Sunday, September 14, 2008
The following represents the position of the IRS on offers in compromise and bankruptcy including some cases dealing with Offers in Compromise and bankruptcy
IRS Internal Revenue Manual - Bankruptcies
1. During the investigation of an offer, certain situations may be encountered that require consideration before a final determination can be made. This section discusses how to treat these situations when evaluating an offer.
1. Bankruptcy can have a specific impact on the Service's consideration of an offer. A taxpayer may attempt to file both bankruptcy and an offer simultaneously, a taxpayer may file an offer in an attempt to avoid bankruptcy or a taxpayer may file an offer after a bankruptcy has been concluded. The following discusses these situations.
Offer in Compromise During Bankruptcy
1. The Service will not consider an offer under its administrative offer in compromise procedures while a taxpayer is in bankruptcy. When a taxpayer files bankruptcy, the Bankruptcy Code provides procedures to resolve the Service's claim.
2. An offer will not be considered under administrative offer in compromise procedures until the bankruptcy is concluded. In Chapter 7 cases, an administrative compromise with the taxpayer can be considered after the taxpayer has received a discharge. See IRM 188.8.131.52.3.. In Bankruptcy Chapter 11, 12, and 13 cases, an administrative compromise will not be considered until the taxpayer completes payments under the plan or the bankruptcy is dismissed by the court.
3. If a taxpayer is in bankruptcy when an administrative offer is submitted or during a pending offer investigation, the offer is returned.
Offers in Compromise Before Bankruptcy
1. When a taxpayer threatens bankruptcy, the impact of bankruptcy on the Service's ability to collect must be considered. If the Offer Investigator believes, based upon factual information, that the taxpayer is seriously considering filing bankruptcy, the employee should discuss the benefits of filing an administrative offer instead.
2. Benefits to the Service:
• The Service can negotiate for amounts collectible from future income and from assets beyond the reach of the government, that may not be collectible if the taxpayer files bankruptcy.
• Negotiations may result in an offer amount that exceeds the amount recoverable in an insolvency proceeding.
• Terms for payment of an offer may result in the funds being collected in a shorter time than through bankruptcy.
3. Benefits to the Taxpayer:
• Bankruptcy carries certain negative repercussions that an offer in compromise will not cause, such as the effect on credit ratings.
• Bankruptcy does not discharge all tax liabilities.
• If a Notice of Federal Tax Lien (NFTL) has been filed, the federal tax lien may survive bankruptcy against certain assets.
4. While evaluating the acceptability of an offer when the threat of bankruptcy is a consideration, determine the reasonable collection potential as defined in IRM 5.8.5, Financial Analysis. To determine the amount that would be collected through bankruptcy and what liabilities would be discharged contact an advisor in the Insolvency Section and discuss the facts of the case.
5. Analysis of the collectibility if bankruptcy were filed along with the financial analysis and a determination of liabilities that would be fully discharged, should result in the information necessary to make an informed decision regarding the offer and to attempt negotiation with the taxpayer.
6. When doing the analysis consider the following questions:
• Is the Service the sole or major creditor?
• Would taxes be dischargeable in bankruptcy?
• Does the offer amount equal or exceed what we can reasonably expect to recover from bankruptcy?
• Are there other considerations, such as what can be collected on liabilities that would not be discharged or from property outside of the bankruptcy, including third parties?
Under no circumstances will the Service accept less than would be recoverable from a Chapter 7 bankruptcy, unless special circumstances exist.
7. If it is determined that processing an offer under the Service's administrative procedures is the better alternative, then proceed with the offer process.
Acceptance of Offer in Compromise After Chapter 7 Bankruptcy
1. In most Chapter 7 bankruptcies, the discharge is issued and the stay lifted in approximately 5 months. An offer will not normally be considered under the Service's administrative procedures until the discharge is granted.
2. For debtors discharged by Chapter 7 where the case is still pending, it is uncertain whether the Service would still have a valid claim in bankruptcy if an offer is accepted. Therefore, the amount acceptable for an offer should include the amount we reasonably expect to recover from the bankruptcy in addition to what can be collected from the taxpayer on non-discharged liabilities or from property outside the bankruptcy.
Bankruptcy After Offer In Compromise Acceptance
1. When a taxpayer files bankruptcy after an offer is accepted, the Service may need to take specific actions to secure unpaid offer funds or to secure payment of tax through the bankruptcy proceeding. (See IRM 25.17, Bankruptcy, for additional information.)
2. In accordance with the Bankruptcy Code, the offer should not be defaulted or payments solicited while the taxpayer is in bankruptcy.
3. When we become aware that a bankruptcy has been filed after the acceptance of an offer in compromise:
The offer funds have been paid in full The bankruptcy filing has no effect on the accepted offer.
The offer funds have not been paid in full Contact the Insolvency Unit to determine necessary action to secure the Service's interest in the bankruptcy proceeding.
Other Insolvency Cases
1. A copy of the court order or other evidence should accompany Form 656.
2. The following should be secured in "Receiverships" and other non-bankruptcy insolvencies:
• A general statement of the circumstances which resulted in the receivership and the purpose of the receivership; that is, whether the objective is liquidation of assets, conservation of assets, foreclosure of a mortgage or reorganization.
• A copy of the petition for the appointment of a receiver and a copy of the court order appointing the receiver or trustee can be used in lieu of a general statement, if the petition provides the information above.
• Copies of all pertinent schedules filed with the court.
3. Consideration of an offer frequently presents questions concerning the rights of the government to priority in the collection of the tax claims over the claims of other creditors of the taxpayer.
4. The rights of other creditors are based on liens which may be recognized by state law, but because of the taxpayers assignment of assets for the benefit of other creditors, the provisions of 31 U.S.C. 3713 apply.
5. When considering the offer:
• Evaluate the rights of all creditors,
• Evaluate all facts and circumstances relating to the various claims,
• Verify all pertinent dates, such as the origin and filing of all claims and liens, and
• Verify the steps which have been taken towards the enforcement of the claimant's alleged rights.
The priority rights of the United States are disregarded when the funds of the estate are disbursed An assignee for the benefit of creditors, as well as an executor or administrator of a decedent's estate, may become personally liable.
A corporation is the assignor and the tax liability sought to be compromised consists of withholding of Federal Insurance Contribution Act (FICA) taxes, or taxes which the assignor might be required to withhold or collect from others and pay over to the government Consider the possibility of enforcing the TFRP provisions of the code.
6. When questions arise regarding the priority rights of the United States contact Area Counsel.
Death of Taxpayer
1. When the Service is notified of the death of the taxpayer who submitted an offer that is currently under consideration, the Service can no longer consider the offer. A termination letter will be generated from AOIC and the offer should be closed with the termination closure option.
2. Many times the offer under consideration was submitted jointly by a husband and wife. In that situation contact with the surviving spouse should be made to determine whether there is a probate proceeding pending.
There is a probate. Explain that consideration of the offer will be terminated and that another offer can be submitted once the probate has been concluded. Contact Technical Support and advise of the probate proceeding and the tax liability due. Terminate consideration of the offer.
There will be no probate proceeding and the surviving spouse does not want us to continue considering the offer. Terminate consideration of the joint offer due to the death of the spouse.
There will be no probate proceeding, the surviving spouse does want us to continue considering the offer, and the surviving spouse was appointed executor by a will. Obtain a copy of the will and an amended offer reflecting the spouse as deceased and continue consideration of the joint offer.
There is no probate proceeding and the surviving spouse wants the Service to continue consideration the offer, however the spouse was not appointed executor by a will. Since the surviving spouse does not have rights to compromise the liability of the deceased taxpayer, secure an amended offer removing the deceased spouse's name and continue consideration of an offer for the surviving spouse's obligation only.
1. When an offer investigation reveals the potential for a transferee situation, the burden of proof of transferee liability rests with the government.
If a determination that a transferee investigation should be initiated, it will not be conducted by the Offer Investigator. Instead, it will be conducted by a field Revenue Officer (RO) by generating an Other Investigation (OI).
OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.
A potential transferee is discovered during an offer investigation Conduct an investigation to determine if a transferee exists.
A transferee liability exits 1. Determine the amount the Service may reasonably expect to collect from the transferee.
2. Include a sum substantially equal to the value determined in the calculation of reasonable collection potential (RCP).
3. Attempt to negotiate an acceptable offer amount with the transferee value included in the reasonable collection potential (RCP) calculation.
There is a question whether a transferee liability may be established and sustained 1. Determine the value of the transferee based on the degree of doubt regarding the transferee being sustained.
2. Attempt to negotiate an acceptable offer amount including this value in the reasonable collection potential (RCP).
Flexibility should be exercised during negotiations if the transferee assessment will not be pursued.
While investigating an offer and the Offer Investigator determines that a transferee assessment should be pursued and negotiations have not resulted in an acceptable offer amount
1. Attempt to secure a withdrawal letter from the taxpayer
2. If the taxpayer does not withdraw the offer, prepare the rejection closing documents and follow procedures for recommending rejection with appeal rights. Include the value of the transferee in the reasonable collection potential (RCP).
Prepare an Other Investigation (OI) to be issue to a field revenue officer to investigate the transferee issue.
Discharge and Subordination Requests
1. The government is bound by the payment terms of an accepted offer period. We cannot require payment of the offer amount in different terms, other than agreed to in the offer agreement.
In these cases, the discharge or subordination investigation will not be conducted by the Offer Investigator. Instead, it must be conducted by the appropriate Technical Support by generating an Other Investigation (OI).
OIs referred per these instructions should be considered high risk cases, code 100, and processed accordingly.
2. Requests for discharge or subordination received while an offer is pending are to be handled as follows:
The discharge or subordination request is approved. Advise the taxpayer that proceeds from the discharge or subordination will be applied to the offer, if accepted. If the offer is not accepted, the proceeds will be applied to the tax liability. Before delivering the discharge or subordination, require the taxpayer to execute a Form 3040, Authorization to Apply Offer in Compromise Deposit to Liability. In the signature block have them write the word "irrevocable" . Retain the signed Form 3040 in the offer case file for use in the event the offer is returned, withdrawn or rejected.
For those taxpayers who have submitted a discharge or subordination while the offer is pending, the taxpayer should check the box and place their initials next to that box. This will serve the same purpose as having the taxpayer write "irrevocable" on the Form 3040.
3. Requests for discharge or subordination received after an offer has been accepted but before all the payment terms have been met should be handled as follows:
The taxpayer does not intend to apply the proceeds received from the discharge or subordination to the offer amount Deny the discharge or subordination request.
The taxpayer does intend to apply the proceeds toward the offer amount Request an investigation of the discharge or subordination from Technical Support and then coordinate with Technical Support to apply the proceeds to the offer amount.
Effect of Previous Offers on Collection Statute
1. Over the years there have been numerous changes in the law and IRS procedures relating to the extension of the statutory period for collection while offers are being considered. The information provided in this section will assist in determining the correct CSED, which can impact the number of required payments.
2. Treasury Regulation § 301.7122-1(f) 1960 states that suspension of the statute of limitations for collection will be for the period the offer is being considered, while any term of an accepted offer is not completed, and for one additional year. Consideration of an offer is conditioned upon the taxpayer signing a waiver.
3. For offers pending prior to 1/1/2000, the taxpayer executed a waiver of the statutory period for collection, extending the collection statute for the period the offer was under consideration and for an additional one year. For offers accepted prior to 1/1/2000 this waiver of the statutory period for collection also included the period of time the terms of an accepted offer were still in effect.
RRA 98 imposed a limitation for offers subject to the waiver of collection statute. The waiver cannot extend the Collection Statute Expiration Date (CSED) beyond either 12/31/2002, or the original CSED, whichever is later.
4. For offers submitted or pending after 12/31/1999, the statutory period for collection was suspended, by operation of law, while the offer was pending, for 30 calendar days following rejection of an offer, and for the period the rejection was being considered in Appeals. This suspension of the collection statute is effective through 12/20/2000.
5. For offers that were pending prior to 1/1/2000 and were still pending on or after 1/1/2000, the collection statute is extended by both waiver periods and by the suspension period (See paragraphs 2 and 3 above).
The limitation on the waiver of collection statute applies to these offer periods.
6. The Community Renewal Tax Relief Act of 2000 was signed into law on 12/21/2000. This act eliminated the suspension of the statutory period for collection, effective on the day of enactment (12/21/2000).
7. The Job Creation and Workers Assistance Act was signed into law March 9, 2002. This law reinstated the suspension of the statutory period for collection, by operation of law, while the offer is pending, for 30 calendar days following rejection of an offer, and for the period the rejection is being considered in Appeals.
8. Cases may be encountered where prior rules were in effect. The following chart shows the changes that have occurred in this area.
If the offer has a… and was… then…
Pending date of 1/1/2000 or later Accepted prior to 12/21/2000 The CSED is extended from the pending date (TC 480) until the acceptance date (TC 781/788).
Pending date of 1/1/2000 or later Accepted between 12/21/2000 and 3/8/2002 The CSED is only extended from the pending date (TC 480) through 12/20/2000.
Pending date of 1/1/2000 or later Accepted after 3/8/2002 The CSED is extended from the pending date (TC 480) through 12/20/2000 and if the offer was still pending, it was also extended from 3/9/02 until the date of acceptance (TC 780).
Pending date of 1/1/2000 or later Rejected and taxpayer does not appeal The CSED is extended from the pending date (TC 480) until 30 calendar days after the rejection letter is issued (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
As of 2/2/2004, the AOIC system automatically 30 days to the date of the TC 481 on Rejected Not Appealed offer closures prior to transmission to masterfile. Appealed rejections carry the Appeals rejection date.
Pending date of 1/1/2000 or later Rejected and sustained in Appeals The CSED is extended from the pending date (TC 480) until Appeals issues a decision letter (TC 481), excluding any portion of that period which falls between 12/21/2000 and 3/8/2002.
Pending date prior to 1/1/2000 Accepted prior to 1/1/2000 The CSED is extended from the pending date (TC 480) until all payment installments are made (TC 780) plus 1 year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later.
Pending date prior to 1/1/2000 Accepted after 12/31/1999 but prior to 12/21/2000 The CSED is extended from the pending date (TC 480) through 12/31/99 plus one year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later. If the offer was still pending on 1/1/2000, the CSED would also be extended from that date until it was accepted (TC 780).
Pending date prior to 1/1/2000 Accepted after 12/20/2000 The CSED is extended from the pending date (TC 480) through 12/31/99 plus one year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later. In addition, the CSED is extended from 1/1/2000 through 12/20/2000. However, the CSED would not be extended from 12/21/2000 until 3/8/2002. If the offer was still pending on 3/9/2002 the CSED would also be extended from that date until it was accepted (TC 780).
Pending date prior to 1/1/2000 Rejected prior to 1/1/2000 The CSED is extended from the pending date (TC 480) until the rejection date (TC 481) plus 1 year. The CSED cannot be extended beyond 12/31/2002 or the original CSED date whichever is later.
Pending date prior to 1/1/2000 Rejected 1/1/2000 or later The CSED is extended from the pending date (TC 480) until 12/31/1999 plus 1 year. The extension cannot extend the CSED beyond 12/31/2002 In addition, CSED is extended from 1/1/2000 until 12/20/2000 or the rejection date (TC 481) plus 30 calendar days, whichever is earlier, and from 3/9/2002 until the rejection date (TC 481) plus 30 calendar days.
9. If only one party to a joint assessment files an offer, then the statute is suspended just for that person. The appropriate CSED suspension code must be input on IDRS to identify the specific taxpayer for which the offer applies. They are described in the table below.
Indicators of Practitioner Fraud
1. During the verification of financial statements, employees should always be aware of any indications that a practitioner violated the duties relating to practice before the Service Circular No. 230 Sections 10.20 to 10.23 or engaged in incompetent or disreputable conduct (Circular No. 230 Section 10.51) relating to offers in compromise. Also, be aware of indicators of fraud. A referral to the Office of Professional Responsibility (OPR) may be appropriate. Some examples of those indicators are:
A. Failure to exercise due diligence is conduct that is more than a simple error but less than willful or reckless misconduct. Simply put, it is negligence.
B. Deceptive advertising with respect to offers (such as unqualified promises of settlement, or "pennies on the dollar" ) should be referred to the Office of Professional Responsibility (OPR).
2. Section 822 of the American Jobs Creation Act of 2004, PL. 108-357, 118 Stat. 1418, expands the sanctions that the Secretary may impose on representatives to include both censure and monetary penalties. If the employee is acting on behalf of an employer or other entity, the Secretary may impose a monetary penalty on the employer or other entity if it knew, or reasonably should have known, of the conduct.
3. A referral should also be made if the employee becomes aware that a suspended or disbarred practitioner is practicing or attempting to practice before the IRS, or when it is noted that an unenrolled return preparer has been added to an otherwise valid Form 2848, Power of Attorney and Declaration of Representative , to attempt to have this person represent the taxpayer before the IRS during the course of the investigation.
The referral process is required by Section 10.53(a) and 10.53(b) of Circular No. 230.
4. Employees should also report suspected violations of Title 18, U.S.C. 207: Post Employment Conflicts of Interest (Circular 230, Section 10.25) to TIGTA.
The Role of the Office of Professional Responsibility
1. Under the authority provided by 31 U.S.C. 330 and 31 CFR 10, which is published asTreasury Department Circular No. 230 " Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service" (Revised 7/26/2002), Offer of Professional Responsibility (OPR) renders decision on applications for enrollment to practice, makes inquiries into matters under its jurisdiction, and institutes disciplinary proceedings against tax practitioners who are found to have violated any part of Circular No. 230. OPR's authority under Circular No. 230 to regulate practice before the Service and to discipline practitioners is generally limited to individuals, not entities.
Badges of Tax Practitioner Abuse in the Offer in Compromise Program
1. A pattern of inappropriate conduct is a factor that the Office of Professional Responsibility (OPR) will consider in determining whether to bring disciplinary action against a practitioner under Circular No. 230.
2. Below are some indicators of abuse by practitioners.
A. Badge of Abuse #1 — Establishing a pattern on several Offer in Compromise investigations to influence the case disposition or Service employee to obtain the desired results by:
• Using abusive language
• Threatening claims of misconduct (e.g. Section 1203)
• Making false claims of misconduct
• Making false accusations
• Verbal/Physical threats or assaults
• Making a bribe (e.g. offering gifts or other things of value)
Verbal and/or physical threats/assaults should be referred directly to the local TIGTA office or by calling the TIGTA National Hotline at 1–800–366–4484 or 1–800–589–3718 after hours.
B. Badge of Abuse #2 — Establishing a pattern on several offer cases in which investigations are delayed by the practitioner performing one or several of the following actions:
• Missing appointments
• Canceling appointments at the last moment with no good cause provided
• Agreeing to provide requested documentation and/or information and then refusing to follow through, hindering the ability of the employee to complete the investigation of the offer
• Providing partial information requiring repeated call backs/correspondence and delays.
Circular No. 230 Section 10.20 states a referral must clearly document all case actions leading to the request for information/documents/substantiation, and the practitioner's failure to comply. This set of facts may also support a referral under Section 10.22 (Diligence as to accuracy) and Section 10.23 (Prompt disposition of pending matters) of Circular 230. In the event that a practitioner refused to provide documentation on grounds of privilege, the Office of Chief Counsel should be consulted.
C. Badge of Abuse #3 — Establishing a pattern on several offer submissions, which would include significant omissions, or significant and unreasonable discounts on a number of assets. The information provided must be shown to be materially misrepresented, not merely a simple error. The omissions or material misrepresentations could include, but are not limited to the following areas:
• Assets are omitted
• Listed assets are undervalued
• Understating the taxpayers income
• Over stating the taxpayers expenses
• Collection Information Statement(s) (CIS) reflect a large number of claimed dependents
• CIS reflects similar dollar amounts in both checking and savings accounts
• CIS reflects no available credit, including credit cards
• CIS reflects omissions of assets
• CIS shows similar listings for monthly income and expenses (e.g. same low wages, same child care expenses)
Due diligence also includes deceptive advertising with respect to offers; such as, unqualified promises of settlement, or pennies on the dollar.
3. The badges of practitioner abuse may also be indicators of potential fraud. The inappropriate misconduct should be discussed with your Fraud Technical Advisor (FTA) if appropriate. If a decision is made to refer the practitioner to TIGTA and/or the Fraud program for potential criminal sanctions, these actions must be clearly documented in the Office of Professional Responsibility (OPR) referral.
Referring Tax Practitioner Abuse to the Office of Professional Responsibility
1. Employees should be alert to the patterns and/or trends of inappropriate conduct as discussed in IRM 184.108.40.206.2 above. When patterns and/or trends are identified through offers submitted by a tax practitioner, or when reported to an employee by any other person other than an officer or employee of the Service, the employee should complete the Form 8484, Report of Suspected Practitioner Misconduct and Report of Appraiser Penalty to the Office of Professional Responsibility (OPR), and refer the suspected practitioner misconduct for appropriate disciplinary action.
2. Circular No. 230 Section 10.53 states a referral should include all of the basic information, as well as reasons to support why it is believed the information submitted by the practitioner was below the expected standard.
3. Mail or fax the Form 8484, the accompanying narrative, and any other supporting documents to:
Office of Professional Responsibility
Attn: Misconduct Reports Desk
1111 Constitution Ave, NW
Washington, DC 20224
FAX: (202) 622–2207
4. Additional information about reporting suspected practitioner misconduct may be found on the Office of Professional Responsibility (OPR) Intranet Website at http://nhq.no.irs.gov/OPR/ or go to irweb.irs.gov. The Office of Professional Responsibility has established an e-mail address to answer questions about Circular No. 230 issues at OPR@irs.gov.
Preparation of Form 8484, Report of Suspected Practitioner Misconduct and Report of Appraiser Penalty to the Office of Professional Responsibility (OPR)
1. Part A – Practitioner Information
Practitioner information must include the practitioner's name, mailing address, telephone number, fax number, social security number, and CAF number. Indicate whether the practitioner is an attorney, certified public accountant, enrolled agent, or enrolled actuary.
2. Part B – Evidence of Practice before the IRS
If available, attach a copy of the Form 2848, Power of Attorney and Declaration of Representative , or an IDRS CAF printout to the Form 8484. If neither a copy of the Form 2848 nor a CAF printout is available, but the employee has personal knowledge of the practice, provide the following statement, " I dealt with this practitioner during (year) regarding a collection matter. The Form 2848 was not put on the CAF and I do not have access to the closed case file." The Office of Professional Responsibility (OPR) must be able to accurately identify and locate the tax practitioner in order to process the referral and establish proof of practice before the Internal Revenue Service.
3. Part C – Explanation of Suspected Misconduct
Complete and attach a narrative to the Form 8484. The narrative should be detailed enough to allow the Office of Professional Responsibility (OPR) to give the practitioner fair notice of the suspected misconduct. It should list all significant events that illustrate the inappropriate conduct in chronological order, explain how the conduct impacts on the administration of the tax laws, as well as any other supporting information that will establish a pattern of abuse. It should include appropriate quotations from the case history that would support the alleged misconduct. If applicable, hand-written material should be transcribed. The narrative should be specific and should include: who, what, when, where, and why.
4. Part D – Contact Person and Address
The contact person is not necessarily the person with first-hand knowledge of the suspected misconduct. Rather, the contact person may be an Area employee responsible for collecting misconduct reports and submitting them to the Office of Professional Responsibility (OPR). The OPR will direct questions concerning the referral to the contact person.
5. Part E – Management Approval
While the Office of Professional Responsibility does not require any particular level of management approval, referrals made by Offer in Compromise (OIC) employees should be reviewed and approved by field Group Managers or Offer Examiner Unit Managers (COIC) before documents are sent to the OPR.
6. Part F – Office of Professional Responsibility (OPR) Acknowledgement of Report
Upon receiving the Form 8484 and the corresponding narrative, the OPR will complete Part F and return a copy to the contact person.
Indicators of Taxpayer Fraud
1. The following are potential fraud warning signs most identifiable during an interview:
A. Failing to keep proper books and records in a business or profession.
B. No records, poorly kept records, or attempts to falsify or alter records.
C. Destroying books and records without plausible explanation or refusal to make certain records available.
D. Extent of taxpayers control of sales and receipts and the apparent unwillingness to delegate this function to employees.
E. Engaging in illegal activities.
F. Personal living standard and asset acquisition is inconsistent with reported income.
G. Indications that valuable assets belonging to the taxpayer are being acquired and held in the name of others.
H. Self-serving statements with no documented proof.
I. Repeated procrastination of the part of the taxpayer in making and keeping appointments.
J. Hasty agreement to adjust and undue concern about immediate closing of the case may indicate that more through examination may be necessary.
2. The following are potential fraud warning signs most identifiable during verification of the financial statement:
A. Uncooperative attitude displayed by:
• Not providing requested information
• Refusal to make certain records available
• Not furnishing adequate explanations for discrepancies or questionable items
B. Trying to conceal a pertinent fact or record.
C. Failing to deposit all receipts to the business account.
D. Use of nominees or false names.
E. Unusual depletion of assets shortly before filing an offer.
F. Inflated salaries, payment of bonuses or cash withdrawals by officers, directors, shareholders, or other insiders.
G. Transfers of property to insiders, shareholders, or relatives shortly before filing the offer.
H. Payoff of loans to directors, officers, shareholders, relatives, or other insiders shortly before filing of the offer.
I. Complicated corporate structures and relationships.
J. Undervaluing of assets.
K. Overstatement of liabilities.
3. The fraud indicators below can fall into any of the categories in paragraphs (1) and (2) above:
A. Making false, misleading, and inconsistent statements.
B. Using currency instead of bank accounts or making large expenditures in currency.
C. Concealment of bank accounts and other property.
4. If indications of fraud are identified follow established procedures for preparing a referral to Criminal Investigation and suspend the investigation until the following:
If Criminal Investigation… Then…
Rejects the referral Investigation of the offer may continue.
Accepts the referral No contact will be made with the taxpayer regarding the status of the offer until Criminal Investigation informs the taxpayer of the criminal investigation and /or authorizes the Offer Investigator to contact the taxpayer.
5. Once the taxpayer has been notified by Criminal Investigation of the pending investigation and Collection has been authorized to contact the taxpayer, the Offer Investigator will advise the taxpayer of the following:
• The offer could be returned because other investigations are pending that may affect the liability sought to be compromised or the grounds on which it was submitted
• Action on the offer will be suspended pending the outcome of the criminal investigation
• The offer could be withdrawn.
An individual's offer-in-compromise, which was based on doubt as to collectibility, was properly rejected because the individual had a reasonable collection potential in excess of $1,000 and he was not in compliance with federal income tax laws. The individual's contention that he was protected under a state law (California) bankruptcy exemption was rejected because it was not properly raised before the IRS Appeals Office. Even if the issue had been properly raised, a federal tax lien would survive a subsequent bankruptcy filing, regardless of any state statute. See 11 U.S.C. sec. 522(c)(2)(B) (2006) (providing that exempt property remains subject to a properly filed tax lien even though the underlying tax claim may have been discharged); Iannone v. Commissioner [Dec. 55,618], 122 T.C. 287, 293 (2004) ("Federal tax liens are not extinguished by personal discharge in bankruptcy.").
A.M. Kun, Dec. 57,513(M), TC Memo. 2008-192.
[Code Secs. 6330 and 7122]
A decision by the IRS to proceed with collection of a tax deficiency, in the form of a filed lien action, was sustained. The 10-year statute of limitations for collection had not expired because it was tolled by the individual's request for a Collection Due Process (CDP) hearing, as well as his submission of an offer-in-compromise. Further, the offer-in-compromise, which was based on doubt as to collectibility, was properly rejected because the individual had a reasonable collection potential in excess of $1,000 and he was not in compliance with federal income tax laws. The individual's contention that he was protected under a state law (California) bankruptcy exemption was rejected because it was not properly raised before the IRS Appeals Office. Even if the issue had been properly raised, a federal tax lien would survive a subsequent bankruptcy filing, regardless of any state statute.
[Code Sec. 6673
A $1,500 penalty for maintaining a suit in order to delay collection was imposed against an attorney. Arguments he raised in a Collection Due Process hearing and in front of the court were clearly groundless.
P filed a petition for review pursuant to sec. 6320, I.R.C., in response to a determination by R that lien action was appropriate.
Held: R's determination to proceed with collection is sustained.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition for review of a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination).1 The issue for decision is whether respondent may proceed with collection, in the form of a filed tax lien, for the total amount of petitioner's Federal income tax liabilities for 1994, 2000, 2001, 2002, and 2003.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference.
Petitioner, a self-employed attorney, filed Federal income tax returns for 1994, 2000, 2001, 2002, and 2003. For each of those years petitioner reported a tax liability, which was assessed, but has not paid any of the tax due.
On February 4, 2005, respondent sent petitioner a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 for 1994, 2000, 2001, 2002, and 2003. Petitioner was informed that the notice of Federal tax lien had been filed a day earlier, on February 3, 2005. On February 25, 2005, petitioner filed a Form 12153, Request for a Collection Due Process Hearing, with respect to those 5 taxable years. As the basis for his disagreement, he stated "STATUTE OF LIMITATIONS, WAIVER AND ESTOPPEL."
Petitioner and respondent's settlement officer participated in an in-person Appeals hearing on May 17, 2005. That same day petitioner submitted an offer-in-compromise of $1,000 on the basis of doubt as to liability and doubt as to collectibility. Petitioner's offer-in-compromise covered his Federal income tax liabilities for 1991 through 2004. As of the date the lien at issue was filed, for the 5 taxable years at issue in this case alone, petitioner's income tax liabilities exceeded $66,000. As to those tax liabilities, petitioner, in his offer-in-compromise, asserted only that "I DO NOT OWE THE TAX FOR THE YEAR 1994 BECAUSE THE STATUTE OF LIMITATIONS HAS RUN."
Petitioner also provided a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, indicating that he was an unmarried, self-employed attorney with total monthly income of $2,999 and total monthly living expenses of $3,206.
The settlement officer informed petitioner that the offer-in-compromise could not be considered at that time because some of the years petitioner listed in the offer were still pending before the Court of Appeals for the Ninth Circuit. On November 16, 2005, the Court of Appeals issued a decision affirming this Court's decision in Kun v. Commissioner [Dec. 55,749(M)], T.C. Memo. 2004-209, in which this Court had sustained respondent's determination that a notice of Federal tax lien filing was an appropriate enforcement action with respect to petitioner's 1995, 1996, 1997, 1998, and 1999 Federal income tax liabilities.2 Kun v. Commissioner, 157 Fed. Appx. 971 (9th Cir. 2005).
On June 8, 2006, respondent's Appeals Office sent petitioner the aforementioned notice of determination.3 Therein, the Appeals Office determined that all legal and procedural requirements for filing the notice of Federal tax lien had been met. The Appeals Office rejected petitioner's $1,000 offer-in-compromise because his reasonable collection potential was believed, on the basis of his financial statement and supporting documentation, to be $10,652.4 The Appeals Office further noted that petitioner was not in compliance with the filing and payment requirements with respect to his 2005 taxable year.5
On June 23, 2006, petitioner filed a timely petition with the Court contesting the notice of determination. At the time the petition was filed, petitioner resided in California. A trial was held on May 15, 2007, in San Francisco, California.
I. Collection Action
A. Statute of Limitations
There is a 10-year limitations period for collection that commences upon the assessment of the tax. Sec. 6502(a)(1). If a hearing is requested under section 6320(a)(3)(B) or 6330(a)(3)(B), the collection action(s) that are the subject(s) of the requested hearing and the running of any period of limitations under section 6502 are suspended for the period during which the hearing and appeals thereof are pending. See secs. 6320(c), 6330(e)(1).
Petitioner alleges in his petition that "respondent is attempting to collect taxes for years in which the statute of limitations has clearly run." Petitioner is incorrect.
A Federal income tax deficiency and additions to tax were assessed for each of the 5 tax years now at issue. The first such assessment was for 1994 and was made on September 11, 1995. Respondent filed the notice of Federal tax lien with respect to the 5 taxable years now at issue, which included 1994, on February 3, 2005, within the 10-year limitations period for collection. In addition, on February 25, 2005, petitioner requested a hearing with respect to his 1994, 2000, 2001, 2002, and 2003 tax years. That request suspended (and continues to suspend) the period of limitations on collection for 1994 and the other tax years at issue. Respondent therefore is not time barred from taking collection action with respect to 1994 (and the other 4 years at issue).
Petitioner's entire statute-of-limitations argument focuses on whether the limitations period was also tolled by an offer-in-compromise that he submitted on April 22, 2002, which he contends was for 1995 and 1996, not 1994.6 That entire issue is a red herring because, as explained above, the limitations period for collection action as to 1994 remains open whether or not that limitations period was tolled by petitioner's April 2002 offer-in-compromise.
B. General Rules Regarding an Appeals Hearing
If a taxpayer liable to pay taxes fails to do so after demand for payment, the tax liability becomes a lien in favor of the United States against all of the taxpayer's real and personal property and rights to such property. Sec. 6321. The lien arises at the time the assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. Sec. 6322. The Secretary is obliged to notify the taxpayer within 5 business days that a notice of a Federal tax lien has been filed and that administrative appeals are available to the taxpayer. Sec. 6320(a). Upon timely request a taxpayer is entitled to a hearing before the Internal Revenue Service Office of Appeals regarding the propriety of the filing of the lien. Sec. 6320(b). This hearing is conducted in accordance with the procedural requirements of section 6330. Sec. 6320(c).
The taxpayer is entitled to appeal the determination of the Appeals Office, made on or before October 16, 2006, to the Tax Court or a U.S. District Court, depending on the type of tax at issue. Sec. 6330(d).7 Where the validity of the underlying tax liability is properly at issue, the Court will review the matter de novo. Sego v. Commissioner [Dec. 53,938], 114 T.C. 604, 610 (2000); Goza v. Commissioner [Dec. 53,803], 114 T.C. 176, 181-182 (2000). The Court reviews any other administrative determination for an abuse of discretion. Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra at 182. An abuse of discretion has occurred if the "Commissioner exercised * * * [his] discretion arbitrarily, capriciously, or without sound basis in fact or law." Woodral v. Commissioner [Dec. 53,206], 112 T.C. 19, 23 (1999).
Aside from his statute of limitations argument, petitioner raises no argument as to the underlying tax liabilities for the 5 taxable years at issue. See Boyd v. Commissioner [Dec. 54,495], 117 T.C. 127, 130 (2001) (noting that an argument that the limitations period on collection has run is a challenge to the underlying tax liability that we review de novo). The only issue left to be addressed is the rejection of petitioner's offer-in-compromise.
C. Petitioner's Offer-in-Compromise
Among the issues that may be raised at the Appeals Office and are reviewed for an abuse of discretion are "offers of collection alternatives" such as an offer-in-compromise. Sec. 6330(c)(2)(A)(iii). The Court reviews the Appeals officer's rejection of an offer-in-compromise to decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law and therefore an abuse of discretion. Murphy v. Commissioner Dec. [Dec. 56,232], 125 T.C. 301, 320 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Woodral v. Commissioner, supra at 23.
Section 7122(a) authorizes the Secretary to compromise any civil case arising under the internal revenue laws. In general, the decision to accept or reject an offer, as well as the terms and conditions agreed to, are left to the discretion of the Secretary. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs. However, regulations promulgated under section 7122 provide that "No offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions" of the regulations "and the Secretary's policies and procedures regarding the compromise of cases." Sec. 301.7122-1(f)(3), Proced. & Admin. Regs.
The grounds for compromise of a tax liability are doubt as to liability, doubt as to collectibility, and promotion of effective tax administration. Sec. 301.7122-1(b), Proced. & Admin. Regs. Petitioner based his offer-in-compromise on doubt as to collectibility, which "exists in any case where the taxpayer's assets and income are less than the full amount of the liability."8 Sec. 301.7122-1(b)(2), Proced. & Admin. Regs. In determining the taxpayer's ability to pay, the individual facts and circumstances of the taxpayer's case are considered and the taxpayer is permitted "to retain sufficient funds to pay basic living expenses." Sec. 301.7122-1(c)(2), Proced. & Admin. Regs.
Petitioner contends that it was an abuse of discretion for respondent's settlement officer to reject his offer-in-compromise without considering "the Bankruptcy Exemption", apparently a California statute that allegedly exempts from creditors certain property belonging to a debtor in bankruptcy.9 Respondent asserts that because petitioner raised the issue of a potential bankruptcy filing for the first time at trial, the issue is not relevant as to whether respondent's settlement officer abused his discretion. As to the merits of petitioner's argument, respondent asserts that any State law exemption is not effective against a Federal tax lien and that, in any event, because the notice of Federal tax lien was filed before petitioner would have filed a bankruptcy petition, the Federal tax lien would continue to attach to any exempt property.
In reviewing the Commissioner's decision to reject an offer-in-compromise for abuse of discretion, we cannot consider issues that were not raised before the Commissioner's Appeals Office. See Giamelli v. Commissioner [Dec. 57,155], 129 T.C. 107, 115 (2007) ("We hold today that we do not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office"); Magana v. Commissioner [Dec. 54,765], 118 T.C. 488, 493 (2002) ("in our review for an abuse of discretion under section 6330(d)(1) of respondent's determination, generally we consider only arguments, issues, and other [matters] that were raised at the collection hearing or otherwise brought to the attention of the Appeals Office"); sec. 301.6330-1(f)(2), Q&A-F5, Proced. & Admin. Regs.
There is nothing in the record reflecting that petitioner raised the issue of a potential bankruptcy filing before the Appeals Office, nor does petitioner assert, at least in a comprehensible manner, to the contrary.10 Moreover, respondent is correct that the notice of Federal tax lien filed in February 2005 would survive a subsequent bankruptcy filing by petitioner, regardless of any California statute. See 11 U.S.C. sec. 522(c)(2)(B) (2006) (providing that exempt property remains subject to a properly filed tax lien even though the underlying tax claim may have been discharged); Iannone v. Commissioner [Dec. 55,618], 122 T.C. 287, 293 (2004) ("Federal tax liens are not extinguished by personal discharge in bankruptcy.").
Because the settlement officer based his decision on an analysis of financial information provided by petitioner indicating a reasonable collection potential in excess of $1,000, see supra p. 4, and on the fact that petitioner was not in compliance with Federal income tax laws, see supra note 5, respondent's settlement officer did not abuse his discretion in rejecting petitioner's offer-in-compromise. We shall therefore sustain respondent's determination to proceed with collection by lien.
II. Section 6673(a)(1) Penalty
Although respondent does not ask the Court to impose a penalty upon petitioner under section 6673(a)(1), the Court may impose such a penalty sua sponte. See Pierson v. Commissioner [Dec. 54,152], 115 T.C. 576, 581 (2000).
Petitioner is an attorney with a longstanding habit of failing to pay Federal income tax. As an attorney, he knew or should have known that he was instituting this case primarily for delay. Indeed, both of his arguments --the argument regarding the statute of limitations and the argument regarding bankruptcy --are clearly groundless in light of the relevant statutes and this Court's caselaw. His dilatory tactics are further evidenced by the fact that he raised an unsupported statute-of-limitations argument in his prior Tax Court case. See supra note 2. Because we are convinced that petitioner instituted this case primarily in order to delay collection, we shall impose upon petitioner a $1,500 penalty pursuant to section 6673(a)(1).
The Court has considered all of petitioner's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
An appropriate order and decision will be entered.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended.
2 Petitioner filed a motion to vacate or revise the decision entered by the Court in accordance with that Memorandum Opinion. The Court denied that motion in a Supplemental Memorandum Opinion. See Kun v. Commissioner [Dec. 55,816(M)], T.C. Memo. 2004-273. Therein, the Court noted that petitioner was merely repeating his argument "that respondent did not timely assess the liabilities in question." Id. The Court then concluded that "Petitioner failed to present any evidence at trial in support of his contention that his 1995-99 income tax liabilities were not timely assessed, and that failure also infects his motion." Id.
3 By that time, the Court of Appeals for the Ninth Circuit's decision had become final.
4 The $10,652 was petitioner's "Net Realizable Equity in assets". The Appeals Office calculated that number by first adding together the fair market value of petitioner's assets, which included, among other things, a checking account and a car. The Appeals Office then reduced the value of the noncash assets by 20 percent to determine the "Quick Sale Value" and then further reduced the value of petitioner's encumbered or exempt assets by the amount of the encumbrances or exempt amount.
5 Pursuant to the Internal Revenue Manual (IRM), an offer-in-compromise "will be deemed not processable" if "All tax returns for which the taxpayer has a filing requirement" are not filed. 1 Administration IRM (CCH), pt. 220.127.116.11.1(1), at 16,276 (Sept. 1, 2005). As of June 8, 2006, petitioner had not filed a 2005 Federal income tax return or an extension request. Nor had he made estimated tax payments or had any tax withheld for that year.
6 This is in response to a statement by the settlement officer and an argument by respondent that the limitations period for collection with respect to 1994 was tolled under sec. 6331(k) and (i)(5) from April 2002 until 90 days after the Court of Appeals for the Ninth Circuit's November 2005 decision.
7 Determinations made after Oct. 16, 2006, are appealable only to the Tax Court. See Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019.
8 In the interest of completeness, petitioner also based his offer-in-compromise on doubt as to liability with respect to the 1994 taxable year on the basis that the applicable limitations period on collections had run with respect to that taxable year. We have already addressed that issue.
9 The statute referred to by petitioner is Cal. Civ. Proc. Code sec. 703.140(b)(1) (West Supp. 2008).
10 In his reply brief petitioner appears to point to respondent's brief, or some other document, in what might constitute an effort to demonstrate that petitioner raised the bankruptcy issue before the Appeals Office. We remain unpersuaded that petitioner raised the issue before the Appeals Office.
The IRS did not violate 11 U.S.C. §525 when it returned a corporation's offer in compromise (OIC) as nonprocessable during the pendency of its chapter 11 bankruptcy proceeding. IRS policy and procedures provided that, because the corporation was in bankruptcy, processing its OIC was not in the government's best interest. Moreover, mandamus relief was not available to the corporation as an alternative means to compel the government to consider its OIC. The IRS owed no clear duty to the corporation to act as required for mandamus relief. Its discretion to compromise carried with it the discretion not to exercise that discretion.
1900 M Restaurant Associates, Inc., 2007-1 USTC ¶50,116; aff'g, BC-DC D.C., 2005-1 USTC ¶50,313, 319 BR 302.
The IRS was not required to process an offer-in-compromise submitted by debtors in bankruptcy. That type of requirement would be a remedy in the nature of mandamus and that remedy was not appropriate. The IRS owed no clear duty to the debtors and its decision to not process offers-in-compromise submitted by debtors in bankruptcy was solely within its discretion. The plan confirmation process was an adequate alternative remedy to obtain a compromised tax liability from the IRS. Requiring the IRS to negotiate with the debtors outside of the plan confirmation process would not further the provisions of the Internal Revenue Code nor would it foster the ultimate goal of achieving a confirmed plan. The reasoning of 1900 M Restaurant Associates, Inc., BC-DC D.C., 2005-1 USTC ¶50,313, was adopted.
W. Uzialko, BC-DC Pa., 2006-1 USTC ¶50,297.
The District Court affirmed a Bankruptcy Court order requiring the IRS to consider an offer in compromise made by an individual in bankruptcy. The Bankruptcy Court had jurisdiction to make such an order under 11 U.S.C. §105, which states that a bankruptcy court can issue any order necessary to carry out the provisions of the Bankruptcy Code.
W.K. Holmes, DC Ga., 2005-1 USTC ¶50,230.
The IRS was ordered to process and consider an offer in compromise submitted by a debtor despite the agency's published policy of not considering offers in compromise from taxpayers who have filed for bankruptcy. The IRS position of not accepting less than what is required to be paid by a Chapter 13 reorganization plan, as set forth in Rev. Proc. 2003-71, was not required by the Tax Code or Treasury Regulations and did not carry the force and effect of law. Also, the IRS determination not to entertain offers in compromise from those in bankruptcy was not exempt from judicial review as an "agency action."
C. Peterson, BC-DC Neb., 2005-1 USTC ¶50,142, 317 BR 532.
A federal district court upheld a bankruptcy court order compelling the IRS to consider an individual debtor's offer in compromise. The bankruptcy court properly reasoned that the IRS could not dismiss the debtor's offer without processing and considering it, as the IRS does with non-debtor offers. The court reasoned that the offer was not submitted as a request for a discharge of taxes, but rather as a reflection of what the debtor was able to pay. The IRS's policy of mechanically disregarding the debtor's offer in compromise did not allow a "fresh start", as generally promoted by the Bankruptcy laws. Moreover, the rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors. The court rejected the government's claim that the order exceeded the bankruptcy court's jurisdiction pursuant to Bankruptcy Code sections 1129(a)(9) and 1129(a)(7). It was determined that Congress only intended to bar consideration of offers during Chapter 11 proceedings where a debtor did not agree to different treatment of his claim. Finally, the court was not persuaded that the order violated the Anti-Injunction Act.
R.H. Macher, DC Va., 2004-1 USTC ¶50,114, aff'g BC-DC Va., 2003-2 USTC ¶50,537.
The IRS has announced its nonacquiescence with respect to In re Macher, in which a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.
Nonacquiescence Announcement, I.R.B. 2004-32, August 9, 2004.
The Chief Counsel has recommended nonacquiescence with respect to In re Macher. In Macher a federal district court upheld a bankruptcy court's order compelling the IRS to consider an individual debtor's offer in compromise. The district court found that the IRS's policy of mechanically rejecting a debtor's offer in compromise did not allow the "fresh start," generally promoted by the bankruptcy laws. The district court also found that the IRS's rejection of such offers contradicted the IRS's general practice of being flexible in negotiating with debtors.
AOD 2004-03, August 5, 2004.
An individual failed to prove that he entered into a contract with the IRS to release a federal tax lien on his real property. Since an IRS agent lacked statutory authority to release the lien prior to the taxpayer's discharge in bankruptcy, he could not accept the taxpayer's offer to release the lien for payment and, thus, there was no mutual assent to a settlement agreement. Moreover, even if a contract had been formed, the existence of a material misrepresentation on the part of the taxpayer would have made the contract voidable.
G.J. Buesing, FedCl, 2000-2 USTC ¶50,724, 228 FSupp2d 908.
An IRS policy not to consider offers in compromise from taxpayers who had filed for bankruptcy was impermissibly discriminatory because it was based solely on the bankruptcy status of the taxpayer and not on the merits of the offer. Failure to consider offers in compromise made by bankruptcy debtors denied the debtors access to procedures set forth in Code Sec. 7122 that were available to all other taxpayers. Further, investigation of offers in compromise did not violate the automatic stay. It was also irrelevant that a bankruptcy filing might transfer the IRS's authority to accept a compromise offer to the Department of Justice. Therefore, married taxpayers who had filed for bankruptcy were entitled to have their offer in compromise considered by the IRS under the same standards as non-debtor taxpayers.
G.E. Chapman, BC-DC W.Va., 99-2 USTC ¶50,690.
D.A. Mills, BC-DC W.Va., 2000-1 USTC ¶50,103, 240 BR 689.
The IRS's rejection of married taxpayers' two offers-in-compromise with respect to both income and employment taxes was not an abuse of discretion. The taxpayers had already filed for bankruptcy when they submitted their first offer-in-compromise (OIC) and the Appeals officer rejected the offer because it was less than what the IRS expected to receive from the bankruptcy distribution and because accepting the offer would risk, if not extinguish, all claims the IRS had to the bankruptcy estate's assets. The IRS also did not abuse its discretion when rejecting the taxpayers' second OIC with respect to the husband's employment tax liabilities because the taxpayers' financial situation had improved by the time the second OIC was submitted and the IRS determined that the taxpayers could pay their liabilities in their entirety. In addition, the taxpayers did not present any argument or evidence to suggest that the rejection of the second OIC was an abuse of discretion.
C.E. Salazar, 95 TCM 1149, Dec. 57,342(M) , TC Memo. 2008-38.
The IRS did not abuse its discretion in rejecting a taxpayer's offer-in-compromise of his outstanding tax liabilities. In evaluating his reasonable collection potential, the taxpayer argued that the IRS failed to make an allowance for his basis living expenses greater than provided in published guidance and that the IRS failed to take into consideration his option to file for bankruptcy and potentially discharge some of the tax liabilities. However, the taxpayer had not disclosed any special circumstances that would warrant allowing him a standard of living more lavish that the standard for the area where he lived. The evidence also indicated that the IRS did consider the possibility that the taxpayer might file for bankruptcy; however, in light of the changes to the bankruptcy law, the IRS believed that the taxpayer would not be able to avoid paying the total tax liability by filing for bankruptcy.
C. Klein, 94 TCM 423, Dec. 57,156(M), TC Memo. 2007-325.
The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the standards will be January 1, 2008. IRS News Release IR-2007-163 , October 1, 2007.
[ Code Sec. 7122]
Delinquent tax liability: Allowable living standards: Expenses. --
The IRS has issued the 2007 allowable living expense standards. Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. The standards are effective October 1, 2007. For bankruptcy purposes, the effective date for the new standards will be January 1, 2008.
The Internal Revenue Service issued the 2007 allowable living expense standards.
Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. For purposes of federal tax administration the standards are effective Oct. 1, 2007.
This year the standards have been redesigned to incorporate:
a new category for out of pocket health care expenses
the elimination of income ranges for national standards for food, clothing and other items
a nationwide set of tables for national standard expenses, eliminating separate tables for Alaska and Hawaii
an expanded number of household categories for housing and utilities
an allowance for cell phone costs in housing and utilities
equal allowances for first and second vehicles under transportation expenses
fewer Metropolitan Statistical Areas for vehicle operating costs
a separate nationwide public transportation allowance
The Allowable Living Expense standards rely on data from the Bureau of Labor Statistics, the Medical Expense Panel Survey and other governmental surveys of actual consumer expenditures and provide a basis for allowances. The IRS adjusts survey data for inflation according to the Consumer Price Index.
Expense information for use in bankruptcy calculations can be found on the Department of Justice U.S Trustee Program Web site. For bankruptcy purposes, the effective date for the new standards will be Jan. 1, 2008.
IRS News Release, IR-2007-163, October 1, 2007.