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User Fees

Posted on Dec. 14, 2016

The National Taxpayer Advocate recently wrote a 10 page comment on the proposal to raise the user fee on offers in compromise. She does not like the increase but, more than just the increase, she does not like the fact that the IRS has decided to charge for a basic government service. The fee charged for offers is just one of many fees that the IRS now charges. A non-exclusive list of other fees include those for: installment agreements, requests for exempt status, private letter rulings, offers in compromise, electronic payments of user fees, payments of taxes by credit or debit card, and pre-filing agreements. We wrote recently about how the dramatic increase in the fee charged for a private letter ruling has driven an excellent change in the way taxpayers request forgiveness for failing to timely roll over their IRA. We also wrote this year on the incentive Congress has given to the IRS to make private debt collection work. The amount of money the IRS collects each year in fees and charges has reached a level that it has an impact on the IRS operating budget.

Aside from the question of how much the IRS should charge for a particular service and whether it should differentiate between services in deciding which ones should have a fee and which should not, the more fundamental question concerns the use of fees, at all, to fund the IRS. Does the increased use of fees signal a slipping back into the pre-1954 world of tax collection where the tax collector had an incentive to collect more money? Does the use of fees undercut the decision in 1954 to create a tax collection agency with only one political appointee in order to remove the IRS from monetary considerations? Does it undercut the Congressional decision in 1998 to cause the IRS to avoid evaluating employees on the basis of productivity measurements pegged to dollars collected or dollars assessed?

In this context, the policy and practical concerns raised by the NTA deserve attention.

Before I turn to the specific concerns raised by the NTA, I want to interject a personal story from two decades ago that attests to the longstanding concerns that the NTA has had in the area of offers. Two decades ago I was the District Counsel for the IRS in Richmond and Nina Olson was the director of the Community Tax Law Project, the first non-academic low income taxpayer clinic. [For more information on this segment of Nina’s career and her role in clinic formation, you might read my article on the history of tax clinics.] We had a case in our office in which Nina represented the taxpayer. The case involved a significant amount of money and the IRS had imposed the fraud penalty. We both estimated that the trial of the case would take two or three weeks which would put a lot of pressure on the resources of her office and my office in a situation in which the taxpayer had little or no money. I suggested that we use the offer in compromise process to avoid fighting about the amount of the liability and focus on the very real collectability issue present.

Nina agreed with my concept but we then had a dispute about the amount of the offer. I wanted something more than a nominal amount and she felt that was not fair to this taxpayer, or low income taxpayers generally. We reached an agreement, but my concerns that a taxpayer seeking an offer must pay an amount that justified the IRS effort in working the offer conflicted with her view that the IRS should allow any taxpayer to compromise their taxes no matter how much they could pay to the IRS in the offer process. Shortly thereafter, she testified before Congress leading up to the changes in the Restructuring and Reform Act of 1998 and convinced Congress to insert IRC 7122(d)(3). So, you do not need to convince me how serious the NTA is about making sure the offer process is fair to all.

The NTA raises seven specific concerns about the increase in user fees and I will address each one in turn:

  • Offers should not be subject to fees because the IRS generally does not charge for fundamental government services that primarily benefit the general public.
  • Congress’ decision to impose “constraints on IRS resources” is an inadequate justification for increasing the OIC fee.
  • Public policy weighs in favor of eliminating the OIC fee.
  • The OIC fee is likely to cost more – in lost tax revenue and increased enforcement costs – than it will generate in user fees.
  • The OIC fee is an accounting “device” that the IRS is pursuing due to a conflict of interest.
  • To help mitigate its conflict, the IRS should conduct a cost benefit analysis before moving forward with the OIC fee NPRM, as it has agreed to do for future user fee proposals and which may also be required by Executive Order 13563.
  • If the IRS charges an OIC fee, it should minimize the burden for taxpayers.

Charging for Basic Services

The NTA views offers as a basic service and, as such, something which the IRS should offer at no cost. She looks at the legislative history of basic versus special services and provides reasons why the offer should fall into the basic services box. She cites to many benefits the IRS obtains from working offers, as well as some comparative services for which it does not charge.

Because the IRS essentially ignored offers until 1992 and only began the current offer program 25 years ago for selfish reasons I have discussed previously, I have trouble jumping on the basic services bandwagon. For many of the reasons discussed by the NTA, I think the IRS, as well as taxpayers, benefits from a robust offer program even if it is not considered a basic service.

Charging because Congress has cut the IRS Budget

The NTA points out that the IRS justification for raising the cost of applying for an offer does not provide an appropriate justification. The Independent Offices Appropriations Act of 1952 (IOAA), codified at 31 U.S.C. § 9701, specifies that

“[E]ach charge shall be— (1) fair; and (2) based on— (A) the costs to the Government; (B) the value of the service or thing to the recipient; (C) public policy or interest served; and (D) other relevant facts…. However, the NPRM justifies the OIC fee increase based on “constraints on IRS resources.”20 The NPRM does not explain how Congress’s decision to reduce the IRS’s funding is relevant to the guidelines provided by the IOAA.”

The NTA makes an excellent point. Having the IRS justify a fee increase because of resource constraints opens the door to having it charge for just about anything the IRS does. We have posted before on several occasions about the poor Congressional decision-making regarding the IRS budget; however, that should not turn every experience with the IRS into one for which it charges. Charging for private letter rulings makes sense if for no other reason than to cause the party making the request to pause before calling upon IRS resources for an opinion; however, charging for collection relief requests like offers and installment agreements takes on a different tenor, and, when the justification for charging cites to resource constraints, government begins to have a totally fee-based feel rather than something we pay for with our taxes.

Public Policy and the Fee

The NTA cites three good policy reasons in support of her argument that the fee charged here makes bad policy. First, she cites the newly enacted taxpayer bill of rights. While the rights listed there do not include the right to not have a fee charged for every interaction with the IRS, they do include rights that implicate the taxpayer’s reasonable expectation of services without the type of barriers imposed by fees. Second, the NTA cites to the legislative history of the Restructuring and Reform Act of 1998 (RRA 98) in which Congress made some changes to the offer provisions, including the one discussed above, and exhorted the IRS to make offers available. The Congressional discussion in 1998 marked the first real comments after the IRS created its modern approach to offers earlier in that decade. Third, she cites to the logic offered in 2003 when the IRS first started charging a fee for offers. At that time, it justified the newly imposed fee because of concerns with frivolous offers that could clog its system. That justification has merit; however, in the intervening years other rules related to frivolous submissions would seem to make the need for the offer fee smaller rather than greater. The IRS seems to have allowed the camel’s nose in the tent with a reasonable argument for a nominal fee and, now that the fee exists, has expanded the cost with an entirely different and not satisfactory explanation.

The True Cost of the Fee

The NTA argues that the reduced number of offers resulting from the fee will cost the IRS more in lost revenues and increased collection costs than the fee will generate. I think the down payment stops more offer requests than the fee but as the fee increases it undoubtedly becomes a barrier to entry. If the offer program effectively gets taxpayers back on track with their taxes, creating barriers has consequences to the ability of the IRS to move taxpayers from those in the pool requiring enforcement to those requiring no effort. To get to the true benefit of offers requires a more detailed study of all of the consequences than I think we have at this point but the theory behind the offer program makes us want people to go through it so they can restart their relationship with the IRS and become good taxpayers again. A recent article about the true cost of getting the TSA Pre designation has an interesting take on the negative impact of government fees and their true cost.

The User Fee is an Accounting Device

When the IRS collects a user fee, it gets to keep the money for use in the IRS budget. When the IRS collects a tax dollar, the money goes into the general treasury and does not directly impact the IRS budget. The NTA argues that the IRS move to greater user fees reflects a move to protect its budget. The more the IRS budget comes from fees and not from appropriations, the more the IRS will have incentives to jack up fees and move to a pay for services method of operating which hurts those who have trouble paying for services and should trouble everyone. Congress should want to fund the IRS at appropriate levels in order to collect revenue in an orderly fashion and provide for enforcement across the board. As Congress has abdicated fair funding of the IRS despite the loss of revenue and the loss of fairness, it drives the IRS to seek alternative sources of funding. I cannot blame the IRS for trying to find funding sources. Every organization seeks funding sources, but Congress should stop this both by adequately funding the IRS so that it does not need to do this and by telling the IRS not to do this. The IRS should not be a fee-based service. Going in the direction of fees for services at the IRS creates many dangerous policies. The NTA rightly points out the dangers when the charges get imposed on a service related to collection.

Conducting a Cost Benefit Analysis

Much of what I have to say here is included in the section above on the true cost of the fee. I agree with the NTA that the cost of the fee here may outweigh the benefits and conducting an analysis of the true cost would provide essential data for making the decision. Because of pressures to increase income, the IRS may have the wrong incentives in place.

If the IRS Charges a Fee It Should Minimize Taxpayer Burden

The NTA suggests that the way the IRS goes about collecting the fee also creates a burden. The collection of the offer fee up front establishes a barrier that can prevent a taxpayer from pursuing an offer. In collecting the installment agreement fee, the IRS takes the fee from the installment payments and does not require the fee as a cost of coming through the door. Changing the way it collects the fee, if it must charge one, can also have an impact on those to whom it charges the fee. When the offer fee came into existence, it made sense to use it as a fee for entry because the goal of the fee related to stopping frivolous submission of offers. If the goal of the fee has changed to one of revenue raising, then the IRS should look at the way it collects the fee.


The NTA has many thoughtful suggestions. The pressures on the IRS to raise revenue for its budget needs provide a bad incentive for adoption of user fees. While the ultimate problem here may lie with Congressional budget decisions, the IRS must take care not to allow itself to go back to pre-1954 ways and the scandals that evolved from the wrong types of incentives.

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