Limitation of 24 Month Offer in Compromise

IRC 7122(f) provides that if a taxpayer submits an offer in compromise and the IRS does nothing on the offer for two years the offer is deemed accepted.  Congress added it in 2006 in response to concerns that the IRS action on offers moved too slowly.  Here is the exact language of the statute:

Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

I previously wrote about aging offers in compromise into acceptance here and here.

The case of RAJMP Inc. v. United States, No. 3:19-cv-00876 (S.C. Cal. 2020) raises the issue of a taxpayer’s remedy in a situation in which the offer has aged into acceptance.  I found the limitations on the taxpayer’s remedy a bit surprising.

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The facts make me wonder if the corporate officers only recently read our blog posts about the impact of aging an offer into acceptance and call into question whether the offer did age into acceptance.  For purposes of this discussion I will presume that the offer did age into acceptance.  The taxpayer submitted it on July 14, 2006.  The IRS accepted it for processing on July 25, 2006.  The taxpayer alleges that the IRS has never issued a notice of rejection of the OIC (nor I presume a notice of acceptance.)  The OIC offered $400,000.  If accepted, the OIC would relieve the taxpayer of about $8 million in liability.  The opinion says that the taxpayer paid the IRS $400,000 but does not say when the taxpayer made the payment.  It does say that the IRS applied the payment to the taxpayer’s account rather than to the OIC, whatever that means.

Assuming that the offer aged into acceptance, which the IRS contests in the litigation, what does a taxpayer do to get the IRS to recognize the statutory offer acceptance and enforce the terms of the OIC contract?  RAJMP brought this suit in district court alleging (1) a continuing breach of contract; (2) a non-monetary claim under 5 U.S.C. 702; (3) violations of the Administrative Procedure Act (APA) and (4) “the Court’s anomalous independent equity jurisdiction, the Court’s supervisory power over federal officers and employees and the equity jurisdiction conferred by the Judiciary Act of 1789.”  In its prayer for relief it asks the court to enforce the contract, abate all balances of the outstanding assessments for the periods covered by the offer, issue any other orders deemed appropriate and award costs and legal fees. 

The IRS moved to dismiss the suit arguing that that the court lacked jurisdiction and the complaint failed to state a claim.  It argued that the Anti-Injunction Act (AIA) and the Declaratory Judgment Act (DJA) barred the relief requested.  The court quickly finds that the taxpayer’s request that the IRS abate the tax the OIC forgave “simply violates the AIA and DJA….”  Here, the Court finds that the remedy is requesting a ruling that the IRS may not collect any further taxes and that RAJMP is excused of its tax liability.  Accordingly, this is a case regarding collection or assessment of taxes.”

The court finds that IRC 7122(f) does not contain a waiver of the AIA or DJA.  One exception to the AIA exists if a taxpayer establishes that the IRS could not prevail and if equity jurisdiction otherwise exists.  The IRS argued that the taxpayer failed to prove either prong of this exception and the court agreed.  First, the court points to the affidavit of an IRS employee that the IRS properly rejected the offer.  The court cites to the affidavit as a basis for deciding that an IRS victory on the merits exists.  In addition to arguing for the possibility of a victory on the merits, the IRS argues latches and the court finds this a possibility.

In addition to failing the first prong of the exception to the AIA, the court goes onto the second prong and decides the case in a manner that would stop all taxpayers seeking a ruling on an offer through affirmative litigation in a district court.  It holds that the taxpayer has an adequate remedy in law and, consequently, does not meet the equitable remedy test. The court finds that the taxpayer could have pursued a monetary damage claim under the Tucker Act for breach of contract, could have paid the full $8 million balance and brought a refund claim, or could have waited for the IRS to sue to collect and raised the statutorily accepted offer as a defense.

I do not find the frequently cited remedy of full payment followed by a refund suit to provide much comfort to the taxpayer.  Like a host of taxpayers receiving this wonderful advice, RAJMP probably does not have $8 million lying around waiting to be tied up in the refund claim/litigation process for several years.  I also do not find the advice of waiting for the IRS to sue very comforting.  This means the IRS can pursue its full range of administrative collection tools against RAJMP with impunity.  Collection suits are rare.  The taxpayer’s hope here would lie in the opportunity to raise the issue in Collection Due Process litigation (CDP) if the CDP opportunities have not already passed.

This leaves RAJMP with the best option of bringing a Tucker Act suit.  Maybe Congress intended taxpayers whose offers aged into acceptance bring Tucker Act suits.  The absence of a judicial remedy to resolve the aged into acceptance offer leaves the taxpayer searching for remedies when the period runs.  This seems like an odd remedy but maybe it presents the most logical choice.

The court rejects the APA as a source of remedy for the same reason it finds the taxpayer has failed to meet the second prong of the AIA test.  The court finds the APA does not provide a remedy if the relief is “expressly or impliedly forbidden by another statute.”  Here the AIA is that statute.

The court rejects the waiver of sovereign immunity and also finds that collection of tax does not provide a basis for a takings claim.  It also finds that because it lacks jurisdiction over the case, it cannot grant the taxpayer a preliminary injunction.

The IRS disputes the underlying argument that it failed to act on the OIC in two years.  In some fashion the taxpayer must fight out that factual issue when it finds the right judicial vehicle.  The RAJMP case, however, points out that a taxpayer will have difficulty litigating the statutory acceptance of an offer.  Presumably, the IRS would concede any case in which it determines that it did, in fact, fail to act within 24 months.  Where it refuses to do so, taxpayers must look for the right path to judicial relief.  This court suggest that path lies through the Tucker Act.

Oversight of Offers – Response to Comment raising Thornberry v. Commissioner

Last week I wrote about a CDP case in which the Tax Court remanded the case to Appeals so that the Settlement Officer (SO) could better explain the impact of the taxpayer’s health on the decision to reject an offer in compromise.  In my post I suggested that the SO should have confronted the past criminal tax behavior of the individual directly since I felt it was coloring her decision.  I suggested that she should have decided if a public policy or best interest of the government rejection was warranted.  I further suggested that if she had decided to reject the offer on those grounds, subject to the approval of her supervisor once removed, the Court would not have remanded the case.

The post drew a lengthy response that I want to address.  I interpreted the gist of the response as a statement that the Tax Court’s decision in Thornberry v. Commissioner, 136 T.C. 356 (2011), will soon eliminate the ability of the IRS to make public policy or best interest of the government the basis for rejecting an offer in compromise.  While I disagree with the comment, it raises several interesting and important issues about the past and future path of offers in compromise.

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My post drew a comment concerning the proper level of review in a CDP case.  To understand my response, I am reproducing the quote here:

“I will tell you why this not going to be used in the future.  The reason is Thornberry v. Commissioner, which establishes a Fifth Amendment Due Process right to the Collection Financial Standards in conjunction with Collection Due Process.  The Court is soon going to rule that this conjunction is the policy of the maintenance of CFS facts, such as housing, medical care, etc.  Buttressed by numerous U.S. Government policy changes raising the level of scrutiny for such facts.  The Affordable Care Act raised the level of scrutiny for medical care above minimum scrutiny.  The Supreme Court just raised the level of scrutiny for property above minimum scrutiny.  The Service itself just included student loans and state taxes in the CFS, because it was irrational to keep them out.

You are still living in the West Coast Hotel/Carolene Products scrutiny regime.  But that regime is over, and those cases, and a slew of others keeping many facts in the political system–Lindsey v.Normet, Berman v. Parker, DeShaney v. Winnebago County–are no longer good law.

The Constitutional regime has changed, and in the new regime, it is laughable to suggest the Commissioner could do anything but maintain CFS facts by asserting “public policy grounds” or any of those ridiculous notions from tax law’s past.

You do your clients a disservice by not pressing the Court to enforce more thoroughly the CFS.  Today taxation exists for only one purpose: to maintain CFS facts.  This is the doctrine behind Custom Stairs and, in the Bankruptcy Court, in In re Andrew Bush Johnson.

What hole have you been living in?  The question you ought to ask yourself is: what legal test was used to include facts in the CFS?”

Because the comment raises the history of the offer program, a trip back in time will help in understanding the comment and my response.  The offer statute traces back to the civil war.  There is a relatively recent law review article on it for those who want more background.  While it has existed for approximately 150 years, in the modern era it has about a 20 year history.  Section 7122 brought the offer in compromise into the 1954 Code where it sat growing cobwebs until about 1991 when an unrelated statute change caused the IRS to dust off the offer in compromise provision.  Between 1954 and 1991 the IRS did have an offer program but it was primarily to, in the words of Nancy Reagan, “just say no.”  The number of offer acceptances, or even offer submissions, was very low.  It was not a program to promote collection or compliance but simply a statute that one looked to on rare occasion.

In 1991 Congress, on its own motion, decided to extend the statute of limitations on collection from 6 years to 10.  At that time Congress was very focused on and interested in the accounts receivable at the IRS and the amount of uncollected taxes on the books.  Someone in Congress, or many someones, thought that by giving the IRS more time to collect it would be able to bring in more of the assessed taxes going uncollected.  The reaction at the IRS was basically one of horror because the collectors at the IRS knew that taxes not collected during the first two years have a very low rate of recovery.  Instead of being pleased with their ability to collect more taxes the bureaucratic reaction focused on how much worse the IRS was going to look with four more years of uncollected receipts on the books almost doubling the amount of uncollected receipts on the books at that time.

In casting around for a way to counteract the bad public relations circumstance created by the extension of the statute of limitations on collection, the IRS looked to the offer in compromise provision as a way to get dollars off of the books.  It began promoting the submission of offers in compromise.  It did so before creating collection standards.  The first few years of the “new” offer program were a bit Wild West in application because of the differences in the views of the revenue officers around the country working on the offers.  Also, the roll out of the offer program occurred prior to the passage of the collection due process (CDP) provisions so the decisions on offers did not receive review from any court.

In the mid-1990s the IRS developed the collection financial standards referred to in the comment.  It pulled the expense standards from the Bureau of Labor Statistics and the assets rules from the exemptions from levy found in IRC 6334.  In 1998 Congress created CDP which under the right circumstances can result in review of an offer in compromise.  The majority of offer cases are not submitted through the CDP process and do not receive court review.  The case I discussed last week, Anderson v. Commissioner, was an offer case submitted in conjunction with the CDP process.  That fact allowed the Tax Court to review the offer process.  The Thornberg case I think the commenter was citing involved CDP and the more general powers of the Tax Court in obtaining jurisdiction of those cases.

The commenter and I seem to agree that you obtain an advantage if you submit your offer within the CDP process.  An offer submitted outside the CDP process does not receive Court review.  Unless he perceives a way to obtain review of a rejected offer that I do not know about, offers submitted outside of CDP simply do not have the opportunity for the application of the due process concerns expressed.  I think the IRS can reject any offer on whatever grounds it establishes until some review mechanism exists for these submissions.  I welcome further comment on this point.

In CDP cases the Court can review whether the IRS follows its processes.  In essence this is what the Court was saying in the Thornberg case.  The IRS sought to deny the taxpayer, who timely filed a request for CDP consideration, a determination and a ticket to Tax Court because the taxpayer was making, inter alia, tax protestor type arguments.  The Tax Court said that the IRS could not simply funnel the taxpayer who met the statutory requirements for CDP back into the administrative process without the chance for court review.  The Tax Court did not say that a taxpayer who did not make a proper request for relief would ultimately receive some benefit not otherwise available, did not say that it would look behind the IRS administratively created review processes such as the collection financial standards and did not say that the IRS could not issue public policy rejections.

The commenter points to the changes in the offer program over time that have made it more accessible.   I agree that the IRS has made changes over the 20 years improving the program.  Starting with the adoption of the collection financial standards in the mid-1990s and leading to the Fresh Start initiatives in 2012 that I referenced in an earlier post. These administrative improvements to the program draw on pragmatic rather than constitution bases.  The review of offers has changed dramatically during the past 20 years.  Initially, they were all reviewed by field revenue officers who ran down the information submitted on Form 433.  Now, only extremely rare offer cases have field work performed and offers receive their entire review from specialist sitting in Brookhaven or Memphis Service Centers who rely on data base searches rather than boots on the ground inspection.  The changes in review standards and review practices are real and have a meaningful impact on offers but I do not see the constitutional driver that the commenter sees.

Les Book wrote an article a few years ago that contained a lengthy discussion of a case presenting the issue of public policy rejection. The case, Oman v. Commissioner, T.C. Memo 2006-231, addressed the IRS rejection of an offer in compromise that a former business executive who ran up substantial liabilities at one point in his life but who had fallen on hard times due to a drug addiction submitted.  He offered $1,000 on a $170,000 at a point in time when he was unemployed, living with friends, no assets and a negative reasonable collection potential (RCP).  The offer was rejected because of his egregious history of past non-compliance and a concern about future compliance with the offer’s terms. 

The Tax Court noted that it reviewed the decision of the IRS to reject the taxpayer’s offer under an abuse of discretion standard.  The Court struggled with the apparent conflict between Internal Revenue Manual provisions allowing the IRS to reject an offer as not in the best interest of the Government and Policy Statement P-5-100 which provides that the IRS will accept an offer when it is unlikely the liability can be collected in full and the taxpayer offers an amount equal to or greater than the reasonable collection potential.  The Tax Court remanded the offer for further consideration to allow the IRS to address the apparent inconsistency but the Court did not dictate that the IRS must accept all offers where the taxpayer offers an amount equal to the reasonable collection potential.  The Court also did not question the manner in which the IRS calculates the reasonable collection potential which heavily depends upon the expense standards it sets and the asset exemption amounts it creates.

Professor Steve Johnson addresses these issues in his article An IRS Duty of Consistency: The Failure of Common Law Making and a Proposed Legislative Solution. He points out that these issues implicate fundamental fairness but are usually subconstitutional.  I agree with Professor Johnson and Professor Book.  The Tax Court has a role in CDP cases involving offers in compromise both in seeing that the IRS has followed its own rules and that the IRS rules make sense.  That type of review, however, does not allow the Tax Court to substitute its own judgment regarding the decision to accept or deny an offer except where the IRS has abused discretion in following the guidelines established by the IRS itself.  With the recent offshore initiatives, the IRS faces taxpayers who have hidden their money in tax havens to avoid taxation or to avoid collection.  Once a taxpayer has taken such action, the IRS may forever remain uncomfortable accepting such a taxpayer for an offer in compromise for fear that still more money remains offshore.  I do not suggest these individuals cannot obtain an offer in compromise but simply that situations exist that may cause the IRS to reject an offer even though the Form 433-A (OIC) does not indicate the taxpayer has an ability to pay and the IRS cannot point to specific assets not showing on the form.  It must have room to exercise judgment in those situations.

The commenter cites to cases with which I am not familiar to suggest that the Tax Court will strike down any attempt by the IRS to reject an offer on public policy grounds.  I have not seen a Tax Court case do that.  As I mentioned in my post, I think the Tax Court would recognize a public policy decision.  Section 7122 provides that the IRS “may” accept an offer in compromise.  It does not dictate that the IRS accept offers and generally does not dictate the approach the IRS uses to decide which offers to accept.  I think that Tax Court review of offers in the CDP cases provides the Tax Court with an opportunity to review whether the IRS has followed the procedures it establishes for acceptance of offers and does not create a constitutional right to prevent the IRS from applying one of its established procedures.  CDP does, however, give the Tax Court the right to insist that the IRS has properly followed both its own procedures and the procedures established by IRC 6320 and 6330.  That is what I take from Thornberry, Anderson v. Commissioner (see my earlier blog post here) and Szekely v. Commissioner (see my earlier blog post here).

 

 

Offer In Compromise Problem of “Form” over Substance

What happens when the Service sets out to do a good thing but runs into a backlog?  In this case two right decisions give taxpayers and their representatives a wrong result.

First, the Service set out to update the Offer in Compromise (OIC) form making it more user friendly and better suited to the purpose it served.  Changing a form requires the Service division proposing the change to work with the Forms Division at the Service on the proposed change.  For the offer in compromise form, the Small Business Self Employed Division (SBSE) would initiate the request.  Then, the Forms Division must create the new form and obtain necessary approvals. Changes to forms do not necessarily take long periods but sometimes the clearance process could significantly slow down the implementation of a form.  The clearance process requires that the form obtain approval from several divisions impacted by the form.  If, for example, the Taxpayer Advocate Service (TAS) in reviewing a form did not agree with the form design or the correctness of a form, then the form could encounter delays as TAS works with SBSE to reach agreement.  I have no idea what is delaying the changes to Form 433-A (OIC) to cause it to conform with the changes in the offer in compromise program.  My example is not intended to suggest that either TAS or SBSE is to blame but somewhere in the Service the corrections must either be stuck or someone in the Service failed to notice that the form and the guidance no longer match as discussed below.

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The Service redesigned the OIC form, creating a new Form 433-A (OIC), specifically to address OICs rather than other collection alternatives.  The new form was released in March, 2012 and can be found here. This form provides an excellent tool for preparing an OIC and vastly improves the previous form.  The Collection Division and the Forms Divisions both deserve credit and praise for designing the new form.

Unfortunately, within two months of issuing the new form, the Service made long needed changes to the OIC program changing the method for calculating the OIC in several fundamental respects.  These changes were published in May 2012 in News Release IR-2012-53.  They made Form 433-A (OIC) obsolete.  Using Form 433-A (OIC) after News Release IR-2012-53 leads the taxpayer or practitioner to the wrong OIC number because the form uses the guidance in effect prior to News Release IR-2012-53.

So, a great new form followed by great new guidance has produced a poor system for submitting OICs.  Taxpayers and practitioners unaware of the dissonance between the form and the guidance will incorrectly calculate the amount needed for an offer and, generally, offer too much or conclude not to make an offer.  Taxpayers and practitioners aware of the dissonance must try to fit the new guidance into a form designed to lead to the submission of the correct reasonable collection number using a form that makes it difficult or awkward.

A couple of examples regarding the dissonance can quickly illustrate the problem.  One of the great changes to the offer process resulting from the Fresh Start initiative announced on May 12, 2012,  allows the taxpayer to reduce the total amount of case by $1,000.  See IRM 5.8.5.  It also allows the taxpayer to use one month of living expenses to reduce the cash on hand reported as an asset.  Finding this benefit in Form 433-A (OIC) is not possible.

A second great change in the offer process concerns the ability to exclude the value of a vehicle up to the amount of $3,450.00.  Prior to the change, taxpayers had to include the entire value of their vehicle after discounting for quick sale value.  This made it difficult for many elderly taxpayers to qualify for an offer because they essentially had to repurchase their car through the offer process of sell it.  Many of these individuals had a negative monthly income over expenses balance sheet and had no practical way to repurchase the car.  They also had need of the car to get to the doctor, grocery store, or almost anywhere they needed to go unless they lived in a very urban area.  The ability to exclude a vehicle of modest value covers most of these individuals.  The Form 433-A (OIC) does not inform the person filling it out that a modest value of the vehicle is excluded and requires the submission of the full quick sale value of the vehicle.  Other examples exist because several changes occurred to the offer requirements.

The dissonance between the form and the guidance has now existed for 16 months.  Who knows how long the problem will continue to exist?  The delay has a significant impact on anyone attempting to fill out the form without knowledge of the offer process outside of the information provided with the form designed specifically for the purpose of submitting an offer in compromise.  The Service deserves credit for making two excellent and well needed changes.  Unfortunately, the order of the change, form first and then substance, has created a difficult situation for parties submitting OICs as well, I suspect, for those processing them.