Tax Lawyer's Blog

Leslie B. Bennett v. Commissioner of Internal Revenue - This case demonstrates how difficult it can be to get the IRS to accept an Offer in Compromise.

The Petitioner, Ms. Bennett, owed $110,000.00 to the IRS. She filed an Offer in Compromise offering $15,000.00 in complete and total settlement of the debt.

The IRS rejected the offer even though it conceded during settlement negotiations and at trial that the amount offered was,

 . . . more than ten times what the [IRS itself] calculated to be the amount the taxpayer could reasonably pay.

The taxpayer filed a Tax Court petition alleging that the IRS abused it’s discretion in rejecting the Offer. 

Judge Holmes noted that the government gave two reasons for it’s rejection of the Offer:

The Commissioner’s notice of determination cited Internal Revenue Manual (IRM) Part 5.8.7.6(5) (Sept. 1, 2005), which states that a “rejection may also be based on a determination that acceptance of the [offer] is not in the ‘best interest of the government’ per policy statement P-5-100.” The Commissioner also cited language from the IRM authorizing rejection when a taxpayer has an egregious history of noncompliance and a probable likelihood of noncompliance in the future.

In addition, the IRS testified that it chose to reject the Offer because there were several years left before the statute of limitations on collection would expire and because the taxpayer’s business showed promise of future profitability.

The Court noted that the Internal Revenue Manual states that,

[O]ffers in compromise are to be evaluated in terms of what is “in the ‘best interest of the government’ per policy statement P-5-100.” That policy, in turn states the Commissioner will accept offers when “it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential.”

The taxpayer argued that the policy statement standard (i.e. unlikelihood of full payment and amount offered reasonably reflects collection potential) if met requires a finding that the offer is in the best interest of the government. 

The Court rejected this argument and stated, 

Policy statement P-5-100 is not a stand-alone statement, however, but only part of another section of the Internal Revenue Manual: IRM part 5.8.1.1.3(1). IRM part 5.8.1.1.3(3) states: “A Doubt as to Collectibility (DATC) offer amount must equal or exceed a taxpayers (sic) reasonable collection potential (RCP) in order to be considered for acceptance.” (Emphasis Added.)

This language, contrary to Bennett’s contention, doesn’t require that the Commissioner accept an offer in compromise whenever the amount exceeds the collection potential. Rather, it only establishes grounds for winning consideration.

The Court noted the IRS based it’s denial of the taxpayer’s offer in part on the taxpayer’s historically poor record of compliance with the tax laws.

If a poor record of compliance with the federal tax laws is reason enough to reject an otherwise reasonable Offer, the IRS can reject anyone’s Offer at any time. If you are filing an Offer in Compromise, by definition, it is because you have not complied with the federal tax laws.

I regularly tell my clients that Offer’s in Compromise based on doubt as to collectibility are a crap shoot. You can meet all of the suggested requirements and the IRS can still legally reject your Offer merely because it feels it’s not in it’s best interests. 

Of course, by the time you find out that the Offer is not in the government’s best interest you have voluntarily given it all of the information it needs to seize your assets and have also given them at least an additional year (the filing of an Offer extends the statute of limitations) to collect the tax.

Moral of the Story:  Never file an Offer in Compromise without first consulting a qualified tax attorney or CPA experienced in such matters. And whatever you do, don’t believe the myriad psuedo-tax professionals out there who tell you they can get your tax debt settled for “pennies on the dollar.” 

Related Posts:

Bad Economy Means Good Time to File Offer in Compromise

Offers in Compromise: Calculating Reasonable Collection Potential

“Pennies on the Dollar?” . . . Buyer Beware

J.K. Harris Settles Fraud Charges with 18 States!

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