Remand of a CDP Case

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In Whittaker v. Commissioner, T.C. Memo 2023-59 the Tax Court remanded the Collection Due Process (CDP) back to Appeals because it found that the Settlement Officer (SO) abused her discretion in rejecting the couple’s offer. In reaching this conclusion it found clear error in the SOs analysis. Cases get remanded to Appeals occasionally. When they do they offer a glimpse at how the judicial process can shape the administrative process. The Whittaker case also provides a reminder of the value of bringing an offer case to the Court in the context of a CDP hearing since the taxpayer would otherwise have no path to judicial review of a rejected offer.


The Whittakers owe about $33,000 and offer to pay $1,629 to resolve their liability.

They could hardly ask for a better start to the opinion: “The Whittakers are hardworking people…” Seeking an offer, you worry that the applicants come across as deadbeats or people trying to gain an unfair advantage on the system. Those type applicants certainly exist. When the Court starts off the opinion with this statement, it bodes well for the Whittakers because it means they have crossed an important threshold in making their case. Just because they are hardworking does not mean they deserve the offer in compromise they have requested but this finding definitely moves their case forward in a positive way.

The Whittakers are in their mid-60s. The opinion says that Ms. Whittaker is only one year away from retirement as a family and community-empowerment specialist for a local school district. Mr. Whittaker is a veteran and a self- employed personal trainer. The opinion does not discuss how long he intends to continue working. The length of future employment can be a sticking point. I recently had a client in his mid-70s and the offer examiner projected his income for the next 10 years. President Biden may have moved the bar on expectations of how long someone will/should work but for many individuals working after full Social Security retirement age should not be something that the IRS expects in my opinion.

The CDP case only involves the tax year 2015. So, that is the only year before the Tax Court. The offer, however, covers 2004-2006, 2015 and 2018. While the Court only addresses 2015, the decision regarding the offer necessarily implicates the whole offer and not just one of the years in the offer. So, the taxpayers get the benefit of a decision covering their whole liability even though it nominally relates just to one year.

The Whittakers submitted a doubt as to collectability offer saying, in effect, that they had no ability to fully pay the debt owed to the IRS. The IRS responded that based on its calculation of their assets they had the ability to fully pay the outstanding liabilities. The IRS could still accept the offer even if the Whittakers had the ability to full pay, but the IRS offer examiner and Appeals employee did not want to accept the offer. The value of the house, the ability of the Whittakers to pull money out of the equity in the house, the value of retirement accounts, the need to use the money in those accounts to pay basic living expenses and the change in their circumstances due to the pandemic were the source of the dispute on how to calculate the correct offer amount.

Because the Whittakers live in Minnesota, the Eighth Circuit decision in Robinette v. Commissioner, 439 F.3d at 459 controls the Tax Court’s actions with respect to scope of review. The Robinette case held that the Tax Court must limit what it considers to the administrative record and not take new evidence.

The Court looked at each of the disputed issues in turn. With respect to the retirement account it stated:

The Whittakers argue that, because they are nearing retirement, the money in those accounts should be viewed as generating income over time, not as an asset to be liquidated to pay their tax debt….

They specifically cite IRM (Mar. 23, 2018), which states that a taxpayer within one year of retirement may have his retirement accounts treated as income; and IRM (Sept. 30, 2013), which states that taxpayers who are retiring may have their future income and expenses adjusted in calculating their RCP. They think these parts of the IRM should have made the IRS increase their projected income a bit, but taken the value of the accounts entirely off the asset-side of the RCP computation — changes that they also say would make their OIC more reasonable. They also point to an authority higher than the IRM that both the IRS and we have to follow — there’s a Treasury Regulation that says that the IRS may compromise a tax debt if a taxpayer has a retirement account with sufficient funds to fully pay his liability, but who would be unable to pay for basic living expenses afterwards if he did so. Treas. Reg. § 301.7122-1(c)(3)(iii) (example 2)

The IRS counters that neither the IRM nor the regulation requires the IRS to treat the retirement account strictly as a source of income. In a situation in which the taxpayers argue for special circumstances, the IRS should consider additional factors such as age, employment status, medical issues, number and health of dependents and ability to earn a living. The Settlement Officer in Appeals states in her report that the special circumstances were considered but did not provide a basis for accepting the offer since the Whittakers had no long-term illnesses and were not living on a fixed income.

The Court acknowledges that reasoning does not create an erroneous view of the law or facts but also notes a problem for the IRS:

this reasoning [the information in the report] didn’t make it into the notice of determination, no matter that it is reasonably clear in the administrative record as a whole. There is some ambiguity in the law here — we typically say that we confine our review to the reasoning in the notice of determination, but administrative-law cases more generally do let a reviewing court “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.”

The Court then moves on to look at the home equity situation.

The [OIC] Unit adopted the county’s assessed value of the Whittakers’ home in its analysis of the OIC. It figured that the quick sale value12 of the home was $194,400. The Whittakers had a mortgage for $85,237, and so a net equity of $109,163. This analysis, however, ignored the Whittakers’ contention that the home was worth less than its assessed value due to its condition as well as their contention that they are unable to tap that equity because of the restrictive terms of their mortgage. The settlement officer did not address these arguments, but disregarded them and adopted the Unit’s valuation.

The Whittakers argue that the home was not worth its assessed amount because it was in bad shape. They further argue that they cannot borrow against the home both because they lack the ability to make the loan payments that would result and because the existing loan documents prohibit such a borrowing. The Court takes the IRS to task for not following up on the Whittakers claims regarding their inability to refinance the house:

The IRS does need to take problems with possible refinancing a home seriously. For example, in Antioco, 105 T.C.M. (CCH) at 1236, [see post here and prior posts] the taxpayer submitted proof of her attempts to refinance after the settlement officer asked for such documents to help the officer make her determination. Here, although the Whittakers didn’t submit such proof, [*12] they said that they would and could if the settlement officer had only asked. The Whittakers have a point — there’s nothing in the administrative record that states or even suggests that the examiner at the Unit or the settlement officer during the CDP hearing asked for any information in addition to the appraised value. The settlement officer noted that she “advised [the Whittakers’ lawyer] that the special circumstances were considered; but did not warrant acceptance of the offer” and that she “was not going to remove the equity for the investment because the taxpayers can fully pay with one of the retirement accounts; plus, the taxpayers have over $100,000 in equity in the home.” There’s no evidence in the record of any consideration of the Whittakers’ arguments on this point.

This is where the CDP process provides a very tangible benefit to all taxpayers because it interjects a judicial overview on a process otherwise completely within the control of the IRS, as Les discussed recently in the Pitt Tax Review.  This does not mean the taxpayer will always win, see e.g. this post discussing a loss by the taxpayer, but it does mean that all taxpayers win by getting a window into the thinking about what is appropriate.

The Court finds that the Settlement Officer’s conclusion regarding the equity in the home and the Whittakers ability to tap into that equity was clearly erroneous. Because of that finding the SOs use of that equity in calculating their reasonable collection potential was an abuse of discretion.

The Court then moved on to the impact of the pandemic. The pandemic impacted many taxpayers. Many had offers pending based on one set of projections only to have those projects smashed by the economic disruption caused by the pandemic. Of course, the disruption impacted taxpayers in different ways depending on their circumstances. It’s easy to image that a self-employed person engaged in personal training would have had little or no work for a significant period of time and then would almost need to start the business from scratch. Given his age, this disruption caused Mr. Whittaker to leave the workforce. The pandemic also caused a major downward shift in the amount of work Mrs. Whittaker had. The SO’s response to this significant change in circumstances was not to recalculate the offer but rather to offer a hold on collection.

The SO also miscalculated Mr. Whittaker’s military pension by almost $1,000 a month. The IRS argues the error is harmless because enough equity still existed to satisfy the liability. The IRS attempted to put in the record at trial information not in the administrative file in order to support its conclusion. The Court rejected this attempt stating:

Upholding the rejection of the Whittakers’ offer because Mrs. Whittaker’s mall job may have resumed or Mr. Whittaker might be able to run a training business using potential clients’ possible pandemic purchases is entirely speculative. These post hoc rationalizations are precisely what Chenery bars. See Antioco, 105 T.C.M. (CCH) at 1240.

The Court notes that the Whittakers lost their jobs in the middle of the CDP hearing. This materially changed their circumstances since their income was critical to the calculation regarding their ability to pay. Rather than compel the IRS to accept the offer that the Whitakers made, the Court sends the case back to Appeals to consider their updated information. This limited remedy does not guarantee the Whittakers will receive the offer in compromise they seek but does give them a good chance for a favorable outcome. Unlike most tax cases, CDP cases provide a moving target. Income and expenses are dynamic. This case demonstrates how their dynamic nature can change outcomes and show how the IRS must be flexible during the CDP process to adapt to changes in a taxpayer’s financial circumstances. One wonders whether the absence of judicial review that accompanies IRS consideration of most collection alternatives reinforces a decision-making process that fails to consider taxpayers’ changing financial circumstances and encourages a more generic IRS approach to evaluating a taxpayer’s true ability to pay. CDP, while not without some problems, injects a needed judicial check on the IRS’s still considerable collection powers.


  1. Steve Kassel, EA says

    This case proves precisely what we learned on Day One of Phase One Revenue Officer training. “If it isn’t in your case file, it didn’t happen”. This was clearly sloppy work on the part of the Settlement Officer. I may have turned the Offer down as well, BUT if the SO had properly documented everything, the Court would not have ruled for the taxpayer.

    Given the numbers I’ve read about in this case, it is likely that the Unemployment benefits paid by the Feds on top of state benefits MAY have put the Whittakers in a STRONGER financial position, but we’ll never know because nothing was documented. Did the Settlement Officer look at bank statements going back to when the government paid the increased Unemployment benefits? Did the Whittakers get any other Federal funds?

    I had a CDP Hearing yesterday with a SO in New York. I made sure to submit everything well in advance and I was pleasantly surprised to find I was working with an IRS employee with a huge amount of experience. The CDP hearing also covered 2015 and no other years like the Whittaker case. I prepared 5 more years of tax returns, 2 of which could not be efiled. Those years have not yet been assessed and the 3 returns that were efiled have been accepted and processed, but the first notice hasn’t gone out. Initially, I sought to get a payment agreement for the entire liability which is over $100,000. My client got into full compliance by making proper ES payments for 2023.

    The SO and I agreed that the best option was for my client to full pay 2015 and we would get a payment agreement for the rest of the liability (which will be under $100,000) in the near future through normal channels.

    My educated guess is that the Whittakers had a good, experienced EA, CPA or attorney representing them and the SO did not represent the best interests of the government. We need good people on both sides of the equation and we can only hope that the SO got additional training….but we all know that probably didn’t occur.

  2. Steve Kassel, EA says

    After clicking on the case itself, I found that the Whittakers were represented by the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb Smith is Associate Clinical Professor and the Director of the Clinic and represented the Whittakers before the Tax Court.

    The only part I don’t understand is the claim by the taxpayers that they couldn’t borrow against the equity in their home because the terms of the mortgage forbade it. I’ve never heard of such language in any mortgage and even if it existed, it may not have been legal.

    In any event, Mr. Smith and his fellow attorneys have done a very good job representing the Whittakers.

  3. Norman Diamond says

    “Because the Whittakers live in Minnesota, the Eighth Circuit decision in Robinette v. Commissioner, 439 F.3d at 459 controls the Tax Court’s actions with respect to scope of review. The Robinette case held that the Tax Court must limit what it considers to the administrative record and not take new evidence.”

    So if the settlement officer illegally prevents discussion of half of the facts, then Tax Court also has to prevent discussion of half of the facts. Has anyone ever presented a reason for this policy other than promotion of injustice?

    “The value of the house, the ability of the Whittakers to pull money out of the equity in the house”

    I don’t like reverse mortgages but, perverse as it is, maybe the Whittakers should get one.

  4. Bob Kamman says

    For another case in which elderly taxpayers receive little sympathy from an SO, see today’s order (denying an IRS motion for summary judgment) by Judge Goeke in Kim, Docket No. 21117-22L

  5. Cindy Macdonald says

    We are almost an exact image of the Whittikers but without any missing tax returns. The SO will not consider anything to do with Pandemic furloughs, regards our meager 501(k) as an asset and says he’s following IRM regulations. He operates in such a narrow band of consideration it turns out to be a complete waste of everyone’s time on both sides of the aisle, unfortunately.

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