User Fees for Processing Installment Agreements and Offers in Compromise

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document contains final regulations that provide user fees charged for processing installment agreements and offers in compromise. The final regulations affect taxpayers who wish to pay their federal tax liabilities through installment agreements and offers in compromise.

DATES:

Effective date: These regulations are effective on December 2, 2013.

Applicability Date: These regulations apply to installment agreements entered into, restructured, or reinstated and offers in compromise processed on or after January 1, 2014.

FOR FURTHER INFORMATION CONTACT:

Concerning cost methodology, Eva Williams, at (202) 803-9728; concerning the regulations, Girish Prasad, at (202) 317-5429 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

This document contains amendments to 26 CFR part 300. On August 30, 2013, a notice of proposed rulemaking (REG-144990-12) relating to the user fees charged for processing installment agreements and offers in compromise was published in the Federal Register (78 FR 53702). The charging of user fees for services provided by agencies is authorized by the Independent Offices Appropriations Act (IOAA), which is codified at 31 U.S.C. 9701. Under the IOAA and OMB Circular A-25, 58 FR 38142 (July 15, 1993) (the OMB Circular), the charges must be fair and must be based on the costs to the government, the value of the service to the recipient, the public policy or interest served, and other relevant facts. In general, the amount of a user fee should recover the cost of providing the service, unless the Office of Management and Budget (OMB) grants an exception under the OMB Circular.

The notice of proposed rulemaking proposed to increase the fee under § 300.1 for entering into an installment agreement from $105 to $120 and to increase the fee under § 300.2 for restructuring or reinstating an installment agreement from $45 to $50. Under the notice of proposed rulemaking, the fee for a direct debit installment agreement remained $52, and low-income taxpayers, as defined in § 300.1(b)(2), would continue to pay $43 for any new installment agreement, including a direct debit installment agreement. The notice of proposed rulemaking also proposed to increase the fee under § 300.3 for processing an offer in compromise from $150 to $186. Offers based on doubt as to liability and offers from low-income taxpayers continue to be excepted from a user fee. The new fee rates for both installment agreements and offers in compromise will be effective January 1, 2014. As explained in the notice of proposed rulemaking, the fees proposed (even after the increase) were substantially less than the full costs to the Government of providing the services and OMB has granted a waiver of the full-cost requirement.

No public hearing on the notice of proposed rulemaking was held because no one requested to speak. One comment was received. After consideration of the comment, this Treasury decision adopts the proposed regulations without change.

Summary of Comment

Under the proposed regulations, the reduced fee of $43 for low-income taxpayers that request a new installment agreement would remain unchanged. This fee is substantially less than the full cost to the IRS of processing a request ($282) and the fee charged to other taxpayers ($120). The commenter commended the IRS for not increasing the user fee for low-income taxpayers, but maintained that any user fee discourages low-income taxpayers from entering into installment agreements. The commenter recommended that the fee be reduced to zero. The commenter stated that many low-income taxpayers do not have the means to pay the user fee, even at the reduced rate. The commenter stated that low-income taxpayers often enter into installment agreements to pay as little as $20-30 per month based on their available net income, and believed that an upfront $43 fee makes it difficult for such taxpayers to enter into the agreement.

The effect of the fee on low-income taxpayers was considered in 2006 when the installment agreement fee was last updated. The IRS determined that the fee should remain $43 for low-income taxpayers because requiring the full rate would be burdensome and many low-income taxpayers do not have bank accounts and cannot take advantage of the reduced fee for direct-debit installment agreements.

The user fee is only charged if the taxpayer enters into the agreement and the fee is collected directly from the amounts paid under the terms of the installment agreement. When the IRS grants an installment agreement, the IRS asks that the taxpayer's first payment be at least the amount of the fee for the agreement. In cases where the installment payments are more than the amount of the fee, a portion of the first payment satisfies the fee and the balance of the first payment is applied toward the liability. In cases where the installment payments are less than the amount of the fee, the full amount of the fee is sought and, in the case of direct-debit installment agreements, automatically deducted from the taxpayer's bank account. The IRS, however, does not default an agreement or otherwise penalize a taxpayer whose first payment is less than the fee but otherwise in the amount of the agreed installments. Rather, the IRS applies the first payment and successive installments against the fee until the fee is paid, and thereafter credits the balance of the payments against the liability. In all cases, the taxpayer does not have to pay both the fee and the installment agreement amount in the first month and the taxpayer does not have to pay the fee in full before the IRS respects the installment agreement. The reduced fee is, therefore, not a barrier to an installment agreement. Nevertheless, the IRS will be reviewing its procedures in light of the comment and will consider clarifying its communications with taxpayers in accordance with that review.

The commenter also questioned why the fee was waived entirely for low-income taxpayers making offers in compromise but only reduced for low-income taxpayers entering into installment agreements. The Treasury Department and the IRS believe it is appropriate to charge a reduced fee for a low-income taxpayer to enter into an installment agreement but not to charge a fee to low-income taxpayers for the consideration of an offer in compromise for two reasons. First, unlike the fee for an installment agreement, which is charged only when the taxpayer enters into an installment agreement, the fee for an offer in compromise is charged for the mere consideration of the offer and is not refunded if the offer is not accepted. Therefore, the fee for an offer in compromise could dissuade a low-income taxpayer from making an offer because the taxpayer cannot be assured of reaching an agreement.

Second, a low-income taxpayer making an offer in compromise ostensibly does not have the ability to pay the tax liability in full. Section 7122(d)(3)(A) specifically provides that the IRS should not reject an offer from a low-income taxpayer based solely on the amount of the offer, and requiring a fee from low-income taxpayers could result in a similar hardship in cases where the taxpayer does not have the ability to pay the fee. In contrast, the vast majority of installment agreements contemplate full payment of the tax liability because the taxpayer has the ability to do so over time. While there are partial-payment installment agreements—those that do not provide for full payment of the liability—they are rarely used.

The commenter also expressed concern that, in order to avoid the fee associated with an installment agreement, a low-income taxpayer might request to be put into currently-not-collectible (CNC) status rather than enter into an installment agreement. The commenter was concerned, moreover, that without an installment agreement the taxpayer would not pay the tax and would instead incur substantial penalties and interest. Generally, a taxpayer who has the ability to pay his tax liability over time (and thus is eligible for an installment agreement) will not qualify for CNC status. The IRS places a taxpayer in CNC status on the basis of hardship when it determines that the taxpayer cannot pay the tax debts after paying reasonable living expenses. Even a taxpayer in CNC status may, without an installment agreement, pay the tax over time to help limit the accrual of penalties and interest. To the extent a low-income taxpayer has the ability to pay his tax liability over time, entering into an installment agreement would be in his interest because it will most likely reduce the overall amount required to be paid on his tax liability. Under section 6651(h), the penalty rate on the balance owed is reduced while an installment agreement is in effect. Additionally, interest and penalties accruing on an account will be minimized if regular payments are being applied to reduce the tax liability against which penalties and interest are calculated.

Finally, the commenter voiced concern that the reduced fee of $43 may prove to be too large in proportion to relatively smaller balances owed. The purpose of a fee, however, is to recover the cost to the Government for a particular service to the recipient, and the cost to the Government does not vary based on the amount of the balance due. The reduced fee for low-income taxpayers is therefore appropriate, regardless of the amount of taxes owed.

The commenter made two additional recommendations. The commenter recommended that the IRS implement procedures to require IRS employees to investigate whether a taxpayer making an installment agreement is eligible for the reduced fee for low-income taxpayers. The commenter also recommended that the IRS enhance internal training and establish procedures to better promote viable payment plans and avoid unrealistic installment agreements for low-income taxpayers. These comments do not affect the content of these final regulations, but the IRS will, nevertheless, consider them when updating the procedures for entering into installment agreements. The IRS notes, however, that as of January of 2008, taxpayers meeting the low-income criteria are identified systemically based on the taxpayer's last return and the account is identified as being eligible for the reduced user fee.

Special Analyses

It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. This certification is based on the information that follows. The economic impact of these regulations on any small entity would result from the entity being required to pay a fee prescribed by these regulations to obtain a particular service. The dollar amount of the fee is not, however, substantial enough to have a significant economic impact on any entity subject to the fee. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business and no comments were received.

Drafting Information

The principal author of these regulations is Girish Prasad of the Office of Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 300

• Estate taxes
• Excise taxes
• Gift taxes
• Income taxes
• Reporting and recordkeeping requirements
• User fees

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 300 is amended as follows:

PART 300—USER FEES

Paragraph 1. The authority citation for part 300 continues to read as follows:

Authority: 31 U.S.C. 9701.

Par. 2. In § 300.1, paragraphs (b) introductory text and (d) are revised to read as follows:

Par. 3. In § 300.2, paragraphs (b) and (d) are revised to read as follows:

Par. 4. In § 300.3, paragraphs (b)(1) introductory text and (d) are revised to read as follows: