Making an Offer in Compromise Does not Stop Seizure and Sale of Home

In United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018) the Eighth Circuit affirmed the decision of the district court allowing the sale of taxpayer’s home and affirmatively determining that an offer in compromise request filed by the taxpayer has no impact on the ability of the court to grant the request by the IRS to sell the home or on the IRS’ ability to sell the home once the court granted its approval. In reaching this conclusion the Eighth Circuit analyzes the exemptions to levy in IRC 6334 and the relief those provisions do and do not provide.

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Taxpayer owes the IRS over $500,000. The opinion does not discuss the actions by the taxpayer to pay or resolve her liability prior to the action by the IRS to sell her house. I imagine that the IRS considered her a “won’t pay” taxpayer. Before seeking to sell her home, the IRS had seized and sold her boat and levied on her bank accounts.

The 1998 Restructuring and Reform Act added IRC 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer. Prior to 1998 collection due process did not exist. Prior to 1998 the 10 deadly sins did not exist one of which calls for the dismissal of an IRS employee who makes an inappropriate seizure. So, the landscape regarding seizures, and especially personal residence seizures, changed dramatically after 1998; however, the amount of litigation regarding seizure of personal residences is low and the Brabant-Scribner case offers a window on one aspect of this process.

As the IRS initiated the process of seizing her personal residence by obtaining the appropriate court approval, the taxpayer filed an offer in compromise. She filed an effective tax administration offer of $1.00, but the amount and sincerity of her offer do not really matter to the legal outcome of this case. The timing and the amount of the offer may have influenced the thinking of the judges and made them more inclined to dismiss her argument but her possibly bad faith effort to stop the approval and execution of the sale should not have affected the outcome here.

To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. Taxpayer argued that her offer was a reasonable alternative; however, the court spends three paragraphs explaining that an offer does not matter in this situation. The relevant language in the applicable regulation is “reasonable alternative for collection of the taxpayer’s debt.” The court explains that the word “for” holds the key to the outcome.

“For” refers to an alternative to the sale of the personal residence such as an installment agreement or the offer of funds from another source to satisfy the debt. An offer in compromise is not an alternative for collection but an alternative “to” collection.

Having determined that the words of the regulation point toward a resolution other than an offer as providing the necessary alternative, the court looks at the remainder of the regulation for further support of its conclusion. It points to the provision in Treasury Regulation 301.6334-1(d)(2) which provides that the taxpayer has a right to object after the IRS makes its initial showing and “will be granted a hearing to rebut the Government’s prima facie case if the taxpayer … rais[es] a genuine issue of material fact demonstrating … other assets from which the liability can be satisfied.” This regulation, like the one providing an alternative “for” collection, looks not to relief from payment of the liability but a source for making payment. It does not provide the offer in compromise as a basis for relief. Based on this the court concludes that “nothing requires the district court to ensure that the IRS has fully considered a taxpayer’s compromise offer before approving a levy on a taxpayer’s home.”

Since the IRS properly made its case for seizing and selling the home and the taxpayer did not rebut that case, the Eighth Circuit affirms the decision of the district court to approve the sale. The decision provides clear guidance for district courts faced with the request by the IRS to seize and sell a personal residence. Personal residence seizures by the IRS remain rare at this point. Taxpayers faced with such a seizure, almost always taxpayers the IRS characterizes as “won’t pay” taxpayers, will find it difficult to stop the seizure and sale based on this decision. I do not think this decision will motivate the IRS to increase the number of personal residence seizures but it will make it a little easier to accomplish when it decides to go this route.

 

When Does an Offer in Compromise Extend the Statute of Limitations on Collection?

United States v. Kenny, No. 1:16-cv-02149 (N.D. Ohio June 6, 2018) involves a spectacularly non-compliant taxpayer against whom the IRS seeks both the reduction of assessments to judgment and an injunction. The court grants both. Mr. Kenny’s defense relied upon the statute of limitation on collection and the failure of his three OICs to extend it. The issue arises regularly because of the handling of OICs by the offer groups in Brookhaven and Memphis.

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Mr. Kenny failed to pay taxes voluntarily for about 25 years. He receives income as an independent contractor or a business owner and not as a wage earner. The court described in some detail his failure to voluntarily comply with his tax obligations and his expenditures which included almost $5,000 in monthly rent, almost $2,000 each month in meals and gas, extensive travel, payment of his son’s student loans and his daughter’s tuition. As with almost any case of this type, the described behavior would appear to have the facts needed in order to pursue prosecution under IRC 7201 for evasion of payment; however, for reasons not explained in the opinion, the government seeks other remedies against Mr. Kenny.

In addition to obtaining a judgment against him for the outstanding balance of the taxes, the IRS also sought an injunction to “to comply with his on-going tax obligations.” In addition to the almost $1.5 million in income taxes he also owes about $10,000 in trust fund recovery penalty. I have seen injunction cases to keep taxpayers from pyramiding trust fund taxes, but his case appears to be an injunction directed at complying with the income tax laws.

The court starts out stating that it generally disfavors injunctions “that do no more than require on-going compliance with the law.” The court goes on, however, to state that the unique facts here support the use of injunction as a tool to promote compliance. It cites to five factors developed by the 6th Circuit for determining whether to issue an injunction:

  • The gravity of the offence
  • Extent of participation
  • Scienter
  • Recurrent nature of offense
  • Likelihood that his business activities will involve him in some offense again

The court spends a long paragraph explaining how Mr. Kenny fits into all of the categories set out by its circuit. The paragraph ends with the notation that the IRS withdrew the request for the appointment of a receiver to handle the business affairs of Mr. Kenny. The appointment of a receiver is a remedy even more extraordinary than an injunction.

Statute of Limitations

Mr. Kenny’s defense to the effort to obtain a judgment against him focuses on the statute of limitations and the impact on the statute on the three offer in compromise (OIC) requests that he filed with the IRS. Essentially, he argues that the IRS rejected the OICs as non-processable returning them without consideration. Further, he argues that because each of the offers were returned as non-processable his submission of the OICs would not extend the statute of limitations on collection and that the IRS needs the extra time it argues results from his submission of the OICs in order for the suit against him reducing the liability to judgment to be considered timely. The applicable IRM provision (IRM 5.8.7.2) provides “An offer can be returned as either a “not processable return” or a “processable return”. It is important to note the distinction because when there is a not processable return the collection statute is not suspended…”  The court does not provide the detail needed to reveal exactly what happened when Mr. Kenny submitted his OIC requests; however, it appears that the IRS rejected the OICs at some time after the processability point thereby triggering the statute of limitations extension needed by the IRS.

The issue of when the IRS rejects an OIC has significance not always noted when the OIC gets returned to the taxpayer. Just as a taxpayer should not submit an OIC without thinking about the statute of limitations implications, a taxpayer should carefully note the basis for the IRS returning an OIC without acceptance. Many things can cause the IRS to return an OIC as non-processable and a detailed description of the circumstances that cause the IRS to determine an offer is non-processable as well as the process for making the determination can be found in IRM 5.8.2. The Centralized OIC units make the determination as stated in IRM 5.8.7.2.1 which provides:

Not Processable Returns

  1. An offer is determined to be not processable if any of the “Not Processable” criteria listed in IRM 5.8.2.3.1, Determining Processability, is present. This decision is the sole responsibility of the Centralized OIC (COIC) sites located in the Brookhaven and Memphis Campus.

About a dozen years ago several taxpayers litigated the processability issue with respect to the bankruptcy criteria. These taxpayers argued that making bankruptcy a processability criteria disadvantaged them in an inappropriate manner. After a couple of victories at the bankruptcy level (See In re Holmes, 298 B.R. 477 (Bankr. M.D. Ga. 2003); In re Chapman, 1999 Bankr. LEXIS 1091 (Bankr. S.D. W. Va. 1999)), the tide turned on this issue and the IRS prevailed (See In re Shope, 347 B.R. 270 (Bankr. S.D. Ohio 2006); In re Uzialko, 339 B.R. 579 (Bankr. E.D. Pa. 2006). I mention the cases for those who might have interest in attacking the processability criteria to show that such an attack would prove difficult because of the discretion IRC 7122 gives to the IRS in making the OIC determination.

A sure sign that the IRS is returning an OIC as non-processable is that the IRS does not give a taxpayer appeal rights when it rejects an OIC. Those who regularly submit offers know that getting a call from the OIC unit relatively quickly after submitting an OIC where the person at the offer unit says “if I do not receive X within 10 days I am going to return your offer as non-processable” happens fairly regularly.

It appears from IRS activity on Mr. Kenny’s OIC submissions several months after the initial submission that the IRS did consider the OICs on their merits before rejecting them; however, the type of rejection may not always be clear. In a recent post complaining about the telephone number provided by the offer unit, I spoke about a processability rejection (an incorrect one) because the assessment occurred as a result of a restitution order and when it does the IRS has no ability to administratively compromise the liability. Unfortunately, the Kenny case offers little guidance on when the return of an OIC results from a non-processable submission verses an unacceptable one on the merits of the offer because Mr. Kenny did not provide much evidence. Despite the absence of clear guidance, the Kenny case serves as a reminder that submitting an offer suspends the statute of limitations on collection and submitting multiple offers can suspend it for quite some time if the submitted offers make it past the processability stage. For taxpayers seeking to defend collection suits on the basis of the statute of limitations keeping careful track of these submissions and the basis for denial of the OIC requests becomes important in deciding if a procedural defense to the suit is available.

 

 

 

 

 

 

Recent Tax Court Case Highlights CDP Reach and Challenges With Collection Potential (and a little Graev too)

I read with interest Gallagher v Commissioner, a memorandum opinion from earlier this month.  The case does not break new ground, but it highlights some interesting collection issues and also touches on the far-reaching Graev issue.

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First the facts, somewhat simplified.  The taxpayer was the sole shareholder of a corporation whose line of business was home building and residential construction.

The business ran into hard times and was delinquent on six quarters of employment taxes from the years 2010 and 2011. IRS assessed about $800,000 in trust fund recovery penalties under Section 6672 on the sole shareholder after it determined he was a responsible person who willfully failed to pay IRS. IRS issued two notices of intent to levy including rights to a CDP hearing. The taxpayer timely requested a hearing, and the request stated that he sought a collection alternative.

After the taxpayer submitted the request for a CDP hearing the matter was assigned to a settlement officer (SO). There was some back and forth between the SO and the taxpayer, and the taxpayer submitted an offer in compromise based on doubt as to collectability for $56,000 to be paid over 24 months. After he submitted the offer, IRS sent a proposed assessment for additional TFRP for some quarters in the years 2012 and 2014.

The SO referred the offer to an offer specialist. Here is where things get sort of interesting (or at least why I think the case merits a post). The specialist initially determined that the taxpayer’s reasonable collection potential (RCP) was over $847,000. That meant that the specialist proposed to reject the offer, as in most cases an offer based on doubt as to collectability must at least equal a taxpayer’s RCP, a figure which generally reflects a taxpayer’s equity in assets and share of future household income.

Before rejecting the offer, the specialist allowed the taxpayer to respond to its computation of RCP. The taxpayer submitted additional financial information and disputed the specialist’s computation of the taxpayer’s equity in assets that he either owned or co-owned.  That information prompted the offer specialist to revise downward the RCP computation to about $231,000 after the specialist took into account the spouse’s interest in the assets that the taxpayer co-owned and also considered the impact of the spouse on his appropriate share of household income.

Following the specialist’s revised computations, the taxpayer submitted another offer, this time for about $105,000. Because it was still below the RCP (at least as the specialist saw it), she rejected the follow up offer, which led the IRS to issue a notice of determination sustaining the proposed levies and then to the taxpayer timely petitioning the Tax Court claiming that IRS abused it discretion in rejecting his offer and sustaining the proposed levies.

So what is so interesting about this? It is not unusual for taxpayers to run up assessments and to then disagree with offer reviewers on what is an appropriate offer and to differ on RCP. RCP calculations are on the surface pretty straightforward but in many cases, especially with nonliable spouses, illiquid assets and shared household expenses (as here) that calculation can be complex and lead to some differences in views.

In addition, the opinion’s framing of the limited role that Tax Court plays in CDP cases that are premised primarily on challenges to a collection alternative warrants some discussion. The opinion notes that the Tax Court’s function in these cases is not to “independently assess the reasonableness of the taxpayer’s proposed offer”; instead, it looks to see if the “decision to reject his offer was arbitrary, capricious, or without sound basis in fact or law.” That approach does not completely insulate the IRS review of the offer (or other alternative) from court scrutiny, and in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand. While that is limited and does not give the court the power to compel acceptance of a collection alternative, it does allow the court to ensure that the IRS’s rejection stems from a proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits).

That led the court to directly address one of the main contentions that the taxpayer made, namely that the specialist grossly overstated his RCP due to what the taxpayer claimed was an error in assigning value to his share of an LLC that owned rental properties.  This triggers consideration of whether it is appropriate to assign a value for RCP purposes to an asset that may in fact also be used to produce income when the future income from that asset is also part of the RCP. The IRM addresses this potential double dipping issue but the Gallagher opinion sidesteps application of those provisions because the rental properties did not in fact produce income, and the offer specialist rejection of the offer, and thus the notice of determination sustaining the proposed levies, was not dependent on any income calculations stemming from the rental properties.

The other collection issue worth noting is a jurisdictional issue. During the time the taxpayer was negotiating with the offer specialist, IRS proposed to assess additional TFRP for quarters from different years that were not part of the notice of intent to levy and subsequent CDP request:

Those liabilities [the TFRP assessments from quarters that were not part of the CDP request] were not properly before the Appeals Office because the IRS had not yet sent petitioner a collection notice advising him of his hearing rights for those periods.  In any event, the IRS had not issued petitioner, at the time he filed his petition, a notice of determination for 2012 or 2014. We thus lack jurisdiction to consider them. [citations omitted]

Yet the taxpayer in amending his offer included those non CDP years in the offer. The Gallagher opinion in footnote 5 discusses the ability of the court to implicitly consider those non CDP years in the proceeding:

We do have jurisdiction to review an SO’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Sullivan v. Commissioner, T.C. Memo. 2009-4. Indeed, that is precisely the situation here: the SO considered petitioner’s TFRP liabilities for 2012 and 2014, as well as his TFRP liabilities (exceeding $800,000) for the 2010 and 2011 CDP years, in evalu- ating his global OIC of $104,478. We clearly have jurisdiction to consider (and in the text we do consider) whether the SO abused his discretion in rejecting that offer. What we lack jurisdiction to do is to consider any challenge to petitioner’s underlying tax liabilities for the non-CDP years.

This is a subtle point and one that practitioners should note if in fact liabilities arise in periods subsequent to the original collection action that generated a collection notice and a consideration of a collection alternative in a CDP case. Practitioners should sweep in those other periods to the collection alternative within the CDP process; while those periods are not technically part of the Tax Court’s jurisdiction they implicitly creep in, especially in the context of an OIC which could have, if accepted, cleaned the slate.

The final issue worth noting is the opinion’s discussion of Graev and the Section 6751(b) issue. While acknowledging that it is not clear that the TFRP is a penalty for purposes of the Section 6751(b) supervisory approval rule, the opinion notes that in any event the procedures in this case satisfied that requirement, discussing and referring to the Tax Court’s Blackburn opinion that Caleb Smith discussed in his designated orders post earlier this month:

We found no need to decide that question because the record included a Form 4183 reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was suffic- ient to enable the SO to verify that the requirements of section 6751(b)(1) had been met with respect to the TFRPs, assuming the IRS had to meet those requirements in the first place.

Here, respondent submitted a declaration that attached a Form 4183 showing that the TFRPs assessed against petitioner had been approved in writing by …. the [revenue officer’s] immediate supervisor…. In Blackburn, we held that an actual signature is not required; the form need only show that the TFRPs were approved by the RO’s supervisor. Accordingly, we find there to be a sufficient record of prior approval of the TFRPs in question.

Updates on Collection Issues

The IRS has recently updated several matters that impact taxpayers in collection. This post pulls together some of the newly available information.  The areas discussed in this post are the financial standards, the updated offer in compromise booklet, the impact of the new law on amounts exempt from levy and the impact of the new law on the time to file wrongful levy claims.

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Financial Standards

On March 26, 2018 the IRS issued new financial standards to be used in collection cases.  The new standards provide guidance to individuals seeking to prepare a collection information statement in order to convince the IRS to grant an offer in compromise, an installment agreement, to make a currently not collectible determination or to otherwise decide the appropriate course of action in a collection case.  The financial standards have their roots in information published by the Bureau of Labor Statistics.  Congress also makes them applicable in bankruptcy cases for certain purposes.

Offer in Compromise

On March 25, 2018, the IRS issued a new Offer in Compromise Booklet. The updated booklet contains the following changes:

Form 656, Section 6, Filing Requirements – “I have filed all required tax returns and have included a complete copy of any tax return filed within 60 days prior to this offer submission.”

This is also addressed in the opening Q&A section under “Other Important Facts”:

“Note: If you have filed your tax returns but you have not received a bill for at least one tax debt included on your offer, your offer and application fee may be returned and any initial payment sent with your offer will be applied to your tax debt. Include a complete copy of any tax return filed within 60 days prior to this offer submission.”

WHAT YOU NEED TO KNOW, Q&A Section, Bankruptcy, Open Audit or Innocent Spouse Claim – “If you currently have any open audit or outstanding innocent spouse claim, wait for those issues to be resolved before you submit an offer.”

PAYING FOR YOUR OFFER – There is better highlighting of the Low-Income Certification option, with emphasis that low income certification means no money need be sent with the offer.

Because the IRS will not work an offer if a taxpayer has not complied with tax laws by filing all necessary returns, many taxpayers file returns immediately prior to the filing of an offer in compromise. The IRS does not always process past due returns with haste because it puts more focus on processing the currently due returns.  The new requirement that a taxpayer attach returns filed within 60 days of the submission of the offer allows the IRS offer group to avoid rejecting cases for lack of filing compliance and to get a view of the liabilities the taxpayer owes in advance of the actual assessment.

The warning about waiting for the resolution of outstanding audits or claims should be considered in the context that an offer in compromise acts as a closing agreement resolving all matters concerning the years covered by the offer. A taxpayer cannot go back and seek a refund after obtaining an offer and the IRS cannot go back and seek an additional assessment.  It is important to resolve all issues for the years covered by the offer but many taxpayers do not appreciate the scope of the offer with respect to the years it covers.

Low income taxpayers continue to receive a benefit when applying for an offer because they do not have to pay a fee for the offer or remit a percentage of the offer. Almost all practitioners know this but many individuals filing offers pro se may not appreciate this benefit and the new booklet tries to make it clearer.

Each of the changes seem appropriate and helpful.

Exemption from Levy

The exemption from levy is tied to the personal exemption. The personal exemption went up last year and the IRS has published guidance on how that change impacts the amount of the exemption from levy in a wage levy situation.  This creates a windfall for individuals subject to a wage levy that Congress probably did not think about when it passed the law.  Of course, windfall may be the wrong term when talking about a provision that can bring a taxpayer to their knees.  Here is the IRS description of the way the wage levy provisions will now work:

Public Law Number 115‐97, TAX CUTS AND JOBS ACT OF 2017, signed by President Trump on December 22, 2017, temporarily increases the basic standard deduction applicable to the 2018 taxable year [IRC § 63(c)(2); Rev. Proc. 2016‐ 55] across all filing categories:

  • From $6,350 to $12,000 for single individuals and married individuals filing separate returns;
  • From $9,350 to $18,000 for heads of households; and
  • From $12,700 to $24,000 for married individuals filing a joint return and surviving spouses.

The Act also suspends personal exemption deductions. Both changes, the increase in the standard deduction and the suspension of the personal exemption, are effective for taxable years beginning after December 31, 2017, and before January 1, 2026. These two changes impact how a recipient of a levy will figure the amount of income exempt from levy. Prior to the change in the law, the amount that was exempt from levy was calculated by taking into consideration both the standard deduction and the total exemptions of the payee. With the elimination of personal and dependency exemptions, a new method for determining the amount of income exempt from levy was needed.

As part of the Tax Cuts and Jobs Act, Congress amended §6334 to provide that from January 1, 2018 through December 31, 2025 employers and other recipients of levies would exclude from levy $4,150 per dependent per year in addition to the amount excluded based upon the standard deduction for the filing status of the person subject to levy. The amount exempt from levy each pay period is calculated by dividing the total amount exempt from levy for the year by the number of pay periods. Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income has been updated. Changes are also being made to Forms 668-W(c), 668-W(c)(DO), 668-W (ICS) and Form 668-W, Notice of Levy on Wages, Salary, and Other Income, along with the instructions.  Due to the increase in the standard deduction amount, in most cases, the taxpayer will have more take-home pay that is exempt from levy.

Employers or others receiving levies will need to figure the amount of income exempt from levy. To do so the recipient  must determine what the payee’s filing status will be (The amount exempt from levy is based upon the standard deduction for that filing status); the frequency of payments, Daily (260), Weekly (52), Bi-Weekly (26), Bi-Monthly (24), Monthly (12); and lastly, the number of dependents that the payee will claim. In this example, the employer knows that the employee will claim the married filing joint standard deduction and has two dependents.

STEP 1: Determine the filing status of the payee.

STEP 2: Find the amount exempt from levy based upon how often taxpayer is paid:

Married Filing Jointly:

STEP 3: The taxpayer is entitled to exclude $4,150 per year per dependent. This chart shows the amount that can be excluded each pay period based upon pay frequency. The amount from far the right-hand column for the correct pay frequency will need to be multiplied by the number of dependents to arrive at the total amount exempt from levy that is attributable to the payee’s dependents.

Amount Exempt from Levy per Dependent:

Step 4:

Amount Exempt from levy from Bi-Weekly Pay:

Add the amount exempt per pay period based upon the payee’s filing status, plus the amount exempt per pay period per dependent to arrive at the total amount of take-home pay that is exempt from levy. A taxpayer that is married, files jointly, is paid $1,500 bi-weekly, and claims two dependents will receive $1,242.32 and will have $257.68 ($1,500-$1242.32) levied.

Wrongful Levy Claims

IRC § 6343(b) previously required taxpayers to make a wrongful levy claim within nine months of the taking of the property. For some people, this time frame was too short because they did not even learn about the taking during that time.  In response, Congress increased the amount of time taxpayers have to seek the return of property when they believe the IRS has wrongfully taken their property while trying to collect from a taxpayer.

Public Law 115-97, the Tax Cuts and Jobs Act extends the period for making an administrative claim to two years and if the taxpayer makes an administrative claim during that period the time to bring suit is extended for 12 months from the date of filing of the claim or for six months from the disallowance of the claim, whichever is shorter. The change applies to levies made after December 22, 2017, and to levies made prior to that date if the nine month period under the prior law had not yet expired.  The IRS issued IR-2018-126 to discuss the change and has revised Publication 4528 to reflect the change.

 

Accelerating the 2008 First-Time Homebuyer Credit in order to Compromise the Liability

We welcome guest blogger William Schmidt of the Kansas Legal Aid Society. William is a regular guest on the blog with his monthly posts on designated orders. He encountered a situation involving a client struggling to satisfy her requirements resulting from the first time home-buyer credit and wrote this guest post for others who might face this situation. In the end his effort to obtain an offer in compromise to assist his client did not prove necessary; however, the process he followed in order to obtain the relief is a process that could work for other clients in this situation. Keith

The first-time homebuyer credit for 2008 is still causing issues for taxpayers. Keith Fogg recently wrote a blog post that looked at the credit in the context of bankruptcy, examining whether the credit is a tax or a loan and the court correctly characterized it as a dischargeable loan. This post will examine a different tactic in dealing with the 2008 credit, looking at Offer in Compromise rather than bankruptcy, and I will relate how I tried to use that method to assist a client.

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The First-Time Homebuyer Credit in 2008

The first-time homebuyer credit under Internal Revenue Code section 36 went through three phases, but applied to home purchases after April 8, 2008 and before May 1, 2010. The first phase, applicable to homes purchased in 2008, “takes the form of a $7,500 interest-free loan” (that is the maximum amount) as stated on the IRS website here. The credit is repaid in equal portions over a 15-year “recapture period” as shown here. The second phase of the credit, applicable to homes purchased in 2009 or 2010, allowed for new home owners to receive a maximum credit of $8,000 that did not have to be repaid if they stayed in the home for 3 years. The third phase, applicable beginning November 7, 2009 for homes purchased in 2009 and 2010, added in long-time homeowners for a maximum credit of $6,500.

Personal note: During the rollout of the credit I was working in the corporate office of H&R Block in their research department, providing guidance to tax preparers. I remember the confusion as the IRS went through the various phases of the credit and its qualifications for homes, homebuyers, and payments. You can see from the linked pages how the credit grew in complexity over those couple years.

One option available to taxpayers who qualified to change from the 2008 credit to the 2009 credit was to amend the tax return. For those who stayed with the 2008 credit, there was the annual recapture repayment amount included with the tax return. The main exception was when the home stopped being the main home. That could “accelerate the recapture” (meaning repayment of the remainder of the credit) unless there was an exception to the repayment of the full credit. Those exceptions included transfer in a divorce settlement, destruction of the home, foreclosure, sale, or death. Foreclosure or sale of the home meant repayment of the credit only up to the amount of the gain through foreclosure/sale.

Even though the loan is interest-free and only in the range of hundreds of dollars each year, there are low income taxpayers on fixed incomes who cannot afford to make that payment to the IRS. Feel free to examine those links above or the scenarios the IRS provided to find information on what a taxpayer is supposed to do if they cannot afford to pay the interest-free loan when the annual tax return is due. It may take you some time because the IRS does not address this kind of client situation on their website.

My Client’s Story

When confronted with a client who could not afford her annual payment under the 2008 first-time homebuyer credit, I had to research what to do to help her. She originally received $3,600 and had paid $1,440, leaving $2,160 to be repaid at $240 annually. Looking at the first-time homebuyer credit pages on the IRS website was no help. I started by getting my client into the Currently Not Collectible status. I did not think it would be fruitful to keep repeating that process every year for 9 years total.

I eventually got in contact with Jennifer Liguori, the Director of the Low Income Taxpayer Clinic of Legal Aid of Arkansas – Springdale. She informed me that she has accelerated the recapture of the credit and then submitted an Offer in Compromise for $10. She had those offers accepted twice.

The Offer in Compromise

I started by amending my client’s 2016 tax return to include the entire $2,160 credit amount, accelerating the recapture. I accomplished this by filling out IRS Form 5405, Part II. The Form 5405 Instructions state in a section about Part II titled “Repaying more than the minimum amount” that “You can choose to repay more than the minimum amount with any tax return.” Filling out this section will provide for the remainder of an individual’s 2008 first-time homebuyer credit to come due.

I also submitted an Offer in Compromise of $1 for my client under Doubt as to Collectibility. While the amended return processing and the submission of the Offer overlapped, I looked at the timing and filed the Offer because it knew it would take time for the IRS to process the Offer. The 2016 amended tax return was processed and my client received a bill for the full amount before there was a response on the Offer.

Approximately seven months after the submission, an Offer in Compromise examiner sent me a letter saying “We cannot accept your client’s offer in compromise at this time based upon the information provided” and that I needed to contact her within 10 days or the offer will be processed as is. I left several phone messages and faxed a letter to make contact within the 10 days but there was no response. It turns out the officer had training and was out of the office yet the phone message did not reflect that.

Once we were able to converse, the examiner informed me that she had to amend the Form 656 for submission under Exceptional Circumstances (Effective Tax Administration). I don’t think this necessarily had anything to do with the first-time homebuyer credit. I think the examiner thought this change was necessary in order to receive manager approval for the $1 offer.

My client had also signed in the wrong place on the original Form 656 – as preparer, not taxpayer – so the examiner needed an original signature from my client 10 days after faxing the amended Form 656 to me.

I have only been in contact with this client by long distance. The client’s home in question is in small town Kansas, two and a half hours away from my office. My only contact with her was by phone or correspondence by mail. Our last phone conversation was in December 2017. I proceeded to leave messages with her and mailed her a letter, but there was no response.

I finally decided to contact the Kansas Legal Services office that covers that county. Since it was located a half hour away from the client, I thought they might be able to assist with locating the client in some capacity. I spoke with the secretary there. She did not seem to have much to provide me at first but called back later with information. Because it was small-town Kansas, she was able to find out that my client was in an unresponsive, terminal coma at the Mayo Clinic in Minnesota and provided me with some contact numbers. I called those numbers and learned that my client actually passed away.

I told the IRS officer that my client was deceased, so the offer is now terminated. The only way an offer would still work is if the estate submitted an offer. In hindsight, the credit would have terminated with the 2018 tax return because of the client’s death because the home stopped being her main home. She would only have owed the $480 for 2016 and 2017 without accelerating the recapture.

I wanted to shine a spotlight on the 2008 first-time homebuyer credit for tax professionals, especially for those who deal with the low income taxpayer community. This is a gray area because low income people need assistance yet the IRS information does not spell out what to do when an individual cannot afford to make the annual repayment for the credit. I submitted a Systemic Advocacy (SAMS) request but I would hope any IRS employees who read this post would consider spelling out the relief available for individuals that meet either the low income or Currently Not Collectible criteria.

 

 

The Trial – How the Great Literary Work Lives on in the Offer in Compromise Unit

As a college student I read this book by Franz Kafka. Working for Chief Counsel, IRS for over 30 years I did my best to avoid having the taxpayers I encountered feel as if they were getting the same treatment as Joseph K. Not everyone I encountered would give me passing marks on that goal but it seems like a basic government function.

Someone at the Brookhaven office of the IRS OIC unit has either not read the book and so does not appreciate the frustration a stone wall creates or read the book and enjoys bringing the fictionalized Joseph K to life through their system. I try not to make the blog a place to air grievances with the IRS but this post is a long complaint. Do not read further if you tire of this type of piece.  At the end, I adopt a suggestion from Les and offer our first poll.

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Last fall I submitted an OIC on behalf of a client who has already suffered much at the hands of the tax system and her spouse. She owes a very substantial liability as a result of her husband’s actions which have landed him in prison. I mention his status because it becomes relevant later in the story. For reasons I will not detail here, she was unable to obtain innocent spouse status though I believe she should qualify. After the final failure in the effort to obtain innocent spouse status, the tax clinic at Harvard, which began helping her at the tail end of her adventure to obtain innocent spouse status, filed the OIC mentioned above.

On January 17, 2018 Employee # 0182126679 of the OIC unit in Brookhaven wrote a letter informing the clinic and the client that he was closing the OIC case because:

“An Offer in Compromise cannot be considered that includes liabilities for which criminal restitution was ordered payable to the IRS. Only the district court that entered the restitution order can modify it.”

The statement is correct as it applies to the liabilities of the husband; however, he did not submit an offer. The statement has no applicability to my client. Her assessment did not result from a criminal restitution order. She was not convicted of any crimes and was assessed via the “regular” assessment process.

The letter from Employee # 0182126679 contains a phone number (844) 805-4980. It does not contain a fax number or any other means of reaching Employee # 0182126679 except his address. Upon receipt of the letter I responded to Employee # 0182126679 by letter and informed him that the criminal restitution exception barring offers does not apply to my client since her assessment did not result from a restitution order. I asked that he reopen the case and I asked that he contact me. I also provided him with the contact information of the Appeals employee handling this case since the offer was submitted in the context of a Collection Due Process case.

Although my letter to Employee # 0182126679 was sent on January 24, 2018, I have yet to hear from Employee # 0182126679. I have called the number listed above on several occasions and have listened to the “soothing” IRS hold music for over two hours on some of the calls. I am listening to it now as I write this post. We are on the 22nd minute of the current call. I have concluded that the number provided is a “dead letter box” that no one at the IRS picks up. The correspondence from Employee # 0182126679 is not the only correspondence from OIC examiners working in Brookhaven that has provided this number. Some examiners provide this number while others offer a number that rings on their desk. I cannot discern a reason for the difference but I know what a difference it makes.

I asked the Appeals employee handling the CDP case to provide me a direct contact number for Employee # 0182126679. He has not. His response was that his coordinator in Appeals who handles OICs made in CDP cases has not informed him of any action taken on the offer. That’s nice but I informed him of the return of the offer and provided him with a copy of the letter from the OIC unit. I would have hoped that would have mattered. It apparently did not. I could write another blog post on my encounters with this Appeals employee but one complaining post is enough.

I asked another employee of the OIC unit to provide me with a working phone number for Employee # 0182126679 as the general number for the OIC unit is not one that gets picked up by anyone. The employee with whom I last spoke would not provide me with a direct dial number for Employee # 0182126679 but said she would give him a message. He has not called in response to whatever message was provided to him.

The good news is that my client is spared from receiving collection correspondence while her offer sits in purgatory but I wonder how many others are out there trying to communicate with an office that gives a phone number no one answers and which refuses to respond to letters or to provide a working number. I would love to know the amount of traffic on this number and to know how many others have tried unsuccessfully to reach the OIC unit at the number it provides but does not answer. I am also curious whether the two year rule regarding offers and acceptance was stopped by the letter saying the offer was being returned or was not stopped since it was a CDP case or starting running again when I informed the OIC unit of the mistake. There are lots of things to think about when on terminal hold.

I had some interruptions in completing this post. It’s now the 57th minute of the call and the music is going strong with occasional interruptions telling me to stay on the call and the first available operator will assist me. I think the first available operator will answer the phone long after I have stopped working this case. Joseph K lives on.

The poll suggested by Les requests that you comment on this post to let us know which taxpayer rights you think are violated from the following choices:

The Right to Be Informed
The Right to Quality Service
The Right to Pay No More than the Correct Amount of Tax
The Right to Challenge the IRS’s Position and Be Heard
The Right to Appeal an IRS Decision in an Independent Forum
The Right to Finality
The Right to a Fair and Just Tax System

 

Designated Orders 12/18/2017 – 12/22/2017: Basis, Discretion to Reject Offers and Restitution Interest

Regular DO guest poster Professor Samantha Galvin of the University of Denver catches us up on some interesting designated orders during a busy pre-holiday week at the Tax Court. Les

The Tax Court issued seventeen designated orders the week ending December 22. Prior to reviewing them closely, I assumed it was a push to get a lot accomplished before the holidays and the end of the year, but nine of the seventeen designated orders (including three consolidated dockets) were issued in light of the Graev decision and many were discussed as part of Keith’s post here.

I discuss three of the eight non-Graev designated orders below. The five remaining orders not discussed involve: 1) a petitioner’s motion for reconsideration relating to a 6621(c) penalty (here and discussed briefly below); 2) a denial of a petitioner’s motion for summary judgment and motion to compel discovery (here); 3) a grant of respondent’s motion for summary judgment in a CDP case where petitioners’ failed to propose a collection alternative (here); 4) a denial of petitioner’s motion for reconsideration on a consolidated docket (here); and 5) a grant of respondent’s motion for summary judgment in a CDP case where a petitioner improperly attempted to raise an underlying liability (here).

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The issues discussed below include an interesting basis computation question when a seller transfers a partial interest in property to a taxpayer that improved the property prior to a subsequent sale to a third party, Appeals’ discretion to reject offers in compromise, and restitution interest abatement and res judicata.

Court Corrects Computations to Basis When There is an Interim Sale of an Interest in Property

Docket No. 021378-03, Stephen M. Gaggero v. C.I.R. (Order here)

It is rare for the Tax Court to grant a petitioner’s motion for reconsideration but it happened, in part, in two different cases two weeks ago. I only discuss this case. The other case involves a section 6621(c) penalty, but the motion is granted only to change certain phrases in the original opinion to reflect the Court’s intended meaning.

To be successful with a motion for reconsideration a petitioner must show that the Court made more than a harmless error pursuant to Rule 160. In this case the error in the original opinion, according to the Court, was a failure to understand that the sale of a share of property to a construction company in exchange for the construction company’s improvements made to the property should have been reflected in petitioner’s adjusted basis when he and the construction company jointly sold the property to a third party in a subsequent transaction. In essence the petitioner sought to add the FMV of the services he received from the constriction company to the basis for purposes of both the initial transfer of a partial interest to the construction company and on the subsequent third party sale.

This error could have been corrected using Rule 155 computations, but the parties cannot agree on the correct numbers. Pursuant to Rule 155(b) if the parties cannot agree, the Court has the discretion to grant them an opportunity to present arguments about the amounts so that the Court can determine the correct amount and enter its decision accordingly.

In this designated order, the Court looks to the closest analogous case which is Hall v. Commissioner, 65 T.C.M. 2575 (1993). In Hall it was held that, “the value of the carpenter’s services did not increase the sellers’ basis in the property for the sale to the carpenter but would increase the basis in the remaining share of the property on any later sale to a third party.” The parties cannot agree about the way the rule in Hall should apply to petitioner’s case. Petitioner argues that the portion of the property exchanged for the construction company’s services should increase his basis on both the partial sale to the construction company and the joint sale to the third party; whereas Respondent argues that the increase in basis should only apply on the joint sale to the third party.

The Court finds that respondent’s application of Hall is correct and the amount determined in the original opinion is not correct. The Court proceeds to go through a calculation using what it has now determined to be the correct amount.

The other findings and holdings from the original opinion are unchanged but require another attempt at Rule 155 computations, however, with the Hall-related dispute laid to rest hopefully the parties will agree going forward.

Offers and IRS Discretion

Docket No. 25587-15SL, Randolph and Jennifer Jennings v. C.I.R. (Order here)

In this designated order the Court is ruling on cross-motions for summary judgment. The case originates from a notice of determination issued after a timely requested CDP hearing on a proposed levy. Petitioners indicated that they wished to submit offer in compromise in their CDP request, but submitted the offer prior to the IRS acknowledging the CDP request and prior to the hearing. The settlement officer learned that the offer had already been submitted and waited for a decision from the offer unit before evaluating the proposed collection alternative.

The offer unit determined petitioners’ reasonable collection potential was higher than the amount of their offer, in part due to the cash surrender value of a life insurance policy. Following the offer unit’s reasoning, the settlement office also rejected the OIC but first allowed petitioners to increase the amount of their offer which would have required them to surrender the life insurance policy. Petitioners were not willing to surrender the policy, so the settlement officer issued a notice of determination sustaining the proposed levy.

Petitioners argue the settlement officer abused her discretion by not considering their poor health and limited employment opportunities, but the Court finds the offer unit considered these things. Petitioners did not propose a different collection alternative other than the offer.

The Court denies petitioners’ motion for summary judgment and grants respondent’s motion. The Court highlights the fact that accepting or rejecting an offer is within the IRS’s discretion and the Court does not interfere with that discretion unless it finds the decision is arbitrary. In this case it is not arbitrary for the IRS to sustain the levy because petitioners’ offer was rejected, petitioners refused to increase the offer amount, and they did not propose any other collection alternatives.

Restitution Res Judicata

Docket No. 12358-16, Debra J. Ray v. C.I.R. (Order here)

This case involves petitioner’s arguments that the IRS improperly assessed interest on her District Court ordered restitution and that the restitution had already been paid in full. Both parties have moved for summary judgment.

Petitioner was ordered by the District Court to make restitution payments after being convicted of criminal tax fraud for filing a false tax return. In that case, the District Court agreed to waive interest and applied a $250 credit toward the restitution. A few months after the District Court decision was made, petitioner paid the restitution in full and the U.S. Attorney filed a satisfaction of judgment with the District Court.

Then several things happened around the same time, the IRS: assessed liability for tax year 2000, assessed restitution and interest finding that petitioner had not fully paid the restitution, and applied her restitution payment toward the tax year 2000 liability.

The IRS issued a Notice of Tax Lien Filing on the restitution amount and interest. Petitioner timely requested a CDP hearing.

Petitioner claimed she had paid restitution in full. After clearing up confusion about whether the lien was filed on the restitution or liability amount, but instead of looking into underlying issue, the settlement officer agreed to withdraw the lien and placed petitioner’s account into currently not collectable status. The interest on the restitution was not abated and petitioner’s claim that she did not owe restitution was not considered.

Petitioner then appealed the CDP determination. The appeals officer examined petitioner’s case and determined that interest abatement was not appropriate since there were not any substantial ministerial or managerial acts that would warrant an abatement of interest. The appeals officer also determined that petitioner still owed $250 of restitution.

As for the interest component, the Tax Court had decided a similar issue in Klein v. Commissioner, 149 T.C. No. 15 (2017); Les discussed Klein in a post here, where he noted that Klein was an important case and one of first impression. The Klein opinion came out after the petitioner filed her petition but before her trial date. In Klein, after a thorough analysis, the Court held it did not have the ability to charge interest on restitution payments under section 6601. As a result of Klein, respondent concedes that petitioner should not be liable for interest on the restitution amount, but whether she still owes any restitution is at issue.

Since petitioner did not have an opportunity to raise the underlying restitution liability previously, the Tax Court’s review is de novo. The Court looks to the doctrine of res judicata which requires that: 1) the parties in the current action must be the same or in privity with the parties of a previous action; 2) the claims in the current action must be in substance the same as the claims in the previous action; and 3) the earlier action must have resulted in a final judgment on the merits.

The Court finds the requirements are met: 1) the parties are the same as both cases involve the petitioner and the government (albeit different agents of the government); 2) the claims in substance both involve whether petitioner paid the restitution required by the judgment; and 3) the satisfaction of judgment filed by the District Attorney is a final judgment which binds the IRS and extinguishes the IRS’s right to collect any additional restitution.

 

As a result, the Court grants petitioner’s motion for summary judgment and respondent is ordered to abate the restitution assessment and corresponding interest.

The Intersection of Innocent Spouse Relief and Offers in Compromise

In Harris v. Commissioner, T.C. Summ. Op. 2017-77, the Tax Court denied a request for innocent spouse (IS) relief to a petitioner whose wife had obtained an offer in compromise (OIC) for the liability from which he sought relief. The Court found that her OIC did not pave the road for him to obtain IS relief. Because the Harvard clinic, like most low income tax clinics, does a high number of OICs and a lesser but still substantial number of IS cases, I read the opinion with interest. I do not remember a previous case in which these two forms of relief from the collection of an assessed liability crossed paths in precisely this manner.

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Mr. and Mrs. Harris got married on December 21, 2012, and continue to reside together in marital harmony at the time of the IS trial in Mr. Harris’ case. The opinion does not discuss whether the timing of their wedding sought to obtain tax benefits available from joint filing or if the timing of the wedding was somehow inextricably driven by factors other than tax. They timely filed their 2012 return (already I am pulling for them – this fact alone makes them an unusual couple to be discussing on the electronic pages of PT.) In 2012, Mr. Harris received wages of $3,877 and non-employee compensation of $3,074 while Mrs. Harris netted $71,784 from three Schedule C businesses. Though they timely filed and made some remittance, they still owed $4,295 of the taxes reported on their return. Both husband and wife participated in filing the return and both knew that their taxes were not fully paid.

In subsequent years, they continued to timely file their returns and Mrs. Harris continue to earn the lion’s share of the family income from her Schedule C businesses. For the year 2013, Mrs. Harris failed to report about $45,000 she received from a distribution from a retirement account. This resulted in an additional assessment for that year. Mrs. Harris also brought into the marriage unpaid taxes for several years. She owed taxes for failure to remit, and she had entered into and defaulted on installment agreements during those years because she continued to fail to make estimated payments.

She decided to request an offer in compromise. Mr. Harris knew about her decision. She submitted an offer for the years 2007 through 2012 (the year of their first joint return.) After some back and forth, the IRS accepted her OIC for a lump sum payment of $7,458 on April 14, 2014. It’s hard to make informed decisions based on limited information but I am shocked that the IRS accepted an offer of this amount given that her 2012 income was $71,784 and her 2013 income was $106,410. Her monthly income leading up to the OIC would have been almost $9,000. Even though she may have had no assets, I would have expected her reasonable collection potential to be approximately $3-5,000 x 12. I am not sure if I want to start having my offers worked in Memphis, send my offers out to whoever prepared hers, or both. Despite my surprise at the amount of the offer, the fact is the IRS accepted it and it may have been a great deal for the IRS for all I know.

The OIC only covered Mrs. Harris and did not cover Mr. Harris. He came to regret this fact and he became very interested in obtaining an OIC himself. He filed doubt as to liability OICs in the four consecutive months of October 2014 through January 2015. The IRS denied each of the OICs, stating that he did not raise an “issue regarding the accuracy or correctness of your tax liability.”

In March of 2015, he took a different tack and filed a request for IS relief. He put in this request that Mrs. Harris should have included him in the OIC she submitted. The IRS denied his request for relief and he filed a Tax Court petition. Mrs. Harris chose not to intervene. Because this is an underpayment case, Mr. Harris needs to obtain relief under IRC 6015(f). The Court looked at Rev. Proc. 2013-34 and the seven conditions listed there. While noting that the factors do not bind the Court, it went through them and found two did not favor relief and five were neutral or weigh slightly against relief. Additionally, the Court pointed out that Mr. and Mrs. Harris left income off their 2012 (his) and 2013 (hers) returns.

Mr. Harris argued that it would be inequitable to hold him liable for the 2012 liability because he should have been included on the OIC. After looking at the circumstances, the Court determined that he was not entitled to 6015(f) relief. The failure to include him on the OIC did not result from fraud or deceit on the part of either Mrs. Harris or the IRS. While it was unclear why he was not included, the failure does not form the basis for IS relief. The result is logical. If he wanted to be on his wife’s OIC, he should have affirmatively taken steps to make it happen. Even if 2012 got added to the OIC at the last minute, the failure to include him does not form the basis for relief through the IS process.

The Court described the four OICs he submitted as being doubt as to liability OICs. Perhaps he should seek to file a doubt as to collectability OIC instead. Mrs. Harris income continues to be relatively high and that may prevent him from obtaining an OIC, but his chances seem better in the collectability realm and non-existent on the liability front. The case points to the need for spouses to coordinate their efforts to obtain relief from the IRS. It is not unusual for one spouse to need relief for liabilities existing before the marriage or separate liabilities during the marriage. In seeking that relief, the spouses need to talk to each other and to professionals. It may be that they need to talk to separate professionals because their interests do not perfectly align. Here, the failure to properly set up her OIC leaves him holding the bag for a liability created by her income. This is both an unfortunate and an avoidable result.