What Does the “Abuse of Discretion” Standard Really Mean for Tax Court Review of CDP Determinations?

With regard to the well-settled “abuse of discretion” standard the Tax Court utilizes in CDP cases, a secondary question arises, namely, the standard the court should use with respect to the subsidiary factual and legal determinations made by the IRS during the CDP process itself. The First Circuit recently addressed this question in a fairly coherent manner. In Dalton v. Comr., No. 11-2217 (1st Cir., 6/20/12), although concluding that the Tax Court properly found overall that the IRS had not abused its discretion in rejecting the taxpayers' offer in compromise, nevertheless determined that the Tax Court used an improper standard of review for the IRS's subsidiary determinations during the CDP process. Observing that Congress did not give the IRS the final say in the CDP process and that the limited scope of the CDP process often produced a “scant record,” the First Circuit opined that a court could not be expected to conduct the same level of judicial review that would follow a bench trial or a more formal agency proceeding. As such, the First Circuit concluded that judicial review was to ensure that the IRS's determinations, whether of fact or of law, were not arbitrary, and, therefore, a reviewing court should simply consider whether the factual and legal conclusions reached at a CDP hearing were reasonable, not whether they were correct.

-Kenneth S. Savell, J.D., LL.M (Tax)
IRS Practice and Procedure Group