Tax delinquents settle under generous IRS plan

April 10, 1994|By New York Times New Service

Despite its reputation among most taxpayers as a fierce bill collector, the Internal Revenue Service is proving in many cases to be a most forgiving creditor.

Or so it seems under an IRS program that some might think is overly generous.

For example, Terry Brent Chapel of Bethesda owed $331,797.09 in back taxes, penalties and interest. Late last year the IRS settled with Chapel for $1,500.

E. Duane Smith of Baltimore owed $235,640.32 over five years. He was allowed to pay $20,000, and the IRS forgave the rest.

It did the same with Gregory and Andrea Harding of Columbia who paid $10,000 of $551,151.65 owed, and Daniel E. Pollack of Baltimore who paid $50,000 to settle a $721,135.25 bill.

In each case the agency found "doubt as to collectibility," and accepted an offer from the taxpayer.

Those who settle under the program, known as "offers in compromise," agree to waive their right to confidentiality. The settlement becomes public record and is available for inspection at each of the agency's 63 district offices.

The idea behind the longtime program, which was expanded in 1992 in an effort to make it more useful as a compliance tool, is simple. Taxpayers who can prove they have few assets are allowed to pay what they can. The government collects at least some revenue when it might otherwise get nothing.

Those who settle must file returns and pay tax for five years. The IRS may reinstate the entire tax liability for anyone who violates this or any other settlement provision.

"There is a time at which to allow interest and penalties to continue to build up so that people get further and further behind doesn't make good sense," IRS Commissioner Margaret Milner Richardson said.

The Tax Code has provided for compromises with delinquent taxpayers since the early part of the century, but until recently the process was used infrequently.

Two years ago, however, the IRS significantly changed its procedures to encourage usage -- giving district managers more authority, for example -- and the number of such settlements began to soar, reaching 18,020 in the fiscal year ended last September, when $1.38 billion of debt was settled for $209 million.

Examination of IRS files in Baltimore showed more than 200 taxpayers in Maryland and the District of Columbia availed themselves of the program from October 1993 through March. )) Settlements typically ran just 10 cents to 20 cents on the dollar, with only a handful of taxpayers paying as much as half of what they owed.

But the program's popularity has also led to criticism from IRS agents and government investigators.

Some critics contend that the agency makes little effort to verify taxpayers' statements, signed under penalty of perjury, about their assets and ability to pay.

An IRS revenue officer, whose job is to collect delinquent taxes, contends that hiding assets is common.

"It's the biggest joke," said the officer, who declined to be identified. "We just accept what they say on paper. We don't have the staff hours to investigate."

The amount proposed to settle a delinquency must be no less than the taxpayer's equity in a home and other assets -- essentially one's net worth -- and what can be collected from future income after allowing for ordinary living expenses.

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