On May 20, 2021, the Tax Court issued a Memorandum Opinion in the case of Mason v. Commissioner (T.C. Memo. 2021-64). The primary issue presented in Mason was whether Appeals abused its discretion by reviewing the Centralized Unit’s decision for abuse of discretion instead of reviewing the Masons’ offer on its merits.
Background: A Lesson in Bureaucracy
Victor and Katherine Mason owed back taxes. They didn’t deny it, but they said they didn’t have the money to pay. They submitted an offer to compromise the debt, and the IRS routed it to the part of the bureaucracy–the Centralized Offer-In-Compromise Unit–that reviews these offers. But another part of the IRS began sending collection notices to the Masons. The Masons asked for a hearing with the IRS Appeals Office.
IRS Appeals is supposed to consider alternatives to forced collection at these hearings, including offers like the one that the Masons wanted. What happened then is that the Centralized Unit didn’t consider the Masons’ offer, but it returned it to them. IRS Appeals didn’t consider the merits of their offer either, but instead reviewed the decision by the Centralized Unit to return it.
As Judge Holmes so eloquently puts it, the Tax Court has “had some similar cases, but never one quite like this.”
Rather Aggressive Collection
The IRS began filing liens against the Masons’ property at the end of 2014 and the beginning of 2015 after the Masons stopped paying under their installment agreement. In May 2015, a Revenue Officer (RO) made a house (field) call to the Masons’ home in Minnesota, so that she “could advise BOTH taxpayers” of the equity in their home. At the time of this field call, Mrs. Mason had filed a Form 2848 (Power of Attorney and Declaration of Representative) with the IRS authorizing her attorney to represent her. Mr. Mason had not. Although the RO stated that she was only trying to make contact with just Mr. Mason, she ended up meeting with both of the Masons as Mrs. Mason “happened to be home when the field call was made.”
The RO told the Masons that the equity in their home was enough to cover their joint liabilities in full, plus some of the separate liabilities, and that “they would need to sell the home to pay off taxes.” She also told the Masons that if they were not willing to place the house on the market, the IRS would seize the home as the next action.
The RO, however, apparently “didn’t mention” that the IRS cannot seize a taxpayer’s residence without first getting the approval of a Federal District Court judge. See IRC § 6334(e)(1). Further, the IRM requires that the area director and area counsel for the IRS also give their approval. IRM pt. 188.8.131.52.5.
And then we have a little nugget of gold from Briefly Taxing’s personal tax court hero, Judge Holmes:
Following this nice-little-home-you-got-here-shame-if-something-happened-to-it field call, the RO [finally] contacted the Masons’ attorney to arrange another meeting with the Masons—this time with counsel present—at some later date.
The CDP Appeal and Offer-in-Compromise
After receiving the IRS’s care package containing a notice of intent to levy, the Masons quickly filed a CDP appeal and offered to settle all of their tax debts for $4,800. (Their liability was well over $100,000.) In support of their OIC, the Masons cited both “Doubt as to Collectibility” and “Exceptional Circumstances (Effective Tax Administration)” as their reasons for the offer. The Masons argued that while they had “substantial home equity,” this equity was their “functional retirement savings that they will need to tap into in the coming years” because of Mr. Mason’s current, and Mrs. Mason’s fast-approaching, retirement. The Masons certified that they had “filed all required tax returns” up to the date the offer was made. The Centralized Offer-In-Compromise unit received the OIC on May 25, 2015. The RO received the CDP request on May 26, 2015.
When the RO “caught wind that the Masons had sent an offer to the Centralized Unit,” she hastily drafted a Form 657 (Offer in Compromise Revenue Officer Report), in which she concluded that the Masons submitted their offer “to delay collection action,” and she further indicated that the offer appeared “to have been submitted solely to delay collection.” This smells decidedly reminiscent of Karen the Asshat SO, but we digress…
It should be noted, if nothing else for posterity’s sake, that the RO did note that Mrs. Mason had “attempted to secure financing” to borrow against the Masons’ home but “was denied at three different banks.” The report was approved by RO Jacobson’s manager and then sent to the Centralized Unit. Asshats, the whole lot of ‘em.
Not unsurprisingly, the Centralized Unit denied the OIC finding that it was submitted solely to hinder collection.
Appeals Screws the Pooch
Less than three weeks later, Appeals (or, as Judge Holmes notes, “a different part of the IRS”) received their request for a CDP hearing. It was assigned to a Settlement Officer (SO) on June 30, 2015. The Masons had already tried to reach the SO, “or whoever would be assigned to their case,” before this time to discuss their returned offer. The SO contacted the Masons on July 10, and they communicated back and forth through August.
The SO shared the Centralized Unit’s reasoning for its return of the Masons’ OIC, and she explained why returning the OIC was proper under the IRM. For their part, the Masons again described their financial situation and continued to question how their OIC could have been returned as “solely to delay” collection action. They kept asking for someone (literally, anyone) to consider their OIC on the merits. On July 21, Mrs. Mason received a second notice of intent to levy from the IRS, this one regarding her personal and trust fund liabilities. She again asked for a CDP hearing. But, as Judge Holmes observes-
All the while, the IRS began trying to take the Masons’ property.
The record shows some confusion among IRS employees about whether levy was appropriate—and for which years and liabilities—given the Masons’ pending OIC and CDP hearing. Well, at least someone at the IRS questioned this bureaucratic cluster$%&… The SO contacted the Masons again on August 17, and she explained that the offer’s return without consideration of its merits was appropriate because the offer did not indicate any “illness or special circumstances that would warrant the equity in assets not being considered.”
On September 8, the SO held a hearing with the Masons on both related CDP requests. During the hearing, the Masons made clear to the SO that they wanted her to consider the merits of the OIC that they had sent to the Centralized Unit. The SO, however, did not do so, but again reviewed the IRM and told the Masons that the return of their OIC was proper and that their circumstances had been considered. Judge Holmes observes that the SO possessed all necessary financial documentation (less than three months old) to review the OIC on its merits. Nevertheless, SO Asshat failed to do so.
On March 3, 2016, the Masons received notices of determination under IRC § 6330. The SO “rounded out her notices” by reminding the Masons that they only wanted Appeals to consider their original offer “which had been returned by collection” and had offered no other collection alternatives.
The Law, According to Judge Holmes (and, well, the Code)
When someone fails to pay tax, the IRS will assess the liability against her and send a notice and demand letter. IRC § 6201; IRC § 6303(a). After that, things only get worse for the taxpayer. Her tax liability will become a lien in favor of the IRS against all of her property, see IRC § 6321, and then she’ll receive a notice of intent to levy (a politely phrased letter that is nevertheless a threat to seize property to collect the tax owed). For more than twenty years, these threats have been accompanied by notices that a delinquent taxpayer is entitled to an informal administrative hearing, called a CDP hearing. IRC § 6330(a); IRC § 6331(d).
CDP was created as part of a broader effort to address the concern that “taxpayers who get caught in the IRS hall of mirrors ha[d] no place to turn that [wa]s truly independent and structured to represent their concerns.” See Lewis v. Commissioner, 128 T.C. 48, 60 (2007). To help break those mirrors, a CDP hearing must be conducted by an “impartial officer” who “has had no prior involvement in the determination and assessment of the underlying tax liability that is the subject of the hearing.” Cox v. Commissioner, 126 T.C. 237, 251 (2006) (quoting Criner v. Commissioner, T.C. Memo. 2003-328, 2003 WL 22843085, at *8), rev’d, 514 F.3d 1119 (10th Cir. 2008). That officer may also “not engage in ex parte discussions of the strength and weakness of the issues of a case that would appear to compromise the Appeals officer’s independence.” Hoyle v. Commissioner, 136 T.C. 463, 470 (2011), supplementing 131 T.C. 197 (2008).
CDP is “more than just a rubber stamp for the Commissioner’s determinations.” Lewis, 128 T.C. at 60. Instead, it offers taxpayers the protection of a fresh look at the circumstances of their cases to ensure that the requirements of all applicable laws and procedures have been met, that the issues they raised have been considered and addressed, and that any proposed collection actions balance the government’s need for efficient collection of taxes with the taxpayer’s concern that collection be no more intrusive than necessary. See Cox, 126 T.C. at 248 (citing IRC § 6330(c)(3)). In a footnoted, Judge Holmes puts the proverbial dot on this particular “i” (which, if you didn’t know, is called a “tittle”).
Driving home this point is IRS Appeals’ recent name change to “Independent Office of Appeals.”
Nevertheless, the IRS had reached the “we’re taking your stuff” (Judge Holmes’ words, not ours) stage with the Masons, and what happened next is what led to the unusual circumstances of this case.
Taxpayers usually ask for a CDP hearing on a form that allows them to check a box if they want an alternative to forced collection, such as an installment agreement or an OIC. The record shows that the IRS put the Masons in fear of losing their home; they responded quickly with an offer sent directly to the IRS, but outside the CDP process. Just days later they asked the IRS agent who was in charge of giving them a CDP hearing to also consider their offer. Nevertheless, neither part of the IRS considered the offer on its merits. This, it turns out, is somewhat of a “button” for the Tax Court.
The Code permits a taxpayer to make an OIC, and IRC § 7122(a) gives the IRS very wide discretion to compromise tax liabilities. IRC § 7122(c)(1); Treas. Reg. § 301.7122-1(c)(1). Indeed, the IRS has delegated decisions on whether to accept taxpayers’ offers to IRS employees, who are “supposed to follow regulations and policies” but who also have “a bit of discretion to tinker at the edges if they find special circumstances.” Brombach v. Commissioner, T.C. Memo. 2012-265, at *5; see also Treas. Reg. § 301.7122-1(f)(3).
The IRS recognizes three broad classes of OICs:
- those based on doubt as to liability;
- those based on doubt as to collectibility, and
- (a catchall third category) those made for the sake of effective tax administration.
The IRS analyzes doubt-as-to-collectibility OICs by calculating how much it thinks a taxpayer can pay, what it calls her RCP—reasonable collection potential. This calculation is fairly complicated, but its goal is easy to understand: It’s the IRS’s best estimate of what it could get by seizing and selling a taxpayer’s property and then garnishing her income. See IRM pt. 184.108.40.206.1. The IRS generally will not accept an OIC that is less than the RCP without proof of special circumstances. Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013); Rev. Proc. 2003-71, § 4.02(2).
An OIC made for the sake of effective tax administration requires the IRS to predict whether collection in full would create economic hardship for the taxpayer. See Treas. Reg. 301.7122-1(b)(3)(i), (iii). The regulation gives as an example of economic hardship a situation where, “[a]lthough taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.” Treas. Reg. 301.7122-1(c)(3)(i)(C).
If collection would not cause economic hardship, the IRS may still compromise a tax liability to promote effective tax administration when the taxpayer identifies compelling public policy or equity considerations. Treas. Reg. 301.7122-1(b)(3)(ii). The IRS will accept an OIC for these reasons if the taxpayer demonstrates that “exceptional circumstances” exist in her situation and meets three requirements:
- the taxpayer must have remained in compliance since incurring the liability and must not have an overall compliance history that weighs against compromise;
- the taxpayer must also show that she acted reasonably and responsibly in incurring the liability; and
- the Commissioner must determine that other taxpayers would view the compromise as fair and equitable.
Rejected Offers and Returned Offers
The IRS doesn’t consider all the OICs it receives the same way. See Treas. Reg. § 301.7122-1(d)(2), (g)(4). Some offers it rejects on their merits. A taxpayer may choose to appeal a rejection within the IRS. IRC § 7122(d)(3)(A) and (B).
There is, however, an important distinction to be drawn. A rejected offer is one that the IRS has actually considered. The IRS has another category of OICs that it returns. See IRC § 7122(d)(3), (g). When an OIC is returned, the IRS has not considered it on the merits because the Commissioner has found it to be “submitted solely to delay collection,” or because it is “otherwise non-processable,” or because the taxpayer failed to submit information that the IRS requested before it would consider the OIC. Treas. Reg. § 301.7122-1(d)(2). The regulations say that a decision to return an OIC is final and unappealable. “The return of the offer does not constitute a rejection of the offer for purposes of this provision and does not entitle the taxpayer to appeal the matter to Appeals.” Treas. Reg. § 301.7122-1(f)(5)(ii).
The IRM provides for one narrow exception to this rule. If an OIC is returned as “submitted solely to delay collection,” the taxpayer may “request for a review of the decision to return the offer with the immediate manager” of the employee who made the decision initially. IRM pt. 220.127.116.11. This review is informal and not provided for in any statute or regulation. Id. There is nothing in the record of these cases to show whether the Masons either asked for or got even this level of review.
OICs Submitted “Solely to Delay Collection”
The IRM cautions—presumably because the consequence is unappealability—that a “determination that an offer is submitted solely for the purpose of delaying collection should be apparent to an impartial observer” and that the team manager at the Centralized Unit must also independently determine that the return is appropriate. IRM pt. 18.104.22.168(1). The IRM also gives a couple helpful examples of when an OIC should be returned including (1) an OIC in which “[t]he taxpayer fails to address the issues or defects of the previously submitted offer” or (2) a second OIC not materially different from a previous one. IRM pt. 22.214.171.124.1(1), Ex. (2).
Judge Holmes observes that deciding to return an offer based on the fact that it was submitted “solely to delay collection “should place a high burden on the reviewing IRS employee to prove that there was…no other conceivable motive in submitting the offer—even given the IRS’s wide discretion in this area.”
As interesting to Judge Holmes (if not more so) was the Masons’ argument that (apart from such extreme examples)
the IRS’s reasoning is disingenuous, because the CDP process is aimed very deliberately to give most taxpayers an opportunity to delay collection by having the IRS take another look at how to collect tax debt or, in some cases, whether those debts are even owed.
The Interplay Between IRC § 6330 and IRC § 7122
The Tax Court generally lacks jurisdiction to review the IRS’s rejection or returns of OICs; thus, after a taxpayer exhausts her remedies within the IRS, that’s the end of the matter. Cf. Asemani v. IRS, 163 F. App’x 102, 105 (3d Cir. 2006). There is one exception. The Tax Court does have jurisdiction to review the IRS’s determination after a CDP hearing, and taxpayers can raise collection alternatives such as OICs at those hearings. IRC § 6330(c); Reed v. Commissioner, 141 T.C. 248, 254 (2013), supplemented by T.C. Memo. 2014-41.
The Code specifically tells a SO who conducts a CDP hearing to address any relevant issues the taxpayer raises. IRC § 6330(c)(2). This doesn’t mean that a taxpayer in a CDP hearing gets any different standard for the IRS’s consideration of the merits of her OIC—the settlement officer is governed by IRC § 7122 and its regulations just as much as the Centralized Unit is. See Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005). What it does mean, however, is that the Tax Court can review a determination of Appeals to reject an OIC on grounds that would have triggered a return if the OIC had been submitted outside the CDP hearing process—for example, OICs from taxpayers who don’t submit financial information after being asked to do so, Treas. Reg. § 301.7122-1(d)(2); cf. Loveland v. Commissioner, 151 T.C. 78, 88 (2018), or OICs from taxpayers who aren’t current with their filing obligations, Reed, 141 T.C. at 256-57.
The Masons are within this exception because they requested a CDP hearing just days after submitting their offer to the Centralized Unit. In their request for a hearing, and again at the hearing, they asked that the SO consider their offer. The SO, however, made clear in her notices of determination that she did not do so. As such, the Tax Court has jurisdiction to review this determination.
Where the SO “Tripped Up” on a “Threshold Question of Law”
Taxpayers have no right to appeal the return of an OIC. Reed, 141 T.C. at 255. However, the SO tripped on a threshold question of law. By researching the IRM on whether the Centralized Unit was correct in returning the Masons’ OIC, and then determining that it was, she was asking and answering a question that isn’t supposed to be the subject of a CDP hearing at all. She was also making a determination that we wouldn’t be able to review—when a settlement officer makes a decision on a precluded issue, that decision is not properly part of the CDP hearing. See Treas. Reg. § 301.6330-1(e)(3).
Judge Holmes, in a footnote, observes that the Tax Court “wants to be as clear as possible that this does not mean the Tax Court lacks jurisdiction to review a notice of determination that said such a thing.” In Reed, the Tax Court rejected the IRS’s arguments that it lacked jurisdiction to review the return of an OIC. It held, instead, that it is “fundamental” that the Tax Court has jurisdiction in collection matters if the IRS issues a determination notice and a taxpayer timely files a petition. Reed, 141 T.C. at 253.
IRC § 6330(c)(3)(B) requires the SO to take into consideration issues that a taxpayer raises, which IRC § 6330(c)(2)(A)(iii) specifically says include collection alternatives like an OIC. Unquestionably, the Masons raised the issue of an OIC, and SO Asshat acknowledged in the notices of determination that they wanted their “offer which was returned by Collection investigated as a collection alternative.”
Order of Submission Shouldn’t Matter
A taxpayer shouldn’t be deprived of her full CDP rights merely because she just so happened to first submit an OIC to the Centralized Unit and then also submit it within CDP.
Stale OICs and Current OICs
In Galloway v. Commissioner, T.C. Memo. 2021-24, the petitioner had submitted an OIC in 2017 that was rejected. He administratively appealed that rejection to Appeals, which then sustained the rejection. In 2018 the IRS began to try to collect the tax, and the petitioner asked for a CDP hearing. At the hearing he urged the SO to reconsider the old OIC that the IRS had already considered and rejected. The SO declined to do so. Critically, the SO gave the petitioner another opportunity to propose an OIC based on his current financial information, but the petitioner rejected the chance. The Tax Court found no abuse of discretion in not giving the taxpayer whose OIC had been administratively appealed and rejected, and which had also grown old, another chance to argue its merits. Id. at *11-*12.
So, what conclusions can be drawn from this “web of law?”
- The SO does not need to consider an outdated OIC that has been rejected or returned because the financial information that supported it is no longer current.
- A settlement officer is better off if she asks the taxpayer whether she wants to request collection alternatives as part of the CDP hearing.
- It’s not unusual for a taxpayer to make an OIC that’s incomplete or that lacks information to support it, but that doesn’t mean that the taxpayer hasn’t “raised” the issue of whether an OIC is an appropriate alternative to forced collection.
- Once an issue is “raised,” IRC § 6330 requires that the officer who’s conducting the hearing “consider” it. Reg. § 301.6330-1(e)(3).
- Proper consideration also means that a settlement officer should ask for more information if faced with a request for a collection alternative that needs additional information or documentation. See Uribe v. Commissioner, T.C. Memo. 2014-116, at *9 (holding that “this illustrates the importance of knowing a taxpayer’s ability to pay when evaluating whether he is eligible for a collection alternative”).
- When a taxpayer ultimately fails to provide the information needed to consider an OIC, it is not an abuse of discretion for a settlement officer to reject a collection alternative. See, e.g., Huntress v. Commissioner, T.C. Memo. 2009-161; Nelson v. Commissioner, T.C. Memo. 2009-108.
The Masons did make an offer that should have been considered on its merits by the SO. See Treas. Reg. § 301.6330-1(e)(3), Q&A-E1 (stating that Appeals will consider “any offers by the taxpayer for collection alternatives”). Not only were the CDP proceedings close in time to when the Masons made their offer to the Centralized Unit, but their offer was physically in front of SO Rush, and it was supported by financial information that was current by the IRS’s own standards. See IRM pt. 126.96.36.199(2) (financial data should be no more than 12 months old). The SO had the full offer packet, Form 656 and all, submitted by the Masons just days before they requested a CDP hearing.
The Masons argued special circumstances: retirement, lack of skills and education to find another job, and a gambling addiction…and they tried to borrow three times against their home so that they could pay down their tax liabilities. Whether or not these reasons would have helped the Masons prevail with the IRS is anyone’s guess, but they didn’t even make it into SO Asshat’s notices of determination or case records, because she simply did not independently review the Masons’ offer or their financial situation.
Another Critical Line
Judge Holmes ends the opinion with another very important, albeit buried observation:
If the SO felt that she was limited by a lack of information or outdated information, all she had to do was ask for it. See Treas. Reg. § 301.6330-1(e) (stating that “taxpayers will be expected to provide all relevant information requested by Appeals”); Uribe, at *8-*9; Lloyd v. Commissioner, T.C. Memo. 2008-15.
This puts the onus on Appeals to request information from the taxpayers before they reject the OIC (or any collection alternative, for that matter) for lack of information.
 Treas. Reg. § 301.7122-1(b).
 Treas. Reg. § 301.7122-1(b)(3)(ii), (c)(3)(ii); Bogart v. Commissioner, T.C. Memo. 2014-46, *10.Add to favorites