Offers in Compromise: How Far Have We Come? 

Sandy Freund

Sandy Freund is a clinical professor of law and co-director of the Federal Tax Law Clinic at Rutgers Law School in Newark, New Jersey.

In this article, Freund examines the declining submission and acceptance rates of offers in compromise, arguing that it is imperative to better educate taxpayers about their options, which will increase payment plan compliance.

There are three main types of offers in compromise (offers) — doubt as to collectibility (DATC), doubt as to liability (DATL), and effective tax administration (ETA) — as well as a lesser-known hybrid, DATC with special circumstances. The acceptance rates, criteria, and frequency of use of these offers have changed over the years.¹

Partial pay installment agreements (PPIAs) provide another collection option that can be compared with DATC offers. A PPIA may yield the same result as a DATC OIC, without any of the economic disclosures that come with the OIC. I examine why the default rate of these payment plans is so high and what should be done to change that.

In this article, I show the types of offers and voluntary payments methods that are underused; the need to unify the criteria for allowing offers when the taxpayer owns a primary residence; how to account for “earning potential”; and what should be considered reasonable collection potential in these economic times. The need for an overhaul of the PPIA program is also addressed. In researching for this article, I discovered that the number of OICs submitted to the IRS in all three categories has been decreasing since 2014, as have the acceptance rates.² I endeavor to explain why.

There will be a discussion of the prevalence of predatory debt relief scams, and how to educate taxpayers so they will not fall victim to paying for an incompetently and inaccurately (if at all) filed OIC.

Finally, I offer suggestions on how to improve the state of the IRS OIC and PPIA programs, including how to make the availability of the various types of OICs known to more taxpayer populations. I also make recommendations for how the IRS can increase compliance with payment plans.

I. The OIC Program

Using the OIC procedure, taxpayers may settle unpaid tax debts for an amount less than the full sum of tax and penalties they owe. These settlements are distinct from installment agreements, under which taxpayers who cannot immediately pay their taxes in full agree to pay their debts in installments over time. Section 7122 authorizes the IRS to enter into OICs, specifically providing that the IRS may compromise a civil or criminal tax case before it is referred to the Department of Justice for prosecution or defense.

In exchange for the IRS settling the tax debt for less payment, the taxpayer becomes subject to conditions and consequences, including a requirement to file tax returns and remain compliant with the tax laws for the subsequent five years. The statute of limitations on collection is also suspended while the offer is being considered.³

A. Legislative History

Section 7122 was enacted in 1992, and the IRS policy statement P-5-100 was approved January 30, 1992. That policy states:

The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.

In cases where an offer in compromise appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. The taxpayer will be responsible for initiating the first specific proposal for compromise.

The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.

Congress further expressed its intent regarding the OIC program in the legislative history of the IRS Restructuring and Reform Act of 1998:

The Committee believes that the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance. In addition, the Committee believes that the IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet their obligations and remain in the tax system. Accordingly, the Committee believes that the IRS should make it easier for taxpayers to enter into offer-in-compromise agreements and should do more to educate the taxpayers about the availability of such agreements.

It is anticipated that the IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes[.] The conferees anticipate that IRS will take into account factors such as equity, hardship, and public policy where a compromise of an individual taxpayer’s income tax liability would promote effective tax administration.

B. Three Types of OICs

1. Doubt as to collectibility OICs.

DATC offers comprise the vast majority of submitted offers: In 2021, of the 43,124 offers submitted, 40,937 were DATC offers. DATC exists when the taxpayer is unable to pay the full amount of the tax liability owed because “the taxpayer’s assets and income are less than the full amount of the liability.”⁴ Thus, these OICs require the IRS to determine the taxpayer’s ability to pay.⁵ The regulations provide that, in determining ability to pay, taxpayers will be allowed to retain sufficient funds to pay basic living expenses. When calculating basic living expenses, IRS guidelines on national and local living expense standards are considered, but individual facts and circumstances will also into be taken into account.⁶

The acceptance of a DATC offer depends on whether it reflects the taxpayer’s reasonable collection potential, which the Internal Revenue Manual defines as “the amount that can be collected from all available means, including administrative and judicial collection remedies.”⁷ The calculation for reasonable collection potential will take into account:

• the amount collectible from the taxpayer’s “net realizable equity” in her assets;

• the taxpayer’s expected future income after taking into account necessary living expenses;⁸

• the amount collectible from third parties; and

• the taxpayer’s income or assets that are available to the taxpayer but beyond the reach of the IRS, such as property held abroad.⁹

The “net realizable equity” is the “quick sale value” of the asset¹⁰ minus any amounts owed to lien holders with priority over the federal tax lien and levy exemption amounts. Essentially, in determining whether a DATC offer should be accepted, the IRS must analyze the taxpayer’s assets, expenses, and liabilities. The IRS provides a worksheet in its OIC packet, for calculating the minimally accepted offer amount. The amount is calculated by adding together the net value of a taxpayer’s assets with any net income left after expenses each month. This excess income is multiplied by a number provided by the IRS. Added together, these two numbers help a taxpayer arrive at a minimally acceptable offer. If a taxpayer offers less than that amount (absent special circumstances), the DATC offer will be rejected.

The current trend shows that from 2014 through 2022, the number of submitted DATC offers has decreased each year (except for the 2020 pandemic year, in which there was a dip followed by an increase in 2021), while acceptance rates have remained relatively constant, hovering between 30 to 35 percent. For example, of the DATC offers submitted in 2021, only 30.9 percent were accepted.

DATC special circumstances offers are a hybrid. “Special circumstances” may exist when the taxpayer cannot afford to fully pay the tax, but has some asset that would, if liquidated, allow a partial payment of the tax. Taxpayers in these cases argue, however, that special circumstances exist that make it unfeasible for them to liquidate these assets. The most common example is when a taxpayer has net equity in a home. The taxpayer can argue that if forced to sell the house, she would not be able to afford rent soon. Attorneys often send the IRS projections of how long it would take a taxpayer to use up the equity in the home and then be unable to afford rent in a small apartment in the county in which they live. Some of those arguments have met with success.

2. Doubt as to liability OICs.

A relatively small number of OICs based on DATL are submitted each year.¹¹ DATL exists when there is an actual dispute over whether the amount of the tax debt owed is correct or if it should have been assessed at all.¹² There must be legitimate doubt about whether the taxpayer owes all or part of the tax debt.

DATL does not exist when the tax debt has been established by a final court decision or there is a judgment related to the amount of the tax liability.

In addition to having doubt regarding whether the liability exists or the amount is correct, there must be supporting evidence to create that doubt. The taxpayer must also provide a written statement explaining why all or a portion of the tax debt assessed is incorrect.¹³

A DATL OIC is commenced upon submission of a completed IRS Form 656-L, “Offer in Compromise (Doubt as to Liability),” containing a written statement explaining why the tax assessment is incorrect, supporting documentation or evidence, and an explanation supporting reasonable doubt. And the form must be signed by the taxpayer under penalty of perjury.

The DATL OIC will be returned and not processed if it is determined the offer was submitted solely to delay collection.¹⁴ The offer should be based on what the correct amount of tax should be. If no tax is believed to be owed, the offer should be for $1. No deposit or application fee is required. The DATL OIC should include only the tax years at issue, and it shouldn’t be submitted contemporaneously with a DATC OIC or ETA OIC. Also, a DATL OIC shouldn’t be submitted for any year involving a pending request for audit reconsideration.

Upon processing the DATL OIC, the IRS collection division will put collection on hold and transfer the case to the examination division.¹⁵ DATL offers are an alternative to audit reconsideration requests.¹⁶

An advantage of a DATL OIC as compared with audit reconsideration is that the taxpayer has a specific person to work with to resolve the DATL case. In evaluating DATL OIC cases, the IRS considers “doubt as to liability” and “hazards of litigation.”¹⁷

If the IRS approves the assessment correction requested in the DATL offer, it corrects the assessment and requests that the taxpayer withdraw the DATL OIC without an actual acceptance. An OIC accepted for processing will be deemed accepted if not rejected within 24 months.

3. Effective tax administration OICs.

The provision allowing for ETA offers was added to section 7122 six years after the provisions for DATC and DATL offers. The Restructuring and Reform Act of 1998 authorizes the IRS to consider equity, public policy, and hardship in collection cases, when doing so would promote effective administration of the tax laws.¹⁸

IRS agents are directed to consider ETA offers only after they determine that the taxpayer does not qualify under DATC or DATL. The critical distinction between ETA offers and the other types is that here the taxpayer technically can pay the liability in full.¹⁹

There are three types of ETA offers: those submitted under “economic hardship,” “public policy,” or “equitable considerations,” although the IRS usually considers the last two categories together. The economic hardship offer is the most common. Courts look at cases involving economic hardship claims narrowly, and the standard enumerated in the regulations is exceedingly difficult to meet.

a. Economic hardship.

“Economic hardship” includes situations in which treating a medical condition will exhaust a taxpayer’s funds, a taxpayer’s monthly income is needed to care for dependents, and a taxpayer has assets, but borrowing against — or liquidating — those assets would render the taxpayer unable to meet basic living expenses.²⁰

The factors that the IRS considers in granting an OIC to individuals do not readily translate to a small business. In many cases, the IRS views the “net value in assets” of the small business as disqualifying for purposes of the offer because if liquidated, those assets could satisfy the tax debt, making it unlikely that a small business would ever qualify for an economic hardship ETA offer.

The three examples in the regulations illustrate the extreme circumstances under which a hardship OIC will be considered. The first involves a taxpayer who has assets that he could liquidate to pay his tax debt, but he has a child with a serious long-term illness. Equity in those assets will eventually be needed to provide for adequate living expenses and medical care for the child.²¹

The second example presents a situation in which a retired taxpayer’s only income is from his pension. Forcing him to liquidate his pension would render him unable to meet basic living expenses.²²

The third describes a disabled taxpayer who has no excess income each month with which to pay his tax debt but owns a modest home that is specially equipped for his disability. The equity in the home is sufficient to pay the tax in full. While it is the usual practice of the IRS to recommend that the taxpayer borrow against the equity to pay the tax, here the regulations recognize that “severe adverse consequences” would ensue for the taxpayer if forced to liquidate or sell his specially equipped primary residence.²³

As a practice tip, it is often easier to have a denied offer accepted on appeal. Many ETA offers, initially denied, have been accepted on appeal.

b. Stories from the field.

Situation 1: My recent experience in submitting DATC (with special circumstances) or ETA OICs has not been good. The last one I submitted was for a retired low-income taxpayer who owed tax of approximately $16,000 for one year because of a premature withdrawal of funds from her IRA. The only asset she had was $80,000 of equity in her primary residence. I argued that since she was unable to get a mortgage, the only way she could pay the tax due was to sell her house and use the equity to pay the tax. She would then have no home and not enough monthly income to meet her basic needs, including new housing.

The IRS held the position that selling her house would leave the taxpayer with funds with which she could pay rent. We appealed this decision, and the denial of the offer was upheld. The agent did an analysis of small, subsidized apartment rentals for older adults in the taxpayer’s ZIP code and determined that she could afford to sell her house and rent an apartment. I argued that there are often waiting lists for those units, and they may not be readily available to the taxpayer. Also, it did not make sense for her to sell her primary residence, if her monthly mortgage payments were equivalent to the prospective rent she would have to pay.

We are awaiting receipt of a final notice of denial, and we plan to request that IRS collections place the client in currently noncollectible collection (CNC) status. Since collections has leeway in its ability to place taxpayers in CNC status when they have only one asset, we anticipate that the IRS will comply with our request.

Situation 2: A colleague of mine had a very similar situation and lost on appeal. Her older client, with significant health problems, on a fixed income, attempted to get a reverse mortgage on her home, but was denied. The IRS rejected her DATC (with special circumstances) OIC, stating that “she could sell her home, pay the tax, and use the rest for rent.”²⁴

Situation 3: Another attorney at a low-income taxpayer clinic had success in getting an ETA offer accepted for a severely disabled Desert Storm combat veteran. The attorney offered that the taxpayer pay one year of his net monthly income or $12,000. Initially, the OIC was denied because the taxpayer had received a lump sum retroactive award from the Veterans Administration — specifically for the taxpayer’s mental health issues resulting from his combat experience and his tax debt. His physician actually found that the tax debt caused him to be suicidal. The taxpayer saw the tax debt as a disregard for the horrors he perpetrated at the behest of the government.

The attorney appealed the denial of the OIC, and the IRS Appeals officer counterproposed that the taxpayer pay 25 percent of the total liability, or $19,500. The taxpayer agreed, and the Appeals officer allowed the offer.²⁵

Situation 4: A taxpayer who was defrauded into withdrawing a large sum of money from her retirement account, and lost it all, was granted an ETA OIC. The IRS found that an ETA based on public policy was warranted because the liability arose from the crime or fraud of a third party.²⁶

Situation 5: Finally, the most recent conversation I had with a colleague involved her frustration with an offer she submitted under DATC special circumstances. Her client was a disabled amputee who uses a wheelchair. The taxpayer was the victim of a swindler, which in turn led to his tax problems. The taxpayer had a lien on his home, in which he had approximately $40,000 in equity. His goal was to move to an assisted living facility, and he needed to have the lien removed so he could sell his house.

His home needed repairs, which he was unable to make. His tax debt was approximately $42,000. His tax clinic attorney filed an OIC for him, arguing that the IRS should not consider the equity in his home when considering the offer because he would need that money to move into assisted living housing. The IRS determined that the value of the home was actually higher than the taxpayer originally stated and concluded that the taxpayer could therefore fully pay the offer. The offer was then considered as an ETA offer. It was ultimately denied because the IRS determined the taxpayer could fully pay the offer, finding no hardship.

Unfortunately, this claim was part of an equivalency hearing, as the taxpayer had contacted the tax clinic after his opportunity to request a collection due process hearing had passed, so he had no appeal rights.

c. Public policy and equitable considerations.

Even if a taxpayer qualifies for a hardship ETA offer, no compromise will be reached if the granting of the OIC undermines compliance by other taxpayers.

Public policy and equitable consideration ETAs (policy ETAs) are usually considered together and not as two separate types of ETA offers. The taxpayer has the burden of proving that compelling circumstances for allowing the policy ETA offer exist, that accepting the OIC wouldn’t undermine public confidence, and that acceptance of the offer would be warranted despite the disparity it might create for similarly situated taxpayers.²⁷

II. Scams and Predatory Firms

Predatory debt relief firms have been flourishing in recent years. While many firms legitimately help individuals file OICs, the IRS added sham preparers to its 2020 “Dirty Dozen” list. During all phases of the COVID-19 pandemic, tax scams have been even more prevalent. Some debt relief firms use deceptive advertising to trap unwary taxpayers into paying them high fees to draft OICs, and then these representatives never follow through.

The Rutgers Federal Tax Clinic has had several taxpayer victims come through its doors. Several of our vulnerable low-income taxpayers have paid $2,500 or more to these firms as an upfront fee. Although the consensus in the field is that these firms do not have a significant impact now, it remains to be seen if the number of these firms will increase in the coming years, as their lure is becoming more sophisticated. Illegitimate firms send out notices mimicking the IRS notice format, and unknowing taxpayers call the phone number on the notice, thinking they are reaching out to the IRS for help.

III. The Partial Payment Installment Agreement

A. The PPIA in General

The partial payment installment agreement (PPIA) is another underused tax repayment method. While delinquent taxpayers are generally aware of the option of entering into full payment installments,²⁸ and many are familiar with the concept of OICs, fewer have heard about an alternative tax-relief program that could produce similar results to the OIC by repaying just a fraction of a tax liability. In fact, some features of the PPIA make it an even better remedy than the OIC.²⁹

The PPIA program, a hybrid of the traditional full payment installment agreement and the OIC, is an installment agreement plan that enables a taxpayer to pay back less than what is owed to the IRS.

B. Legislative History

The American Jobs Creation Act of 2004 (the act of 2004) amended and codified section 6159 wherein there is a provision giving the IRS the authority to enter into PPIAs with taxpayers.³⁰ Before the act of 2004 was put into law, taxpayers who could not immediately pay their tax liabilities in full had only the option of entering into a full payment installment agreement with the IRS, agreeing to fully pay their tax liabilities by the collection statute expiration date.³¹ Codification of the PPIA changed that.

After passage of the act of 2004, various taxpayer advocate groups and organizations argued for the importance of the IRS to fully accept the PPIA program. In her 2009 annual report to Congress, then-National Taxpayer Advocate Nina E. Olson, now a member of Tax Analysts’ board of directors, called for clarification on how the IRS is authorized to enter into installment agreements that do not provide for full payment.³² The report emphasized that the OIC program, at that time, did not recognize the lending problems taxpayers were having and did not allow a taxpayer to disregard equity in assets.³³ The IRS often told taxpayers to refinance a home, for example, when banks were refusing to refinance.

The PPIA was seen as a tool for taxpayers to use by making partial payments to resolve their tax liabilities when they could not pay the tax in full in installments.³⁴

In the years after the enactment of the act of 2004, the IRS regulations began to include guidelines pertaining to the PPIA.³⁵ The guidelines list situations in which a taxpayer is unable to immediately fully pay delinquent tax liabilities, and they set out the requirements for a PPIA. The regulations indicate that when a taxpayer is unable to fully pay a debt over the life of the collection statute expiration date, but has some ability to pay, the taxpayer “may be allowed to pay their liabilities over a prescribed period of time.”³⁶

C. Practical Considerations

The IRS generally accepts a PPIA application if the taxpayer has insufficient assets to liquidate and insufficient income for a full payment plan.³⁷ Similar to filing for an OIC or traditional installment agreement plan, the taxpayer must be compliant with tax filings and current tax payments in order to be eligible. Also, the taxpayer’s complete financial information must be submitted, which includes Form 433-A, “Collection Information Statement for Wage Earners and Self-Employed Individuals,” for individuals with all supporting documents.³⁸

Under the IRM, to qualify, a taxpayer must owe at least $10,000, which includes interest and penalties, and must either be unable to liquidate assets or have insufficient equity to cover the tax debt if the assets were liquidated.³⁹ The taxpayer is also required to write a letter to the IRS with a request to enter the PPIA along with Form 9465, “Installment Agreement Request,”⁴⁰ and a Form 433-A financial statement enumerating assets and monthly income and expenses.

Like regular full payment installment agreements, taxpayers on a PPIA plan must make their monthly payments on time and remain compliant with all their tax obligations during the term of the PPIA.⁴¹

D. Statistical Data

The Treasury Inspector General for Tax Administration examined the effectiveness of the PPIA program in 2022.⁴² TIGTA analyzed the PPIA program from 2016 until 2020, providing a chart that illustrates that the number of PPIAs decreased from 2016 to 2018, rose slightly in 2019, and then decreased again in 2020. Note that the major decrease in 2020 may have been caused by COVID-19, but the numbers seem to be trending downward. The report notes that on average, PPIAs account for less than 2 percent of all installment agreements. That is an astounding statistic.

The Treasury Department attributes that to the failure of the IRS to adequately educate the public about the availability of PPIAs. There is no form for requesting a PPIA, and the current installment agreement form does not consider anything but full payment.⁴³

The report also concluded that PPIAs have a high default rate. The average default rate was 16 percent higher than the default rate on traditional installment agreements.

In her 2016 annual report to congress, Olson found that PPIAs had a high default rate in 2012-2016. That the default rate continued to be high from 2016-2020 is also concerning.

According to TIGTA, a high default rate can be attributed to several factors. The financial analysis that is necessary to determine the taxpayer’s ability to pay under the PPIA may not be accurately assessing the ability of these taxpayers to pay the amount due. The 2022 TIGTA report pointed to how the IRS mismanaged PPIAs. Specifically, the IRS failed, in many instances, to perform a two-year review of the taxpayer’s financial situation, which would have enabled agents to ascertain whether the PPIA needed to be adjusted.⁴⁴

E. PPIAs Compared With OICs

There are circumstances in which a taxpayer who may not qualify for an OIC could still qualify for a PPIA. It is important for both taxpayers and tax professionals to thoroughly understand the potential burdens and benefits of each of these voluntary collection options.⁴⁵ If the taxpayer is not educated in how a PPIA works, he may make monthly payments to the IRS that are higher than is actually required.

While information about the taxpayer’s income and assets must be provided to the IRS on the collection information statement (Form 433-A) for both PPIAs and OICs, the IRS may use the asset information differently. Unlike the OIC program, the PPIA program allows a taxpayer to be accepted into the program even if the taxpayer does not sell or cannot borrow against assets in certain circumstances.

The Treasury regulation states that in granting a PPIA, the IRS will not require the taxpayer to liquidate assets when the assets have minimal equity or the taxpayer is unable to use the equity.⁴⁶ The IRS will also consider whether an asset is necessary to generate income. If an asset is used by the taxpayer in generating income, the IRS will not require the liquidation of this asset or consider it in calculating the value of the taxpayer’s net assets.⁴⁷ The IRS will also consider whether forcing the taxpayer to sell or borrow against the asset would impose an economic hardship on the taxpayer.⁴⁸

The regulations consider examples illustrating the benefits of a PPIA. Many taxpayers have significant equity in either their residences or retirement accounts, rendering them ineligible for an OIC. On the other hand, in entering into a PPIA, the taxpayer may be able to keep all their home equity or retirement account wealth, and exclude it from their net asset calculation, resulting in repayment of a much lower amount of tax.⁴⁹

Another benefit of the PPIA is it is usually granted much faster than an OIC, in part because the IRS often requests updated financial information from the taxpayer months after the initial OIC package is submitted.⁵⁰ While OICs can take months or even years to complete, setting up and entering into a PPIA could be done in as little as 30 to 60 days from the initial request.⁵¹

The IRS also scrutinizes a taxpayer’s financial information more thoroughly when considering an OIC.⁵² Thus, the cost of engaging a tax professional to complete an OIC will likely be higher than the cost to propose a PPIA, because an OIC will require more work hours.

IV. Conclusion

A. General Observations

In my many years of representation of low-income taxpayers through the Rutgers Law School-Newark Low-Income Taxpayer Clinic, we have submitted hundreds of offers. We have been extremely successful in getting offers accepted. We have had almost every offer we have submitted under DATC granted. That is likely attributable to the thorough analysis we conduct before submitting the offer. We do not file these OICs if the facts indicate that the taxpayer does not qualify. In those cases, we examine any other viable collection options. Still, many of these cases require a lot of work and creativity.

This rate of success is not true for any other category of offer we have submitted. For example, we have had very limited success with ETA OICs. We have had no success with DATL offers.

We have, however, had several DATC offers with special circumstances granted on appeal. Each offer had initially been denied by the OIC agent. It was not until we appealed the denial that we have had the agent’s determination reviewed and overturned. It seems that OIC agents are hesitant to grant offers that are not clear cut — that is, when special circumstances warrant the granting of the offer even though the offer doesn’t fit the cookie-cutter mold.⁵³

A practice tip is that when filing an OIC for a taxpayer with an asset, be persistent with the IRS in your argument about the hardship that would ensue if the taxpayer liquidated it (if the asset even can be liquidated). Agents are instructed under the IRM to consider these special circumstances.⁵⁴

B. Future of the OIC and PPIA Programs

It is unclear why the number of OICs submitted continues to decline. While COVID-19 may account for declines in 2020 submissions, there isn’t yet an explanation for what caused the decrease since 2014. In her goal for 2022, National Taxpayer Advocate Erin M. Collins listed “increased taxpayer participation” in the OIC program as an objective.⁵⁵ She reports a finding that during the period from 2014 through 2020, the IRS inventory of CNC cases nearly doubled.⁵⁶ Those cases may indeed belong to taxpayers who would have been better served by an OIC.

When a taxpayer is placed in CNC status, the case is written off by the IRS as an uncollectible receivable, and no active collection action is taken by the IRS. Instead, the taxpayer receives an annual notice with a reminder that the tax is due, and that interest continues to accrue on the debt. The taxpayer will be removed from CNC status and involuntary collection will ensue only if the taxpayer’s financial situation improves.⁵⁷ When the IRS refuses to grant an OIC, it will sometimes recommend placing a taxpayer in CNC status until her financial situation improves. That isn’t helpful for many taxpayers, and the downside to CNC status must be carefully weighed.

The national taxpayer advocate astutely notes that private collection agencies assigned to these cases do not advise the taxpayers of the voluntary collection options available to them.⁵⁸

The program must be publicized to segments of the population who could benefit from it. For those in CNC status, that status may mean they won’t qualify for a loan, a credit card, or a mortgage anytime in the future. That is because CNC status is a blight on a taxpayer’s credit report. The interest in the tax debt accrues as compounded interest is charged by the IRS until the debt is satisfied. For some taxpayers, especially those who are older or ill, CNC status is preferable, but for many other taxpayer populations, an OIC would give them a fresh start. Outreach and education efforts by the government — as well as LITCs, legal service organizations, and immigration organizations — are critical.

More easily understandable literature should be distributed to taxpayers with IRS debts, including those in CNC status. Plain language notices (in English and other languages depending on the target audience) should be made available in other IRS collection mailings. IRS collections should include stuffer notices with collection letters, advising taxpayers of the opportunity for free tax help from LITCs, should they qualify.⁵⁹

Getting taxpayers into the offer program is a win-win for the government and the taxpayer. The taxpayer pays what his net worth and net monthly income indicates he can pay, and the government, instead of “writing off” the taxpayer’s account as uncollectible, gets a compliant taxpayer who returns to the system and agrees to file and pay the tax due for the next five years.⁶⁰ The taxpayer emerges with a clean slate and comes off the slippery slope of failing to file or pay for one year, which snowballs into a habitually noncompliant taxpayer.