Can the IRS
turn down your offer in compromise if the offer is truly the best and most you
are able to pay?
My
experience with OICs and partial payment plans has generally involved
disagreement with the maximum a client can pay. I do not recall having the IRS
tell me that they agreed with the maximum amount but were going to reject the
OIC anyway. Some of that – to be fair – is my general conservatism with
representing an OIC.
COMMENT: There are tax mills out there promising pennies-on-the-dollar and inside knowledge of an IRS program called “Fresh Start.” Here is inside knowledge: the IRS Fresh Start program started in 2011, so there is nothing new there. And if you want pennies on the dollar, then you had better become disabled or fully retired with no earning power, because it is not going to happen.
Today we are
going to talk about James O’Donnell.
James did
not believe in filing tax returns. Sometimes the IRS would prepare a substitute
return for him; it did not matter, as he had no intention of paying. This went
long enough that he was now dragging over $2 million in back taxes, penalties
and interest.
I suppose
his heart softened just a bit, as in May, 2016, he submitted an offer in
compromise for $280,000. He attached a check for $56,000 (the required 20%
chop) and simultaneously filed 12 years’ worth of tax returns.
When reviewing
an OIC, the IRS will also review whether one is up-to-date with his/her tax
compliance. The IRS did not see estimated tax payments for 2016 or 2017. In
September, 2017 the IRS rejected the offer, saying that it would reconsider
when James was in full compliance.
Bummer, but
those are the ropes.
James must
have hired someone, as that someone told the IRS that James did not need to pay
estimated taxes.
Odd, but
okay. The IRS decided to reopen the case.
The pace quickened.
In October,
2017 the IRS wanted to lien.
James
requested a CDP hearing as he - you know – had an offer out there.
I agree.
Liens are a bear to remove. It is much better to avoid them in the first place.
In March,
2018 the IRS rejected the offer.
In April,
2018 James appealed the rejection. His representative was still around and made
three arguments:
(1) The unit reviewing the offer erred in
concluding the offer was not in the government’s best interest.
(2) James was in full compliance with his tax
obligations.
(3) James was offering the government all he could
realistically afford to pay.
There was paperwork
shuffling at the IRS, and James’ case was assigned to a different settlement
officer (SO). The SO sent a letter scheduling a telephone conference on May 15,
2018.
James
skipped the call.
Sheeesshhh.
James
explained that he never received the letter.
The SO
rescheduled another telephone conference for June 14, 2018.
Two days
before the hearing – June 12 – Appeals sustained the rejection of the offer,
reasoning that acceptance of James’ offer was not in the government’s best
interest because of his history of “blatant disregard for voluntary
compliance.”
James made
the telephone conference on June 14. The SO broke the bad news about the offer
and encouraged James to resubmit a different collection alternative by June 26.
James filed
with the Tax Court on August 20, 2018.
On July 30,
2019 (yes, almost a year later) the IRS filed a motion to return the case to
the agency, so it could revisit the offer and its handling. The Tax Court
agreed.
The IRS
scheduled another conference call, this one for January 28, 2020. The IRS
presented and James verbally agreed to a partial-pay with monthly payments of
$2,071, beginning March, 2020.
COMMENT: This strikes me as a win for James. Failing the OIC – especially given the reason for the fail – a partial-pay is probably the best he can do.
The SO sent the
partial-pay paperwork to James for his signature.
James blew
it off.
He now felt
that the SO had not considered all his expenses, making $2,071 per month unmaintainable.
OK. Send the
SO your updated numbers – properly substantiated, of course – and request a reduction.
Happens all the time, James.
Nope. James
wanted that OIC. He did not want a partial-pay.
It would be
all or nothing in Tax Court.
COMMENT: A key difference between the OIC and a partial-pay is that the IRS can review a partial-pay at a later point in time. As long as the terms are met, an OIC cannot be reviewed. If one’s income went up during the agreement period, for example, the IRS could increase the required payment under a partial-pay. This is the downside of a partial-pay compared to an offer.
James was betting
all his chips on the following:
Appeals calculated the reasonable collection potential of $286,744. James had offered $280,000. Both sides agreed on the maximum he could pay.
The Tax
Court pointed out that – while correct – the IRS is not required to accept an
offer if there are other considerations.
Offers may be rejected on the basis of public policy if acceptance might in any way be detrimental to the interest of fair tax administration, even though it is shown conclusively that the amount offered is greater than could be collected by any other means.”
What other consideration
did James bring to the table?
For two decades (if not longer) petitioner failed to file returns and failed to pay the tax shown on SFRs that the IRS prepared for him. During this period he was evidently a successful practitioner in the insurance and finance business. As of 2016 his outstanding liabilities exceeded $2 million, and he offered to pay only a small fraction of these liabilities. Because of his lengthy history of ignoring his tax obligations, the Appeals Office determined that acceptance of his offer could be viewed as condoning his ‘blatant disregard for voluntary compliance’ and that negative public reaction to acceptance of his offer could lead to ‘diminished future voluntary compliance’ by other taxpayers.”
The Tax
Court bounced James, but it was willing to extend an olive branch:
We note that petitioner is free to submit to the IRS at any time, for its consideration and possible acceptance, a collection alternative in the form of an installment agreement, supported by the necessary financial information.”
Accepted OICs
are available for public review. It is one thing to compromise someone’s taxes
because of disability, long-term illness and the similar. That is not James’
situation. The Court did not want to incentivize others by compromising for fourteen
(or so) cents on the dollar with someone who blew-off the tax system for twenty
years.
Our case this
time was James R. O’Donnell v Commissioner, T.C. Memo 2021-134
