The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Lisa Starczewski, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
In Bennett v. Comr.,1 the IRS rejected a taxpayer's offer in compromise in spite of the fact that the amount offered was ten times the amount that could “reasonably” be collected at the time. Instead, the IRS placed a portion of the debt into a “currently not collectible” status. The IRS did this in order to wait and see whether the taxpayer was able to pay more in the future. The issue presented was whether this amounted to an abuse of discretion.
Generally, tax debts are settled in one of the three following ways: (1) the Commissioner allows a taxpayer to pay the debt over time through the use of an installment agreement; (2) the Commissioner declares the debt “currently not collectible” and takes no collection action until and unless the taxpayer's finances improve; or (3) the Commissioner accepts a taxpayer's offer to compromise for less than the full debt owed.
When determining how to handle a debt owed by a taxpayer, the Commissioner must treat similarly situated taxpayers consistently and should analyze the specific facts and circumstances of each case. The regulations provide that “[n]o offer to compromise may be rejected solely on the basis of the amount of the offer without evaluating that offer under the provisions of this section and the Secretary's policies and procedures regarding the compromise of cases.”2
In addition, IRM 126.96.36.199(6) (9-23-08) states that offers 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.”
In this particular case, the taxpayer had failed to file returns for five years (1997 - 2001). The taxpayer eventually submitted an offer in compromise of $14,908. The IRS's final offer was $33,484.81. The taxpayer submitted a financial update showing that her income had dropped to an average of $4,093 in the last seven months while her monthly expenses averaged $4,777. The Commissioner rejected her offer in compromise and labeled a portion of her debt “currently not collectible.” Based on this determination, the Commissioner sent her a notice of determination stating that he would indefinitely suspend his collection activities for all years pending an improvement in the taxpayer's finances.
The taxpayer argued that because her offer of $14,908.81 exceeded her $1,468.81 collection potential, it was in the government's best interest to accept the offer.
The Tax Court upheld the IRS's determination that the taxpayer's financial situation may improve in future years. The court found no error in the Commissioner's conclusion that the taxpayer had several more years of earning capability and that her business had potential to be more successful in the future. The court noted that the Commissioner had prepared an “exhaustive narrative” supporting his position.
Of course, it didn't help that the taxpayer had failed to file returns for several years, filed returns with amounts owed without including payments, and made several misstatements regarding her payments along the way.
The moral of the story seems to be this - the IRS is not going to allow taxpayers to walk away from legitimate tax liabilities by claiming not to be able to afford the payment if there is a legitimate basis on which to believe that better days are ahead. When the money comes, the IRS will be there - with its hand out.
For more information, in the Tax Management Portfolios, see Mather and Weisman, 638 T.M., Federal Tax Collection Procedure -- Defensive Measures, and in Tax Practice Series, see ¶3870, Collection of Tax.
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