IRS Says “No, Thank You” To Taxpayer’s Offer In
Compromise
By Lisa Starczewski, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
In Bennett v. Comr.,1
the IRS rejected a taxpayer's offer in compromise in spite of the fact
that the amount offered was ten times the amount that could
“reasonably” be collected at the time. Instead, the IRS
placed a portion of the debt into a “currently not
collectible” status. The IRS did this in order to wait and see
whether the taxpayer was able to pay more in the future. The issue
presented was whether this amounted to an abuse of discretion.
Generally, tax debts are settled in one of the three following
ways: (1) the Commissioner allows a taxpayer to pay the debt over time
through the use of an installment agreement; (2) the Commissioner
declares the debt “currently not collectible” and takes no
collection action until and unless the taxpayer's finances improve; or
(3) the Commissioner accepts a taxpayer's offer to compromise for less
than the full debt owed.
When determining how to handle a debt owed by a taxpayer, the
Commissioner must treat similarly situated taxpayers consistently and
should analyze the specific facts and circumstances of each case. The
regulations provide that “[n]o offer to compromise may be
rejected solely on the basis of the amount of the offer without
evaluating that offer under the provisions of this section and the
Secretary's policies and procedures regarding the compromise of
cases.”2
In addition, IRM 5.8.7.6(6) (9-23-08) states that offers in
compromise are to be evaluated in terms of what is “in the 'best
interest of the government’ per policy statement P-5-100.”
That policy, in turn, states the Commissioner will accept offers when
“it is unlikely that the tax liability can be collected in full
and the amount offered reasonably reflects collection
potential.”
In this particular case, the taxpayer had failed to file returns
for five years (1997 - 2001). The taxpayer eventually submitted an
offer in compromise of $14,908. The IRS's final offer was $33,484.81.
The taxpayer submitted a financial update showing that her income had
dropped to an average of $4,093 in the last seven months while her
monthly expenses averaged $4,777. The Commissioner rejected her offer
in compromise and labeled a portion of her debt “currently not
collectible.” Based on this determination, the Commissioner sent
her a notice of determination stating that he would indefinitely
suspend his collection activities for all years pending an improvement
in the taxpayer's finances.
The taxpayer argued that because her offer of $14,908.81 exceeded
her $1,468.81 collection potential, it was in the government's best
interest to accept the offer.
The Tax Court upheld the IRS's determination that the taxpayer's
financial situation may improve in future years. The court found no
error in the Commissioner's conclusion that the taxpayer had several
more years of earning capability and that her business had potential
to be more successful in the future. The court noted that the
Commissioner had prepared an “exhaustive narrative”
supporting his position.
Of course, it didn't help that the taxpayer had failed to file
returns for several years, filed returns with amounts owed without
including payments, and made several misstatements regarding her
payments along the way.
The moral of the story seems to be this - the IRS is not going to
allow taxpayers to walk away from legitimate tax liabilities by
claiming not to be able to afford the payment if there is a legitimate
basis on which to believe that better days are ahead. When the money
comes, the IRS will be there - with its hand out.
For more information, in the Tax Management Portfolios, see
Mather and Weisman, 638 T.M., Federal Tax Collection Procedure --
Defensive Measures, and in Tax Practice Series, see ¶3870,
Collection of Tax.
1
T.C. Memo 2008-251.
2
Regs. §301.7122-1(f)(3).
|
