O’Donnell v. Commissioner
T.C. Memo. 2021-134

On November 30, 2021, the Tax Court issued a Memorandum Opinion in the case of O’Donnell v. Commissioner (T.C. Memo. 2021-134). The primary issue presented in O’Donnell was whether the settlement officer abused his discretion in sustaining the collection action against a taxpayer who had a “blatant disregard for voluntary compliance.”

Background to O’Donnell v. Commissioner

Let me begin by saying that James O’Donnell is not a paragon of tax compliance.

According to Judge Lauber, he “failed to comply with his Federal income tax obligations for a very long time.” For two decades (if not longer) he failed to file returns and failed to pay the tax shown on substitutes for return (SFRs) that the IRS prepared for him, including in 2006, 2010, 2011, 2013, and 2014. The IRS for those years assessed deficiencies, additions to tax, and interest totaling more than $430,000. His outstanding liabilities for all open years exceeded $2 million in May of 2016, when he submitted an offer-in-compromise to the IRS for $280,000.

DelinquentThe OIC processing unit reviewed the petitioner’s delinquent returns and account transcripts, the OIC unit ascertained that he had not made required estimated tax payments for 2016 or verified that his tax withholdings or estimated tax payments for 2017 were sufficient. In October 2017, while his OIC remained under review, the IRS sent the petitioner a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. The NFTL covered 2006, 2010, 2011, 2013, and 2014. The petitioner timely requested a CDP hearing, asserting that “[i]t is premature to take collection action” and urging the IRS to accept his previously submitted offer. Nine months later the IRS filed an NFTL for 2012.

In March 2018, the OIC unit rejected petitioner’s offer, concluding that acceptance of his offer would “not be in the best interest of the Government.” The OIC unit advised him that he could appeal the rejection to the IRS Office of Appeals, which he did in April 2018.

Ultimately, Appeals sustained the OIC unit’s rejection of the petitioner’s offer. While determining that his reasonable collection potential ($286,744) was close to the amount offered ($280,000), the Appeals Office concluded that acceptance of his offer was not in the IRS’s best interest given the petitioner’s history of “blatant disregard for voluntary compliance.” Because offer acceptance reports are available to the public under IRC § 6103(k)(1), Appeals concluded that acceptance of petitioner’s OIC would “diminish future voluntary compliance.”

In August 2018, the petitioner timely petitioned the Tax Court for review, challenging the NFTL for 2006, 2010, 2011, 2012, 2013, and 2014. The petitioner alleged in his petition that the IRS improperly denied his OIC. He did not dispute his underlying liability for any year.

Standard of Review

Because the petitioner did not challenge his underlying tax liabilities at the CDP hearing or in his petition, the Tax Court’s review is for abuse of discretion, which exists when a determination is arbitrary, capricious, or without sound basis in fact or law.[1]

T.C. Memo. 2021-134Abuse of Discretion

In deciding whether the SO abused his discretion in sustaining the collection action, the Tax Court considers whether he:

  1. Properly verified that the requirements of applicable law or administrative procedure have been met;
  2. Considered any relevant issues petitioner raised, and
  3. Considered whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the petitioner that any collection action be no more intrusive than necessary.[2]

The Tax Court’s determined that the SO properly discharged all of his responsibilities under IRC § 6330(c).

IRC § 7122(a) authorizes the IRS to compromise an outstanding tax liability. The statute makes clear that exercise of this authority is discretionary. Possible grounds for compromise include doubt as to collectibility, the ground petitioner urged.[3] The IRS may compromise a tax liability on this basis where the taxpayer’s assets and income render full collection unlikely.[4]

The Tax Court neither independently assesses the reasonableness of a taxpayer’s proposal, nor does it substitute its judgment for the SO’s as to the acceptability of any particular offer.[5] Rather, the Tax Court’s review is limited to ascertaining whether the decision to reject the taxpayer’s offer was arbitrary, capricious, or without sound basis in fact or law.[6]

Although the IRS’ general policy is to accept an OIC that reflects the taxpayer’s “reasonable collection potential,” this is not an ironclad rule. The Internal Revenue Manual (IRM) provides (and has long provided) that the IRS may reject an OIC if acceptance would not be in the best interest of the Government.[7] Because reports of accepted OICs are publicly available,[8] the IRS may reject an OIC if it determines that the “public reaction to the acceptance of the offer could be so negative as to diminish future voluntary compliance.”[9]

Long TimeFor two decades (if not longer), the petitioner failed to file returns and failed to pay the tax shown on SFRs that the IRS prepared for him. During this period, he was evidently a successful practitioner in the insurance and finance business. As of 2016 his outstanding liabilities exceeded $2 million, and he offered to pay only a small fraction of these liabilities. Because of his lengthy history of ignoring his tax obligations, the Appeals Office determined that acceptance of his offer could be viewed as condoning his “blatant disregard for voluntary compliance” and that negative public reaction to acceptance of his offer could lead to “diminish[ed] future voluntary compliance” by other taxpayers.

The Tax Court has repeatedly held that an SO does not abuse his discretion when he adheres to published IRM collection guidelines.[10] Considering petitioner’s history of noncompliance and the magnitude of his outstanding liabilities, rejection of his offer was well within the guidelines set forth in the IRM. Therefore, the Tax Court concluded that the Appeals Office did not act arbitrarily or capriciously in rejecting his offer.[11]

(T.C. Memo. 2021-134) O’Donnell v. Commissioner

  1. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
  2. IRC § 6330(c)(3).
  3. See Treas. Reg. § 301.7122-1.
  4. Treas. Reg. § 301.7122-1(b)(2).
  5. See, e.g., Johnson v. Commissioner, 136 T.C. 475, 488 (2011), aff’d, 502 F. App’x 1 (D.C. Cir. 2013).
  6. Murphy, 125 T.C. at 320.
  7. See IRM pt.; cf. IRM pt. “[O]ffers may be rejected on the basis of public policy if acceptance might in any way be detrimental to the interests of fair tax administration, even though it is shown conclusively that the amount offered is greater than could be collected by any other means.” See IRM pt.
  8. See IRC § 6103(k)(1).
  9. See IRM pt.
  10. See Eichler v. Commissioner, 143 T.C. 30, 39 (2014); Savedoff v. Commissioner, T.C. Memo. 2020-125; Brown v. Commissioner, T.C. Memo. 2019-157.
  11. See Hauptman v. Commissioner, 831 F.3d 950, 954 (8th Cir. 2016) (holding that the taxpayer’s history of noncompliance supplied an adequate basis to reject his OIC), aff’g T.C. Memo. 2014-214.


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