Limitation of 24 Month Offer in Compromise

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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.

Comments

  1. Carl Smith says

    Why not wait for the IRS to levy a few dollars and then file a 7433 wrongful collection action suit? If the court in that 7433 case finds that there are damages because the OIC had aged into acceptance, so no further levy was possible, clearly the ruling on the OIC would bind the IRS under collateral estoppel if the IRS attempted any further collection and the taxpayer broght another 7433 suit.

    • Lavar Taylor says

      Carl

      The IRS may be able to levy the taxpayer to the point where there is no practical way for the taxpayer to file a 7433 claim and then bring suit. A taxpayer may be forced out of business by levy action and/or may otherwise be deprived of the ability to bring suit as the result of levy action.

      Other options might include a quiet title action, asserting that the IRS no longer has a lien because the OIC has been accepted and the amount due under the OIC has been paid. If a quiet title action doesn’t work, I would go with a mandamus action seeking to compel the IRS to comply with the statute. I find the court’s rationale in this case to be less than satisfactory.

  2. frank donahue says

    In my opinion, the first order of business is to resolve this statement: “First, the court points to the affidavit of an IRS employee that the IRS properly rejected the offer.”

    There are a number of ways to address this apparent discrepancy. The IRS loads all Doubt to Collectibility Offers onto their AOIC system, and all of the letters as well as brief histories are located here. If the OIC was assigned to an Offer Specialist, that persons history is also on the ICS database under the business’ EIN, which would have a more detailed summary of actions taken and letters issued.

    Seems that a FOIA request is in order to flush out why the IRS is indicating that the OIC was rejected and the Taxpayer is indicating that it wasn’t.

  3. Kenneth H. Ryesky says

    “The taxpayer submitted it on July 14, 2006. The IRS accepted it for processing on July 25, 2006.”

    So we now have an 11-day window of possible contention. The TP would argue that 14 July (Bastille Day) was the date of submission per the IRC 7502 “postmark rule,” while the IRS may well be tempted to argue that 25 July was when the IRC 7122(f) 24-month clock starts to tick. This dispute, if indeed it arises, should be put to rest by the TP citing to Hull v. United States, 146 F.3d 235, 239 – 240 (4th Cir. 1998) (though the IRS has been known to sell courts on positions no less egregious).

    At the other end of the 24-month window, how does the TP know whether the IRS has or has not rejected the OIC? How long must the TP wait for the IRS’s rejection letter to appear in his/her/its mailbox (especially if the TP resides overseas)? What if the TP telephones the IRS and the IRS service representative on the other end of the telephone convo is unaware of any action on the OIC because it has not posted to the TP’s account which is accessible to the service rep (happened to me twice in the past 6 months)?

    These are other matters for the TP to take into consideration when using the “aging into acceptance” strategy.

  4. An Addendum to Form 656 acquires the same processing date as the original OIC. But, what happens if IRS returns Form 656, based upon an error, after 20 months, but not only fails to refer to Addendum, in IRS’ return letter, but also fails to attach Addendum to letter and fails to complete Form 656 Section 5, requiring Addendum’s attachment to returned Form 656? Is Addendum considered to be severed from the original OIC, as of the return letter date, and be deemed approved, by ageing, after 24 months?

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