Another Offer Denied, Another Reason for Submitting in Collection Due Process

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I keep something of a running tally of cases where my clients would have been unjustly treated if not for the protections of Collection Due Process (CDP) hearings. As a practitioner, I think it helps me in advising and counseling my clients on a course of action: what are the pros and cons of proposing a “collection alternative” prior to doing so in a CDP hearing?

The main “con” is pretty straightforward: if the IRS does something crazy, you’re stuck arguing with the IRS (and not a court) about it. The recent case Richard Dillon et al. v. United States et al. illustrates that point nicely, both in terms of how impossible it is to get judicial review on Offers in Compromise outside of CDP, and how stuck you can be with a completely unreasoned IRS determination.

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The Dillons apparently wanted to submit an Offer but couldn’t get their feet in the door -it was returned as non-processible. Rather than give up on it, they went to federal district court on an Administrative Procedure Act (APA) argument. The Dillon opinion resolves on a jurisdictional issue: whether there is a waiver of sovereign immunity. This, in turn, involves the intersection of the Anti-Injunction Act and the APA. While the APA generally waives sovereign immunity when there is an allegation of agency error and the requested relief is not for money damages, the waiver does not apply “if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.” The Dillon court, like other federal courts before, concluded in part that the Anti-injunction Act and the tax exception to the Declaratory Judgment Act directly applied and thus under the APA “forbids the relief” that the Dillons sought.

Because of this jurisdictional issue the underlying substance of the complaint concerning the Offer is not given much attention. However, from the opinion we can glean the following:

The Dillons are married, live in St. Paul and owe about $150,000 in back taxes from 2011 – 2017. They are also “approaching retirement” and have about $180,000 in their retirement account. Every other aspect of their finances goes largely unsaid and apparently did not much matter.

I am not a financial advisor, but that vignette conjures up a married couple that will likely struggle during retirement. Were they to liquidate their retirement accounts to pay their back debts they would have virtually nothing left after taxes. On these facts alone, liquidating their retirement accounts would very likely cause economic hardship in the Dillons most vulnerable years (i.e. during retirement). That’s how I see it, and that is also apparently how the Dillons’ attorney framed the Offer to the IRS.

Fortunately, the Treasury Regulations provide for exactly these sorts of Offers -ones where the taxpayer could theoretically full-pay, but a parade of horribles would ensue if they did. They are called “Effective Tax Administration” Offers and some examples are provided at Treas. Reg. § 301.7122-1(c)(3).

Unfortunately, the IRS is often loathe to accept Effective Tax Administration Offers. From both anecdotal evidence and this rather dated article the evidence suggests that getting an Effective Tax Administration Offer accepted is a massively uphill battle.

At its worst, the Dillon case shows just how bad the IRS may be at evaluating these Offers. Apparently, the Offer was “returned” (that is, not processed) without Appeal rights because the IRS determined that it was submitted “solely to hinder or delay” collection. See IRC § 7122(g) and Treas. Reg. § 301.7122-1(f)(5)(ii).

That’s pretty bold, and given the scant information I have, pretty ridiculous. For one, the debts aren’t likely to expire imminently. For two, the stated rationale (“we can collect more than you’re offering”) obviates the entire purpose of ETA Offers, which will always involve an Offer less than “Reasonable Collection Potential” -that’s their whole raison d’etre. Virtually every ETA Offer would be denied (indeed, go unprocessed) if submitting one for less than RCP was seen as intended to hinder or delay collection.

However, I’ve also been informed by those in the know that the IRS tends not to make “solely to hinder or delay” determinations lightly. Sometimes this appears to happen when the taxpayers account was assigned to a Revenue Officer (RO) and the taxpayers file an Offer to essentially take the matter out of the RO’s hands. If the RO has seen some bad taxpayer behavior (transferring property to nominees, etc.) they will reach out to the Offer unit and advise them to make a “solely to hinder or delay” determination.

So perhaps there are good reasons why the Offer unit didn’t let this ETA Offer through the door. I’d sure like to see some more facts…

Alas, no more facts are to be found. Indeed, the Dillons want more than just additional reasoning behind the IRS conclusion: they demand that the Offer be processed via a “writ or order” of the court. That remedy is why they went to court, and ultimately why they are unsuccessful on jurisdictional grounds. Note that if they were in the Tax Court on a CDP determination, however, not only would jurisdiction be clear cut, but the reasoning behind the “solely to hinder or delay” determination would be front and center. And to me, that would provide an important check on what may (or may not) be an irrational decision by the IRS that you’re otherwise stuck with.

Lessons Learned: Advising Clients on Offers

In the past, I mostly considered how “complex” my client’s Offer was in my advice about whether it was worthwhile to wait for a CDP hearing. If it was even remotely complex there was a good reason to wait for CDP.

Dillon emphasizes how low of a bar “complex” is in the Offer context. In my experience, virtually any Offer where the client wasn’t going to pay the full present value of their retirement account (say, because they were entering retirement) or the full equity in their home (say, because they had horrible credit and couldn’t borrow against it) has been enough of a reason to counsel waiting for CDP. I have seen too many times where the IRS review is just to look at the far-right column of the Form 433-A OIC and compare it to the total liability, ignoring any reasons why that is inappropriate that we’ve put forth in a narrative, and leave it at that: “Oh, you’re 64 and have $40,000 in retirement? Then it should be no problem at all to full pay a $30,000 liability.” I assure you this is barely a caricature of how the analysis tends to play out.

But Dillon (and to an extent, the Brown saga) raise other reasons to wait on CDP even if it isn’t a “complex” Offer. Two reasons immediately come to mind.

First, and obviously, in the absence of CDP you are stuck with bad or unjustifiable preliminary decisions made by the IRS as to whether your Offer is “processible.” Without CDP you can’t even get your foot in the door to dispute it, no matter how slam-dunk the underlying Offer may be.

Dillon underscores that problem. I’ve had cases where obvious Offer candidates are “returned without appeal rights” for failing to make quarterly payments where no such payments were required or failing to file a return when they did, in fact, file but the IRS rejected the return for ID verification issues. One was saved by the grace of CDP. The other will have a student assigned to it this semester.

Second, CDP keeps the IRS honest. And frankly, I’ve seen time-and-again that such value cannot be understated. Many of my clients just want to be heard: none of them are doing particularly well financially as virtually all of my clients being under 250% of the federal poverty line, per IRC § 7526. Yes, the IRS has a fair amount of latitude in when to accept an Offer, but if it is going to be rejected my client and I want to know the reasons why. Absent CDP I find that we are never given anything beyond a boilerplate “we’ve considered your circumstances and determined they do not justify accepting your Offer.” When pressed on this (which I really only can do with any value in CDP reviewing the administrative file) I often find that the IRS never really appeared to “consider the circumstances” at all.

A Parting Thought: The Value of Judicial Review on Collection Actions

As an academic who cares about tax administration, I’m not a huge fan of incentivizing people to “wait” on addressing their tax problems. It’s inefficient and costly.

(Note that the Tax Court may have inadvertently (and in my opinion incorrectly) further incentivized waiting until CDP in the context of arguing the underlying merits of the liability under IRC § 6330(c)(2)(B). As covered here, here, and here, if you are proactive in arguing against the underlying tax you may miss out on the chance to get court review later. I definitely don’t trust IRS Appeals enough on deficiency issues with low-income taxpayers (the common “prove the kid lived with you” scenario) to foreclose judicial review.)

I hope that the (much needed) increase in IRS funding (see Les’s post) will ameliorate some of the issues I’ve seen through better training and support. But even if it improves the quality of review on collection issues (a big “if” since it isn’t clear how much of that money would be going to exam, etc.) I believe the need for judicial review of collection actions remains. If you ever have a position contrary to the IRM, you have virtually no chance of success without judicial review.

And sometimes the IRS rules, frankly, are nonsensical or needlessly hurt low-income taxpayers. Vinatieri is the classic example, and Keith has noted other times where it seems that those in positions of power seem to just “make-up” rules. A judiciary check against that power, even if modest, I think, is in order. Most of my low-income clients are collection cases, and collection (the actual taking of their modest property) is a serious concern that can carry serious consequences if you get “the wrong person” at the IRS reviewing the case.

As a parting example, I once submitted an Offer for a homeless client. It was preliminarily rejected by the IRS on their determination that the taxpayer had disposable income because… yep, they weren’t paying for housing. Because the IRM (basically) says “take actual housing expenses,” and since stable housing was just a dream of theirs, they shouldn’t be allowed $1,000 in anticipated monthly housing costs while trying to leave a domestic violence shelter.

I kid you not.

I am convinced this particular case was resolved favorably only because I was able to say to Appeals, as they informed me they were upholding the determination: “do you really want this to play before a Tax Court judge?” I have heard from other colleagues (especially in California) that they’ve run into the homelessness housing expense issue before, with both failure and success. I don’t think the IRS, as an entity, endorses the position that homeless people shouldn’t be allowed the means to pay for housing. But that’s what the frontline workers (and the “Independent Office of Appeals”) end up doing based on their reading of the IRM. Part of me wished my case went to trial so that it could have gained some notoriety, and either led to the IRS changing the IRM on its own or a Tax Court decision that forced its hand.

But for now, I’ll settle for the fact that at least my particular client was given a positive outcome that would not have occurred in the absence of CDP. I’m sure there are other such examples from practitioners nationwide.

Caleb Smith About Caleb Smith

Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.


  1. There is a massive disconnect between the amount the OIC units in Brookhaven or Memphis believe will be collected over the life of a liability and the amount the collections department will actually collect. I believe TAS did a report on this as well.
    More recently, it feels like offer reviewers are searching for a reason why an Offer shouldn’t be accepted to clear their inventory rather than determining an Offer amount that will benefit both the Service and the Taxpayer.
    To compound problems, I am seeing a lot more rejections being sustained on Appeal even where the reviewer made a material miscalculations.
    At this point it feels repeated cycles of CNC are the preferred method of resolving many of these liabilities even if it Taxpayers are stuck with the tax lien until the clock runs.

  2. Shawn Richter says

    A notable part of the current equation is the long delay in receiving an actual hearing. I filed for a hearing in January and am still waiting. Not to mention I was recently told by a TAS rep. that they are currently working on requests from last November.

  3. Joseph Cole says

    When you file an OIC through the normal channels, you get two whole bites at the apple. You get a first pass review by the Offer Specialist and you get a de novo review by the Appeals Officer.

    When you file an OIC through a CDP yo get a first pass review by the Appeals Officer, and the review by the Tax Court for abuse of discretion. Tax Court Review is usually far from a full second bite of the apple.

    OICs are tough and usually involve a lot of tough “judgment calls” like how much can we expect the taxpayer’s business to net in the future, how much is the taxpayer’s property worth, and what are the client’s future earning prospects. The tax court will almost always defer to the Appeals Officer on these judgment calls, which effectively gives you no real second bite of the apple in most cases.

    • Frank Donahue says

      Joseph. As a former Offer Specialist who is now working on what we used to refer to as the “dark-side”, I agree with you wholeheartedly! I have been far more successful in Appeals with my OIC cases than the first level O/S or O/E and find that once I have a rejection letter in hand I can frame my response laser-focused on the requirements in Appeals dictate. Also, as often as I read about cases going to tax court in this forum, rare is the case in which Appeals hasn’t been sustained as you pointed out.

  4. Michelle Wynn says

    While I certainly prefer the CDP context when it comes to incorrect or unreasonable non-processable determinations, in the Offers I have submitted outside CDP where the Offer was returned as non-processable for an incorrect reason, I have typically (not always, but often) been able to call in and explain the situation over the phone to the Offer Unit and then re-send the original Offer package to them without the need for additional TIPRA payments or Application fees (in those cases where they didn’t meet the low income requirements). I’ve also had Offers returned for failure to make a TIPRA payment or payment of the Application fee and called back in to resolve the issue where the taxpayer’s circumstances do qualify them for the waiver but someone messed up in reviewing the application. I’d rather not have to rely on whether I can actually reach the OIC Unit in time to get the decision overturned or whether the phone lottery will put me through to someone who can help, but at least it’s something where my Offer is submitted after CDP/Equivalent Hearing rights have run out or before CDP rights are offered.

  5. Bob Kamman says

    Perhaps not the Dr. Bonnie Dillon of St Paul, a family practice physician and graduate of the University of South Dakota School of Medicine, who in 1998 according to a South Dakota newspaper made a mission trip to Bolivia with her husband Rick, an environmental health specialist. She currently is affiliated with a medical practice in St Paul. Their names are connected to a house in St Paul (on Hoyt Avenue) that was sold in 2020 for $625,000 – I didn’t find if they were sellers or buyers.

  6. Bob Kamman says

    It was an educated guess that a skeptical Revenue Officer was involved here. The “Plaintiffs’ Memorandum in Opposition to United States’ Motion to Dismiss” states that one of the named defendants is “the Internal Revenue Service Revenue Officer assigned generally to the Plaintiffs’ collection case who, on information and belief, through internal administrative procedures initiated or recommended return of the Plaintiffs’ Offer in Compromise.”

    In response to that pleading, the government attorney explains why IRS rejects offers that it considers to have been submitted only for delay. “If the IRS is compelled to process every frivolous offer-in-compromise (like Plaintiffs’), taxpayers who do not wish to pay their taxes would be armed with the ability to continually submit frivolous offers-in-compromise, and then appeal the denial of their frivolous offers. During this process, the IRS would be prevented from taking steps to collect the taxes owed by these taxpayers.”

    What is more frivolous? An offer from taxpayers who admit up front that they could pay in full, but at too great a hardship? Or the many offers from taxpayers who make such frivolous requests as an allowance for housing when they are currently homeless? Congress has left that decision mostly to Revenue Officers, and certainly not to the Tax Court.

  7. Chris Nebel says

    Having worked for 33 years on the “dark side” as an RO, Tech Advisor, ATAT Collection Group manager and later as a Local Taxpayer Advocate, I agree whole heartedly with this article. Getting an Offer in front of Appeals will usually have a far better outcome. One additional aspect to remember, if a Revenue Officer determines an OIC (or even an IA) have been submitted solely to delay collection, a group manager must approve the determination. While there is no “formal” appeals process in a solely to delay determination, the manager is required to discuss the matter with the taxpayer or representative if requested and Revenue Officers are required to notify the manager that a conference has been requested. I have had success in having a reasoned conversation with collection group managers and/or Territory Managers…. If the RO never secures that approval and then takes a collection action, the collection action can be deemed “improper” and reversed.

  8. Timothy Carter says

    When the IRS begins collections on the Dillons, can they not still request a CPD hearing, and then re-submit the OIC as a collection alternative, arguing that it was not properly considered originally, and then appeal to Tax Court if the determination goes against them? And if so, is there still a “con” to proposing a collection alternative prior to a CPD hearing?

  9. Bob Kamman says

    What I read between the lines is that they had missed the deadline for requesting a CDP hearing. They were at the point where District Court, however remote the chance of success, was their only shot left.

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