IRS: Offer in Compromise

In Accounting & Finances, Business, Taxes on January 3, 2015 by Sufen Wang

You Can’t Judge an Offer in Compromise By Its Cover: Tax Court Decides IRS Must Review OIC Further
handshake_with_uncle_samA tax court recently took a hard line with the IRS when it came to the agency’s consideration (or lack of it) of an offer in compromise. A taxpayer can submit an offer in compromise if the IRS is seeking to collect an unpaid tax liability from them by lien or levy. The OIC allows the tax debt to be settled for less than the full amount owed. In this real life case, when Stacey and Timothy Bogart offered $10,000 as an OIC to promote effective tax administration, the IRS said, Nope.
handcuffsBut let’s backtrack. This all started when the bookkeeper for the Bogarts construction company embezzled $116,000 from 2006 to 2007. This stolen amount was obviously not reported on the couple’s income tax returns, and when the IRS discovered the discrepancy, there was trouble for the honest taxpayers. The agency assessed a tax deficiency of $69,309, not including interest. The bookkeeper got sent to the clink and was ordered to pay what he had stolen back to the Bogarts.
handmoneyExcept he didn’t give them a dime of the $116,000, which left the Bogarts in a bind. They did everything by the book and asked for a collection hearing, offering the $10,000 OIC to settle their 2006 and 2007 tax liabilities. This is when the IRS said nope to the offer, asserting that the couple didn’t have any economic hardship. But the Bogarts knew their rights as taxpayers: they petitioned the Tax Court for relief because the IRS doesn’t always have the last say in tax matters.
judgeOnce in the legal ring, the Bogarts entered a motion for summary judgment. Throwing a one-two punch, they argued that the IRS had to accept their ETA OIC as a matter of law under the circumstances, and if the summary judgment was denied, the IRS should be required to give their ETA OIC proper consideration, since it had failed to do so before. The IRS also entered a motion for summary judgment, and stuck to its rejection of the OIC as proper procedure.
So when does the IRS even have to consider an OIC? Well, there are three instances when the agency could compromise a tax liability:
1. When there is doubt concerning its existence or amount.
2. When its collectability is doubtful due to the taxpayer’s lack of assets or income.
3. When the compromise would promote effective tax administration.
All of these leave room for interpretation, but number 3 is where things get more than a little fuzzy. So let’s break it down again. There are two instances where the IRS could accept an ETA OIC:
3A. When full collection of the liability would bring the taxpayer down to economic rock bottom.
3B. When the taxpayer can identify compelling public policy or equity considerations to justify the compromise.
courtPoint 3B is where the IRS missed the mark. The court denied the IRS’ motion for summary judgment and also ruled that the IRS hadn’t given the ETA OIC all the consideration it deserved. The IRS didn’t consider whether the embezzlement was an exceptional circumstance under public policy or equity grounds. Also, going forward, the IRS will have to be more diligent about considering collection alternatives raised by taxpayers – instead of just sticking to the economic hardship script, as stats show that the agency tends to do.
bill (1)The Bogarts didn’t get a complete knockout, but definitely won the round. While the court rejected their motion for summary judgment, it held that the ETA OIC had not been fully considered and remanded it to the IRS to consider further. The Bogarts’ diligence and the court’s decision in their favor is a good example of why every taxpayer should understand their Taxpayer Bill of Rights, discussed in last week’s post.
Sufen Wang, M.S.Accountancy
Wang Solutions, Long Beach, CA (562) 856-0793
Editor: Hannah Huff, M.F.A. Creative Writing: Poetry, (626) 806-5805

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