IRS changes offer in compromise program.

Recently, the IRS made significant changes in its procedures for offers in compromise of a tax debt. A revised policy statement, new Internal Revenue Manual procedures and simplified forms all signal a move toward more frequent use of the offer in compromise as a viable alternative in resolving the collection of tax liabilities. The Service sees these changes as evidence of how "Compliance 2000" can be used to achieve a more easily administered system that takes into account the unique problems that may lead a taxpayer to noncompliance.

It is an accepted business practice to resolve collection and liability issues through compromise. Compromises have been provided for in the Code at least as far back as 1906. But for too long, cumbersome and lengthy procedures have frustrated taxpayers and hampered the IRS's use of this collection tool. Each year the Service receives an average of 8,000 offers in compromise requests from taxpayers and accepts about 2,000. Over the past three years, total tax debts on these offers averaged $171 million a year. Some rejected offers would have provided the Government with more money than what was eventually collected. Traditional IRS approaches, such as reporting accounts as currently not collectible or entering into extended installment agreements, have not always proven to be the most effective way of bringing taxpayers into compliance with the tax laws. In reporting cases as currently not collectible, the Service has taken the view that because of the 10-year statute, the Federal tax lien and offset authority, there is always a possibility that some payment may be received. Far too often, however, this simply does not happen. Sometimes, the Service enters into installment agreements that require payments over extraordinarily long periods of time. In many cases, the taxpayer is not paying enough to cover the accruals and will never satisfy the liability.

These concerns and others (such as delays in the decision process) triggered the revisions to the offer in compromise program and the revised policy statement regarding offers. The new policy statement clearly states that the Service will accept an offer if the amount offered reasonably reflects collection potential. The new policy confirms positively that offers in compromise are a useful collection tool and a practical alternative to a prolonged installment agreement. Offers conform to the IRS goal of achieving collection at the earliest possible time and at the least cost to the Government. The policy states that the ultimate goal is a compromise that is in the best interest of both the taxpayer and the Government. To further encourage IRS employees to implement the new policy in both its spirit and intent, new offer in compromise training materials are now available in each district office. Also, each field Collection employee has received a copy of the memorandum from the National Office explaining the goals for the new offers program.

Practitioners have been actively involved in the revisions to the offers program, resulting in a more accessible and understandable program for everyone. Significant changes include:

* The delegation of authority to accept offers has been expanded to include chief, collection field branch and chief, special procedures function if the unpaid liability (including accruals) is $100,000 or less. The chief, collection division has the authority to accept offers in excess of $100,000.

* Form 433-A, Collection Information Statement for Individuals, and Form 433-B, Collection Information Statement for Businesses, which are shorter and easier to complete, replace the extensive Form 433.

* There is a decreased emphasis on collateral agreements. Collateral agreements will remain a useful tool in the appropriate cases, but will not be required with all offers.

* IRS investigation and acceptance report requirements have been simplified.

Practitioners should give new thought to recommending an offer in compromise proposal to the IRS if their clients cannot pay the tax liability in full or through a realistic payment agreement. The amount of the offer should at least equal or exceed a client's equity in assets. When reviewing an offer, the Service will consider the following four factors.

1. The amount collectible from the taxpayer's assets.

2. The amount collectible from the taxpayer's present and future income. (Here the Service will consider the present value of money in relation to future collection potential. In other words, by accepting the offer now, the Service will get money that is worth more today than in the future; e.g., collection of $1,000 today is equal to almost $1,500, present value, collected five years from now.)

3. The amount collectible from third parties (e.g., 100% penalty and transferee liability).

4. The amount the taxpayer should reasonably be expected to raise from assets available to him but beyond the reach of the Government.

When preparing an offer for a client, the practitioner should attach a statement to Form 656, Offer in Compromise, describing in detail why he believes the Service cannot collect more than the offer from his client's assets and present and future income. It is important to take into consideration that the Service generally has 10 years to collect a taxpayer's liability. The financial statement, Form 433-A or 433-B, should also accompany From 656. Other financial statements will be accepted if they conform to Form 433-A or -B and are signed under penalties of perjury. The instructions to the new Form 656 have been written to conform to the new policy and are easier to understand than the old set of instructions. The section entitled "Practical Consideration" is particularly useful in reviewing an offer proposal; it lists the questions IRS employees must ask themselves when considering the offer.

It is important to note that taxpayers must agree to comply with all tax filing and payment requirements for five years after an offer in compromise is accepted. This provision is included in Section(4) of Form 656. If the taxpayer does not abide by all the terms of the offer, the Service may reinstate the entire tax liability.

If a client submitted an offer before the new policy was announced, his tax adviser should contact the revenue officer involved in the case and request a review under the new offer in compromise procedures.

Offers in compromise are hardly the first option anyone would choose. But they are a viable alternative in a bad situation, and they give taxpayers the chance to move beyond their tax problems and get a fresh start. It makes good business sense to adopt this approach, which seeks to improve voluntary compliance in the long term. The new offer in compromise program is not a giveaway program or a cure for the accounts receivable inventory. Last year, accepted offers reduced the accounts receivable inventory by about $140 million, which was typical of recent IRS history. The new offer in compromise procedures represent an effort to respond to the realities of taxpayers' circumstances and needs with prompt and reasonable decisions.

BOB WENZEL Assistant Commissioner (Collection) Internal Revenue Service Washington, D.C.