Accountant Criticizes OIC System and Proposed User Fees

From: postoffice@www.qai.irs.gov

1) The use of the definition of current taxes as used in the O/C Program is not clear. Therefore, in my opinion, it is not utilized effectively.

[2] I handle many Offer-in-Compromises (Offer) and see taxpayers throughout the year regarding such. They come to me because they want to comply with the IRS rules. They usually owe many years worth of back taxes and have not paid current estimated taxes. I hear it all the time, I want to get my life back in order.

[3] The problem is that there is no incentive for the taxpayer to submit an Offer beyond the first quarter of the year. As it stands today, as you may know, before the IRS can even review an Offer, current estimated taxes must be paid in the year the taxpayer submits the Offer from January 1 of the current year through the date of submission. The IRM 5.8.3.4 states otherwise, but that is how the O/C Program is working. All Offers are returned if estimated taxes calculated are not paid before the submission. The IRS currently uses current taxes to mean current estimated taxes before the submission of the taxpayer's Offer, plus, current estimated taxes after the submission of the Offer. If the taxpayer comes to me after May 1st, they usually cannot pay their January 1st to April 30th current estimated taxes. In prior years, only current tax returns had to be filed. Regardless, the requirement that current taxes (as defined by the IRS) be paid for the current year before an Offer can be accepted may sound reasonable; unfortunately, the application of this requirement does not work and, I believe, undermines the O/C process.

[4] For example, if a taxpayer comes to me in August, there is no incentive for him to submit an Offer until January of the following year. There is no incentive for him to pay his current estimated taxes from August through December. Instead, there is an incentive to put the Offer on the back burner. That is a sad situation.

[5] Let me give another example of why the use of the current tax definition undermines the O/C process. Currently, I have a taxpayer willing to pay $3,000 a month in estimated taxes; but, because there is no incentive to do so until January 1st, he does not pay it. Who knows if he will have the $3,000 a month to pay to the IRS in January when it is time to submit the Offer. You and I both know it is unlikely. It is a wasted opportunity for other compliant taxpayers who could have kept their money and the IRS who could have had this taxpayer's money.

[6] I look at it almost like going to a convenience store to buy a product. Without question, taxes are not a convenience good; however, while standing in line at the register, you may see a product you want so you buy it. If the opportunity to purchase a product is there, the product will most likely be purchased. The taxpayer takes the opportunity as it arises and I think the IRS should too.

[7] I propose the solution for this problem is to require the person submitting the Offer to pay current estimated taxes from the day they submit the Offer. Taxes are technically due quarterly. The actual Form 1040 tax return is obviously only due annually. There should be some way to calculate the X amount of dollars of actual taxes due after the Offer is accepted for that period from the day the Offer was submitted to the end of the year (pre-calculated tax amount). A taxpayer should be required to pay that balance within 60 days. If the taxpayer does not pay that balance in 60 days, the Offer should be voided just as with any tax due that is not paid after the Offer is accepted. If there is an overpayment on the pre-calculated tax amount, it can then be applied towards the settlement amount in the taxpayer's accepted Offer.

[8] In essence, this solution would change how the IRS uses the definition of current taxes in the O/C Program. It would provide the taxpayers the incentive to submit Offers throughout the year versus overwhelming the personnel in the IRS O/C Program in January and under utilizing them later in the year when there are less Offers submitted. In addition, not only is the taxpayer willing to pay the IRS, but the IRS will have the taxpayer's financial information sooner. That means that if the taxpayer does not pay the Offer, in other words, continues to hide from the IRS, then the IRS has the taxpayer's information to enforce collection.

[9] I view it as a business decision. Let's say I had a client who owed me $10,000 and he gives me a choice to either accept $8,000 today or sue, and maybe I will get the $10,000 later. What would I do if I feel the $8,000 is reasonable? I would take the $8,000 and move on. I would not do the two ineffective steps the IRS is doing: 1) waiting to maybe find the person later, and 2) become so caught up with getting the last reasonable penny, it costs me more than it is worth.

2) Unreasonable use of the National Standards.

[10] The O/C Program currently uses the U.S. Department of Labor, Bureau of Labor Statistics, April 2002, Consumer Expenditures in 2000 data (BLS data) which is over two years old. This data should be adjusted to provide for inflation. This should be as simple as changing the IRM to provide for adjusting the BLS data for the Cost of Living Adjustment. Even the Social Security Administration recognizes inflation. Additionally, the IRM that the IRS uses excludes actual cost from the BLS data for household operations and household furnishings and equipment. The IRS does allow for the BLS data to include housekeeping supplies but that is different from the latter. The calculation for an Offer settlement amount is based upon how much monthly income the taxpayer has over the IRS allowable expenses. According to the IRM, all, not some, reasonable and necessary expenses for the health and welfare of the client or for the taxpayer's production of income should be allowed. However, by excluding those former BSL figures and not indexing, the IRS is not following IRM 5.15.1.3.1A which states that reasonable, necessary expenses are always allowed.

3) The role of the National Taxpayer Advocate Office (NTA) with respect to the IRS appears to be in conflict with its role as the advocate for the taxpayer.

[11] An excerpt from the document, IRS Oversight Board, September 2002, Oversight of the Office of the Taxpayer Advocate: Principal Findings and Actions, reads:

[12] In summary, she [Nina Olson] believes that too much authority to act directly to solve taxpayers problems, at least in cases of systemic hardship, is inconsistent with the independence and impartiality of a true advocate and also undermines routine accounts management processes throughout the IRS. An especially critical point that she makes, and the Board accepts, is that even though the NTA works for the American public and serves taxpayers, the job of the Taxpayer Advocate Service (TAS) is not automatically to side with individuals who complain against the IRS:.

[13] Her opinion and the Board's concurrence are of a concern to me. The statement implies that in reviewing equally-made arguments by the taxpayer and the IRS regarding a particular subject, Ms. Olson's actual duty is not to side with the taxpayer but, rather, consider taking the IRS position arbitrarily even though the IRS has its own staff of people fighting for them. It appears to me that when there is not a clear, compelling argument from either side, the taxpayer advocate should take the side of the taxpayer. I am concerned about what the taxpayer advocate would do in an actual situation. In the following section below, please see an actual situation regarding IRM 5.8.4.2 #4. Who would the taxpayer advocate side with my client or the IRS?

4) IRS improper determination of a reasonable request in accordance with Internal Revenue Manual (IRM) 5.8.4.2. #4.

[14] Memphis, Texas is one of two new locations processing Offers. In my opinion, that office is being extremely unreasonable in not complying with the IRM stated above. Once the Memphis office starts processing an Offer, they give the taxpayer only 15 days to respond with additional information. Many times, we do not receive their letter requesting additional information until 5 of the 15 days are left before we must respond to the Memphis office.

[15] I recently called the Memphis office, 866-790-7117, regarding a current client, and was told by the IRS agent, Ms. Brown ID #49-09414, that we do not give additional time to respond. When I asked to speak to her supervisor, she said he was not available. When I asked to speak to that person's supervisor, the person who came to the phone was her supervisor whom I had initially asked for. His name is Glenn Carter. Mr. Carter said, we do not give additional time. Why don't you just resubmit a new Offer later? His comment is appalling. He wants the taxpayer to resubmit the Offer and have the IRS go through their normal procedures again, just because they don't won't) give additional, reasonable time to respond. The implication of that statement gives the appearance that the Memphis office is handling a large volume of Offers when two or more offers may, in reality, only be one. It seems to me that the Memphis office is trying to pad their statistics. I then asked Mr. Carter for his supervisor. Mr. Carter was very rude and did not let me finish my sentence. Thirty minutes later, his supervisor, Elizabeth English, did call me. She agreed with her personnel that additional time should not be given. To support her position, she read from an excerpt from IRM 5.8.4.2, included in a document from the National office, and she quoted:

[16] Throughout the investigation, follow-up actions are required within 15 days. I pointed out to her that in the same IRM 5.8.4.2, Item #4 also states, Reasonable requests for additional time to provide requested information that are initiated by the taxpayer or authorized representative should be granted. She immediately granted me an additional 5 days and assured me she would point out this rule to the personnel below her. Being concerned that this is a systemic problem, upon the close of my extended due date to respond, I called the Memphis office again. Ms. Johnson, ID #49-04244, stated, we do not give additional time. I spoke to Mr. Carter again who continued to be rude and slammed the phone down on me. I then called back and placed a conference call to Mr. Carter with the Washington's Taxpayer Advocate Office on the phone just so I could get Elizabeth English to call me back.

[17] Currently, I have resolved the problem as it relates to that particular taxpayer's additional time, but I am concerned that Offer submitted by my taxpayer will not be properly handled. I am also concerned that the IRS position of not allowing additional time to respond will continue to be a problem with other taxpayers who come to me for assistance with Offers.

[18] I did contact Darlene Caputo at the Taxpayer Advocate office, 901-395-1967. She was wonderful and went as high as she could go. She spoke to Nancy Hale, legal counsel. Ms. Hale explained the definition of reasonable request for additional time, and I am paraphrasing, that reasonable is determined by the IRS and since the IRS records indicate the taxpayer had 15 days to provide additional information, Elizabeth English's department can consider all requests as unreasonable in their determination.

[19] I reiterate my concern that this is a systemic problem. I believe Nina Olson has the duty as an advocate for the taxpayer to side with the taxpayer in the instance where equal weight can be given to both the IRS and the taxpayer's arguments.

[20] The Offer process takes an unreasonable amount of time because, in my opinion, the IRS is unreasonable in its expectations. Additionally, the IRS uses the word reasonable to mean anything they want and not how the average person would use the word reasonable. The O/C Program should be as much a business decision as a tax compliance issue. As a taxpayer, I, for one, would want the government to have more money now and not maybe later. In addition, I wish the Taxpayer Advocate Service had more power like it did in the past whey they were able to tell the IRS what to do rather than to only request them to do a particular task.

[21] In conclusion, I have been in business for 20 years, but I have never felt the IRS was abusive. I believed they were under- funded and there might have been an individual being abusive here or there; however, I am actually starting to feel, based upon five or six other incidences just this year, that the IRS is, in fact, becoming abusive. I do not like that feeling.

[22] I welcome the opportunity to further discuss any of these issues.