The IRS raised the fee for processing an offer in compromise, an agreement between the agency and a taxpayer to settle a tax debt for less than the full amount that is owed.
The Thursday final rules set the fee for processing an offer at $205 from $186, a 10% increase. The proposed rules called for raising the fee to $300. The agency is allowed to charge a user fee under Section 7122.
The fee amount is “substantially less” than the full cost the agency faces in providing the service, according to the rules (T.D. 9894).
Practitioners warned that the fee itself can still be a barrier for someone living paycheck to paycheck who doesn’t qualify for a fee waiver.
Charging for an offer in compromise is “one of the worst policies I imagine,” said Jeff Trinca, vice president of Van Scoyoc Associates in Washington and a member of the National Association of Enrolled Agents.
“Essentially, you have a taxpayer who can demonstrate that he or she cannot afford a debt and needs to compromise at a lower amount, and the government is going to charge him or her for that. It defies logic,” he said in an email.
The rules incorporate the definition of a low-income taxpayer under Section 7122(c)(3), as required by the Taxpayer First Act (Pub. L. 116-25), a 2019 agency reform law. The code section exempts low-income taxpayers—at or below 250% of the poverty level—from the fee for any offers submitted after July 1, 2019.
The IRS would determine if a taxpayer meets that threshold by looking at their household size and gross monthly income. The Taxpayer First Act required that the agency also review a taxpayer’s adjusted gross income from a recent tax return.
“I’m also glad to see the final regulations incorporate the alternative method of providing for a fee waiver in the Taxpayer First Act (but of course the Service really had no choice in that regard),” Patrick Thomas, founding director of Notre Dame Law School’s Tax Clinic, said in an email.
In a comment letter on the 2016 proposed rules, the Federal Tax Clinic at Gonzaga University Law School warned that increasing the fee to $300 would be a “meaningful and significant” jump for most of the individuals who rely on the clinic, especially those on the outskirts of the 250% poverty level.
“We urge the IRS to consider this context prior to increasing the fee for all taxpayers,” the letter said.