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

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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.


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).




  1. Carl Smith says

    Where a taxpayer submits an offer in compromise to the New York State Department of Taxation and Finance, on the accompanying financial disclosure form (DTF-5), there are questions about prior criminal convictions. Any offer submitted by a person with a prior criminal record gets special, additional public policy review. I have represented three different taxpayers with this problem, and was lucky in all three cases that their crimes were not thought sufficient to bar their offers, though I know at least one other NY-area clinic that had a NY OIC that was disallowed on public policy grounds because of a prior, unrelated criminal conviction. In my cases, I was told that the Department is most concerned about financial crimes and recent crimes. My clients had convictions for drug and assault crimes that were ten or more years old, so they were given a fresh start by OICs.

    In New York, there is a “tax court” parallel called the Division of Tax Appeals. But, there is no New York equivalent of CDP, so no OIC turndown is subject to court review. As a result, there has never been a court opinion discussing whether a public policy turndown of a NY OIC is permissible — and whether this raises a constitutional problem. Two years ago, New York (in a link on its website) said it had adopted the IRS Collection Financial Standards in determining whether there is hardship justifying an OIC. But again, there is no New York case law discussing the propriety of those standards in reviewing an OIC for acceptance.

    • John Ryskamp says

      Has it ever occurred to you that the “public policy” of New York is subject to New York’s OWN Due Process considerations, and that the “review” is itself the promulgation by New York of an individually enforceable collection due process right? No, because lawyers never argue the content of due process. They don’t have any idea how to do so, because they have no idea what due process is based on. Too bad for your clients. It’s absurd to argue that “no OIC turndown is subject to court review.” The review and “turndown” (or approval) are subject to due process. The problem is that YOU don’t know what due process is. Obviously, New York has informally followed the CFS, and is now simply formalizing those standards. The policy of the CFS is to maintain CFS facts. That is individually enforceable and a Due Process right, because taxpayers have a right to have the IRS apply the CFS to their cases.

      The implication, as other commentators have pointed out since CDP began, is the unification of tax rates and tax process. They are one. But they are not one if you don’t understand the Constitutional test. And tax lawyers NEVER understand Constitutional tests because they are technocrats; hence, they are always falling back on public policy–they have no idea that they can fall back on due process.

      Anyway, you’re living in the stone age. You would think that post-Koontz, which elevated the level of scrutiny for property, tax lawyers would understand that state or Federal, formal or informal, CFSs not only view the facts listed in their CFSs (such as housing or medical care) as property, but also that there is now a property right in, for example, the CFS fact of housing QUA housing (quite apart from any contract or even Due Process rights in those facts).

      Part of the deformation in our understanding of the law resulting from the nearly absolute power granted to the political system by the West Coast Hotel/Carolene Products scrutiny regime, is that virtually nothing is regarded as a fact for Constitutional purposes. The IRS doesn’t even recognize the enumerations in the CFS (such as housing, medical care, transportation) as facts. At most, they will say they are goals, ideals, approximations–ANYTHING other than facts in which taxpayers may have the right to reorder tax policy. Because the moment housing, for example, as recognized as a fact for CFS purposes, the Due Process door is opened and the tax rates themselves must maintain CFS facts.

      Look at it this way: just as in Custom Stairs v. Commissioner, in which it was the tax rates in conjunction with tax process which nearly drove the company out of business (and notice that the Court, on due process grounds, did not allow the Commissioner to drive the company out of business), it is in FACT tax rates in conjunction with tax process which lead to the Commissioner applying the CFS to taxpayers. Huh? That is irrational. No facts support it. It fails minimum scrutiny. No facts support assaults on CFS facts in order to then later maintain CFS facts–and yet that is the policy.

      Both state and federal. What has anyone’s criminal record to do with this? Not a thing. But it shows how far you are from understanding due process, and that your thinking is still balled up by this “criminal” concept.

      What are you going to do when Mel Watt reduces mortgage principal, thereby elevating the level of scrutiny for housing above Lindsey v. Normet minimum scrutiny? That is applicable to New York through the Due Process clause of the Fourteenth Amendment because housing will then become a fundamental right. And housing is in the CFS, which is now officially New York policy.

      Still going to be hung up on New York’s assertion that “public policy” justifies a turndown of an OIC? Join the 21st century, already.

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