Failing to Keep Current After Obtaining an Offer in Compromise

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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  Although the 5th Circuit designated its opinion as non-precedential, it wrote a seven-page opinion analyzing the facts and the offer agreement itself.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.

Comments

  1. Frank Donahue says

    Future compliance is absolutely at the cornerstone of the OIC process! Before I retired and began representing tax clients, I was assigned a subsequent Offer as the Taxpayer failed to pay an additional $1,300 in a later F1040 tax. That action on his part cost him an additional $82,500 as that is what his second OIC cost him! I was amazed at the fact that he didn’t pay the $1,300 because, as you indicated, the IRS does give the individual a period to pay the delinquent tax, which he failed to do.

    I now use this individual’s experience to re-iterate the importance of future compliance, and even have included this sad story in the congratulatory letter that I send to my clients after their OIC is accepted- and force them to print this and keep it handy! My standard language as I initially explain the terms and condition of the F656 are that they will hopefully remain in compliance forever, but “are required to remain in compliance for the following five years after acceptance by terms of the contract”. Sadly, not everyone is able to comply with these terms as Sadjadi’s demonstrated, (as well as one of my first clients! But that is a story for another day…..)

  2. Ruth Rowlette says

    I, too have encountered this with my Offer clients. One approach I have taken is to put them on an Installment Payment plan for 2 years, force them to file on time and pay in full for those years and then do the Offer. This usually brings them into estimated tax or withholding compliance and helps them change their patterns of payment.

  3. Charles Markham says

    I am curious what the overall recidivism rate is on accepted OICs. Does anybody know where to find this statistic? I have suspected it might be much higher than those who believe.

    However, I also believe CSED starts running again upon offer acceptance so that if one goes 4 out of 5 years and then falls back into old habits. The reinstated debt might expire anyway.

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