IRS Gets Called Out In Offer In Compromise Case

 

I am looking at an offer in compromise (OIC) case.

These cases are almost futile for a taxpayer, as the Tax Court extends broad deference to the IRS in its analysis of and determinations on OICs. To win requires one to show that the IRS acted in bad faith.

COMMENT: I have soured on OICs as the years have gone by. Those commercials for “pennies on the dollar” stir unreasonable expectations and do not help. OICs are designed for people who have experienced a reversal of fortune - illness, unemployment, disability, or whatnot – which affect their ability to pay their taxes. It is not meant for someone who is irresponsible or inexplicably unfettered by decency or the responsibilities of the human condition. Not too long ago, for example, one of the clients wanted us to pursue an OIC, as he has racked up impressive tax debt but has no cash. I refused to be involved. Why? Because his cash is going to construct a $2-plus million dollar home. I am very pro-taxpayer, but this is not that. Were it up to me, we would fire him as a client.

Let’s look at the Whittaker case.

Mr. W is a veteran and was a self-employed personal trainer. Mrs. W worked in a local school district and had a side gig as a mall security guard. They were also very close to retirement.

The Ws owed everybody, it seems: a mortgage, student loans, the IRS, the state of Minnesota and so on.

In 2018 the IRS sent a notice of intent to levy.

The Ws requested a collection due process (CDP) hearing.

COMMENT: The Ws were represented by the University of Minnesota tax clinic, giving students a chance to represent clients before the IRS and courts.

The IRS of course wanted numbers: the Form 433 paperwork detailing income, expenses, assets, debt and so forth.

The Ws owed the IRS approximately $33 grand. The clinic calculated their reasonable collection potential as $1,629. They submitted a 20% payment of $325.80, per the rules, along with their OIC.

In the offer, the Ws stressed that their age and difficult financial situation meant that soon they would have to rely on retirement savings as a source of income rather than as a nest egg. Their house was in disrepair and had an unusual mortgage, meaning that it was extremely unlikely it could be refinanced to free up cash.

The IRS has a unit - the Centralized Offer in Compromise unit – that stepped in next. Someone at the unit calculated the Ws’ RCP as $250,000, which is wildly different from $1,629. The unit spoke with representatives at the clinic about the bad news. The clinic in turn emphasized special circumstances that the Ws brought to the table.  

That impasse transferred the OIC file to Appeals.

It was now March 2020.

Remember what happened in March 2020?

COVID.

The two sides finally spoke in September.

Appeals agreed with an RCP of $250 grand. The Settlement Officer (SO) figured that the Ws could draw retirement monies to pay-off the IRS.

Meanwhile Mr. W had retired and Mrs. W was gigging at the mall only two weekends a month.

The SO was not changing her mind. She figured that Mrs. W must have a pension from the school. She also surmised that Mr. W’s military pension must be $2,253 per month rather than $1,394. How did she know all this? Magic, I guess.

The W’s argued that they could not borrow against the house. They had refinanced it under something called the Home Affordability Refinance Program, which helps homeowners owing more than their house is worth. A ballon payment was due in 2034, and refinancing a house that is underwater is nearly impossible.

This did not concern the SO. She saw an assessed value of $243,000 on the internet, subtracted an $85 thousand mortgage, which left plenty of cash. The W’s pointed out that there was deferred maintenance on the house – a LOT of deferred maintenance. Between the impossible mortgage and the deferred maintenance, the house should be valued – they argued – at zero.

Nope, said the SO. The Ws could access their retirement to pay the tax. They did not have to involve the house, so the mortgage and deferred maintenance was a nonfactor. She then cautioned the W’s not to withdraw retirement monies for any reason other than the IRS. If they did so, she would consider the assets as “dissipated.” That is a bad thing.

Off to Tax Court they went. Remember my comment earlier: low chance of success. What choice did the Ws have? At least they were well represented by the tax clinic.

The Court saw three key issues.

Retirement Account

The W’s led off with a great argument:

 

  

This is Internal Revenue Manual 5.8.5.10, which states that a taxpayer within one year of retirement may have his/her retirement account(s) treated as income rather than as an asset. This is critical, as it means the IRS should not force someone to empty their 401(k) to pay off tax debt.

The SO was unmoved. The IRM says that the IRS “may” but does not say “must.”

Yep, that is the warm and fuzzy we expect from the IRS.

The Court acknowledged:

We see no erroneous view of the law and no clearly erroneous assessment of facts.”

But the Court was not pleased with the IRS:

But there may be a problem for the Commissioner – this reasoning didn’t make it into the notice of determination …”

The “notice of determination” comment is the Court saying the files were sloppy. The IRS must do certain things in a certain order, especially with OICs. Sloppy won’t cut it.

Home Equity

The W’s had offered to provide additional information on the loan terms, the deferred repairs to the house, the unwillingness of the banks to refinance.

The IRS worked from assessed values.

It is like the two were talking past each other.

Here is the Court:

The IRS does need to take problems with possible refinancing a home seriously.”

The Whittakers have a point – there’s nothing in the administrative record that states or even suggests that the examiner at the Unit or the settlement officer during the CDP hearing asked for any information in addition to the appraised value.”

There is no evidence in the record of any consideration of the Whittakers’ arguments on this point.”

Oh, oh.

Here is the first slam:

We therefore find that the settlement officer’s conclusion about the Whittaker’s ability to tap the equity in their home was clearly erroneous on this record. This makes her reliance on that equity in her RCP calculations an abuse of discretion.”

COVID

The W’s had alerted the IRS that Mr. W had completely retired and Mrs. W was working only two weekends a month. The SO disregarded the matter, reasoning that the W’s had enough pension income to compensate.

Which pension, you ask? Would that include the pension the SO unilaterally increased from $1,394 to $2,253 monthly?

The Commissioner now concedes that the settlement officer was mistaken, and that Mr. Whittaker had a military pension of only $1,394 per month.”

Oops.

There was the second slam.

The IRS – perhaps embarrassed – went on to note that the Mall of America opened after being COVID-closed for three months. Speaking of COVID, the lockdown had inspired a nationwide surge in demand for fitness equipment. Say …, wasn’t Mr. W a personal fitness trainer?

The Court erupted:

Upholding the rejection of the Whittakers’ offer because Mrs. Whittaker’s mall job may have resumed or Mr. Whittaker might be able to run a training business using potential clients’ possible pandemic purchases is entirely speculative.”

True that.

The settlement officer ‘did not think that the loss of the Whittaker’s wage income or self-employment income … sufficiently mattered to justify reworking the Offer Worksheet.’”

The Court was getting heated.

The settlement officer’s explicit refusal to rework the worksheet despite the very considerable discrepancy in the calculation before and after the pandemic is a clear error and thus an abuse of discretion.”

The Court remanded the matter back to IRS Appeals with clear instructions to get it right. It explicitly told the IRS to consider the material change in the Ws’ circumstances – changes that happened during the CDP hearing itself - and their ability to pay.

We said earlier “almost futile.” We did not say futile. The Ws won and are headed back to IRS Appeals to revisit the OIC.

Our case this time was Whittaker v Commissioner, T.C. Memo 2023-59.

Notice(s) Of Intent To Seize And Levy

 

I received the following notice under power of attorney for a client.  

Another accountant at Galactic Command works with the client. I am the tax nerd should problems arise.

Yeah, we have a problem.

For more than one year, too.

Combine the two and I can get cranky. Just because I know the route doesn’t mean I want to revisit the site.

But back to our topic.

The notice seems terrifying, doesn’t it? The IRS is talking about seizing and levying and all matters of unkindliness.

Let’s go through the sequence of these notices.

First, you owe the IRS. There is a sequence of four notices, sometimes referred to as the “500” sequence.

• CP501         You have unpaid taxes somewhere.
• CP502         We have not heard from you about unpaid taxes.
• CP503         Hey, dummy! Are you there?
• CP504         We intend to levy if you do not do something.

This is the fourth notice in the sequence for our client for tax year 2022. As you can see, he/she/they are moving through the IRS machinery rather quickly. Then again, almost $225,000 in taxes and penalties buys you a better spot in line.

The CP504 is however not the final:final notice.

Let’s talk IRS procedure.

Before the IRS can go after your stuff (bank account, car, John Cena collectibles), it must (almost always) allow you a hearing. This is called a Collection Due Process (CDP) hearing, and it entered the tax Code with the 1998 IRS Restructuring and Reform Act. The Act was Congress’ response to IRS horror stories, including aggressive collection actions.

The IRS is not allowed to go after you until you have been offered that CDP hearing. You can turn it down, blow it off or whatever, but the IRS must provide the opportunity before it can unleash the tender attention of Collections.

 Except …

There is a short list of stuff the IRS can levy before a CDP. The list is uncommon air, except for:

Your state tax refund

That’s it. For most of us, the IRS can only go after our state tax refund – at this stage.

Then you have the FINAL BIG BAD notice: either the 1058 or LT11.The difference depends on whether you have been assigned to a Revenue Officer (RO).

LIFE TIP: Avoid having your own Revenue Officer.

 

If you get to a 1058 or LT11, you are at the end of the line. You will be dealing with Collections, and it is unlikely you will like the experience.

You may want an attorney or CPA, depending upon.

Not that having a CPA seems to matter – because clearly not - to our client.

A Ponzi Scheme And Filing Late

I am reading a case involving a late tax return, a Ponzi scheme, and an IRS push for penalties.

It made me think of this form:

It is used for one of two reasons:

(1)  Someone is filing a tax return with numbers different from a Schedule K-1 received from a passthrough entity (such as a partnership).

(2)  Someone is amending a TEFRA partnership return.

That second one is a discussion for another day. Let’s focus instead on the first reason. How could it happen?

Easy. You are a partner in a partnership. You bring me your Schedule K-1 to prepare your personal return. I spot something wrong with the K-1, and the numbers are large enough to matter. We contact that partnership to amend the return and/or your K-1. The partnership refuses.

COMMENT: We would use Form 8082 to inform the IRS that we are not using numbers provided on your K-1.

This is a tough spot to be in. File the form and you are possibly waiving a flag at the IRS. Fail to file it and the IRS has procedural rights, and those include the right to change your numbers back to the original (and disputed) K-1.

There is another situation where you may want to file Form 8082.

Let’s look at the Rosselli case.

Mr. Roselli (Mr. R) was a housing appraiser. Mrs. Rosselli was primarily a homemaker. Together they have five children, three of whom have special needs.

Through his business, Mr. R came to know the founder of a solar energy company (DC Solar). Turns out that DC Solar was looking for additional capital, and Mr. R knew someone looking to invest. The two were introduced and – in gratitude – Mr R became a managing member in DC Solar via his company Halo Management Services LLC.

This part turned out well for the R’s. In 2017 DC Solar paid Halo approximately $300 grand. In 2018 DC Solar paid approximately $414 grand. Considering they had no money invested, this was all gravy for the R's.

COMMENT: Notice that Halo was paid for management services. Halo in turn was Mr. R, so Mr. R got paid over $700 grand over two years for services performed. This was a business, and Mr. R needed to report it on his tax return like any other business.

In late 2018 the FBI raided DC Solar’s offices investigating whether the company was a Ponzi scheme. The owners of DC Solar were eventually indicted and pled guilty, so I guess the company was.

Let’s roll into the next year. It was tax time (April 15, 2019) and there was not a K-1 from DC Solar in sight.

COMMENT: You think?

The accountant filed an extension until October 15. It did not matter, as the R’s did not file a tax return by then either.

The IRS ran a routine check on DC Solar and its partners. It did not take much for the IRS to flag that the R’s had not filed a 2018 return. The IRS contacted the R’s, who contacted their accountant, eventually filing their 2018 return in January 2022.

You know what was on that 2018 return? The $414 grand in management fees.

You know what was not on that 2018 return? A big loss from DC Solar.

Here is Mr. R:

Mr. Carpoff informed me that I was to receive Schedule K-1s showing large ordinary losses for 2018 from DC Solar, and as a result I would not have a tax liability for that year. However, before the K-1s could be issued … DC Solar’s offices were raided by the FBI.”

All of DC Solar’s documents and records were seized by federal authorities in the ensuing investigation. As a result, I was unable to determine any tax implications because I did not receive a K-1 or any other tax reporting information from DC Solar.”

Got it: Mr. R was expecting a big loss to go with that $414 grand. And why not? DC Solar had reported a big loss to him for 2017, the prior year.

But the IRS Collections machinery had started turning. By August 2022, the IRS was moving to levy, and the R’s filed for a Collection Due Process (CDP) hearing.

COMMENT: There is maddening procedure about arguing underlying tax liability in a CDP hearing, which details we will skip. Suffice to say, a taxpayer generally wants to fight any proposed tax liability like the third monkey boarding Noah’s ark BEFORE requesting a CDP hearing.

At the conclusion of the CDP hearing, the IRS decided that they had performed all the required procedural steps to collect the R’s 2018 tax. The R’s disagreed and filed with the Tax Court.

The R’s presented three arguments.

• They reasonably assumed that they would not be required to file or pay tax for 2018 because of an expected loss from the DC Solar K-1.

The Court was not buying this. Not owing any taxes is not the same as not being required to file. This was not a case where someone did not work, meaning they dd not have enough income to trigger a filing requirement. The Rs instead had a more complicated return, with income here and deductions or losses there. Granted, it might compress to no tax due, but they needed to file so one could follow how they got to that answer.

• The R’s reasonably relied on advice from their accountant and others.

The Court did not buy this either. For one thing, the Rs had never informed their accountant about the $414 grand in management fees. If one wants to rely on a professional’s advice, one must provide all available pertinent information to the professional. The Court was not amused that the R’s had not shared the LARGEST number on their return with their accountant.

• The R’s argued that they would experience “undue hardship” from paying the tax on its due date.

The R’s argued that their income died up when DC Solar was raided. Beyond that, though, they had not provided further information on what “drying up” meant. Without information about their assets, liabilities and remaining sources of income, the Court found the R’s argument to be self-serving.

Also, the Court did not ask – but I will – what the R's had done with the $700 grand in management fees they received in 2017 and 2018.

Yeah, no. The Court found for the IRS, penalties and all.

And here is what I am thinking:

What if they had timely filed their 2018 return, showing a loss from DC Solar equal to the management fees?

Problem: there was no K-1 from DC Solar.

Answer: attach the 8082.

I think the tax would eventually have turned out the same.

But I also think they would have had a persuasive case for abatement of penalties for late filing and late payment. The penalty for late file and pay is easily 25%, so that abatement is meaningful.

Our case this time was Rosselli v Commissioner, TC Bench Opinion, October 23, 2023.

IRS Collection Alternatives: Pay Attention To Details

 

I was glancing over recent Tax Court cases when I noticed one that involved a rapper.

I’ll be honest: I do not know who this is. I am told that he used to date Kylie Jenner. There was something in the opinion, however, that caught my eye because it is so common.

Michael Stevenson filed his 2019 tax return showing federal tax liability over $2.1 million.

COMMENT: His stage name is Tyga, and the Court referred to him as “very successful.” Yep, with tax at $2.1-plus million for one year, I would say that he is very successful.

Stevenson had requested a Collection Due Process (CDP) hearing. It must have gone south, as he was now in Tax Court.

Why a CDP hearing, though?

Stevenson had a prior payment plan of $65 grand per month.

COMMENT: You and I could both live well on that.

His income had gone down, and he now needed to decrease his monthly payment.

COMMENT: I have had several of these over the years. Not impossible but not easy.

The Settlement Officer (SO) requested several things:

·      Form 433-A (think the IRS equivalent of personal financial statements)

·      Copies of bank statements

·      Copies of other relevant financial documents

·      Proof of current year estimated tax payments

Standard stuff.

The SO wanted the information on or by November 4, 2021.

Which came and went, but Stevenson had not submitted anything.

Strike One.

The SO was helpful, it appeared, and extended the due date to November 19.

Still nothing.

Strike Two.

Stevenson did send a letter to the SO on December 1.

He proposed payments of $13,000 per month. He also included Form 433-A and copies of bank statements and other documents.

COMMENT: Doing well. There is one more thing ….

The SO called Stevenson’s tax representative. She had researched and learned that Stevenson had not made estimated tax payments for the preceding nine years. She wanted an estimated tax payment for 2021, and she wanted it now.

COMMENT: Well, yes. After nine years people stop believing you.

Stevenson made an estimated tax payment on December 21. It was sizeable enough to cover his first three quarters.

COMMENT: He was learning.

The SO sent the paperwork off to a compliance unit. She requested Stevenson to continue his estimated payments into 2022 while the file was being worked. She also requested that he send her proof of payments.

The compliance unit did not work the file, and in July 2022 the SO restarted the case. She calculated a monthly payment MUCH higher than Stevenson had earlier proposed.

COMMENT: The SO estimated Stevenson’s future gross income by averaging his 2020 and (known) 2021 income. Granted, she needed a number, but this methodology may not work well with inconsistent (or declining) income. She also estimated his expenses, using his numbers when documented and tables or other sources when not.

The SO spoke with the tax representative, explaining her numbers and requesting any additional information or documentation for consideration.

COMMENT: This is code for “give me something to justify getting closer to your number than mine.”

Oh, she also wanted proof of 2022 estimated tax payments by August 22, 2022.

Yeah, you know what happened.

Strike Three.

So, Stevenson was in Tax Court charging the SO with abusing her discretion by rejecting his proposed collection alternatives.

Remember the something that caught my eye?

It is someone not understanding the weight the IRS gives to estimated tax payments while working collection alternatives.   

Hey, I get it: one is seeking collection alternatives because cash is tight. Still, within those limits, you must prioritize sending the IRS … something. I would rather argue that my client sent all he/she could than argue that he/she could not send anything at all.

And the amount of tax debt can be a factor.

How much did Stevenson owe?

$8 million.

The Court decided against Stevenson.

Here is the door closing:

The Commissioner has moved for summary judgement, contending that the undisputed facts establish that Mr. Stevenson was not in compliance with his estimated tax payment obligations and the settlement officer thus was justified in sustaining the notice of intent to levy.”

Our case this time was Stevenson v Commissioner, TC Memo 2023-115.

Offer In Compromise And Reasonable Collection Potential

Command Central is working two Collections cases with the same revenue officer.

For the most part, I am staying out of it. There is a young(er) tax guy here, and we are exposing him to the ins-and-outs of IRS procedure. This is a subject not taught in school, and training today is much like it was when I went through: a mentor and mouth-to-ear. Friday morning we spent quite a bit of time trying to determine whether someone’s tax year was still “open,” as it would make a substantial difference in how we approach the situation.

COMMENT: This is the statute of limitations. The IRS has three years to assess your return and then ten years to collect. Hypothetically one could get to thirteen years, but that would require the IRS to run the three-year gamut before assessing and then the ten-year stretch to collect. I do not believe I have ever seen the IRS do that. No, of greater likelihood is that the taxpayer has done things to suspend the statute (called “tolling”), things such as requesting payment plans or submitting offers in compromise. Do this repetitively and you might be surprised at how long ten years can stretch. 

Personally, I suspect one of these two clients is dead in the water.

Why?

Let’s like at some inside baseball for an offer in compromise.

Collections looks at something called reasonable collection potential (RCP). As a rule of thumb, figure that the IRS is looking at a bigger number than you are. RCP has two components:

(1)  Net realizable equity in your assets

The classic example is a paid-off house.

To be fair, the IRS does spot you some room. It will use 80% (rather than 100%) of the house’s market value, for example, and then allow you to reduce that by any mortgage. Yes, the IRS is pushing you to refinance the house and take out the equity. It is not unavoidable, however. The push could be mitigated (if not stopped altogether) in special circumstances.

(2)  Future remaining income

This is a multiple of your monthly disposable income.

Monthly disposable income (MDI) is the net of

·      Monthly income less

·      Allowable living expenses (ALE)

Trust me, what you consider your ALE is almost certain to be significantly higher than what the IRS considers your ALE. There are tables, for example, of selected expense categories such as allowable vehicle ownership and operating costs. The IRS is not going to spot you $1,000/month to drive a luxury SUV when calculating your ALE. You may owe it, but they are not going to allow it. Yep, the math has to give, and when it gives, it is going to fall on you.

MDI is then multiplied by either 12 or 24, depending on which flavor offer in compromise you are requesting.

The vanilla flavor, for example, requires you to submit a 20% deposit with the offer request.

That is a problem if you are broke.

Then you have to pay the remaining 80% payments over five months.

 But – you say – that 80% includes twelve months of income. How am I to generate twelve months of income in five months?

I get it, but I did not write the rules.

Let’s look at a recent case. We will then have a quiz question.

Mr. D owed taxes for 2009 through 2011, 2013 through 2017, and payroll tax trust fund penalties for quarter 2, 2014 and quarters 3 and 4, 2015. These totaled a bit under $410 grand.

Shheeessshhh.

Mrs. D owed taxes for 2011 and 2013 through 2017.

OK. Those were joint income tax liabilities and would already have been included in Mr. D’s $410 grand.

They filed and owed with their 2018 return.

In March 2020 they requested a Collection Due Process Hearing.

They filed and owed with their 2019 return.

In July 2020 they offered $45,966 to settle their personal taxes for 2009 through 2011 and 2013 through 2019. Total personal tax was about $437 grand.

Now began the Collections dance.

Their offer was submitted to the specialized unit that works with offers. The unit wanted more information. The D’s had disclosed, for example, that they had retirement accounts.

The IRS asked: could you send us paperwork on the retirement accounts? 

The D’s send information for her IRA but not for his 401(k).

COMMENT: It almost never works to play this game.

The IRS calculated RCP based on their best available information.

Let’s look at just one facet: the house.

The D’s said the house was worth $376,600 on their original application. It had a mortgage of $310,877.

The IRS said that the house was worth $680,816.

COMMENT: Really? Did they think the IRS had never heard of Zillow or Movoto?

Following is the taxpayers’ comment:

On September 24, 2021, petitioners acknowledged that this value did not reflect the actual fair market value of the personal residence, stating that ‘we always start low as the initial starting point of the negotiation.’”         

COMMENT: Again, it almost never works to play this game.

Here is the math for NRE:

FMV	680,816
	80%
Adjusted	544,653
Mortgage	(310,877)
RCE	233,776

                                          

 

 

The D’s argued that the $680,816 value for the house was ridiculous.

They had it appraised at $560,000.

The IRS said: OK. Even so, here is the NRE:              

FMV	560,000
	80%
Adjusted	448,000
Mortgage	(310,877)
RCE	137,123

The IRS of course determined the D’s could pay significantly more than their proposed offer. I want to stop our discussion here and go to our quiz question:

I have given you enough information to know the IRS would turn down their offer of $45,966. How do you know?

Go back and review how RCP is calculated.

It is the sum of realized assets and some multiple of income.

The offer was less than RCP.

In fact, it was less than the asset component of RCP.

Could it happen? Of course, but it would take exceptional circumstances: think elderly taxpayers, maybe severe if not terminal illness, the residence being the only meaningful asset, etc.

That is not what we have here.

So the D’s tried a gambit:

Petitioners propose that this Court find as fact their allegations that the SO was ‘hostile, irate [and] yelling’ and ‘not qualified to be impartial and honest in this case.’”

That might work. Must prove it though.

Jawboning the SO when gathering information does not seem like such a brilliant idea now.

Here is the Court:

Since the record before us (which we are bound by) is silent as to any of the SO’s alleged acts of impropriety or bias, we find this argument by petitioners to be unsubstantiated.”

Offer denied.

Our case this time was Dietz v Commissioner, T.C. Memo 203-69.

Collections and Hutzpah

 

An old partner of mine would have called it “hutzpah.”

The case is ridiculous, but it does give us a chance to review the tolling of the statute of limitations.

Let’s start:

·      The IRS has – barring unusual circumstances – only so much time to collect taxes from you. This period is 10 years from the date of assessment. A key concept here is that the date of assessment is not necessarily the date you filed, and that one tax year can have more than one ten-year period running concurrently (think an IRS audit a couple of years after you filed).

·      The 10 years can be interrupted (the fifty-cent word is “tolled”) for certain things, such as filing for an offer in compromise. This means that that 10-year statute can stretch to much longer than 10 years in the real world.

Let’s look at the Ward case.

The IRS determined the Wards had underreported income by $197 grand for 1996 and $209 grand for 1997. The Wards took the matter to Tax Court and lost.

The 1996 tax was assessed in November 2002.

COMMENT: Plus ten years puts one at November 2012.

The 1997 tax was assessed in December 2002.

COMMENT: Plus ten years means December 2012.

Alright, how in the world does one get to 2022 with these dates and facts?

Let’s look at the following:

(1)  Offer in compromise dated 12/27/2002

(2)  Due process hearing requested 7/15/2003

(3)  Offer in compromise dated 3/15/2004

(4)  Offer in compromise dated 12/4/2008

(5)  Due process hearing requested 12/16/2011

(6)  Offer in compromise dated 3/6/2014

(7)  Offer in compromise dated 9/23/2015

Five offers? This has the signature of tax protest and will likely go poorly with the Court.

Each offer tolls the statute. The IRS has up to two years to resolve an offer, and it is not uncommon for an offer to take a year or more to resolve. The statute is tolled while an offer is being considered. Just reviewing the dates quickly, the Wards added at almost seven years to the statute.   

Then we have the due process hearings.

A CDP is a Collections hearing and generally means that the IRS wants you to pay more tax than you think you can pay. The hearing allows one to propose a payment alternative – think a smaller monthly payment than the IRS wants. The statute is tolled during CDP, and the IRS tacks-on another 30 days to boot after the determination.

I see that just one of the CDPs added over a year and a half to the statute.

Add all the seven tolling events and the statute had tolled until the summer of 2021.

Yep, the tax years were open, and the IRS could pursue collection.

Let’s go back.

Remember I said that the Tax Court had decided the matter?

Two of the offers were to contest the tax liability.

Let’s give some background about offers.

There are three types of offers:

(1) You argue that you do not owe the tax (or at least as much). This is a "liability” offer.

(2) You argue that you cannot pay the amount due in full. Think of a “pennies on the dollar” late-night commercial and you get the drift. This is a “collectability” offer.

(3)  You argue that fair and effective and fair tax administration requires acceptance of an offer. This third type is rare. I have never done one in practice, although we presently have a client where I intend to request one. The facts are extraordinary, though, and involve financial malfeasance while the client was a minor.

A key point is that a liability offer is off the table once the Tax Court has decided. The Wards’ first and fourth offers were liability offers and were therefore invalid.

Still, the offers tolled the statute.

So, the Wards played a wild card: they argued that the IRS considered two invalid offers in order to toll the statute. The IRS was playing a cynical game to buy time, and the Wards should not be punished for the IRS’ egregious behavior.

Hutzpah!

The Court shut them down immediately:

It was Defendants who primarily benefited from these delays. While the offers remained pending, the IRS could not collect payment on the underlying assessments…. [By] filing so many offers, [Defendants] successfully blocked collections for years.”

The statute tolled. The Wards owed. The Court had little patience with people who knew just enough to muck-up the tax collection process for the better part of two decades.

Our case this time was United States of America v Walter and Virginia Ward, USDC AK, Case 3:21-cv-0056, July 6, 2022.

The Problem-Child Client: Recidivist

 

It happens: the problem-child client.

Let’s talk about one type of problem child: the recidivist.

Thomas Kelly was a securities broker in New York City. We have three tax years at play - 2013 to 2015. Thomas had not been filing his returns or paying his taxes.

On December 22, 2017, he filed 2013, reporting adjusted gross income of $1.9 million. The tax was approximately $690 grand.

A few days later (December 26, 2017) he filed 2014, reporting AGI of almost $1.5 million and tax of approximately $515 grand.

Keeping the streak going, on January 17, 2018, he filed 2015, reporting AGI of $1.2 million and tax over $400 grand.

Got it. Thomas fell out of the system and was now trying to get back in. Maybe there had been familial or medical setbacks. He was trying to correct his mistakes. Everybody likes a comeback story.

Let’s jump forward over a year and a half to September 2019. Thomas owed the IRS over $2.5 million for years 2013 through 2015.

Late file penalties. Late pay penalties. Interest on everything. Yep, it gets expensive.

The IRS issued three notices:

* Two for liens

* Another for a levy

Thomas requested a CDP (Collection Due Process) hearing. He was after three things:

* He wanted a payment plan

* He wanted withdrawal of the liens

* He wanted abatement of the penalties

Got it. So far this is standard stuff.

The hearing was scheduled for March 2020.

Then COVID happened.

The hearing was held-up until February 2021.

At the hearing …

FIRST, Thomas wanted to pay $30,000 per month.

Problem: Thomas owed enough that $30 grand would not pay his taxes in full before the statute of limitations played out.

CTG: This is a called a partial pay plan. There are requirements in the Internal Revenue Manual (IRM), and one is that the taxpayer be current on his/her other taxes. Thomas owed approximately $250 grand on his 2019 taxes.

The IRS did not want to include 2019 in his payment plan. In addition, the IRS did not see payments on his 2020 estimated taxes.

CTG: Borrow $250 grand and a bit more for those estimated taxes, Thomas. Battle, war, and all that.

It makes sense if you think about it. Thomas was asking the IRS to accept less than a dollar-on-a-dollar for past taxes. He was then asking the same deal for his current taxes. The IRS was not going to agree to this.

Thomas dug in his heels and wanted the IRS to include 2019 and 2020 in the payment plan.

The IRS of course didn’t.

Thomas complained that the IRS settlement officer abused his discretion in denying him a payment plan.

CTG: Thomas, shut up.

SECOND, Thomas wanted the liens removed.

CTG: This one is going to be tricky. The IRS is reluctant to remove a lien, especially once you get to those dollar levels.

Thomas argued that the IRS Settlement Officer abused his discretion in refusing to withdraw the liens.

CTG: Thomas … SHUT UP!

Thomas next argued that releasing the lien would facilitate his being able to pay the tax. The lien would affect his licensing, and that effect could negatively impact his earning power.

CTG: Nice segue. We now need to go from “could” to “would,” as we need to persuade skeptical parties. Is there a cite from governing body rules and regulations we can copy and paste? Can you get a letter from your employer? We need something more than our word, as that is considered self-serving.

Nope, says Thomas. My word is good enough.

CTG: You are not taking advice well, Thomas.

THIRD, Thomas wanted the penalties abated. He had two arguments.

CTG: Bring it.

The first was that he qualified for first time abatement (FTA).

CTG: OK, but that will address 2013 only. You won’t be able to use it again for the other years.

FTA is bread-and-butter. If you have been clean for the preceding 3 years, the IRS can waive the penalty. The FTA applies to a limited number of penalties, but the good news is that limited number included Thomas’s specific penalty.

Good job, Thomas.

However, the IRS pointed out that Thomas had penalties for 2012. The … tax … year … immediately … preceding 2013.

CTG: Thomas, did you even google what FTA is?

Thomas had a second argument: he had reasonable cause.

CTG: OK, Thomas, sway me.

His wife started spending money like madwoman in 2007. This caused all matters of marital and financial problems. She filed for divorce in 2015.

CTG: Thomas …

The attorney fees were crushing. He was having financial hardship …

CTG: Thomas …

… emotional problems …

CTG: Thomas …

… battling depression.

CTG: Thomas, the Court is going to want to know how your divorce proceedings – in 2015 – affected your tax responsibilities for 2013 and 2014.

Tax Court: Yes, Thomas, please tell us.

Here are a few trenchant comments by the Court:

He successfully conducted his securities business during 2013 – 2015, earning more than $1 million annually …”

… he has a history of tax noncompliance, dating as far back as 2009.”

His allegations of financial hardship at the relevant times thus seem questionable.”

CTG: We are losing them here, Thomas.

Tax Court:

In any event, financial hardship ‘generally does not affect a person’s ability to file.’”

CTG: Going…

Tax Court:

At the time of the CDP hearing petitioner’s outstanding liabilities for 2013 - 2015 exceeded $2.5 million. Those liabilities arose from his repeated failure to file returns and pay tax, despite earning between $1 million and $2 million annually. During the hearing he refused to pay even his (comparatively modest) estimated tax liability for 2020.

CTG: Gone.

Yes, the IRS sours with a recidivist. I have seen the IRS dig in when they see someone failing to file, never paying estimates, extending with no payment, repetitively filing returns with significant balances due. This is not a matter of knowing how to navigate the IRS. One can navigate like Magellan and not get there.

Thomas could have - I believe - gotten a partial pay. Perhaps he needed to borrow to pay 2019 and 2020, but: so what? He had the earning power, and borrowing would have facilitated the (much more significant) $2.5 million at play for 2013 through 2015.

He had a shot at releasing the liens if he could show (likely) injury to his earning power. He had to show some cause, though, otherwise everyone would make this argument and the IRS would never be able to lien.   

He was hosed on penalty abatement, however. Recidivist.

He certainly did not need to fling charges of abusing discretion. The Settlement Officer was just following IRM guidelines, which Thomas (or his tax advisor) could have double-checked at any time.   

Our case this time was Thomas E Kelly v Commissioner, T.C. Memo 2022-73.