Filing a Collection Due Process Petition Based on Denial of a Doubt as to Liability Offer

In Crim v. Commissioner, the Tax Court dismissed a case in which the petitioner sought to obtain Tax Court review of the rejection of the denial of an offer in compromise for doubt as to liability. The Tax Court dismisses the case because the petitioner did not have the statutory predicate for jurisdiction – a collection due process (CDP) determination letter. Petitioner argued that the offer rejection letter, which came from the examination division because the offer was a doubt as to liability offer “reflects a ‘determination’ sufficient to invoke the Court’s jurisdiction.” Petitioner sought to use the decision of the Tax Court in Craig v. Commissioner, 119 T.C. 252, 257 (2002), which held that a wrongly issued decision letter could form the basis for a timely petition where the IRS should have issued the taxpayer a determination letter, as a hook for similar treatment of the rejection letter he received from the IRS. The Court did not accept this argument.


The IRS rejected the doubt as to liability offer because the IRS does not have the ability in that process to compromise a liability previously determined by the Tax Court, other courts, or in a closing agreement. The liability petitioner asked the IRS to review was a restitution order for $17,242,806.57 issued by the United States District Court for the Eastern District of Pennsylvania resulting from Mr. Crim’s criminal conviction for conspiracy to defraud the United States under 18 U.S.C. 371 and the corrupt interference statute in IRC 7212(a). The IRS cannot compromise restitution orders whether the request comes in a doubt as to liability or a doubt as to collectability offer because the amount has been ordered by the district court. Mr. Crim’s underlying complaint concerns the timing of the change in the manner in which the IRS can collect on restitution orders. His criminal acts occurred prior to 2010, but in 2010 Congress changed the law to permit assessment of the restitution amount as if it were a tax and collection on that assessment as we have discussed here, here, and here. Mr. Crim views the change in the law as applied to him as violating the ex post facto clause of the constitution. The Third Circuit rejected his argument twice, here and here, as premature because the IRS had not tried to collect at that point.

The Tax Court performed its normal jurisdictional analysis. In addition, it looked at the Craig decision to determine if its decision in Craig could stretch to cover a letter from the examination division. The Tax Court determined that the letter sent to Mr. Crim rejecting his offer in compromise for doubt as to liability could not be construed to be a determination letter and that it lacked jurisdiction over his case. The Court provided several reasons: 1) the letter did not come from Appeals; 2) the letter did not purport to sustain a notice of Federal tax lien or a proposed levy; 3) the record does not suggest Mr. Crim had requested a CDP hearing at the time the letter was issued; and 4) the record does not suggest the IRS had issued a levy or filed a NFTL. The Court went on to apply Craig to this situation and point out that in Craig, the Appeals Office made a mistake in a “real” CDP case and issued the wrong letter, but here there is no CDP case which would allow the Court to construe the letter sent to Mr. Crim as a mistake.

Finally, the Tax Court addressed Mr. Crim’s argument that the 3d Circuit told him that he could raise his ex post facto argument if the IRS seeks to collect from him and that the statement by the 3d Circuit should allow him to come to Tax Court to make that argument. The Tax Court pointed out that the 3d Circuit did not, and could not, open the doors of the Tax Court for him to bring a case at any time. He needed to have the proper prerequisite in order to do so, and he did not have it yet.

Nothing about the decision is surprising. The nine page order goes into greater detail explaining why the Tax Court lacks jurisdiction than I might have expected, but the case is one that may be one of first impression at the Court. Mr. Crim may be back if at some point the IRS takes the type of collection action that would allow him to invoke jurisdiction. At that time, he will have the chance to argue that individuals who committed their crimes prior to the change in the law in 2010 regarding assessment of restitution orders should not apply in his circumstance. In the meantime, maybe others in his situation will make the argument and establish precedent on this issue.


Update on Aging Offers into Acceptance

I wrote a post almost two years ago about the provision placed into IRC 7122(f) as part of the Tax Increase Prevention and Reconciliation Act of 2005, which deems a doubt as to liability and doubt as to collectability offers received by the IRS on or after July 16, 2006, accepted if the IRS does not act on the offer within two years.  The prior post was prompted by a question I received from Scott Schumacher, my fellow clinician and now the associate dean at the University of Washington.  Scott’s clinic had a case that appeared to cross the 24-month threshold, but they could find no manual provisions describing what happens when that occurs.

A recent internal guidance memo, SBSE-04-0117-0007, shows that the IRS is now thinking about this issue and developing internal controls to monitor the amount of time an offer is pending.  The memo is short and establishes guidance for the IRS employees who process offers as they arrive.  It allows practitioners to see what the IRS will do to mark the arrival of a new offer and the beginning of the two year time frame.  When I posted on this issue previously, only one commenter mentioned having a case that went past the two year time period.  If you have experienced an offer that aged into acceptance, please send in a comment to allow the community to gain a sense of whether this is happening.  My research assistant searched the IRM to see if the IRS had published other guidance on this issue since the post two years ago and found a few pieces of information in the IRM.  The Appeals OIC discussion does mention the two year rule; the OIC manual has a brief discussion of the rule at (04-18-2016) and last April the director of collection policy issued a letter similar to the one linked above.

I had a conversation with an offer examiner recently who said that his group had gotten behind for a bit in completing the offers but was relatively caught up at this moment.  Non-business offers seem to take about 4-6 months.  Unless an offer slips through the cracks, it seems unlikely that it would reach the two year period.  No doubt an occasional offer does slip through the cracks for what could be a nice reward at the end of a very long tunnel.

Fast Track Mediation for Collection

In Rev. Proc. 2016-57 the IRS announced a new fast track mediation specifically designed for collection cases (FTMC).  The program will allow taxpayers with issues in offer in compromise (OIC) cases and trust fund recovery penalty (TFRP) cases to go to a mediator in Appeals to try to resolve an issue in their case which could provide the basis for overall resolution if the parties could reach agreement on that issue.  I do not know how much demand exists for this type of mediation, but the effort to provide mediation in these fact intensive situations seems like an idea worth trying.


The Rev. Proc. points out that fast track mediation for SBSE cases has existed as a possibility since 2000 and the program included collection cases; however, mediation occurred in only a small number of collection cases.  In 2011 the IRS introduced fast track settlement for examination cases but that initiative did not include collection cases.  The idea for use of Appeals in FTMC does not include giving the Appeals employee settlement authority but rather to have them serve as a mediator acting as a neutral party to assist the taxpayer and the collection function in reaching agreement on a point of dispute.

Collection and Appeals will jointly administer the FTMC program.  Because SBSE handles all of the collection cases for the IRS, taxpayers falling into any of the stovepipes into which the IRS divided itself in 2000 can use FTMC.  The IRS envisions that FTMC will take place “when all other collection issues are resolved but for the issue(s) for which FTMC is being requested.  The issue(s) to be mediated must be fully developed with clearly defined positions by both parties so the unagreed issues can be resolved quickly.”  To use FTMC, both the IRS and the taxpayer must agree.  Neither party can force the procedure on the other.

The Rev. Proc. provides a list of issues in OIC and TFRP cases for which it contemplates FTMC use.  It does not state whether the list provides the exclusive opportunities for use of FTMC but the manner in which the Rev. Proc. is written makes me believe that engaging in FTMC for issues not on this list will rarely, if ever, occur.  For OIC the list includes the following issues:

  • Valuing the taxpayer’s assets, including those held by third parties;
  • Determining the amount of dissipated assets that the IRS should include in the reasonable collection potential (RCP) calculation;
  • Deciding whether the facts warrant a deviation from the national or local expense standards;
  • Determining the taxpayer’s proportionate interest in jointly held property;
  • Projecting the amount of future income based on projections other than current income;
  • Calculating the taxpayer’s future ability to pay when the taxpayer lives with and shares expenses with a non-liable person;
  • Evaluating doubt as to liability cases worked by Collection, e.g., a case involving TFRP; and
  • A catch-all provision that uses as an example whether a taxpayer’s contributions to a retirement savings account are discretionary or mandatory.

The TFRP list includes the following issues:

  • Whether the person meets the test as a “responsible person” of the business that failed to pay over the trust fund taxes;
  • Whether the person willfully failed to pay over the collected taxes or willfully attempted to evade or defeat the payment; and
  • Whether the taxpayer properly designated a payment.

The Rev. Proc. explains when FTMC will not apply:

  • To determine hazards of litigation or use the Appeals Officer’s settlement authority;
  • For cases referred to the Department of Justice (remember that once a case is referred to the Department of Justice settlement authority resides with the DOJ and while DOJ case refer a matter back to the IRS to obtain the views of the IRS, DOJ has total control of the outcome of the case);
  • For cases worked at an SB/SE Campus site (because almost all OIC cases are worked at campus sites in Brookhaven and Memphis, I assume that this statement in the Rev. Proc. does not apply to the OIC units but the Rev. Proc. does not make this 100% clear. To my knowledge TFRP cases are worked by Revenue Officers assigned to field units and this restriction would not have much impact on TFRP cases.  So, I am having trouble understanding what this restriction covers)
  • To cases in the Collection Appeals Program (OIC cases should not use the CAP program and TFRP cases would only get to the CAP program after the assessment of the TFRP and not before the determination of the liability exists. So, this exclusion would not seem to have much impact);
  • To Collection Due Process cases (this restriction could have a significant impact in the OIC context because many practitioners submit offers during the CDP process. I prefer to submit offers during a CDP case over submitting them outside of CDP.  It is not clear to me why the IRS would exclude offers submitted during a CDP case unless it assumes that the Appeals employee assigned to the CDP case could or would serve this function.  My experience is that the Appeals employee plays a relatively tradition role in CDP cases and does not get involved during the consideration of the offer by the offer unit.  To the extent that having a mediator provides a useful function, it seems that the mediator could assist in an offer arising during a CDP case just as the mediator could assist in other offers);
  • To cases in which the IRS determines the taxpayer has put forward a frivolous issue whether or not the issue makes the list in Rev. Proc. 2016-2 (this makes sense given that either party can nix the use of a mediator and the IRS position here just puts down a marker that it will not go to mediation on something it considers frivolous);
  • To cases in which the taxpayer has failed to respond to IRS communications or to submit documentation (the IRS does not want to use FTMC to allow the taxpayer to stall);
  • To OIC cases involving Effective Tax Administration offers except in limited circumstances, to cases in which the taxpayer refuses to amend the offer yet provides no specific disagreement, to cases in which the IRS has explicit guidance and to cases in which Delegation Order 5-1 requires a level of approval higher than a group manager (almost all of these exceptions involving reasons for which the IRS would not agree to FTMC on an individual case basis and just set out markers so the taxpayer would know in advance);
  • To cases where FTMC use would not be consistent with sound tax administration; and
  • To issues otherwise excluded in subsequent guidance.

A taxpayer can request FTMC after full development of an issue and before Collection makes its final determination.  The IRS has created Form 13369 for use in requesting this process.  Both the taxpayer and the IRS must sign the firm in order to invoke the procedure.  In addition to the form the taxpayer submits a written summary of their position with respect to the disputed issues and the IRS will submit a written summary as well.  Once the parties have prepared the form and the statements, Collection sends the package to the appropriate Appeals office.  The Appeals office decides whether to accept the case for FTMC.  The taxpayer must consent to disclosure of their tax information to participants in the mediation and does this in signing the Form 13369.

The Rev. Proc. goes on to describe the manner of the mediation as well as the post-mediation process.  If the mediation succeeds, it should allow the OIC or the TFRP case to move forward to resolution by removing a roadblock to agreement.  If it does not succeed, the taxpayer still retains the right to appeal the denial of the OIC or to appeal the proposed determination of the TFRP.  In this regard, the mediation seems to have little downside for the taxpayer except to the extent the denial of the mediation is perceived to have solidified the view of Appeals and keep the taxpayer from having a productive Appeals conference at a later stage.    Because I have never used mediation, I have no basis for forming an opinion of the likely success of this new process.  Perhaps those who have used it in the Examination context can comment on how it might work in these two specific collection situations.  I suspect that training of IRS employees to spot situations in which it might assist and to have open minds about using the process will have a high impact on its success.  If the employees considering OICs or TFRP assessments would prefer to move the case to Appeals in a more traditional manner than to have a mediator from Appeals intervene in their cases, the program will not succeed.


TIGTA Reports on IRS Offer In Compromise Program

In the last few weeks TIGTA released reports addressing transfer pricing, nonfilers, backup withholdingIRS’s Information Technology, and offers in compromise. In this brief grab bag post I will highlight the main findings of TIGTA’s offer report.

There has been a steady drumbeat of attention for the IRS administration of offers over the years. As Keith has written previously in his post Making Offers in Compromise Really Public, the offer program grew in the 90’s as IRS tried to get receivables off the books. The National Taxpayer Advocate has highlighted IRS’s inability to realize the potential that offers can play in encouraging future compliance and remedying inequities (see for example Most Serious Problem 20 and 21 from the 2014 Annual Report)


The TIGTA report discusses the grounds for accepting offers and the process IRS is supposed to comply with upon receipt of Form 656. The IRS’s IRM provides that employees are supposed to process offers within 16 days of receipt and contact taxpayers within 4 months; if the 4 month deadline is not going to be met, IRS is supposed to let the taxpayer know in writing with an interim letter.

On balance, TIGTA found that IRS has made significant improvements in the way it administers offers, including the following:

1) IRS updated the application forms,

2) IRS created an online prequalifier tool,

3) IRS established a group of offer specialists to work payroll service provider cases, and

4) IRS encouraged more taxpayers to consider whether offers would benefit them.

With respect to specific changes, the report highlights how IRS tweaked the application process to increase the chances that a submission would include a user fee and include appropriate schedules. IRS has created an online offer prequalifier tool which TIGTA believes has led to a significant uptick in the percentage of submitted offers that are accepted and reduced significantly the receipt of incomplete offers. IRS development of the online offer tool (also accessible through the helpful IRS Offer in Compromise web page which is here) seems like a terrific way for taxpayers to exercise some self-help in an area where I know that there have been some less than savory characters preying on vulnerable taxpayers looking for representation in the offer process.

IRS has also created a special unit to help victims of payroll provider fraud, an issue that generated legislative attention in 2014. TIGTA found IRS decisions on all cases involving payroll fraud were supported by the documentation in the case files. As Keith discussed in the recent post on the McDonald’s franchisee defrauded by a payroll provider the IRM has some language now permitting the IRS to grant defrauded taxpayers the possibility of offer relief in this situation. The TIGTA report suggests that the IRS is using this authority which is good news for those caught in this terrible situation.

On the other hand, TIGTA found considerable room for improvement, noting that offer employees did not always complete the initial processing timely nor contact taxpayers if by the promised dates. Additionally, TIGTA found that 11 percent of the rejected offer cases failed to include documentation that IRS employees discussed other collection alternatives with taxpayers.

In response to the findings, IRS agreed to remind employees of deadlines and update its guidance to ensure that its employees discussed and documented other collection alternatives when IRS rejects an offer.

It has now been a quarter century since this IRS embarked on the program of using the offer in compromise process as a viable collection alternative. Compared to most state offer programs (or lack of offer programs) the IRS program does a good job of giving taxpayers a chance for a fresh start on their federal taxes without having to resort to bankruptcy. The benefit of the program particularly exists for taxpayers with low income and few assets. Still, the financial situation facing the IRS makes implementation less than ideal in many cases and the TIGTA report points out some of the areas in need of improvement.



Making Offers in Compromise Really Public

The IRS must publicly display accepted offers in compromise (OIC). In the early 1950s, a scandal came to light in which an IRS employee used the compromise provisions to write off the liabilities of members of the criminal element.  The employee was prosecuted (see page 148 for a brief discussion of the events) and President Truman issued an executive order requiring that the IRS make accepted offers public.  Subsequently, Congress passed IRC 6103(K)(1) which provides for public inspection and copying of accepted OICs.  Prior to 2000, these public inspection sites existed in each IRS district and districts generally followed state lines.  At some point the IRS consolidated the inspection sites into seven “conveniently” located sites around the country. These sites are depicted in Figure 1 of the recent Treasury Inspector General of Tax Administration (TIGTA) report entitled “The Offer in Compromise Public Inspection Files Should Be Modernized.”  For example, if I want to view the publicly available OIC records for someone in Boston, all I need to do is head over to Buffalo within a year after the offer becomes public and find the IRS public reading room.

In the 1950s when the IRS first started making OICs public and up until about 1992, the IRS only approved a handful of offers each year. I do not know if it was the prosecution of the IRS official for accepting offers or a general feeling that offers were not worth the trouble but the IRS did not like to accept OICs.  In the Richmond district during the 1980s, one revenue officer had the duty of examining offers.  From my observation, he would carefully research all of the finances of the person or business submitting an OIC before saying no.  The taxpayer seeking the OIC received plenty of attention but had a very low chance of the revenue officer accepting the offer.  For the one offer a year that was accepted in the Richmond District, the procedure was cumbersome and led to a document that was then usually ignored in many respects.  I provide some additional background on why the IRS decided to begin accepting OICs in an earlier post.  As TIGTA notes in its report, though without explaining the reason for the significant increase, the number of offers accepted today greatly exceeds the number of offers accepted at the time of the creation of the current system.  The dramatic increase occurred because in the early 1990s the IRS was trying to combat the large uncollected receivables on its books and to counter the impact of the increase in the statute of limitations on collection from six to ten years.  To do this, the IRS decided to begin accepted OICs on a grand scale.  Yet, little has changed since the public display of OICs began.  It is a labor intensive, costly process that leads to public views of OICs by almost no one.  I picture these seven reading rooms as having lots of cobwebs.

TIGTA proposes to change the system of making offers public. It proposes to put them online.  I fully support their suggestion.  I have made a similar proposal previously with respect to the notice of federal tax lien (NFTL) and Tax Court filings.  Both of my suggestions raise significant policy questions about what can, because of identity issues with NFTLs, and should, because of privacy issues with Tax Court filings, be public.  TIGTA does not get into policy considerations of how putting OICs online will change the very private nature of the current nominally public process of displaying OICs.  For the reasons I discuss below, I think it will have little impact on the individuals but may have an impact of our view of the system.


TIGTA’s report first finds a number of flaws in the way the IRS administers the current system. In the normal style of a TIGTA report it reviews how the IRS handles the public inspection of offers and bangs the IRS for its mistakes.  One common mistake concerns whether the OIC gets publicly displayed at all.  TIGTA found a number of OICs that never made it to the allegedly public reading rooms.  I was not surprised by this news and it does point to a significant flaw in a system even if it is a system that no one cared about anyway because of the way it operates.

Another mistake TIGTA found concerned the public display of the OIC in the wrong regional reading room. This type of mistake occurred regularly with the largest example cited involving almost 300 OICs that were intended for display in California which instead were displayed in Colorado.  The more serious mistake concerns the display of un-redacted information.  TIGTA found numerous instances of information being displayed that should not have.  Since almost no one goes to these reading rooms, I do not think that the taxpayers had their information compromised, but the concern is legitimate and correction appropriate.  The most interesting of the flaws TIGTA found concerns the lack of guidance to IRS employees about the public display of OICs.  It cites several examples.  The one I liked the best was the rules employees at the reading rooms imposed upon individuals looking to read the public OICs.  Some let visitors look at the entire year of OIC acceptances, some a few months and one employee limited visitors to looking at the public OICs only if they could give “a specific taxpayer’s name.”  This view changes the nature of public even more than locating the files in seven places around the country.

After going through the obligatory litany of IRS failures, the TIGTA report gets to the meat of the report where it points out that “we believe that the infrequent inspections could be the results of the combination of inconvenient file locations, limited information available in the files, and the unsearchable paper based format.” Yes, Yes and Yes.  In December, 2009, the Office of Management and Budget issued the Open Government Directive.  The directive “instructs agencies to respect the presumption of openness by publishing information online in order to increase accountability and to promote informed participation by the public.”  TIGTA also cites internal IRS directives with a similar bent.  It points to the significant cost of running the little used paper system.  In this section, it uses a cost per viewing that surprises me and I think the viewings are very low.  It says that “it costs approximately $455,000 annually to administer the program, equating to around $15 per offer and more than $100,000 per viewing.”  I interpret that as saying only four OICs were viewed in the average year.  Wow.

The report does not talk about what you would actually view if you drove or flew to Buffalo on a fine winter’s day. It would have been helpful to the discussion to see a sample of a publicly displayed OIC.  It has been a long time since I saw a publicly displayed OIC but, if the IRS properly does the redactions it is instructed to do, I do not think you get to see much more than the taxpayer’s name and the accepted amount of the OIC.  You do not get to see how much was written off, how old the taxes were, whether the fraud or other penalties existed as a part of the forgiven liability, etc.  The dearth of information on the publicly displayed OIC not only protects the privacy of the individual but it protects the IRS from criticism since it is hard to criticize what you do not know.  I think a useful part of the discussion about publicly displaying OICs during the discussion of how should a system change that has been frozen in time for a long period, is what information should be public in order to allow it to make an informed decision on whether an OIC was appropriate. The file contains redacted Forms 7249 and a related redacted transcript(s) of account. Several provisions of the Internal Revenue Manual (IRM) address the public display of offers and provide good background for anyone embarking on a quest for information from accepted offer.  Before you go, look at IRM (describing a host of public tax information and IRM for OICs specifically) and  IRM (describing what the IRS displays publicly from the OIC file).   Notice that if you try to take a picture of the offer displayed for public inspection, the on-site IRS employee is directed to call local security or the police.  So bring a pencil and paper if you want to take notes.  If President Truman wanted to make this information public in order to avoid another instance of bad taxpayers getting OICs from bad IRS employees, his idea is totally frustrated by the current amount of information made available.

TIGTA’s suggestion to put the information online deserves attention. The IRS apparently agrees with the suggestion.  Congratulations to them both.  Now, talk about what you are going to put online in the spirit of President Truman and the whole idea anyway.

Grab Bag – OICs: Dissipation and, not of, Weed


OICs – 1) The IRS Takes the High-ish Road and 2) Tax Court Explains What IRS OIC Calculations Should Be and Highlights Important 2013 IRM Changes.

This post will cover two interesting developments regarding offers in compromise from over the last few months.  The first is an internal memo from SBSE (SBSE-05-0416-0016) relating to collection potential of a company in the medical marijuana industry, and specifically if the public policy position in the IRM should cause it to reject an OIC outright.  The second is the Alphson v. Comm’r case, where the Tax Court did an exhaustive review of the calculations that should go into a review of an OIC on doubt as to collectability, and noted a 2013 charge to the IRM regarding dissipation of assets.


Public Policy – IRS has mellowed on pot shops, but only on OICs

There is a cottage industry popping up around offering “advice” on Section 280E, which the IRS continues to enforce against state legal marijuana related businesses (for those of you unfamiliar with Section 280E, it is fairly nuanced, but generally states various normal business deductions are disallowed for any enterprise dealing with schedule I narcotics, which includes the Mary Jane).  A lot of this advice seems doobious, at best, but the Service has been issuing more guidance this year.  In any event, various people in and out of that industry feel the imposition on state legal businesses is incorrect (including the largest dispensary in the US, Harborside Health in California), and feel the IRS is being overly aggressive.  In at least one way, the Service is taking a somewhat rational view of the industry, which is that it will not automatically reject an OIC from a state legal pot shop based on the IRS’ public policy provisions in the IRM (the Service will, however, calculate that collection potential in a fashion certain to bring you down).

In an internal SBSE memorandum regarding collections, the Service has instructed its employees not to reject OICs simply on public policy grounds where their actions are legal under state law.  The IRM, under IRM, Public Policy Rejection (Mar. 7, 2014), provides internal guidance on when to reject on OIC based on public policy.  The IRS policy is a rejection can occur on public policy grounds, even if it is clear that the funds could not be collected.  One example of why this might be appropriate under the IRM is “indicators exist showing that the financial benefits of a criminal activity are concealed or the criminal activity is continuing.”  As this is federally illegal, it is understandable why an IRS employee might have questions.

The guidance indicates there will be no blanket rejection based on the fact that the enterprise is continuing and illegal under federal law, and such offers should be considered.  This is great news, as the tax burden on these state legal businesses can be huge, but… The guidance further goes on to direct how collection potential should be calculated, which has the potential to effectively block any offer.  The guidance states the Service will only allow deductions against future income in calculating collection potential based on what is deductible under Section 280E (not that much).  This will drastically artificially inflate the collection potential to levels that likely will not provide much benefit to the taxpayer.  My guess is the IRS has the discretion to allow the deductions in calculating collection potential, which I would encourage from a revenue generation standpoint and the general reasons behind OICs, but this is, like so many other IRS problems, something Congress needs to deal with.

Alphson –OICs, Dissipating Assets, and  the IRM

The second OIC matter is Alphson v. Commissioner, TC Memo 2016-84, from May.  The case does not break any new ground, but does have a good discussion of how the Service did and should calculate collection potential, the latitude the Service has in rejecting OICs and the guidance under the IRM, and the dissipation of assets.  In Alphson, the Tax Court upheld the Service’s rejection of an offer as reasonable, even though there were minor errors in the calculation by the Service (no abuse of discretion).  Alphson apparently ran up a $200k tax bill from ’08 to ‘10.  Over the same time period, he settled some litigation and was awarded $1.2MM.  The OIC for doubt as to collectability offered $2,400, and the Service rejected the offer based on the fact that the Service felt Mr. Alphson wasted over $1MM.  Alphson claimed he was unemployed, couldn’t find work over the last three years, was broke, and had thousands of monthly expenses.

The Court noted, “we’re certainly aware of the longstanding rule that the IRM doesn’t have the force of law, but because Section 7122 gives such wide discretion to the Commissioner to establish guidelines for evaluating OICs, we’ve generally upheld a settlement officer’s determination rejecting an OIC as reasonable when he follows the IRM.”  The Court also then cited case law standing for the proposition that the Court will hold up determinations that are less than correct stating, “close enough for government work” (or folk music—just kidding, that was the Court holding, but it didn’t say “close enough for government work”).

The Court then worked through both the net equity aspect of the calculation and the future income.  Both are extensive and worth a read, but I want to highlight the net equity, specifically the dissipation discussion.  The IRS position was that Alphson had about $1.5MM in net equity, while Alphson submitted that he had $501 in net equity.  Some of the difference was due to accounts Alphson failed to list (not a strong starting point), but the largest aspect was about $1.2MM from the settlement that was not included.  The Service believed the assets were dissipated for frivolous reasons, while Alphson contended they were for necessary living expenses and should be included.

Alphson argued that language added in September 2013 to the IRM was applicable, stating dissipated assets were only those that the taxpayer had frittered away while attempting to avoid the tax.  See IRM (Sept. 30, 2013).  The Court agreed the Service had not shown Alphson was attempting to avoid tax, but the provision was added after the review by the Service in June of 2013.  Under the old version, dissipated assets were simply reviewed to see if they were used on nonpriority items.  The Court found the Service properly applied this standard to the review of Alphson’s claim of necessary living expenses, including substantial credit card bills (without explanation of the charges), country club costs, and rent of $9,700 a month (nice digs).

Couple parting thoughts.  The 2013 change to the IRM, which is still there, is taxpayer friendly (I think it also changed the look back from five to three years).  The Alphson argument would have been stronger had his OIC been reviewed later in the year.  I would have also been nervous taking that case through the tax court; such a low offer and with some fairly bad facts.  Sometimes there is no other choice though.

Procedure Grab Bag – Collection Financial Standards & 7-Eleven

Over the last two months, the IRS has made two administrative changes that we didn’t previously cover that impact the collection of taxes, predominately from low income taxpayers.  One is fairly negative (National Standards for collection potential), and I have mixed feelings about the other (paying taxes while buying a Big Gulp).

Deflation Nation

The Service has issued updated National Standards for taxpayer expenses when determining collection potential.  These amounts are what the Service views as reasonable expenses for food, housekeeping supplies, clothing, and miscellaneous expenses.  A taxpayer can rely on the National Standards without having to put forth any evidence of the actual expenses paid.  The Service also issues amounts by County for taxpayers for expenses relating to housing and utilities.  If a taxpayer seeks to claim expenses in excess of the National Standards (or local for housing), the taxpayer has to substantiate the same and prove the additional expense is necessary.  This can be onerous, especially for people using predominately cash, those who are ESL, and those with temporary housing.

The most recent National Standards, and at least some of the local housing and utilities amounts, have decreased from 2015.  The new 2016 amounts are:


Expense One Person Two Persons Three Persons Four Persons
Food $307 $583 $668 $815
Housekeeping supplies $30 $60 $60 $71
Apparel & services $80 $148 $193 $227
Personal care products & services $34 $61 $62 $74
Miscellaneous $119 $231 $266 $322
Total $570 $1,083 $1,249 $1,509


More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $341


While in 2014 (and I think 2015), those amounts were:

Expense One Person Two Persons Three Persons Four Persons
Food $315 $588 $660 $794
Housekeeping supplies $30 $66 $69 $74
Apparel & services $88 $162 $209 $244
Personal care products & services $34 $61 $64 $70
Miscellaneous $116 $215 $251 $300
Total $583 $1,092 $1,249 $1,482


More than four persons Additional Persons Amount
For each additional person, add to four-person total allowance: $298


For larger families, the amount increased slightly, but for smaller families, the amount decreased, when many taxpayers making these types of offers were already feeling the pinch.  Various local amounts for housing and utilities also decreased, some of which by over $100.   When putting both together, collection potential is increased by well over $100, perhaps approaching $200 per month.  Having worked in the clinic at Villanova and assisting various pro bono clients in my private practice, I know most taxpayers using these standards felt the national amounts were difficult to live on and assumed significantly more discretionary income than they had.  That got squeezed a bit more with these adjustments.

7-Eleven Payment Heaven

The IRS has issued a new cash payment option largely aimed at helping unbanked taxpayers pay their taxes.  The notice can be found here.  The payment option allows taxpayers to use cash to pay their taxes at the over 7,000 domestic 7-Elevens (not sure it works in the roughly billion international 7-Elevens—I had no idea it was so popular overseas).   This is being done with a partnership with PayNearMe and ACI Worldwide’s  With rumors that the IRS will stop allowing walk in cash tax payments (already only allowed in limited locations) and taxpayers receiving penalties for certain cash payments, any additional payment method for those without bank accounts and credit cards is welcome.  I’ll be honest, the idea of 7-Eleven collecting our taxes is entertaining and seems quintessentially American (even if it is owned by a Japanese company).  It also makes me nervous, as outsourcing tax collection in other areas has not panned out well, and the franchise model strikes me as potentially allowing for less corporate oversight (7-Eleven in Australia is also currently battling a huge human rights issue over its wages).  Also, Slurpees are gross.  But, apparently other countries have been using 7-Elevens to pay some taxes and traffic tickets, so maybe this will work out splendidly.

Ignoring the major Slurpee issue, the IRS program requires the taxpayer to go to and to the payments page (so, no bank account, but easy access to the internet is needed).  There you select the cash option, and walk through the steps.  Once the taxpayer’s info is in the page, the taxpayer will receive an email from, which confirms their information.  The IRS then has to verify the information, at which point PayNearMe sends the taxpayer another email, with a link to a payment code and instructions (this is sort of seeming like a pain in the @$*).  The individual can then print the payment code, or send it to his or her smart phone.  The taxpayer then can go the closest 7-Eleven, make the payment, and receive a receipt.  Only $1000 per day can be paid, and there is a $3.99 charge per payment.

I applaud the notion, but the implementation, especially for low income and ESL, seems pretty onerous.  I’m not sure all taxpayers who may need to use this service have easy access to the internet, computers, email addresses, printers, and/or smart phones.  Not to mention, there are quite a few steps, this does take a while, and we are charging them to pay their taxes.

The IRS is also encouraging taxpayers to start the process well ahead of tax time, due to the three step process, and the fact that the funds “usually posts to the taxpayer’s account within two business days.”  The notice does not indicate what the payment date is for the penalties and interest, but the notice would seem to indicate it is the posting date and not the date the taxpayer hands the funds over to 7-Eleven.  I don’t think Section 6151 has a Kwik-E-Mart exception for time of paying tax, and I do not think 7-Eleven qualifies as a government depository under Section 6302, so taxpayers do need to be certain to allow for substantial time to pass between the payment date and the tax return due date.

Settling a Tax Court Case with an Offer in Compromise

Today we welcome first time guest blogger, Erin Stearns. Professor Stearns directs the low income taxpayer clinic at the University of Denver Sturm College of Law, Graduate Tax Program. She writes today about a little used procedure. Chief Counsel attorneys do not like to use this procedure though the manual provides for its use. I wrote some time ago about the more common use of this procedure when litigating with the Department of Justice. In the right case, settling the merits with a compromise of the payments makes a lot of sense. Keith

This post focuses on how a taxpayer with a pending U.S. Tax Court case can use a little known tool called a “Service Offer in Compromise” to be relieved of federal tax liability while avoiding the need to go to trial.

For many years, taxpayers have been using offers in compromise (“OICs”) for doubt as to collectability or effective tax administration to compromise federal tax liability, penalties, and interest for less than the amount owed. A body of law authorizes and provides guidance on such OICs. See, e.g., IRC § 7122, Treas. Reg. § 301.7122-1, and IRM § 5.8. In 2014, the most recent year for which we have statistics, the IRS received 67,935 offers and accepted approximately 27,000 offers (approximately 40%). The total value of all accepted offers in 2014 was over $179,000,000. See Trends in Compliance Activities through Fiscal Year 2014, Treasury Inspector General for Tax Administration, November 10, 2015. While another type of OIC – for Doubt as to Liability – may be used to dispute liability, discussion of such OICs is beyond the scope of this post.


Generally the IRS must assess tax on the applicable tax year(s) before it will consider an OIC covering that period. In most instances, a taxpayer who petitions Tax Court based on a statutory notice of deficiency to challenge the alleged liability must either reach a settlement with the IRS or go to trial to determine the amount of liability owed. The Tax Court would then issue a decision approving the settlement or, if the case has gone to trial, a decision as to the correct amount of tax and penalties owed. The IRS would subsequently assess tax, penalties (if applicable), and interest based on the decision of the Tax Court. Once the liability has been assessed, the taxpayer could submit an OIC for doubt as to collectability or effective tax administration to try to settle the debt for less than he or she owes.

A Service OIC operates similarly to the OICs described above with one distinct difference: the taxpayer with a pending Tax Court case (hereafter, the “petitioner”) could submit an OIC to cover the alleged liability even though the IRS has not yet assessed the tax against him or her. A provision in the Internal Revenue Manual, effective July 25, 2012, provides authority for Service OICs. See IRM §

The starting point for the petitioner who wishes to submit a Service OIC would be to contact IRS Counsel’s office to obtain its consent to filing a Service OIC.  IRM § Counsel’s office must agree to follow certain procedures set forth in the IRM provision in order for the OIC to be a “Service OIC.” Therefore, as a practical matter, Counsel’s office could prevent the petitioner from filing a Service OIC if it refuses to follow these procedures. Id. However, assuming Counsel’s office agrees to follow the IRM procedures and allow the petitioner to file a Service OIC, the Counsel attorney assigned to the case would have to follow the procedures set forth in IRM § If the case is with IRS Appeals when the petitioner requests permission to submit a Service OIC, then the Appeals Office would need to close the case and transfer it to Counsel’s office, as only Counsel’s office is authorized to follow the procedures related to Service OICs. See IRM §

If Counsel’s office agrees to allow the petitioner to file a Service OIC, the petitioner would prepare the OIC and send it directly to Counsel’s office.  The OIC would be either an OIC for doubt as to collectability or effective tax administration, and would use the Forms 656 and 433-A(OIC) for an individual offer or 433-B(OIC) for a business offer. Counsel’s office would then send the Service OIC to the appropriate Centralized OIC unit of the IRS, where it would be processed and reviewed like any other OIC for doubt as to collectability or effective tax administration. An offer examiner or specialist would be assigned to determine the petitioner’s Reasonable Collection Potential (“RCP”) based on his or her assets and future income. The examiner may also determine that special circumstances warrant a departure from the petitioner’s RCP in the case of an effective tax administration offer. Because it typically takes the IRS at least six months to review an OIC and the petitioner’s case may be docketed for calendar call during this time, it may be necessary to file one or more motions to continue the Tax Court case generally. Counsel will likely assent to such a motion. Counsel’s office may also request that the IRS conduct an expedited review of the OIC.

The IRM provisions on Service OICs state that Counsel’s office “should” obtain from the petitioner a stipulation agreeing to the “full amount of deficiencies and penalties.” IRM § The “full amount of deficiencies and penalties” would be either the amount alleged on the statutory notice of deficiency or a lesser amount agreed to by the parties. The Service OIC provision in the IRM gives the petitioner the choice to authorize Counsel to (1) file the stipulation with the Tax Court, or (2) hold the signed stipulation in escrow at Counsel’s office.  See IRM § Under the first option – filing the stipulation with the Tax Court – the petitioner would be bound by the amount agreed to in the stipulation if the OIC were not accepted. Under the second option – holding the stipulation in escrow at Counsel’s office – the petitioner could request that Counsel’s office destroy or return the stipulation to the petitioner in the event that the IRS rejects the petitioner’s OIC.

Although the IRM states that Service OICs may be submitted “[i]f a settlement is reached in a docketed Tax Court case,” as a practical matter, nothing would prevent the petitioner whose stipulation was destroyed or returned from going forward and presenting new evidence to reach an agreement as to a lesser amount or try the case on its merits. While there may be some exceptions, holding the stipulation in escrow appears the more favorable option because it gives the petitioner more flexibility if the IRS rejects the OIC.

The Service OIC should be used to compromise all the petitioner’s outstanding balances and may include tax years not covered by the pending Tax Court litigation. For example, a petitioner may have assessed balances for 2011 and 2012 and may be in Tax Court for years 2013 and 2014 where balances have not yet been assessed. If the petitioner filed an OIC for doubt as to collectability, it could cover 2011 and 2012, as well as the unassessed balances for 2013 and 2014. The petitioner would want to work with Counsel’s office to ensure that the offer is treated as a Service OIC insofar as it applies to 2013 and 2014.

If the IRS accepts the Service OIC and assuming the stipulation is held in escrow, IRS Counsel would file the stipulation with the Tax Court upon learning that the Service OIC has been accepted. The amount agreed to in the stipulation would be assessed against the petitioner, but the Service OIC will relieve the petitioner of some if not most of the liability and penalties. If the IRS rejects the Service OIC, then the petitioner has the right to appeal the rejection to the IRS Appeals Office. If the Appeals Office upholds the OIC rejection, then the petitioner does not have the right to challenge the rejection as part of her Tax Court case, but may still pursue the merits of her case in Tax Court and may continue to work with Counsel to reach a settlement or take the case to trial.

The question arises of when and why it makes sense to file a Service OIC. In my experience a Service OIC can be useful in certain situations, but should be used sparingly. A Service OIC is appropriate where the petitioner could likely prove she does not owe the entire amount alleged by the IRS, but because of either complicated legal issues or substantiation problems, proving this would be cumbersome for the petitioner and the amount the petitioner would rightfully owe still exceeds what she can pay. A Service OIC should not be used in a case where the petitioner is reasonably confident that she can present evidence to reduce her liability to zero or some nominal amount by working with Appeals, Counsel’s office, or by taking a case to trial.

To illustrate when a Service OIC may be useful, assume that the IRS’s statutory notice of deficiency asserts that the petitioner was prohibited from taking a loss deduction because it exceeded her basis in an LLC. The petitioner agrees that the loss deduction did in fact exceed her basis, but is not sure to what extent because the LLC did not keep good records. At a minimum, the resulting liability would be more than she could pay. To determine the correct value for basis, and thus liability, the petitioner would need to go back and reconcile multiple years of LLC records. She does not have the time or skill to do this, and cannot afford to hire someone. The petitioner may wish to bypass this exercise and submit a Service OIC based on her RCP. Counsel’s office may agree to this to avoid protracted negotiations with the petitioner and/or a trial. Counsel’s office would likely require that petitioner sign a stipulation as to the amount alleged on the statutory notice of deficiency, and petitioner should insist that Counsel hold this stipulation in escrow. If the IRS accepts the Service OIC, then the petitioner could be relieved of a significant amount of liability and penalties.

In speaking with attorneys at Counsel’s office about Service OICs, I have learned that they can create administrative challenges because additional work is required to prepare the stipulation, and Counsel’s office must also monitor the case to ensure the IRS correctly assesses the tax, penalties and interest if and when the Service OIC is accepted. Therefore, I would hesitate to ask Counsel’s office to entertain Service OICs on a routine basis. The vast majority of time, it makes sense for petitioners to settle their cases and then proceed with an OIC once assessment has taken place. However, in certain situations, a Service OIC can be a win-win for both Counsel’s office and petitioners. Counsel’s office “wins” because the petitioner will stipulate to an amount of deficiencies and penalties owed while avoiding a trial and the Tax Court’s order will reflect the stipulated amount. The petitioner “wins” because although she is technically liable for the amount to which she stipulates, she can be relieved of some or most of this liability if the offer is accepted and she meets the terms and conditions thereof.