IRS backlog of tax compromise cases increases, despite boost in staff

The backlog of tax settlement cases at the IRS has tripled over the last five years, despite a significant increase in staff devoted to working out compromises with taxpayers who can't pay their taxes, according to a new report from the General Accounting Office. The agency's Offer in Compromise Program, which allows certain delinquent taxpayers to pay less than their full tax liability, now has a backlog of about 95,000 cases, even though the number of staff hours devoted to the program has more than doubled since 1997, according to the report. The IRS reassigned staff from other agency collection programs to meet the rising demand of the compliance program. "IRS officials told us that having devoted such a large proportion of collection resources to the Offer in Compromise Program may be negatively impacting other collection programs," said the report, "IRS Should Evaluate the Changes to Its Offer in Compromise Program" (GAO-02-311). Since Congress passed the 1998 IRS Restructuring and Reform Act, publicity about the tax compromise program has increased its popularity with taxpayers, causing the number of applications to skyrocket. At the same time, changes to the program designed to improve customer service and accountability have added more time to the process. The IRS can offer a tax compromise if the taxpayer's liability is in doubt, or if the agency determines the taxpayer is unable to pay the full amount due to economic hardship or other special circumstances. The IRS has 10 years from the date of assessment to collect delinquent taxes from a taxpayer. From fiscal 1997 to 2001, the percentage of compromise cases closed within six months dropped from 64 percent to 32 percent, while the percentage of those resolved after more than 12 months rose from 7 percent to 25 percent, according to the report. The IRS now takes an average of 10 months to resolve a tax compromise case. The IRS is trying to reduce the backlog by processing all offers through two agency centers and sending the more complex cases to other field offices, where higher-level employees tackle them. Easier cases are processed through a fast-track system or a standardized system, so specialists can spend more time with complicated settlements. Under standardized and fast-track processing, agency employees spend less time verifying a taxpayer's financial information and taxpayers do not have to provide supporting documentation. The IRS estimates the new system will enable the agency to close 40 percent more cases while using lower-level employees and 10 percent fewer staff overall. But GAO said the agency's assumptions in making such estimates "have little empirical basis." "As of January 2002, IRS had not completed plans for evaluating the effectiveness of most of the initiatives [to reduce the backlog], had not completed plans for a performance data system in light of the initiatives, and had not set goals for processing time based on an evaluation of taxpayer needs, other benefits and costs," the report said.