IRS not obligated to accept offer in compromise
Bennett, TC Memo 2008-251
The Tax Court held that the IRS did not abuse its discretion when it refused to accept the taxpayer’s settlement offer, which was higher than the amount it had calculated the taxpayer could pay. Instead the Service could place part of the taxpayer’s debt in “currently not collectible” status, which would allow it to collect more if the taxpayer’s finances improve.
Facts. The taxpayer failed to file her tax returns from 1997 through 2001. She also failed to pay over the taxes for four quarters during 2000 and 2001 that had been withheld from employees of a company she helped run. In 2003, the IRS began an audit and asked the taxpayer to file the missing returns. She did and also filed her 2002 return, months after it was due. The 2002 return showed she owed $8,000, but she failed to include any payment with the return.
At a collection due process hearing she requested, the taxpayer said she was owed a refund on her 2003 taxes that she would apply to her 2004 taxes. Actually, her 2003 return showed that she owed more than $15,000, which she did not pay. The taxpayer then sent the IRS a “check” for $5,619, which she said was an estimated payment of her 2004 tax liability, along with a $1,500 offer to compromise her 1996, 1999, 2002, and 2003 income tax debts and her 2000-2001 trust fund recovery penalties. The Service promptly rejected the offer and submitted a counteroffer for $31,757.
After the IRS discovered that the taxpayer’s $5,619 estimated tax payment was never posted because the taxpayer had sent only a copy of the check, not the check itself. It said the taxpayer could try another offer in compromise, but she had to prove that she had filed her 2004 tax return and paid any tax due. The taxpayer accepted this suggestion in July 2005. She filed her 2004 federal income tax return and fully paid the tax due. She also included proof of a $3,000 estimated tax payment for 2005. The taxpayer now submitted a second compromise offer of $14,908, and the IRS counteroffered with $54,816, which, after negotiations, it lowered to $33,484.
After the taxpayer submitted a financial update that showed her income had dropped below her monthly expenses and that she was dependent on family loans for living expenses, the Service decided to reject her offer of compromise and place her 2002 debt in “currently not collectible” status. The IRS notified the taxpayer that it was suspending collection activities for all years pending an improvement in the taxpayer’s finances. The taxpayer filed an appeal of the Service’s rejection and its decision to place her 2002 debt in currently-not-collectible status. She argued that because her offer of $14,908 exceeded her $1,468 collection potential, the offer was in the government’s best interest, according to an IRS policy statement, and it had no justification for rejecting it.
Tax Court’s opinion. The Tax Court pointed out that tax debts typically are settled in one of three ways:
(1) The IRS may allow a taxpayer to pay his or her debt over time through an installment agreement. (2) The IRS may declare the debt “currently not collectible” and take no collection action until the taxpayer’s finances improve.
(3) The IRS may accept the taxpayer’s offer to compromise for less than the full debt owed.
The parties agreed that the question in the case was whether the Service abused its discretion in rejecting the taxpayer’s offer and instead classifying her tax debt as currently not collectible. According to the court, the IRS accepts an offer to compromise on one of three bases: doubt as to liability, doubt as to collectibility, or promotion of efficient tax administration. Because the taxpayer placed her offer in the doubt-as-to-collectibility category, the court examined the rules for such offers.
IRM part 184.108.40.206(5) states that offers in compromise are to be evaluated in terms of what is in the government’s best interest as outlined in policy statement P-5-100, which states that the IRS will accept offers when “it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The taxpayer argued that her offer met both of policy statement P-5-100’s requirements:
(1) Her full debt was not collectible. (2) Her $14,909 offer greatly exceeded her collection potential of $1,469.
Therefore, she claimed that her offer was in the government’s best interest and that the Service’s refusal to accept it was an abuse of discretion.
The court pointed out that policy statement P-5-100 did not stand alone, but was part of IRM part 220.127.116.11.3(1), which stated that a doubt-as-to-collectibility offer in compromise must equal or exceed a taxpayer’s reasonable collection potential to be considered for acceptance. This language, stated the court, did not require that the IRS accept an offer in compromise whenever the amount exceeds collection potential. Instead, it establishes grounds for winning consideration.
According to the court, even policy statement P-5-100 does not say that the IRS will accept any offer exceeding reasonable collection potential, but only that it will do so when the amount offered reasonably reflects collection potential. It goes on to state that “taxpayers are expected to provide reasonable documentation to verify their ability to pay.” IRM part 18.104.22.168 lists, as an example of an offer of compromise that the IRS might reject, an offer from a taxpayer who has “an egregious history of past noncompliance” and who will be highly unlikely to remain in compliance during the offer period.
The court said the Service based its determination in part on its finding that the taxpayer’s circumstances might change in the near future (i.e., before the limitations period for collecting her taxes ran out). Because the taxpayer had so delayed filing her returns, the court found no error in the Service’s conclusion that there were eight or more years remaining before the limitations period would run out on most of the years in question. The court also found no error in the Service’s conclusion that the taxpayer had several more years of earning capability. Even though her public relations business had not been enormously successful, she did have the potential to be more successful in the future.
The taxpayer argued that the Tax Court’s decision in Oman, TC Memo 2006-231, which dealt with the same issue as the present case, supported her argument. The court disagreed, pointing out that Oman led only to a remand for a further hearing and came to no firm conclusions resolving the possible conflict between IRM part 22.214.171.124(5) and policy statement P-5-100. Unlike the absent record in that case, the IRS pointed out the present case boasted a full record, which made its reasoning clear. According to the court, because IRM 126.96.36.199(5) and policy statement P-5-100 are both contained in the Service’s manual of policies and procedures, they would both seem to carry equal weight. In any case, the court said that both were merely guidelines guiding the Service’s consideration of all fact and circumstances. Reg. 301.7122-1(f)(3), which the court said was unquestionably binding, does not compel the IRS to accept any particular offer, but to consider all facts and circumstances of the case. That was what the IRS did in this case, said the court.