Additional OIC Comments Not Specifically Related to the Mason Case

When Bryan was writing his post, we had an exchange about OICs.  Some of the comments I provided to him I might have provided in posts over the years, but I will state them here in case we have new readers or old readers with memories like mine.  Most of these comments relate to the history of OIC provisions or the IRS administration of the OIC.

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The Current OIC Program

Although Congress authorized the IRS to compromise collection cases in the 1860s, the IRS very rarely did so.  In Virginia when I started working in Chief Counsel’s office in 1980, one RO in the state was assigned to work offers.  He would travel the state working the offers and reject every offer after careful consideration.  I think what was happening in Virginia was happening across the US.  Then in 1990, Congress extended the statute of limitations on collection from 6 to 10 years.  I was working in the National Office at the time in the group of attorneys specializing in collection matters.  I watched firsthand the reaction to the change in the statute of limitations, which came as a surprise to the IRS.

The extension from 6 to 10 years was an idea that Congress had to collect more money without having to say they raised taxes.  They could score this as something which would bring in dollars and use that score to reduce taxes elsewhere or spend more money and have it look as though the event was revenue-neutral.  We see the same discussion today as Congress debates whether to give the IRS more money so it can collect billions of additional dollars.  While I think the IRS could use more money, the amount it will collect as a result of receiving more money is tricky to predict.

When Congress changed the statute of limitations on collection in 1990, it did not consult with Treasury or the IRS.  Had they been consulted, Congress would have learned that the IRS collects very little money after the first two years.  The bill got passed at a time when Congress, and therefore the IRS, was very concerned with the Accounts Receivable due to the IRS and was asking lots of questions about how the IRS could reduce the ARDI (I can’t remember all of the acronym.)  The IRS even had an executive whose only job was to reduce accounts receivable. 

The IRS knew that the extended statute of limitations was going to cause the ARDI to balloon because of the uncollectable accounts that were going to stay on the books four years longer.  So, it started casting about looking for fresh ideas to reduce it and one of them was to actually accept offers instead of rejecting them.  It was the wild west for the first few years as the IRS tried to get its policy completely lined up.  In the mid-1990s an excellent attorney, now an IRS executive, Carol Campbell, created the income and expense guidelines as well as the exempt asset guidelines based on IRC 6334.  In 1998, Congress came behind and codified some of the things going on, including requiring the IRS to have income and expense guidelines which it had already created.  So, the current OIC program is less than 30 years old and resulted not from a change in the statute but from a change in administration because Congress gives the IRS almost complete discretion in OICs.

OICs for Low-Income Taxpayers

One of the few restrictions placed upon the IRS as the IRS codified additional OIC provisions in 1998 was the requirement that it not reject OICs simply because the taxpayer did not offer some minimum amount.  This restriction is located in IRC 7122(c)(3).  You can give credit for that code section primarily to Nina Olson and partially to me.  Nina had a Tax Court case with my office back when she directed the Community Tax Law Project in Richmond, Virginia.  The IRS had determined that the taxpayer owed a lot of money.  The case had a messy factual background that was going to require a lengthy and difficult trial. 

If the IRS won, it was unlikely to collect anything from the taxpayer, whose business had ended and who had spent time in prison.  I suggested that, instead of a trial, she concede the liability and we compromise the debt.  Nina liked the idea, but we fought over the compromise because I wanted a minimum amount to make the effort worthwhile.  Subsequent to the case but not long thereafter, Nina was asked to testify before Congress.  In her testimony to Congress leading up to the 1998 changes, she convinced Congress that requiring a minimum amount to compromise the debt of a low-income taxpayer was wrong.  Her testimony resulted in the passage of IRC 7122(c)(3), for which I claim partial credit since I was the person at the IRS who “inspired” her testimony.

OIC Stats

For those who can peek behind the paywall, David Van Den Berg recently wrote an article for Law 360 building on the current National Taxpayer Advocate’s comments regarding OICs in the mid-year report.  In her report, she provides stats on the declining number of OICs over the past decade. According to the NTA, fiscal year 2020 marked the seventh consecutive year of decline in OIC receipts, and total OIC receipts for FY 2020 were the lowest they had been since 2008.  She states that TAS is looking for ways to increase the number of successful OICs.  Unemployment is a big driver of receipts.  Perhaps the unemployment situation caused by the pandemic will cause many more OICs. 

In his article, David mentions that the IRS is considering investing in robotics and exploring digitization of the OIC forms as well as creating an ability to submit the OIC online.  I mentioned to him when he contacted me about the article that I would like to see the IRS articulate its goals for the OIC program as part of deciding whether it has too many or too few OICs.  It started the modern program over 30 years ago as a reaction to a surprise change in the statute.  It started the program to reduce accounts receivable rather than to necessarily benefit collection or benefit taxpayers as a whole.  With a tightly crafted goal for the program, it would be easier to determine if it was meeting the goal for accepting offers rather than just saying a goal exists to increase the number of offers.

Submitting an Offer in Compromise Through Collection Due Process

The case of Mason v. Commissioner, T.C.M. 2021-64 shows at least one benefit of submitting an offer in compromise (OIC) through a request for a collection due process (CDP) hearing.  As part of his lessons from the Tax Court series, Bryan Camp has written an excellent post both on the case and the history of offers.  I will try to provide some insights not explicitly covered in Bryan’s post, but if you have time to read just one, I suggest reading his post.

In my clinic, we try to file offers in CDP if possible because we get the chance to go to Tax Court, where the possibility of a reversal exists, such as occurred here.  Except in CDP cases, taxpayers cannot go to court to contest the denial of an OIC.  Bryan prefers that the door to court remains shut because he thinks the process should be inquisitorial and not adversarial.  The current system works primarily in that way, with only a small percentage of cases having the opportunity to go to court and a still smaller group actually going to court with an even still smaller group getting a favorable outcome by going to court.  His point, which is a valid one, is that the cost of going to court is too high compared to the benefits it brings to the system.  My thought is that it benefits the system to occasionally have someone outside the IRS look at how the system is working and set some parameters for the IRS.

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In Mason, the taxpayer had submitted an OIC prior to requesting a CDP hearing.  The IRS returned rather than rejected the OIC request.  The IRS returns OICs that either do not meet its processability standards or which relate to cases in which the taxpayer fails to complete some action requested by the OIC specialist.  The IRS returns OICs at the outset because the taxpayer has unfiled returns, has an ongoing bankruptcy case, or because of a host of other reasons stated in section 5.8.7.2 of the Internal Revenue Manual.  My clinic knows the reasons for the return of offers at the outset and almost always has no problem with those.  In every case, after the OIC unit determines that an offer meets the processability requirements and does not quickly return it, an OIC examiner is assigned who then works the case and eventually, several months later, reaches out to the clinic to tell us what additional information it needs.  In almost 15 years of submitting offers for clinic clients, I may have seen one or two offers get accepted without the request for additional information, but in 99% of the cases, the OIC examiner calls after reviewing the file and wants more.  When the OIC examiner calls, the taxpayer and the representative usually have a short window within which to obtain the additional information.  The OIC examiner will state a date in the conversation by which the material must arrive on their desk and state “if X does not arrive by Y date, your offer will be returned and you will not have appeal rights.”  We try very hard to get the newly requested material to the OIC examiner by the requested date and only fail if the lengthy period of darkness waiting for the review of the OIC to conclude has caused us to lose touch with the client.

In the Mason case, a rare reason for returning the offer occurred.  The Masons owed over $150,000.  Owing that much usually buys you the chance to have a revenue officer (RO) work your case.  As someone who primarily represents low-income taxpayers who do not owe enough to buy the services of an RO, I am envious.  I would much rather work with an RO than an Automated Call Site (ACS).  Of course, some ROs are difficult to work with and some ACS responders are good to work with, but by and large I would prefer to work with an RO because most ROs will be responsive and, if it is possible to frame an RO’s work this way, reasonable.  Having an RO means you have someone who can exercise much more judgment and therefore work toward reasonable solutions that ACS would find difficult.

The Masons, however, experienced the downside of having an RO work their case.  The RO assigned to their case appears diligent, competent, and committed to reaching the appropriate result.  For them, this proved a bad combination.  They had valuable assets with which they did not want to part in order to satisfy their large tax obligation.  Shortly after their conversation with the RO, who let them know that they needed to work to pay the liability, they filed an OIC offering about $5,000.  The RO did something I cannot remember seeing before.  The RO wrote to the OIC unit and said that the taxpayers submitted the OIC for purposes of delay and not in a good faith attempt to satisfy their liability.

Had the OIC unit accepted the OIC for processing, it would have taken several months before the OIC came to an end.  It would have ended with a rejection (assuming the Masons stuck to the very low dollar offer) and would have provided them the opportunity to go to Appeals, which could have taken several more months.  At the end of this lengthy process which almost certainly would have resulted in a rejection of the OIC, the case would have gone back into the active collection inventory but might have been assigned to a less diligent RO, if one was assigned at all.  By going the OIC route, the Masons would have suspended the statute of limitations on collection but would have also had access to their assets for the period that the OIC was under consideration and might have benefited on the back end.

To keep this from happening, the diligent RO wrote to try to convince the OIC unit to return the offer at the outset without processing it.  The OIC unit agreed and returned the offer as submitted for delay based upon IRC 7122(g).  This kept the momentum of the collection of the liability going; however, the next step for the RO with taxpayers who would not voluntarily liquidate their assets and pay the tax was to levy.  Before the RO could levy, a CDP notice needed to occur.  While the Masons did not diligently pursue payment, they did diligently pursue their rights and they quite properly filed a timely CDP request.  In making the request they stated a desire for an OIC.

After the normal delays present in a CDP case, an employee of Appeals worked their CDP request.  The Appeals employee looked at their OIC, which mirrored the OIC returned to them earlier, and determined that the OIC unit properly returned the OIC.  Because the OIC unit properly returned the OIC, the Appeals employee determined that they should not receive an OIC through the CDP process without looking at the merits of the OIC but only at the merits of the earlier decision by the OIC unit to return the OIC.

As mentioned before, only a small number of OICs are subject to judicial review and only a tiny fraction of those involve the issue of returned OICs.  Judge Holmes looks at the prior case law involving OICs and gives a good background on those cases.  He determines that the Appeals employee working a CDP case must consider the merits of the offer and cannot simply determine that the prior decision to return the offer was correct.  So, he remands the offer to allow Appeals a second chance.  Unless Ms. Mason, who now pursues the case alone after Mr. Mason’s death, substantially modifies the offer or unless her circumstances have materially changed over the period of this process, it seems likely that Appeals will make a determination that the IRS should not accept the OIC as a collection alternative to levy.  If it makes that decision and the Tax Court does not overturn it, then the case may go back to the diligent RO, or perhaps that RO has now retired, moved, been promoted, or has too large an inventory. 


Failing to Keep Current After Obtaining an Offer in Compromise

Thanks to Jack Townsend for alerting me to the case of Sadjadi v. Commissioner, No. 19-60663 (5th Cir. 2020) in which the court affirms the decision of the Tax Court revoking taxpayers’ offer in compromise and allowing the IRS to levy to collect the liability.  Nothing about the case surprises me but it does serve as a reminder of what happens when you fail to keep current after obtaining an offer in compromise.  It also serves as a reminder that the OIC produces a contract, and the terms of that contract clearly obligate the taxpayers to timely file and timely pay for five years after the acceptance of the offer.

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Mr. and Mrs. Sadjadi owed taxes for 2008 and 2009 based both on their filed returns and subsequent audits.  They worked with the OIC unit and had an offer accepted.  The offer required payment over time which they did; however, while making the offer payments they failed to pay their 2015 liability.  As a result, the IRS revoked their offer acceptance and sent them a CDP notice which they responded to by requesting a hearing.  At the hearing they requested an Installment Agreement to pay off 2015 but wanted the IRS to recognize the OIC rather than to bring back the liabilities compromised in the agreement.

They offered a rather meager Installment Agreement payment compared to the amount the Settlement Officer calculated they could pay.  Ultimately, the Settlement Officer rejected their proposal and sent the determination letter.  The Tax Court sustained the decision of the IRS and they appealed to the 5th Circuit.  Although the 5th Circuit designated its opinion as non-precedential, it wrote a seven-page opinion analyzing the facts and the offer agreement itself.  In that regard it provides a rare glimpse at offers in compromise from the perspective of a circuit court.

First, the court referred to the OIC form which provides:

The parties used the standard offer-in-compromise form. The left-hand column of the form contained the following statement: “I must comply with my future tax obligations and understand I remain liable for the full amount of my tax debt until all terms and conditions of this offer have been met.” On the opposite side of that statement, the form states, “I will file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The left-hand column also contains the following statement: “I understand what will happen if I fail to meet the terms of my offer (e.g., default).” On the opposite side of this statement, the form states, “If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect any amount ranging from the unpaid balance of the offer to the original amount of the tax debt without further notice of any kind.”

The taxpayers made a simple argument regarding their compliance with the OIC.  They took the position that:

The petitioners now appeal the Tax Court’s judgment, claiming that they complied with all the terms and conditions of the offer-in-compromise because they paid the agreed amount.

The IRS agreed with the taxpayers that they had paid the offer amount but said that was only part of the agreement.  The IRS argued that the OIC required the taxpayers to keep current in their filing and payment obligations for five years after the OIC.  The circuit court agreed, finding the language of the OIC clear.

[T]he offer-in-compromise in this case contains clear and unambiguous language that explains the consequences of default. The form states that the petitioners would “file tax returns and pay required taxes for the five[-]year period beginning with the date of acceptance of this offer.” The form further explains that the petitioners would “comply with [their] future tax obligations and . . . remain liable for the full amount of [their] tax debt until all terms and conditions of this offer have been met.”

The 5th Circuit’s decision here provides a simple straightforward interpretation of language in the contract, which seems simple and straightforward.  Had the court decided any other way, the decision would have been quite surprising.  Our clinic, like all clinics of which I am aware, spends a fair amount of time talking to clients about the need to keep current in filing and paying for five years.  We vet clients concerning this point, since no benefit to the client comes from obtaining an OIC only to see it destroyed by failure to make payments during the five-year period.  Clients who have a history of filing non-compliance sometimes get turned away, because we fear their ability to comply with the OIC terms does not exist. 

Neither the Villanova nor the Harvard clinics where I have worked go to this extreme, but I remember that when Special Trial Judge Leyden ran the clinic at University of Connecticut, she would keep her OIC cases open for the entire five-year period and work with the taxpayer during those five years to make sure that the taxpayer timely filed and paid.  I was impressed with that level of client service though unwilling to offer it myself.  The clinic administrator who worked with me when I first arrived at Villanova would call the clients each year to provide a reminder.  The IRS will give taxpayers a second chance, at least that has been my experience, by notifying them of a failure to file or pay and giving a short curative period.  Such a period is not required by the terms of the offer but does put the clinic, if not the client, into high alert mode to try to fix the problem.  Our clinic has had individuals who fell off the wagon and either lost their offer or worked with us to scramble and cure the default.

Future compliance is one of the reasons the IRS enters into OICs.  Getting people back in the system of timely filing their returns and timely making payments provides the incentive for the IRS to write down the past due liabilities.  The taxpayers’ arguments here essentially attacked the core of the OIC contract.  They failed at the Tax Court and the 5th Circuit, but their failure provides instruction that the courts read the contract in the same manner as practitioners who work with the OIC agreement every day.

A Drama in Three Acts: Designated Orders Jan. 13 – 17 (Part Two of Three)

Today we leave the familiarity of Graev and move into AJAC and administrative law. Without further ado I present:

Part Two: What to Expect When You’re Expecting A Better Deal from Appeals

Some of the most important designated orders are the ones that deal with common situations and fairly unremarkable facts, but raise arguments that rarely make it into published opinions. The order we will be discussing in Orienter v. C.I.R., Dkt. # 20004-13L (order here) is a perfect example. Though I (obviously) appreciate anyone reading my synopsis and analysis of the order, I strongly commend any practitioner that works in tax controversy (and especially collection) to read the order for themselves as well. It is that substantive and that worthwhile.

It is also fairly easy to digest. In just 16 (incorrectly numbered) pages Judge Holmes lays out four discrete issues I will focus on and three more that I won’t. The issues that I believe warrant additional detail are:

  1. How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?
  2. How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?
  3. Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?
  4. Is the IRM a source of “administrative procedure” such that a violation of it would be a violation of IRC 6330(c)(1) (that the requirement of “any applicable law or administrative procedure” be met)?

I’ve been at an ABA Tax Section meeting where Judge Holmes said that he would recommend studying administrative law to anyone considering going into tax. These are all interesting questions that bring us to the crossroads of administrative and tax law… Let’s see what Judge Holmes thinks about them.

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To set the scene, Judge Holmes describes matters as getting “complicated” for the taxpayers, though I found this case represent a fairly typical scenario for taxpayers filing an Offer in Compromise. This doesn’t mean that the situation isn’t complicated, only that it isn’t particularly unusual. The main complicating factors were (1) the Orienters had more tax debts they wished to settle than just the years at issue in the CDP Notice, and (2) the Orienters sent their Offer to the IRC COIC unit, rather than to the IRS Appeals Office working the case. Since IRS Appeals really just forwards the Offer to COIC in any case, so long as you let Appeals know that you submitted an Offer it shouldn’t really affect your CDP hearing -other than likely to have it postponed until COIC reaches a preliminary determination. These two factors (multiple years at issue, and especially multiple “levels” of IRS review of the Offer) are what bring us to the interesting legal issues.

Issue One: How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?

As we have been told once or twice before, the Tax Court is a court of “limited jurisdiction.” In a CDP case, jurisdiction is limited only to those years that were a part of the CDP hearing (and consequently, those on the Notice of Determination). The CDP hearing and Notice of Determination was strictly for the 2004 tax year, but the Offer was for 2002 – 2005 tax debts. Should the Tax Court only consider the jurisdictional year and ignore the other years, even though those years clearly matter to the Notice of Determination?

I’m not sure what that would really look like, since in filing an Offer you are essentially wrapping all of your tax debts into one liability and arguing your inability to pay that one liability. You can’t really just look at one year in reaching a determination of ability to pay, because you need to look at the tax debt as a whole. Luckily, I don’t have to spend much time thinking about what such limited review would look like because, as Judge Holmes notes, there is already numerous cases (though none that are technically precedential: see post here) on point that allow the Tax Court to consider the full debt (i.e. non-jurisdictional years) in reaching a determination of abuse of discretion for the jurisdictional year.

Should practitioners find themselves dealing with a similar strain of “jurisdictional trap” in CDP hearings, I’d commend them to read this order for the cases cited, and particularly the case of Sullivan v. C.I.R., 97 T.C.M. 1010 (2009) (apologies, couldn’t find a link) that Judge Holmes highlights. While I’ve never had the IRS try to argue that the Tax Court is barred from even considering non-jurisdictional years, the Court’s reasoning in Sullivan for when and why such years can be considered may be helpful, because it brings up the statutory language which could be relevant for far more than just rejected Offers. The most relevant section of Sullivan is:

“This Court is disabled from halting the IRS’s collection of [non-jurisdictional] liabilities, but it is not disabled from knowing about them. In determining whether the rejection of the OICs and the collection […] is appropriate, this Court is authorized (as the Appeals officer was required) to consider ‘any relevant issue relating to … the proposed levy.’ Sec. 6330(c)(2)(A), (d).”

So, as to Issue One, we have a fairly uncontroversial (though helpful and clarifying) answer: the Tax Court can consider the other non-jurisdictional years in order to determine if there was an abuse of discretion for the jurisdictional year in the Offer.

Issue Two: How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?

It is with Issue Two, I believe, where things start to get slightly away from the ordinary CDP Offer. The Orienters Offer was originally for $25,000. IRS COIC preliminarily recommended rejection of the Offer, but that they might consider it if the amount was bumped up to $65,860 -the amount COIC calculated as the “Reasonable Collection Potential” (RCP). This was unacceptable to the Orienters, so they decided to try their luck with Appeals.

And it does not appear that their luck improved.

In fact, IRS Appeals determined that the RCP was closer to $200,000, and sustained the rejection of the $25,000 Offer, finding that even the special circumstances of the Orienters (who appear to have health problems) would not warrant accepting either the $25,000 or the $65,860 proposed by COIC. The Orienters, now fearing that they had perhaps made the wrong decision in not accepting the $65,860 Offer, tried to have the case sent back to COIC so they could accept that proposal. But they were stymied: IRS Appeals said the case could not be transferred. Eventually, a Notice of Determination reflecting this was issued.

This all comes down to what your options are when IRS Appeals seems to take a harder line than the originating function. Here, the Orienters want to argue that IRS Appeals is essentially barred from behaving as they did, or at least that their behavior is an “abuse of discretion” because it goes against the IRM vis a vis the “AJAC” rules.

Put broadly, AJAC is meant to have Appeals review cases more like a reviewing Court (i.e. limited to specific issues before it, rather than looking for or raising new ones). To the Orienters, this means Appeals was only supposed to review whether enough information was provided to warrant acceptance of an Offer less than $65,860 -not to re-work the Offer or raise new issues. The IRM provides that “[g]enerally, Appeals will sustain a rejection only under the same basis for which the offer was rejected.” (IRM 8.23.4.3(2).) But the basis of the rejection by Appeals was not the same as the basis of rejection by COIC. And so the IRS Appeals officer went against the AJAC principles embodied in the IRM, and thus abused its discretion.

The IRS, however, frames the issue a bit differently: the only issue was whether the Offer of $25,000 should be accepted or the levy sustained. Oh, and the IRS Appeals officer did follow the relevant IRM provisions (for example, 8.22.7.10.6) in either case.

Judge Holmes sees the issue as hinging on what the meaning of the phrase “same basis” is in this context. If IRS Appeals did reject on “the same basis” as COIC, then there isn’t really an issue because IRS Appeals followed the IRM (more on what the consequence to not following the IRM could be in the next post, since it brings up some really interesting admin law points).

So what was is the “basis” for rejection at issue here? Judge Holmes thinks it would be too narrow to define the issue in the way the Orienters want. The question is simply whether an Offer should be accepted for $25,000  i.e. the Offer put forth and rejected. This amount was admittedly less than the RCP, and the discount was arrived at on the grounds of “special circumstances” (always difficult to quantify in exact dollars). When IRS Appeals reviewed the file and recalculated the RCP, Appeals wasn’t “raising new issues” but really just determining if they believed the $25,000 offer should actually be accepted (if Appeals didn’t take a second look at RCP, it isn’t immediately clear what they would be doing in Appeals to begin with). In finding that RCP + Special Circumstances did not equal $25,000 Offer, they were rejecting on the same basis as COIC -even if they reached a different amount they thought may be reasonable.

Thus, we conclude Issue Two: No AJAC violation. So no abuse of discretion on those grounds. On to the largely related Issue Three…

Issue Three: Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?

So maybe IRS Appeals didn’t violate AJAC. But is there another way the Orienters can get back to that (now-enticing) COIC number of $65,680? Let’s look a little bit more at how that number was memorialized, to understand what legal meaning it may carry.

When COIC proposes a rejection of an Offer, it will send a few spreadsheets walking through its calculation of RCP and, usually, a page of boilerplate about how they “considered” special circumstances but that they didn’t warrant accepting the Offer proposed. Sometimes when special circumstances are raised and considered the IRS may “suggest” an alternative Offer amount they may be willing to accept. Such appears to be the case with the Orienters. The question is how much “value” that suggestion of $65,680 holds.

There are a long line of cases that essentially treat Offers under contact principles. Which seems to make sense, since (1) it is loaded with contractual terms governing performance (e.g. filing and paying on time for five years), and (2) it is literally called an Offer in Compromise, with offer and acceptance being fundamental to the formation of a contract.

In this case, the Orienter’s would like to characterize that $65,680 as a counter-offer, which they are free to accept. Judge Holmes is not buying this: the COIC letter (which usually states “rejection”) was only that -a rejection. It was not a counteroffer, because “a mere inquiry regarding the possibility of different terms […] is ordinarily not a counter-offer.” Restatement (Second) of Contracts Sec. 39 (1981). In Judge Holmes’ words, the “$65,860 was never on the table – it wasn’t even in the oven.”

Further, even if the Orienters were able to characterize the rejection letter as a counter-offer (I believe the language of the letter said COIC “could not even consider an Offer of less than $65,680” which certainly makes it seem like a suggestion, and not a set term), they would probably not prevail on contract grounds. And that is because, lest we forget, the Orienters pretty clearly rejected the supposed counter-offer by going to Appeals. And once you reject, you can’t just “go back” now that you regret it.

So, no luck to the Orienters on trying to find some sort of authority for their proposition that they should be allowed to accept the “counter-offer” of $65,680. But does that mean the Orienter’s are doomed? Tune in for part three where we will look at one final (and very interesting) line of argument that explicitly puts administrative law and the IRM in the crosshairs.

Whose Household is It?

The IRS just issued two FAQs providing information regarding offers in compromise (OIC).  One of the FAQs is unremarkable while I find the other FAQ inadequate for reasons that I will explain further below. 

Every year in the seminar that accompanies the clinic, I devote one class to offers in compromise because so many of the clients coming to the clinic need an offer in compromise or, at least, need us to analyze whether they qualify for an OIC.  I tweak the fact pattern a little bit every year but I still use the fact pattern developed by Les Book when he ran the tax clinic at Villanova before I took his place.  The first issue presented by the case involves the taxpayer’s household.  The students do not find the IRS’ instructions clear on this point.  This year, as is typical, about half of the students found that taxpayer’s household included persons he was living with and half found that the taxpayer had a household of one.  Why do they have trouble with this basic issue?

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The fact pattern has Steve Freshstart living with his girlfriend.  Steve moved in two months ago.  Steve and the girlfriend maintain separate bank accounts.  Steve pays has $900 a month to cover his share of the rent and utilities on the apartment.  Steve buys his own food.  Steve uses his money for Steve while his girlfriend, Cindy, uses her money for herself and her two children.  Whether Steve must include his girlfriend’s finances in his offer in compromise matters not only to the computation of his allowable living expenses and ultimately his reasonable collection potential but also to his relationship with his girlfriend.

Imagine you are Cindy and your boyfriend who moved in with you two months ago now needs you to bare your financial soul to the IRS because you are living together even though your financial living arrangement seems very much like one of roommates rather than soulmates.  If Steve must ask Cindy to provide all of her financial information to the IRS just because she shares an apartment with him seems unnecessarily intrusive yet the IRS instructions lead half of my students to that conclusion.  The latest FAQs do nothing to alleviate the confusion. 

Here are the new FAQs:

Q. Does Form 8821, Tax Information Authorization, allow taxpayers to designate a third party to represent them before the IRS on an OIC?

A. No. Form 8821 does not authorize a third party to speak on the taxpayer’s behalf or to otherwise advocate the taxpayer’s position before the IRS. Form 8821 only authorizes the designated third party (appointee) to inspect and/or receive a taxpayer’s confidential information for the type of tax and the years or periods the taxpayer lists on their Form 8821. Therefore, a taxpayer’s appointee cannot represent the taxpayer in a collection matter, such as an OIC before the IRS. Taxpayers should use Form 2848, Power of Attorney and Declaration of Representative, to authorize an individual to represent them before the IRS.

Q. Does a taxpayer need to include his or her spouse’s income on the taxpayer’s Form 433-A (OIC), If the taxpayer’s spouse doesn’t owe taxes?

A. Yes. A taxpayer needs to provide information about the taxpayer’s entire household’s average gross monthly income and actual expenses when making an OIC. The taxpayer’s entire household includes all individuals, in addition to the taxpayer, who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc. The IRS needs this information to accurately evaluate the taxpayer’s OIC. The information may also be used to determine the taxpayer’s share of the total household income and expenses and what the taxpayer can afford to pay the IRS.

 The first FAQ provides a logical piece of information, viz., that a person who does not represent the taxpayer cannot represent them in an OIC.  The Form 8821 permits the holder to receive information but has nothing to do with representation of a taxpayer before the IRS.  While I do not know how necessary it was to issue this FAQ because I have no idea how many people try to represent a taxpayer based on a form allowing them to merely obtain information, I have no problem with this FAQ.

The second FAQ provides very little information that will assist my students in deciding what to do with Cindy and her children.  In the simulated problem they have, it’s really just a question of math whether Cindy’s finances get added to Steve’s since the students do not need to interface with Cindy.  In real life the questions become much stickier.  On several occasions the clinic has encountered significant others quite reluctant to bare their finances to the IRS and quite put out with the clinic for suggesting that they must do so or their boyfriend/girlfriend will not reach the promised land of an OIC.

My view is that the IRS does not need or really want Cindy’s financial information.  At this point in the relationship she is financially a roommate rather than someone whose finances have intertwined with the taxpayer needing collection relief.  It is no more appropriate to ask her for financial information than it is to ask college roommates to provide financial information should one of the other roommates seek an offer in compromise.  Yes, she and Steve live in the same household and share the same bed but they do not share finances and that is the critical factor in requiring her financial information.

These questions can be close.  Deciding who constitute a household requires more than simply sharing space.  The FAQ would help if it made that clear and if it was written so that Harvard and Villanova law students could figure out who belongs to a household for this purpose.  If these law students cannot make that determination, imagine how hard it is for pro se taxpayers to try to work their way through this problem. 

The Surprise Bill – Interest Due after Bankruptcy

The case of In re Widick, No. 10-40187 (Bankr. D. Neb 2019) provides a reminder that bankruptcy does not discharge all debts even when the debtor pays all of the tax for the year through the bankruptcy plan.  Mr. and Mrs. Widick completed a chapter 13 plan.  To obtain the plan and to complete the plan, they paid all of the income taxes for two years and all of the trust fund recovery penalties for two quarters.  I suspect that their bankruptcy attorney did not mention to them that paying all of the taxes does not keep the IRS from coming back after the bankruptcy case to collect the interest.  They brought this action to hold the IRS in contempt for violating the discharge injunction due to its efforts to collect from them after the bankruptcy court granted the discharge in this case.  With relative ease, the bankruptcy court delivered to them the sad news that the IRS could continue to collect from them after the discharge and the authority for the IRS actions went back for three decades in the controlling circuit case of Hanna v. United States (In re Hanna), 872 F.3d 829 (8th Cir. 1989).

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In bankruptcy creditors cannot generally collect post-petition interest from a debtor.  An exception to this rule exists if the creditor has a secured claim with enough equity to pay the interest or if the debtor is in chapter 11 where the creditor can receive interest after the plan confirmation (but not for the period from the petition to confirmation.)

Although bankruptcy generally serves as an interest free zone, interest still runs.  The difficult concept for debtors with tax debt comes where the IRS starts pursuing them after discharge to collect interest on a debt that they believe they have satisfied.  Whether the IRS can come after this debt post-discharge depends on whether the debt itself qualified as non-dischargeable debt.  In the case of the Widicks, it did.  Because the debt satisfied the exception to discharge in 523, the IRS could pursue collection of the interest after the granting of the discharge.

The Widicks owed income taxes that were recently incurred.  These income taxes received priority status under B.C. 507(a)(8)(A).  The unpaid TFRP liabilities also attained priority status under B.C. 507(a)(8)(C) and due to their nature have priority status no matter how old they were.  Because the income taxes and TFRP taxes had priority status, the debtors had to provide for payment in full of these taxes and all pre-petition interest in order to obtain confirmation of their plan.  The chapter 13 plan did not require, and could not require, the Widicks to pay the interest that ran on these taxes over the 5 year life of the plan.  Debtors might think that because the plan did not require payment of post-petition interest, they got a pass on this interest.  Because debtors might easily reach this conclusion, their lawyer must carefully advise them of the interest rules with respect to taxes.  Otherwise, they will become quite upset when the IRS offsets post-discharge refunds and takes other collection action.

A similar situation occurs in offers in compromise.  The standard language of the offer in compromise developed by the IRS requires that the debtor forego any refund for the year in which the IRS accepts the offer (and any pre-offer years.)  As with bankruptcy, the taxpayer’s representative must carefully explain to the individual obtaining the offer the consequence of this provision.  The taking of the refund might occur 12 months or more after the offer acceptance.  At that point the taxpayer can easily have forgotten the promise to forego the refund.  For this reason, putting a discussion of the refund taking in the letter closing out the offer provides a good way for the representative to prepare the taxpayer for the future and protect themselves from criticism and anger that occurs when the IRS takes the refund.

Here, the debtors’ chapter 13 attorney did not prepare his clients for the consequence of the post-discharge interest liability.  In its relatively short opinion the court points out that although the Hanna case cited above involved a chapter 7 debtor, case law existed with respect to chapter 11 and 13 cases in their district.  The law here is well settled even if it is surprising.  Clients may not like this aspect of the law, but if they know it’s coming, then they understand it’s part of the bargain of the discharge — just as the taking of the post-offer acceptance refund is part of the bargain of the offer in compromise.

IRS Can File a Proof of Claim in Bankruptcy Court for the Full Amount of Tax Liability Even After an Accepted Offer in Compromise

Guest blogger Ted Afield today discusses the intersection of offers in compromise with bankruptcy. Professor Afield (with co-author Nancy Ryan) will be creating a chapter on Offers in Compromise for the next edition of Effectively Representing Your Client Before the IRS. Christine

In our clinic at GSU, we do a lot of collections work and routinely submit offers in compromise, which the IRS often accepts, on behalf of our clients. While our hope is always that the accepted offer will be a critical step that allows the taxpayer to get back in compliance with his or her tax obligations and get out from under the weight of a detrimental financial liability, unfortunately the accepted offer is sometimes not enough to prevent a taxpayer from continuing to be overwhelmed by other financial obligations. In situations like these, the taxpayer may in fact file bankruptcy during the 5-year compliance window for the offer in compromise. If this happens, the IRS potentially has a claim in the bankruptcy proceeding because the offer in compromise may have already been defaulted or may be defaulted in the future if the taxpayer fails to file tax returns and timely pay taxes. Accordingly, the IRS will file a proof of claim in the bankruptcy proceeding, which raises the question of should this proof of claim be for the full amount of the tax liability or for the compromised amount of the tax liability.

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This was the question recently taken up in a memorandum opinion by the Bankruptcy Court for the Southern District of Texas, Houston Division, in In Re: Curtis Cole, No: 18-35182 (May 29, 2019). In this case, Mr. Cole and the IRS had entered into a compromise of tax liabilities for 2003-2014 totaling over $100,000 for the much more manageable sum of $1,000. During the five-year monitoring period, Mr. Cole started off well and timely filed and paid his 2016 income tax. For 2017, however, Mr. Cole recognized that he would not be able to timely file a return, and he accordingly requested and was granted an extension. Mr. Cole did then file his 2017 return and pay his 2017 tax bill on October 15, 2018.

PT readers who do a lot of OIC work will immediately recognize the potential problem that Mr. Cole created for his offer because an extension of time to file is not an extension of the time to pay taxes, raising the possibility that the IRS would default Mr. Cole’s offer for failing to pay his 2017 taxes in a timely manner. Compounding the problem was that Mr. Cole had filed for Chapter 13 bankruptcy one month earlier, on September 15, 2018. As a result, the IRS filed a proof of claim in the bankruptcy proceeding for the full amount of the original tax liability that was compromised under exactly that theory (i.e., that Mr. Cole’s late payment of 2017 taxes caused his offer to default and thus caused the amount of the IRS’s claim to be the full amount of the tax liability).

Mr. Cole was not happy with this development and attempted to raise a couple of equitable arguments that did not have much of a leg to stand on. Mr. Cole’s first hope was that he would be simply forgiven his confusion over whether a filing extension also constituted a payment extension. This did not have much resonance in light of the fact that it is well established that filing extensions are not in fact payment extensions. Mr. Cole also attempted to argue that he effectively had rights under the Internal Revenue Manual by asserting that the IRS violated its own procedures when it did not offer him any opportunity to cure his late payment before declaring the offer to be in default. See I.R.M. 5.19.7.2.20, which states that in the event of a breach of the offer’s terms, the IRS should send the taxpayer a notice letter and provide an opportunity to cure before defaulting the offer. Again, this argument could not carry much weight in light of the well-established principle that the IRM does not give taxpayers any rights, and thus the IRS was not obligated to provide an opportunity to cure the default. Ghandour v. United States, 37 Fed. Cl. 121, 126 n.14 (1997).

Mr. Cole’s strongest argument was based on his reliance on a bankruptcy court opinion from the Eastern District of North Carolina that had ruled on a similar issue and had concluded that the proof of claim should be for the compromised amount rather than the full amount of the tax liability. In re Mead, No. 12-01222-8-JRL, 2013 WL 64758 (Bankr. E.D.N.C. Jan. 4, 2013). The Mead court found that the contractual language in Form 656 stating that the IRS may file a “tax claim” for the full amount of the tax liability if a taxpayer files for bankruptcy before the offer’s terms expire is ambiguous in regards to whether the “tax claim” refers to the full liability or the compromise amount. Accordingly, the Mead court held that the IRS violated the nondiscrimination rule of 11 U.S.C. § 525(a), on the grounds that it appeared that the IRS was trying to collect the full amount of the tax liability, rather than the compromised amount, solely because the taxpayer was in bankruptcy.

The Cole court, however, was not persuaded by its sister court in North Carolina and held that Mead was both distinguishable and simply incorrect.  Mead was distinguishable because, unlike in Cole, there was not an issue of whether the offer had been defaulted. However, even without that distinguishing characteristic, the Cole court noted that the outcome would be the same. In other words, regardless of whether the offer was in default, if the terms of the offer had not yet expired, the IRS would still need to file a proof of claim for the full amount of the tax liability in order to preserve its rights in case the taxpayer did subsequently default the offer. This is why the terms of the offer explicitly state in Section 7: “If I file for bankruptcy before the terms and conditions of the offer are met, I agree that the IRS may file a claim for the full amount of the tax liability, accrued penalties and interest, and that any claim the IRS files in the bankruptcy proceeding will be a tax claim.” I do not agree with the Mead court’s assertion that this language is ambiguous.

It’s not that the issue of whether the offer has been defaulted is irrelevant. Rather, that issue is simply premature at the moment when the IRS files its proof of claim. Even if the offer has unequivocally not yet been defaulted, the IRS must file a proof of claim for the full amount of the liability to protect its right to recover the full amount, should a default occur. So when can Mr. Cole attempt to make his likely to be very uphill arguments that he has not defaulted the offer? As the court notes, he does this when he submits his Chapter 13 plan, in which he will propose how to treat the IRS’s claim. If he believes he has not defaulted his offer, he can propose that the IRS only receive what it is owed if the offer is still in force. The IRS can then object if it believes that the offer is in default, and the issue can then be decided.

In comparing Cole and Mead, I think the Cole court likely has the better argument. The contractual language in Form 656 pretty unambiguously gives the IRS the right to file a claim for the full amount of the tax liability in a bankruptcy proceeding during the five-year monitoring period. That does not mean that the IRS will recover the full amount if the offer is not in default, but taxpayers should certainly expect such a claim to be filed and that they will have to litigate whether the offer is defaulted when they propose their bankruptcy plan.

Offers in Compromise and Tax Refunds – Part Two

In this post I will review which refunds the IRS will seize to when a taxpayer seeks an OIC, and discuss when the taxpayer has options to keep their refund.  

The rules depend on the type of offer. At the end of Part One, I summarized the four types of offers that a taxpayer can make the IRS to settle their tax debt. This background is important because the danger to the client’s refund depends on the type of offer they are seeking. The possible offers to the IRS are: 

  1. Doubt as to liability (DATL) 
  2. Doubt as to collectibility (DATC) 
  3. Doubt as to collectibility with special circumstances (DATC-SC) 
  4. Effective Tax Administration (ETA) 

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A compromise is a binding contract between the government and a taxpayer. The terms of the contract for DATC, DATC-SC, and ETA offers can be found in the IRS’s Form 656 booklet. For doubt as to liability offers, the terms are in Form 656-L 

Refund Considerations: Pre-Offer 

When a taxpayer owes a debt to the IRS or to certain other agencies, the taxpayer’s refund may be applied to that debt pursuant to IRC 6402. Some taxpayers decide to stop filing as a result. This is generally counter-productive. If a taxpayer waits too long to file, they will lose the refund to the statute of limitations anyway, without receiving any reduction in their debt. Also, the IRS generally requires filing compliance before it will consider any proposal by the taxpayer for a collection process other than full payment or enforced collection.  

Many potential clients call LITCs seeking an Offer in Compromise even though they have unfiled returns. So, the first hurdle is getting the tax returns filed.  

A taxpayer should not have to be in filing compliance for a Doubt as to Liability offer to be processable. Alternatives to DATL – including audit reconsideration and Form 843 claims for refund or abatement – do not require filing compliance. A DATL offer is solely concerned with the correct liability for the tax period in question. Form 656-L lacks language on filing compliance which is present in the general 656 booklet, and a DATL offer does not include a 5-year compliance period post-acceptance. However, Rev. Proc. 2003-71 section 5.04 says that an offer can be returned if the taxpayer fails to file a return, and it does not appear to limit this statement by type of offer. I also found the IRM sections on offer processability unclear on this point. Perhaps I missed the relevant IRM provision, but it appears to me that IRM 5.8.2 could use clarification. Disagreements over processability of an offer are some of the most frustrating in tax representation, since the Service takes the position that its processability decision is not subject to appeal. Rev. Proc. 2003-71, sec. 5.05. I recall LITC reports a few years ago about centralized OIC processors refusing to forward an offer to the specialized DATL unit. If that is still a problem, it would be helpful to have a specific IRM provision on processability of DATL offers. I invite readers to comment on their recent experiences with this. 

Refunds generally don’t “count” towards the taxpayer’s offer 

If refunds are due for any unfiled years, our clients naturally would like the balances to count towards their offer. Taxpayers frequently ask whether they can just offer the IRS their next tax refund, or their refund from an unfiled year. Unfortunately for them, Congress in IRC 7122(d)(1) said that IRS gets to make the rules for the OIC program, and the IRS has decided that offset tax refunds don’t count as payments towards a DATC offer, nor do they reduce the taxpayer’s minimum offer amount for DATC, DATC-SC, or ETA offers. IRM 5.8.1.13.3, Amount Offered states 

The total amount of money offered must be indicated and must be more than zero. The amount offered may not include money already paid, expected future refunds, funds attached by levy, or anticipated benefits from capital/net operating losses. 

This is mirrored in the Form 656 booklet, p. 3.  

However, doubt as to liability offers are different – if IRS agrees that the correct liability should be lower, it will adjust the assessment and refund any excess payments that are within the refund statute of limitations. This is noted in the Form 656-L terms. So in that sense, refunds that have been offset will “count” as payment for DATL offers.  

The policy on not considering refunds as payments for DATC offers seems extremely unfair to most of my clients, but it is a logical policy. When the IRS is accepting less money than it is owed based on “doubt as to collectability,” it naturally wants to consider that refunds should be coming in to the Treasury anyway under section 6402. Taxpayers have filing obligations, and as mentioned above the IRS will not consider making a deal unless those obligations are being met. The taxpayer needs to offer more than that to make a compromise worthwhile for the IRS.  

This policy makes less logical sense when it comes to effective tax administration and DATC-SC. One could incorporate past or imminent refund offsets into the taxpayer’s economic hardship or public policy argument, and propose a lower offer due to the hardship or public policy implications of the offsets. However, this argument needs to be couched in the language of ETA hardship or public policy justifications. (See Part One.) It will not work to simply ask for past refunds to be credited towards the offer.  

There is one exception to the rule that seized refunds don’t count as payments towards an offer (DATC, DATC-SC, or ETA). If a taxpayer would receive their refund in the normal course of events (i.e. it is not due to be offset under the terms of the OIC or for any other reason), they can ask the IRS in writing to apply it to an outstanding offer amount. (IRM 5.19.7.2.21.3, Applying Refunds for Non Recoupment Tax Years.) As we’ll see below, this will mostly be applicable to DATC-SC and ETA offers 

Tax refunds while an OIC is under consideration 

The IRS will offset tax refunds while an offer is under consideration. This applies to all types of offers per the Procedure & Administration Regulations, sec. 301.7122-1(g)(5). This is business as usual for the Service under section 6402.  

Keith has written about circumstances where the IRS will not exercise its right of offset. If a taxpayer is facing serious economic hardship, it may be possible to receive an offset bypass refund (OBR). Taxpayers often ask if this is a possibility when an offer is pending.  

The question then arises whether requesting an OBR might violate the terms of the contract that the IRS requires for an OIC, in which case requesting an OBR could cause the IRS to reject the offer. Form 656-L does not contain any provisions regarding refund offsets. The DATC contract terms regarding offsets are: 

The IRS will keep any refund, including interest, that I might be due for tax periods extending through the calendar year in which the IRS accepts my offer. I cannot designate that the refund be applied to estimated tax payments for the following year or the accepted offer amount. If I receive a refund after I submit this offer for any tax period extending through the calendar year in which the IRS accepts my offer, I will return the refund within 30 days of notification.  

Thankfully the contract goes on to exclude DATC-SC and ETA offers from those terms: 

The refund offset does not apply to offers accepted under the provisions of Effective Tax Administration or Doubt as to Collectibility with special circumstances based on public policy/equity considerations. 

So taxpayers seeking offers based on doubt as to liability, doubt as to collectibility with special circumstances, or effective tax administration are free to request an OBR to save their refund while an offer is pending. For DATC the question is more complicated and is discussed below under planning concerns and uncertainties 

Tax refunds after an OIC is accepted 

Refund offsets should stop for taxpayers with DATC-SC and ETA offers when the offer is accepted.  Offsets will stop for taxpayers with accepted DATL offers after the agreed-upon correct liability is paid.  

For regular DATC offers, unfortunately, the OIC offset terms extend to the calendar year in which the offer is accepted. The 656 booklet explains on page 1 that  

The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2018 and you file your 2018 Form 1040 on April 15, 2019 showing a refund, IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer. 

This can come as a surprise to taxpayers, and it can cause serious hardships. (As we saw above, the DATC offset terms do not apply to ETA or DATC-SC offers.)  

The National Taxpayer Advocate has recognized that multiple refund offsets can cause hardships for low-income taxpayers who rely on refunds to pay basic living expenses. In her 2018 Annual Report to Congress, she designated problems with the OIC program as a Most Serious Problem facing taxpayers. This is particularly concerning where additional refunds are lost because of the time it takes the IRS to process the offer. If an offer is rejected and appealed, Office of Appeals consideration adds an average of 6.5 months in processing time. This can easily push the taxpayer into the next calendar year. To solve this problem as a matter of fairness and to prevent hardship, the NTA recommends that the IRS change its policy to only seize one tax refund while an offer is pending.  

DATC Offer Planning Considerations and Uncertainties  

One way to avoid the standard offset provisions of Form 656 would be to request a “special circumstances” offer. If the offer can be so categorized, you avoid the need to reform or change the OIC contract. As we saw in Part One, an offer for DATC-SC technically requires the taxpayer to offer less than their reasonable collection potential, and to justify this on hardship or public policy grounds. Since calculating RCP involves judgment calls on the value of assets, and can involve judgment calls as to appropriate household income and living expense figures, there may be cases in a gray area between “regular” DATC and DATC-SC. The offset provisions could weigh towards making a DATC-SC offer, depending on the taxpayer’s circumstances.  

Keith gave this very good advice to a commenter on his OBR post: 

One of the “preprinted” provisions of the standard offer in compromise is that the IRS will keep the refund, if any, for the year in which the offer was approved. Because the refund comes months, or sometimes even a year, later the retention of this refund comes as an unpleasant surprise to many who have received relief through an offer. The existence of this provision requires discussion and planning with the client at the time of acceptance to ensure that withholding in the year of offer acceptance carefully matches the anticipated liability. If the client can claim the EITC or other refundable credits, it is usually not possible to adjust withholding in order to prevent a refund yet the money provided by the EITC refund could be critical to the financial success of the individual. Although I have never done it, I am told that it is possible to negotiate concerning this provision when entering into the offer. So, if you anticipate a big refund in the year of offer acceptance and if the refund will be critical to the financial success of the individuals obtaining the offer try at that point to negotiate out of the offer contract the provision allowing the IRS to offset the refund for the year of the offer. If you cannot do that or if it was not done, you can request offset bypass at the time you file the return for the year of offer acceptance but you are asking for something different than offset bypass under the IRS’ ability to waive offset under 6502 you are asking to reform the contract. I have never done this and do not know the chances of success. I expect the IRS would treat it similar to a regular bypass request but am unsure. Consult the IRM.  

I followed that advice and consulted the IRM. Unfortunately, it is not clear to me that it will be possible to reform the DATC contract to allow a refund to reach the taxpayer. Perhaps I missed a relevant provision; if so please let me know in the comments. It should not hurt to call the offer examiner, or call TAS, and inquire.

A taxpayer cannot alter the preprinted DATC conditions up front. IRM 5.8.1.13.5 (05-05-2017) Standard Conditions provides that

If the taxpayer submitted the Form 656 altering any of the provisions of Form 656, Section 7, the offer should be immediately deemed not processable based on an altered Form 656.

In some cases it is possible to make a collateral agreement to an offer. However, the IRM section on collateral agreements appears to foreclose the possibility of using a collateral agreement to get around the refund provisions:

Form 656 contains a term which waives refunds and overpayments for all tax years through the year the offer in compromise is accepted. This waiver is a standard term, which cannot be altered. 

IRM 5.8.6.4 (10-04-2017) Waiver of Refunds 

I also checked the IRM sections on offset bypass refunds, IRM 21.4.6.5.11 (05-07-2018) Hardship Manual Refunds and 21.4.6.5.11.1 (11-08-2017) Offset Bypass Refund (OBR). These do not mention OICs. If you have experience with obtaining a refund through the OBR or another process while a DATC offer was pending or accepted, please share your experience with us in the comments. It is an important issue for affected taxpayers who may be faced with choosing between an OBR to avoid eviction and maintaining their DATC compromise.