Contrasting the Compromise Standards between the Chief Counsel, IRS and the Department of Justice in Litigated Cases

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We have discussed different aspect of offer in compromise (OIC) policy before in the blog (see posts here, here, and here); however, we have not discussed the difference in policy between the IRS and the Department of Justice Tax Division (DOJ Tax) when it comes to settlement of cases. When the IRS litigates in Tax Court to determine a taxpayer’s correct liability, Chief Counsel, IRS serves as its counsel. When the IRS litigates in other contexts, DOJ Tax serves as its counsel (see previous post about this here). Even though both offices have tax litigators seeking to represent the IRS, the offices take different approaches when it comes to their approach to settling a case.

This discussion has some crossover with the discussion on the IRS policy concerning applicability of collection to the assessment of taxes. Does it make sense to devote resources to trying a case when the taxpayer has little or no ability to pay the tax should the government win the case. In many of the cases coming into the Tax Court the IRS has invested almost no resources in proposing the assessment. It has simply sent the taxpayer a computer generated letter and maybe a relatively low graded correspondence examiner has spoken to the taxpayer or reviewed mail sent by the taxpayer. The relatively high graded attorney and the Appeals Officer face the prospect of spending far more time than the examination division did in creating the case all to produce an assessment that will simply sit in the every growing inventory of the understaffed Collection Division.

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Chief Counsel will settle a case based on the merits of the issue(s) presented but will almost never look at the ability of the taxpayer to pay the tax. Even in a situation in which the effort to try the case to determine the liability might require significant resources and the likelihood of ever collecting much, if any, of the liability should assessment occur, Chief Counsel attorneys generally close their eyes to the collection potential of the case because of their office policy.  The manual provision (IRM 35.2.6(1)) giving guidance to Chief Counsel employees provides “It is preferable that all settlements be effectuated by a merits settlement rather than upon the basis of inability to pay. This general guideline is applicable even though there may be a substantial basis for concluding that the petitioner may not be able to pay the agreed deficiency. In this instance, the case should be settled on its merits, and if the petitioner is unable to pay such deficiency, he can later file an offer in compromise based upon doubt as to collectability.” Most Tax Court cases result in a settlement or a trial, during which the IRS assesses the taxpayer; moreover, the taxpayer can file an offer in compromise only after an IRS assessment.

In contrast DOJ Tax attorneys have the ability to settle cases based on the taxpayer’s ability to pay the liability at issue. According to DOJ Settlement Reference Manual, Section V.A.1, “[e]ven though the Government may have a strong case on the merits, absent other considerations, Government lawyers should not expend substantial resources to obtain an uncollectible judgment. Instead, it may be more efficient to negotiate a collectability settlement.”  When the IRS refers a case to DOJ for DOJ to handle, the ability to settle the case also travels to DOJ.  Under  IRC 7122(a), the Attorney General has the authority to settle a refund or other suit at any stage of the proceeding after the suit has been referred to the Department of Justice. “The Attorney General has the inherent power to compromise any litigation in which the Department of Justice represents the United States;”

According to one author, David J. Herzig, writing “Justice for All: Reimagining the Internal Revenue Service,” this broad power “afford[s] the Department of Justice the opportunity to settle a case for reasons of strategy rather than solely on the merits.” The IRS acknowledges that once it has referred a case to DOJ, the referral gives DOJ full authority to settle cases.  IRM 34.8.1.1(7)  discusses the authority of DOJ to consider settlements based on collectability, regardless of whether the case has been classified as “S.O.P.”

As the IRS refers cases to DOJ, it generally classifies them SOP or Standard.   If classified SOP, Settlement Option Procedure, the IRS essentially says to DOJ no need to consult with us if you want to settle the case.  If the IRS classifies the case Standard, the IRS classification essentially requests DOJ consult with the IRS in settling the case.  The consultation, however, is somewhat one-sided in that DOJ can ignore the wishes of the IRS and settle in whatever manner it deems appropriate because it has sole authority to settle.  This does not mean DOJ ignores the IRS because it does not but it does mean that the views of the IRS on the outcome of a case do not bind DOJ in its decision to settle on whatever basis it deems appropriate.

Why does Chief Counsel adopt the policy of ignoring collectability in pursuing litigation at a time of limited resources while DOJ Tax exercises discretion in pursuing cases where it perceives that doing so would not result in the collection of tax should it succeed? In giving up the bankruptcy SAUSA work, Chief Counsel acknowledged that its resources are stretched very thin. The policy the IRS has adopted in TFRP cases to consider collectability in determining whether to assess could equally apply to settlements reached by Chief Counsel attorneys. It has precedent for changing its approach in the policies of its client and in the policies of its counterparts at DOJ. Yet, in the face of severely dwindling resources, Chief Counsel’s office continues to move cases into litigation without taking into consideration the ability of the IRS to collect the assessments it has spent many hours to create.

Perhaps it is time for Chief Counsel’s office to reconsider its policy to litigate cases in which the prospects of collection appear low or non-existent. In a small number of cases, it will wrap up litigation with an offer in compromise. Guest blogger Erin Stearns will discuss that rarely used process in an upcoming post. If Chief Counsel’s office got its client to work with it in identifying clients with little prospect of collection, it could work settlements similar to DOJ and perhaps achieve a greater number of settlements resolving the collection issue at the same time as the assessment. Given the resource issues it faces, it may be time to rethink its approach to tax merits litigation.

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