To determine whether IRS is fulfilling the requirements of the Restructuring Act in terms of independently reviewing all proposed offer rejections, considering the facts and circumstances of each case, and not rejecting offers from low-income taxpayers solely on the basis of the amount offered, we reviewed relevant laws, regulations, and program guidance; studies by TIGTA; and reports by the OIC quality review program, IRS’s appeals office, and the National Taxpayer Advocate. Program changes, some initiated by IRS and some mandated by the Restructuring Act, contributed to increases in the demand for offers, the number of processing steps, and the number of staff hours needed to process a case. The Extent to Which IRS’s Current Initiatives Would Reduce Offer Inventory and Processing Time Is Uncertain

IRS has begun implementing a new strategy for processing offers, consisting of several separate initiatives intended to reduce inventory and processing time. Less complex offers will be processed centrally using standardized procedures intended to reduce staff hours per case and allow processing by lower-grade staff, while more complex offers will continue to be processed by higher-grade professional staff. IRS expects to stabilize inventory and keep up with the flow of new cases by the end of fiscal year 2002. IRS Lacked Data on the Effect of Prohibiting Partial Payment Installment Agreements

In April 1998, IRS counsel determined that IRS did not have the authority to enter into installment agreements that would not provide for full payment of the taxpayer’s liability before the collection statute expired. According to IRS officials, this policy change created a situation in which some taxpayers who were willing to pay some amount would not qualify for either an installment agreement or an offer. However, a continued increase in the inventory of cases, processing time, and costs would put the effectiveness of the OIC Program at risk.
What GAO Found

A growing backlog of cases and longer processing times have prompted concern about the management of the Internal Revenue Service's (IRS) Offer in Compromise (OIC) Program. OIC inventory and processing time have grown despite significant increases in program staff. Program changes increased the demand for offers, the number of processing steps, and the number of staff hours needed to process the case. Yet, the demand for offers exceeded staff's capacity to process them. The extent to which IRS' current initiatives would reduce the OIC Program inventory and processing time is uncertain. The current initiatives are intended to separate the processing of less complex and more complex offers, with lower-grade staff using standardized procedures to process less complex offers and higher-grade staff specializing in more complex offers. IRS projects that the initiatives will stabilize the inventory and keep up with the flow of new offers by the end of fiscal year 2002. IRS met the requirements of the IRS Restructuring and Reform Act of 1998 by independently reviewing all proposed offer rejections, considering the facts and circumstances of each taxpayer when determining allowances for monthly living expenses, and not rejecting offers from low-income taxpayers solely on the basis of the amount offered. IRS lacks data on the effect on taxpayers of its 1998 decision that the agency lacked the authority to enter into partial payment installment agreements. IRS officials said the policy change created a situation in which taxpayers who were willing to pay some of their tax liability might not qualify for either an installment agreement or an offer. According to these officials, the only other option was to put such taxpayers' accounts into inactive status.