42 Improve Assessment and Collection Procedures
IMPROVE ASSESSMENT AND COLLECTION PROCEDURES
Legislative Recommendation #18
Improve Offer in Compromise Program Accessibility by
Repealing the Upfront Payment Requirements
SUMMARY
• Problem: Financially struggling taxpayers who cannot aord to pay their tax liabilities in full may apply
for an “oer in compromise” (OIC). Under an OIC, the IRS agrees to accept less than full payment in
satisfaction of the debt. Currently, taxpayers are required to include non-refundable partial payments
with their OIC applications. e Treasury Department has acknowledged that the partial payment
requirement may substantially reduce access to the OIC program and has estimated that repealing the
requirement would raise revenue.
• Solution: Repeal the requirements that taxpayers include partial payments with OIC applications.
PRESENT LAW
IRC § 7122(a) authorizes the IRS to settle a tax debt by accepting an OIC. According to Policy Statement
5-100, the IRS will “accept an oer in compromise when it is unlikely that the tax liability can be collected
in full and the amount oered reasonably reects collection potential.” Taxpayers whose oers are accepted
must le and pay their taxes for the next ve years, as stated on IRS Form 656, Oer in Compromise (2023)
(Section7, items l and m). If they fail to remain in compliance for the ve-year period, the IRS may seek to
collect the amounts it compromised.
IRC § 7122(c)(1)(A) requires a taxpayer who would like the IRS to consider a “lump-sum” oer – payable
in ve or fewer installments – to include a nonrefundable partial payment of 20 percent of the amount of
the oer with the application. IRC §7122(c)(1)(B) requires a taxpayer who would like the IRS to consider
a “periodic payment” oer – an oer payable in six or more installments – to include the rst proposed
installment with the application and to continue to make installment payments while the IRS is considering
it. In addition to these upfront partial payments, Treas. Reg. § 300.3 requires that most oer applications
include a $205 user fee. IRC § 7122(c)(3) provides that taxpayers with low incomes (i.e., taxpayers with
adjusted gross incomes for the most recent tax year, or taxpayers with household gross monthly incomes
multiplied by 12 months, that is not more than 250 percent of the Federal Poverty Level guidelines) are not
subject to the user fee or the partial payment requirement.
1
ey may apply for a waiver on Form 656.
REASONS FOR CHANGE
By accepting an oer, the IRS often collects money it would not otherwise collect and may convert a
noncompliant taxpayer into a compliant one by requiring the taxpayer, as a condition of the agreement, to
timely le returns and pay taxes for the following ve years. e Treasury Department’s General Explanations
of the Administration’s Fiscal Year 2017 Revenue Proposals acknowledged the benet of oers by proposing
to repeal the partial payment requirement, explaining that the requirement “may substantially reduce access
to the oer in compromise program. ... Reducing access to the oer-in-compromise program makes it more
dicult and costly to obtain the collectable portion of existing tax liabilities.” e Treasury Department
estimated that repealing the requirement would raise revenue.
2
1 See also Treas. Reg. § 300.3(b)(ii), (iii).
2 In the past, the IRS expressed concern that repealing the partial payment requirement or limiting the user fee might have the effect
of increasing the number of frivolous offers. The tax code discourages frivolous submissions by imposing a penalty of $5,000 on
any person who submits a frivolous OIC application. See IRC § 6702(b).
IMPROVE ASSESSMENT AND COLLECTION PROCEDURES
43National Taxpayer Advocate 2024 Purple Book
A 2007 TAS study found that taxpayers above the low-income threshold were no better able to aord to make
partial payments than those below it, and that those below it frequently did not obtain a waiver. Similarly,
a 2005 Treasury Inspector General for Tax Administration report found that when the IRS rst imposed a
user fee (it was $150 in 2003), OIC submissions declined by more than 20 percent among taxpayers at every
income level, including those who were eligible for a fee waiver. Furthermore, after the partial payment
requirement was imposed, the slight increase in the oer acceptance rate did not oset the 26 percent decrease
in submitted oers, suggesting that higher upfront costs deterred many taxpayers from submitting acceptable
oers. us, upfront payments such as the user fee and the partial payment requirement likely reduce
collections and increase enforcement costs.
RECOMMENDATION
• Amend IRC § 7122(c) to remove the requirement that taxpayers include a partial payment with oer
applications and to provide that any user fee that is imposed will not be required as an upfront payment
but rather will be collected out of amounts otherwise due on accepted oers.
3
3 For legislative language generally consistent with the recommendation to repeal the partial payment requirement, see Small
e.g., National Taxpayer
Improve Offer in Compromise Program Accessibility),
.
