Procedure & Administration
The Tax Court held that the IRS had abused its discretion by closing a taxpayer’s case one day after a deadline passed for him to furnish certain documents related to his proposed offer-in-compromise.
Background
Thomas Szekely is a self-employed engineer. He filed income tax returns for 2006, 2007, 2008, 2009, and 2010 reporting his tax liability for each year. However, he failed to make the required estimated tax payments for these years, and he did not remit with any of his returns the balance of tax due. He also had unsatisfied tax liabilities stemming from the 2004 and 2005 tax years. After filing his 2006–10 returns, he paid his 2004 and 2005 tax debts, and he met his quarterly estimated tax obligations for 2011 as he incurred them. Unable to pay the rest of his outstanding tax liability, Szekely sought, with the assistance of the Taxpayer Advocate Service, to negotiate a settlement with the IRS, but he and the IRS were unable to reach an agreement.
On Sept. 2, 2011, the IRS filed a notice of federal tax lien against Szekely’s property and rights to property to assist in the collection of his $64,541 tax debt for tax years 2006–10. On Sept. 8, 2011, the IRS mailed Szekely notice of this filing, which informed him of his right to request a Collection Due Process (CDP) hearing. He timely submitted a request for a CDP hearing.
Four months passed before Szekely received any response from the IRS to his request for a CDP hearing. Finally, by letter dated Feb. 3, 2012, a settlement officer (SO) from the IRS Appeals office acknowledged receipt of his hearing request and notified him that she had scheduled a telephone CDP hearing for Feb. 23, 2012. In the letter, the SO informed Szekely that, if he wished her to consider an offer-in-compromise (OIC) or other collection alternative, he should submit, before the scheduled CDP hearing, a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, together with supporting documentation and three months of bank statements. The letter made clear that she could not consider collection alternatives without receiving these documents. The SO gave Szekely 14 days from the date of her letter to provide the required information. He complied with the SO’s request and submitted all of the required documentation by letter dated Feb. 12, 2012.
On Feb. 23, 2012, Szekely and the SO had the telephone CDP hearing. During that call, Szekely did not dispute the propriety of the lien notice filing, but he reiterated his desire to enter into a compromise agreement with the IRS to reduce his tax liabilities. The SO informed Szekely that he was required to complete a Form 656, Offer in Compromise, and another Form 433-A—this time, Form 433-A (OIC)—before she could consider a collection alternative. She said that she would mail him the required forms and instructions.
On Feb. 28, 2012, the SO sent Szekely a follow-up letter with the promised IRS forms. This letter asked him to complete and submit the forms, with supporting documentation and the required payments (an OIC application fee and the initial offer payment), by March 13, 2012. Unlike the Feb. 3 letter, the Feb. 28 letter did not warn Szekely of any negative consequences if he failed to submit all of the required information by March 13. It is unclear when Szekely received this letter, though he did not deny that he had received it before March 13. He did not communicate with the SO between the date he received the letter and March 13. Szekely testified that if the SO had informed him that March 13 was an absolute cutoff date, he would have called her to request additional time to submit the requested information.
On March 14, one day after the March 13 response date, the SO concluded that the filing of the notice of federal tax lien should be sustained and forwarded the case to her manager for approval. One week later, on March 21, the IRS sent Szekely a notice of determination. It informed Szekely that the IRS had sustained the filing of the lien notice and that it could not consider collection alternatives because he had not supplied the forms the SO had requested. On March 24, before receiving the notice of determination, Szekely mailed to the SO the requested Form 656, updated financial information intended to supplement the Form 433-A that he had submitted on Feb. 12, a check for $150 representing the OIC application fee, and a $1,600 check representing his initial offer payment.
Almost six months later, by letter dated Sept. 5, 2013, the IRS informed Szekely that it was unable to process the OIC submitted on March 24. The reason the IRS gave was that he had failed to provide a Form 433-A (OIC) as requested. The IRS accordingly closed its file on Szekely’s OIC request.
The Tax Court’s Decision
The Tax Court held that the IRS had abused its discretion in not considering Szekely’s offer-in-compromise, asserting the IRS had not treated Szekely in a fair and rational manner. Therefore, it remanded Szekely’s case to the IRS Appeals office for a supplemental CDP hearing to consider his OIC.
The Tax Court explained that in a bare technical sense, the IRS had not abused its discretion. The SO had given Szekely until March 13 to submit the OIC, financial documents, and required initial payment. Since the OIC and supporting documentation had not arrived by March 14, when the SO closed the file, or by March 21, when the IRS mailed the notice of determination, the IRS on those dates had before it no basis for compromising Szekely’s tax liabilities and thus no basis for disturbing the notice of federal tax lien.
Nonetheless, the Tax Court came to the conclusion that the IRS had abused its discretion because of the way it handled Szekely’s case. First, the Tax Court found that, although it has previously approved allowing a taxpayer only 14 days to submit documents, the short amount of time Szekely actually had under the deadline to complete a lengthy form and assemble the required documents was unreasonable. Thus, the IRS should have given Szekely a grace period for submitting the form and documents. Also, the “sluggishness” of the IRS in responding to Szekely’s CDP hearing request and the “alacrity” with which it concluded his case should be closed, suggested to the court that the IRS had applied an unacceptable double standard.
In addition, the Tax Court stated, in exercising his or her discretion, an SO should take into consideration the entire context of the case. Other than missing the deadline for submitting the documents at issue on time, Szekely had manifested timeliness and good faith in all his dealings with the IRS during 2011–12, and the court asserted that the SO should not have assumed immediately after the deadline passed that Szekely was giving up on his efforts to obtain an OIC.
The court also suggested that the IRS should have attempted to contact Szekely to find out if he needed more time to provide the requested documents. Finally, the Tax Court found that the IRS’s haste in closing the taxpayer’s file prevented it from considering the centerpiece of the case, the taxpayer’s OIC. The court stated that the IRS’s reason for denying the OIC, that the taxpayer had not submitted Form 433-A (OIC), instead submitting information to supplement the Form 433-A he had provided earlier, was questionable.
Reflections
The Tax Court did Szekely a favor by sending his case back to IRS Appeals when strict adherence to its precedent did not require it to do so. Although it is not entirely clear from the facts presented in the Tax Court’s opinion, it seems likely that if the IRS actually reviews Szekely’s offer-in-compromise, he may be entitled to relief.
Szekely, T.C. Memo. 2013-227
