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Offer In Compromise Problem of “Form” over Substance

Posted on Sep. 10, 2013

What happens when the Service sets out to do a good thing but runs into a backlog?  In this case two right decisions give taxpayers and their representatives a wrong result.

First, the Service set out to update the Offer in Compromise (OIC) form making it more user friendly and better suited to the purpose it served.  Changing a form requires the Service division proposing the change to work with the Forms Division at the Service on the proposed change.  For the offer in compromise form, the Small Business Self Employed Division (SBSE) would initiate the request.  Then, the Forms Division must create the new form and obtain necessary approvals. Changes to forms do not necessarily take long periods but sometimes the clearance process could significantly slow down the implementation of a form.  The clearance process requires that the form obtain approval from several divisions impacted by the form.  If, for example, the Taxpayer Advocate Service (TAS) in reviewing a form did not agree with the form design or the correctness of a form, then the form could encounter delays as TAS works with SBSE to reach agreement.  I have no idea what is delaying the changes to Form 433-A (OIC) to cause it to conform with the changes in the offer in compromise program.  My example is not intended to suggest that either TAS or SBSE is to blame but somewhere in the Service the corrections must either be stuck or someone in the Service failed to notice that the form and the guidance no longer match as discussed below.

The Service redesigned the OIC form, creating a new Form 433-A (OIC), specifically to address OICs rather than other collection alternatives.  The new form was released in March, 2012 and can be found here. This form provides an excellent tool for preparing an OIC and vastly improves the previous form.  The Collection Division and the Forms Divisions both deserve credit and praise for designing the new form.

Unfortunately, within two months of issuing the new form, the Service made long needed changes to the OIC program changing the method for calculating the OIC in several fundamental respects.  These changes were published in May 2012 in News Release IR-2012-53.  They made Form 433-A (OIC) obsolete.  Using Form 433-A (OIC) after News Release IR-2012-53 leads the taxpayer or practitioner to the wrong OIC number because the form uses the guidance in effect prior to News Release IR-2012-53.

So, a great new form followed by great new guidance has produced a poor system for submitting OICs.  Taxpayers and practitioners unaware of the dissonance between the form and the guidance will incorrectly calculate the amount needed for an offer and, generally, offer too much or conclude not to make an offer.  Taxpayers and practitioners aware of the dissonance must try to fit the new guidance into a form designed to lead to the submission of the correct reasonable collection number using a form that makes it difficult or awkward.

A couple of examples regarding the dissonance can quickly illustrate the problem.  One of the great changes to the offer process resulting from the Fresh Start initiative announced on May 12, 2012,  allows the taxpayer to reduce the total amount of case by $1,000.  See IRM 5.8.5.  It also allows the taxpayer to use one month of living expenses to reduce the cash on hand reported as an asset.  Finding this benefit in Form 433-A (OIC) is not possible.

A second great change in the offer process concerns the ability to exclude the value of a vehicle up to the amount of $3,450.00.  Prior to the change, taxpayers had to include the entire value of their vehicle after discounting for quick sale value.  This made it difficult for many elderly taxpayers to qualify for an offer because they essentially had to repurchase their car through the offer process of sell it.  Many of these individuals had a negative monthly income over expenses balance sheet and had no practical way to repurchase the car.  They also had need of the car to get to the doctor, grocery store, or almost anywhere they needed to go unless they lived in a very urban area.  The ability to exclude a vehicle of modest value covers most of these individuals.  The Form 433-A (OIC) does not inform the person filling it out that a modest value of the vehicle is excluded and requires the submission of the full quick sale value of the vehicle.  Other examples exist because several changes occurred to the offer requirements.

The dissonance between the form and the guidance has now existed for 16 months.  Who knows how long the problem will continue to exist?  The delay has a significant impact on anyone attempting to fill out the form without knowledge of the offer process outside of the information provided with the form designed specifically for the purpose of submitting an offer in compromise.  The Service deserves credit for making two excellent and well needed changes.  Unfortunately, the order of the change, form first and then substance, has created a difficult situation for parties submitting OICs as well, I suspect, for those processing them.

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