Lewis Introduces US Tax Compromise Improvement Act

by Leroy Baker, Tax-News.com, New York

19 May 2009

Legislation has been introduced in the United States House of Representatives that would help struggling taxpayers enter into offer-in-compromise (OIC) agreements with the Internal Revenue Service (IRS).

The legislation, known as the Tax Compromise Improvement Act of 2009, was introduced by Ways and Means Oversight Subcommittee Chairman John Lewis, a Georgia Democrat, and Ranking Member Charles W. Boustany, Jr., a Louisiana Republican, on May 12.

OIC agreements are an important collection alternative for the IRS and taxpayers. Many taxpayers seeking to enter into OIC agreements have recently lost jobs or are experiencing financial difficulties.

Taxpayers can apply for an OIC agreement with the IRS to settle their unpaid taxes. Under current law, because of legislation passed in 2006, a taxpayer offering to settle a tax liability must make a partial payment with submission of an OIC application (e.g., a nonrefundable, 20% down payment). If the OIC application is turned down, the taxpayer’s down payment is not refunded. Under the Lewis/Boustany bill, taxpayers would not be required to submit a partial payment with their applications.

According to the two lawmakers, the legislation is consistent with the administration’s fiscal year 2010 revenue proposal to eliminate the partial pay requirement.

The need to increase the usage of OIC agreements in situations of economic hardship was raised at a February hearing of the Ways and Means Subcommittee on Oversight examining IRS assistance to taxpayers during the economic downturn.

In announcing the hearing, Lewis said: “Americans are suffering during these difficult economic times. They are trying to do the right thing and pay their taxes, but they may be unable. We need to understand their problems. They need to reach out to the IRS for assistance. Together, we must find ways to collect the proper amount of taxes owed in a manner that is fair and recognizes the problems that taxpayers are facing during this recession.”

At the hearing, National Taxpayer Advocate Nina E. Olson testified that the number of OICs received by the IRS fell by 21% from fiscal year 2006 to fiscal year 2007 as the down payment requirement took effect.

Olson testified that the 21% decline is partly attributable to the difficulty taxpayers face in obtaining funds to make the 20% down payment prior to the acceptance of an offer. She also noted that less than one in four offers is actually accepted. As a result, federal taxes that could be collected are left unpaid.

Olson’s last annual report to Congress, released in January 2009, urged more compassion from the IRS in dealing with financially distressed taxpayers.

“It is imperative for the IRS to consider the circumstances of taxpayers facing economic hardship before initiating enforcement actions,” Olson wrote.

When the IRS contemplates taking an enforced collection action such as a levy, a lien or an asset seizure, both the tax code and IRS procedures require that IRS personnel consider whether the collection action will impose an economic hardship on the taxpayer.

Despite these requirements, “current IRS guidance provides little direction to help IRS employees identify taxpayers who are experiencing economic hardship and prevent undue economic burden,” Olson wrote.

Olson’s report made three principal recommendations to reduce burden on financially struggling taxpayers, including: making greater use of collection alternatives when economic hardship is present; simplifying the “cancellation of debt” minefield that many taxpayers who default on debts must navigate; and implementing a “screen” to protect low income Social Security recipients from continuous, automated tax levies.

Olson estimated in her report that tens of thousands and possibly hundreds of thousands of taxpayers who qualify to exclude canceled debts from gross income do not file the appropriate form to claim allowable exclusions. Instead, some of these taxpayers unnecessarily include the amount of the canceled debt in gross income, and other taxpayers who fail to include it unnecessarily face IRS examinations and tax assessments.

The Taxpayer Advocate’s report recommended that Congress change the law to remove taxpayers with modest amounts of debt cancellation from the cancellation of debt income regime, and recommended that the IRS develop an insolvency worksheet that taxpayers can file with their returns and create a centralized unit dedicated to handling cancellation of debt issues.

Recommended