depended on 
whether tax liability information was available for comparison between 
two offers. For cases where tax liability information for one or both 
of two chronological offer dispositions had not been migrated from 
IRS's Master File to the AOIC database, a common occurrence when offers 
were closed not processable, we set a 1-year time limit for designating 
the subsequent offer as a repeat offer. Where the tax liability 
information was available for two offers, we compared it to see if any 
one tax liability matched. If it did, we called the subsequent offer a 
repeat and the length of time between offer submissions did not matter. 
Finally, any time an offer that was part of a repeat offer set was 
accepted, we assumed that offer was the last offer in the offer set. 
Any subsequent attempt by a taxpayer to compromise the same tax 
liabilities started a new offer set. 

We believe a 1-year time limit is reasonable as a criterion for 
establishing repeat offers because most tax modules are 1 year in 
length corresponding with a taxpayer's annual filing requirement (for 
example, a tax module for an individual or corporate taxpayer would 
represent a calendar year period that they were required to file an 
income tax return). Taxpayers submitting offers must include all 
outstanding tax liabilities in the offer submissions, and we believe 
taxpayers who have not successfully compromised tax liability are not 
likely to have fully paid that tax liability and at the same time 
incurred a new tax liability, which they attempt to compromise within 
that 1-year period. 

The actual number of repeat offers and the average duration of time it 
takes taxpayers to compromise tax liabilities are estimates because (1) 
taxpayers continue to submit offers in the future for current tax 
liabilities for which prior offers were not accepted, (2) some 
taxpayers may fully pay outstanding tax liabilities then immediately 
incur new liabilities, and (3) some taxpayers filing jointly 
simultaneously attempt to compromise separate tax liabilities,[Footnote 
34] and it was not always possible to separately identify the two sets 
of offers. In the first situation, we underestimated the average time 
it takes to compromise tax liabilities when taxpayers extend that 
period by making future attempts to compromise their liabilities. In 
the second situation, we overestimated the number of repeat offers and 
the average time, but we believe such occurrences are rare. In the 
third situation, scenarios existed where we could have either 
underestimated or overestimated the actual number of repeat offers or 
the average duration times. On balance, we believe the first situation 
is the most common and that our estimates of the actual number of 
repeat offers and the average time duration are conservative. 

Generating Other OIC Program Statistics: 

We also used our GAO-derived dates and disposition types to develop 
additional statistics using the AOIC database. For example, when OIC 
Program staff believe one of the reasons a taxpayer submitted an offer 
was an attempt to delay the collections process, they will enter one of 
several codes designating the offer as such in the AOIC database and 
return the offer to the taxpayer. We analyzed AOIC data by these codes 
and determined how frequently offers were returned for each code, the 
percentages of all offers submitted that were solely to delay 
collection activities, and how many offers involved professional 
practitioners. We also determined how long it took the OIC Program to 
return solely to delay offers involving professional practitioners. 

In addition, we used the AOIC database to estimate how many ETA offers 
were processed over time. Before October 2005, IRS did not make a 
distinction between ETA offers on the AOIC database and offers accepted 
based on doubt as to collectability with special circumstances. These 
offers were commingled and categorized as offers where an alternative 
basis was used for compromise. However, an agency official told us that 
we could use all offers designated as alternative basis offers as a 
proxy for the number of ETA offers processed by IRS. The agency added a 
data field beginning in October 2005 to specifically track ETA offers. 

Furthermore, we calculated the Collections function's inventory levels 
for fiscal years 2000 through 2005. In addition, we used the tax 
liability and offer amount fields in the AOIC database to determine the 
percentage of tax debt compromised by IRS's Collection function. 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

Commissioner: 

April 14, 2006: 

Mr. James R. White: 
Director, Tax Issues: 
Strategic Issues Team: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. White: 

Thank you for the opportunity to respond to your draft report entitled, 
"IRS Offers In Compromise (OIC) - Performance Has Been Mixed; Better 
Management Information and Simplification Could Improve the Program," 
(GAO-06-525). 

I am pleased that your report acknowledges many of the improvements we 
have made in this important program. As you noted, the timeliness of 
determinations has improved even as the costs of the program have been 
significantly reduced. This reduction in costs has been primarily 
achieved by reducing the number of revenue officers dedicated to the 
program. Freeing up these revenue officers to return to core collection 
activities also has increased our enforcement presence in other areas, 
such as employment tax compliance and combating abusive tax avoidance 
transactions. 

The report also confirms that these advances in timeliness and 
efficiency have not come at the expense of quality. You note that both 
the field and campus offer in compromise operations have met their 
quality goals, and that the rate at which the Office of Appeals 
sustains collection decisions is further evidence that quality goals 
are being achieved. 

With respect to the audit recommendations, we are in partial agreement 
with each of the four recommendations. Many of your concerns mirror our 
own and, as a result, we already have efforts under way to address some 
of these concerns. Our comments on the draft report's specific 
recommendations are enclosed. 

If you have any questions, please call me or Kevin Brown, Commissioner, 
Small Business/Self-Employed Operating Division, at (202) 622-0600. 

Sincerely, 

Signed by: 

Mark W. Everson: 

Enclosure: 

Comments of the Internal Revenue Service on the GAO report entitled 
"IRS Offers In Compromise (OIC) - Performance Has Been Mixed; Better 
Management Information and Simplification Could Improve the Program" 
(GAO-06-525): 

Recommendation 1: 

Take the following steps to immediately improve the OIC program: 

* Eliminate the distinctions between hardship-ETA and DATC in the 
application, instructions, and procedures to simplify the program, and: 

* Adjust staffing levels to increase productivity and reduce cost per 
offer, unless IRS can demonstrate that case complexity has increased. 

Response: 

Although we understand the need to simplify the OIC program whenever 
possible, we believe that eliminating the distinction between economic 
hardship and doubt as to collectibility offers may not be the best 
approach. Nonetheless, we are open to the suggestion that the 
instructions in the Form 656 could be clarified in this area. As we 
prepare for the next revision of the form, we will consult with 
practitioner groups and the Taxpayer Advocate on this issue, and we 
will provide greater clarity. 

The distinction between these two types of offers is very important in 
terms of the additional compromise authority granted in the regulations 
promulgated after the IRS Restructuring and Reform Act of 1998. In our 
experience, the distinction also has meaning for many potential program 
participants. In a doubt as to collectibility situation, the liability 
could not be collected in full, even taking into account all of the 
taxpayer's income and assets. An economic hardship offer can be 
accepted when the tax liability at issue could be collected in full, 
but doing so would cause the taxpayer economic hardship. (Economic 
hardship is defined as the inability to pay reasonable basic living 
expenses.) Because of the economic hardship guidelines, thousands of 
taxpayers have had OICs accepted that would have been rejected prior to 
the regulations being amended. To the extent the delineation of these 
two types of offers in the instructions may alert some taxpayers that 
they are potential offer candidates-and may prompt them to better 
describe the economic hardship that would result from collection the 
distinction may be meaningful and helpful in some cases. 

We agree that staffing levels should be adjusted in response to 
changing program needs. As the GAO report confirms, we have made 
significant adjustments over the past several years. Full-time 
equivalents (FTEs) in the Centralized OIC sites have been reduced from 
380 in 2002 to 320 in 2005 and revenue officers dedicated to the 
program in the field have been reduced from 1,078 in April 2001 to 267 
in April 2006. We have moved cautiously in this area so as to minimize 
backlogs and gaps in activity, and to ensure that staffing reductions 
do not impact timely service. The IRS has been in negotiations with the 
National Treasury Employees Union (NTEU) and recently reached: 

an agreement that will return about 100 additional revenue officers to 
general program collection work. 

Recommendation 2: 

Develop meaningful measures of performance including: 

* A measure of processing timeliness for taxpayers; 

* A measure of compliance for all program participants; and: 

* A measure of accessibility that gauges ease of participating in the 
program. 

Response: 

We agree that meaningful measures of performance are an essential part 
of effective program management. As a result, we have in place a 
comprehensive suite of operational measures to gauge the progress and 
effectiveness of the program. The three main OIC program objectives are 
timeliness, quality, and efficiency, and we are confident that our 
existing measures provide the necessary information to assess our 
performance in each of these areas. We measure and report on the 
timeliness of OIC case closures by tracking the number of months it 
takes to close each individual OIC case. We measure the quality of 
casework using the embedded quality system. The draft report 
acknowledged that the program is meeting its quality goals. The 
efficiency of the program is measured by both the number of hours taken 
to close a case and the number of field closures per direct staff year. 
Consequently, we are not inclined to adopt additional measures at this 
time. 

Based on our experience with the OIC program, we do not agree that 
timeliness measured by taxpayer rather than by individual offer would 
be an effective measure of performance. Nonetheless, we do agree that 
"repeat offers" is an area worthy of additional review, and we have 
already taken steps to address this issue. By making changes to our 
processes for requesting additional information from taxpayers, we have 
significantly reduced the number of offers returned to taxpayers for 
failure to provide requested information. We believe this reduction in 
returned offers will help reduce the number of repeat offers because a 
higher percentage of cases will be worked to a final decision. We also 
plan to ask the Office of Program Evaluation and Risk Assessment 
(OPERA) to undertake a small study of repeat offers to get a better 
sense of whether we need to make additional changes to the program. 

We agree that the IRS can do a better job of compiling information 
regarding compliance during the five year monitoring period following 
acceptance of an offer. Future compliance is an important potential 
benefit of the program. We will explore methods for gathering reliable 
post-acceptance compliance information. We also acknowledge that we 
have not historically tracked compliance by other program participants. 
We have begun to gather data on taxpayer behavior following rejection 
through the handoff unit referenced in Recommendation 4. 

We are concerned about the perception that the offer in compromise 
program is less accessible than in the past. We expect that the 
customer satisfaction survey we are currently conducting will give us 
some insights into the ease or difficulty of navigating the offer 
process. Depending on those results, we may ask OPERA to do some 
additional research and analysis on accessibility. We also will engage 
practitioner groups in discussions of this issue to determine perceived 
barriers to entering the program and how those barriers might be 
overcome. 

Recommendation 3: 

Set processing timeliness goals for taxpayers that are based on an 
assessment of taxpayer needs and other benefits. 

Response: 

We agree that taxpayer needs and other benefits should be taken into 
account when setting program goals, including goals related to 
timeliness. Our current processing timeliness goals are based in part 
on such considerations. Taxpayer and practitioner feedback consistently 
reveals a need for a quality determination, effective communication, 
and a resolution at the earliest possible time. Our current timeliness 
goals were established taking into account these needs, the complexity 
of cases, and certain legal requirements which tend to have an impact 
on processing time. We are currently conducting a customer satisfaction 
survey of taxpayers who participated in the OIC program and will 
consider whether feedback from that survey reveals additional taxpayer 
needs that should be taken into account it setting timeliness goals. 

Recommendation 4: 

Conduct analyses of the reasons for performance trends in order to: 

* Determine causes of the growth in repeat offers; 

* Determine how repeat offers affect timeliness 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 handoff unit. 

Response: 

We agree that an increase in the number of repeat offers could 
potentially be a sign of breakdowns in the process. We have shared the 
GAO analysis with our research department and hope to validate those 
findings in the near future. As referenced in our response to 
Recommendation 2, we have already taken several steps that we believe 
will reduce the number of repeat offers in the future. In particular, 
we recently revised our procedures for requesting missing information 
or documents from taxpayers. The IRS will now initiate an additional 
taxpayer contact to secure missing information before an OIC is 
returned. We have also clarified the steps that must be taken before an 
OIC will be returned for failure to make estimated tax payments. As 
noted earlier, we also intend to review a representative sample of 
repeat offers in order to determine whether other changes are 
appropriate. We will use this sample to analyze the effect, if any, of 
repeat offers on timeliness. 

As your report noted, a decrease in taxpayer participation in a program 
does not necessarily indicate that the program is less accessible. We 
have continued to improve our forms and instructions to better inform 
taxpayers of program requirements and expectations, and believe that 
some reduction in offers is attributable to taxpayers making a more 
informed decision as to whether the compromise program is right for 
them. We hope that our customer satisfaction survey will provide data 
regarding any difficulties taxpayers face in participating in the 
program so that appropriate changes in procedures can be made. 

We agree that it is important for the IRS to determine the 
effectiveness of the hand-off unit. We will continue the operational 
review process now in place and reach a decision about whether the unit 
is effective and should be made permanent. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White (202) 512-9110 or whitej@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Charlie Daniel, Assistant 
Director; Evan Gilman; Eric Gorman; Shirley Jones; Susan Mak; Michael 
Rose; Samuel Scrutchins; and Jennifer Li Wong made key contributions to 
this report. 

(450379): 

FOOTNOTES 

[1] GAO, Tax Administration: IRS Should Evaluate the Changes to Its 
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15, 
2002). 

[2] Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998). 

[3] This provision is being considered with H.R. 4297, which has been 
passed by both the House and the Senate and was in conference as of 
April 6, 2006. Although not included in the original House bill, the 
Senate-passed version of H.R. 4297 incorporated certain additional 
provisions that were originally included in S. 2020, including this 
provision related to deposits for offers. 

[4] This refers to IRS policy statement P-5-100. 

[5] An FTE generally consists of one or more employed individuals who 
collectively complete 2,080 hours work in a given year. Therefore, one 
full-time employee or two half-time employees equal one FTE. 

[6] Department of the Treasury, Internal Revenue Service SB/SE Payment 
Compliance and Office of Program Evaluation and Risk Analysis, IRS 
Offers in Compromise Program: Analysis of Various Aspects of the OIC 
Program (Washington, D.C.: September 2004). 

[7] IRS's collection actions can include notices demanding payment; 
liens (legal claims filed against a taxpayer's property as security or 
payment for the tax debt); and levies (legal seizures of taxpayers' 
assets to satisfy tax debts). However, a Notice of Federal Tax Lien may 
be filed at any time while the offer is being considered if IRS 
determines that the collection of the liability is in jeopardy. 

[8] Except offers based on DATL. 

[9] Trust fund recovery penalties are assessed against taxpayers 
because they withheld taxes from others but did not make a timely 
federal tax deposit or payment in that amount. Trust fund taxes are 
withheld income and employment taxes, including Social Security taxes, 
railroad retirement taxes, and collected excise taxes. 

[10] The $150 application fee is waived if (1) the offer is submitted 
based solely on "doubt as to liability" or (2) the taxpayer's total 
monthly income falls at or below income levels based on the Department 
of Health and Human Services' poverty guidelines. 

[11] Taxpayers are required to have filed and paid any required 
employment tax returns on time for the two quarters prior to filing the 
OIC, and must be current with deposits for the quarter in which the OIC 
was submitted. 

[12] Some taxpayers may submit more than one repeat offer in the same 
year. For example, a taxpayer could have submitted a fourth offer in 
early 2005 and a fifth offer in late 2005. Offers submitted in fiscal 
year 2005 may also have preceding offers submitted in earlier years. 

[13] Our analysis of timeliness indicates that one initiative to reduce 
costs by increasing timeliness, IRS's upfront screening for 
processability, is working as intended. In fiscal year 2005, 75 percent 
of initial offers were not processable and were sent back to taxpayers 
on average in 10 days. 

[14] GAO, Tax Administration: IRS Should Evaluate the Changes to Its 
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15, 
2002), and Tax Administration: IRS Needs to Further Refine Its Tax 
Filing Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 
22, 2003). 

[15] In the SB/SE Collection/Appeals Joint Program Review, October 18 
through 22, 2004, IRS reviewed a random sample of 113 cases that had 
been rejected by COICs and accepted by Appeals in July and August 2004. 

[16] Delinquent taxpayer accounts in fiscal year 2001 were 5.4 million; 
in 2002, 5.7 million; and in 2003, 6.2 million. Data were not available 
for 2005. 

[17] Other measures of participation could be constructed. For example, 
the dollar amount of tax liability compromised could be compared to the 
dollar amount of aggregate delinquent tax debt. 

[18] Department of the Treasury, Internal Revenue Service SB/SE Payment 
Compliance and Office of Program Evaluation and Risk Analysis. 

[19] Although OPERA collected compliance data on business taxpayers, 
the IRS study cautioned that the business data were not reliable for an 
analysis similar to the individual master file data analysis because 
researchers did not verify the continued operation of businesses that 
had interacted with the program. 

[20] See GAO, Executive Guide: Effectively Implementing the Government 
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 
1996), 23, and GAO-03-143, 45. 

[21] GAO-02-311, 37. 

[22] Enrolled agents are tax professionals, such as certified public 
accountants and attorneys, who are permitted by IRS to act on 
taxpayers' behalf in tax matters and are subject to Circular 230, IRS's 
rules of conduct for tax professionals. 

[23] Department of the Treasury, Internal Revenue Service SB/SE Payment 
Compliance and Office of Program Evaluation and Risk Analysis. 

[24] IRS describes potential abuse as a situation in which taxpayers 
have submitted four or more churns. A churn is an offer for which (1) 
at least one prior offer was received for the Taxpayer Identification 
Number, (2) the final disposition letter mail date for at least one of 
the prior offers was within 180 days of the new offer's date, and (3) 
the final disposition for at least one of the prior offers for which 
the mail date was within 180 days was returned processable, returned 
not processable, or rejected. 

[25] Section 3462 of the Restructuring Act also required the Secretary 
of the Treasury to develop national and local allowances for basic 
living expenses, create special rules for the treatment of offers, and 
establish procedures for administrative review of rejected offers. 

[26] This provision is being considered with H.R. 4297, which has been 
passed by both the House and the Senate and was in conference as of 
April 6, 2006. Although not included in the original House bill, the 
Senate-passed version of H.R. 4297 incorporated certain additional 
provisions that were originally included in S. 2020, including this 
provision related to deposits for offers. 

[27] All offers disposed by the Appeals were rejected by the OIC 
Program. We identified all of these as offers rejected by the offer 
program and created new disposition dates based on the rejection date 
for these offers. 

[28] GAO, Tax Administration: IRS Should Evaluate the Changes to Its 
Offer in Compromise Program, GAO-02-311 (Washington, D.C.: Mar. 15, 
2002). 

[29] As of the end of fiscal year 2005, the AOIC database contained 
1,239,596 offers, of which 18,500 were still being processed in the 
Collections function at the end of the fiscal year. Five offers were 
closed on Saturday, October 1, 2005, before our copy of the database 
was downloaded to disk. We assume these offers were closed on September 
30, 2005, for purposes of our statistics. A total of 4,399 offers had 
been removed before these counts to prevent duplication because they 
represented transfers from one area office to another prior to 
centralization of the AOIC. 

[30] The IRS Received Date was used 99.88 percent of the time, and the 
Area Office Opening Date was used 0.12 percent of the time. There were 
10 instances where the GAO-derived Collections function ending date 
preceded the available starting dates. In these instances, the starting 
date was made the same as the ending date. 

[31] The Area Office Closing Date was used 92.77 percent of the time. A 
rejection letter date was used the remaining 7.23 percent of the time. 

[32] The GAO-derived Collections function ending date plus 30 days was 
used 81.30 percent of the time, and the Sent-to-Appeals date was used 
18.70 percent of the time. The database contained 83,937 rejected 
offers sent to Appeals, of which 76,520 had been closed by Appeals by 
the end of fiscal year 2005. 

[33] Individuals and businesses may have more than one tax liability. A 
tax liability is defined as the tax debt a taxpayer owes on any 
particular type of tax for any particular tax period. For example, a 
corporation might owe taxes on annual income for 1 or more years, or 
tax periods. At the same time, the corporation might also owe 
employment taxes on one or several quarterly tax periods. Each of these 
types of taxes and tax periods are separate tax liabilities. When a 
taxpayer submits an offer application, all outstanding tax liabilities 
should be included. 

[34] This can occur, for example, when an individual taxpayer incurs 
tax liabilities, then marries and incurs additional tax liabilities 
with a spouse. The taxpayer is separately liable for the tax 
liabilities incurred before the marriage, but jointly liable with the 
spouse for the tax liabilities incurred during the marriage. In these 
instances, separate offers are required. 

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