Negotiation with collections officer is not administrative proceeding

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that the IRS abused its discretion by not considering the proposed offer in compromise, the proposed installment agreement, and the claim of economic hardship of the taxpayers.

Background

James Loveland is a retired boilermaker, and his wife, Tina, is a retired teacher. Fate has not been kind to the Lovelands in recent years. In the housing crisis, the couple lost their home to foreclosure. In addition, around that time, James was forced to quit working due to a heart condition and Tina was diagnosed with breast cancer. These events put the Lovelands in a precarious financial position and they quit paying their income taxes, leading to an outstanding federal tax liability of over $60,000 for the years 2011 through 2014.

In 2015, the IRS issued the Lovelands a notice of intent to levy. This prompted them to enter into negotiations with the IRS over their tax liability, and, as part of the negotiations, the Lovelands submitted an offer in compromise. Their submission included a completed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and they attached to it financial information including bank statements, pension and income documentation, and information about expenses and assets. The Lovelands argued in the OIC that their health problems and the foreclosure constituted special circumstances that limited their ability to pay.

The collections officer rejected the Lovelands' OIC, finding that the financial information the couple submitted indicated that acceptance of the OIC was not warranted. The Lovelands appealed the decision but withdrew the appeal so they could attempt to negotiate an installment agreement with the collections officer. The Lovelands agreed voluntarily to make payments of $800 per month, and they believed this constituted an accepted installment agreement.

While the talks over the installment agreement were progressing, the Lovelands also were attempting to get a loan that would be secured by property they owned, with the intent of using the proceeds from the loan to pay down their tax liability to under $50,000 so they would qualify for a streamlined installment agreement. However, on the day they submitted a loan refinancing application, the IRS placed a federal tax lien on the property, which caused the bank to refuse to make the loan.

As a result of the IRS's filing the lien on the property, the Lovelands requested a Sec. 6320 Collection Due Process (CDP) hearing. At the outset, the Appeals officer assigned to their case informed the Lovelands that for a collection alternative to be considered in the hearing, the couple would have to submit a completed Form 433-A with supporting documents. The Lovelands asked the IRS to consider the previously rejected OIC and also requested an installment agreement and relief due to economic hardship. They did not submit financial information beyond what they had provided with the previously rejected OIC.

The Appeals officer declined to review the OIC because the Lovelands had had a prior opportunity for a hearing. Although the couple had sent the officer a copy of their earlier Form 433-A, the officer, without reviewing the financial information they had previously provided, declined to review the proposed installment agreement and the claim of economic hardship because the Lovelands had not submitted the required financial information.

The Lovelands in response filed a petition in Tax Court, challenging the IRS's determination in the CDP hearing. The IRS filed a motion for summary judgment, arguing that it had not abused its discretion because the Lovelands had not submitted the Form 433-A and financial information requested by the IRS at the beginning of the CDP hearing process. The Lovelands in turn argued that they had provided the financial information when they earlier submitted the Form 433-A and supporting documents.

The Tax Court's decision

The Tax Court sided with the Lovelands and remanded their case to the IRS Appeals Office. The court held that the IRS had abused its discretion by failing to consider the Lovelands' proposed OIC, their proposed installment agreement, and their claim of economic hardship.

Offer in compromise: Under Sec. 6330(c)(4)(A)(i), an issue cannot be raised in a CDP hearing if it has been raised and considered in a previous CDP hearing or any other previous administrative or judicial proceeding. According to the Tax Court, unlike an issue related to an underlying liability, which can be raised if there was no prior opportunity to challenge the underlying liability, a collection alternative (here, the OIC) can be raised if it was not considered in a prior administrative or judicial proceeding. Thus, the question was not whether the Lovelands had a prior opportunity but whether there was a prior proceeding.

The court explained that while the Lovelands had a prior opportunity for a CDP hearing about their OIC, they did not take that opportunity. Because they only negotiated with the IRS collections officer and did not have a CDP hearing about her rejection of their offer, they never had a prior proceeding. Thus, the Lovelands were free to request consideration of the same OIC in a subsequent CDP hearing regarding the same tax for the same period.

Installment agreement: The court stated that under its precedent, it is not an abuse of discretion for an Appeals officer in a CDP hearing to reject a collection alternative such as an installment agreement where a taxpayer does not provide the financial information needed to evaluate the merits of the alternative. The court further noted that under its precedent, it is not an abuse of discretion to refuse to consider a collection alternative where the IRS has requested but not received updated financial information when previously submitted financial information is out of date. The Internal Revenue Manual (IRM) indicates that if financial information is more than 12 months old and significant changes have occurred, a request for updated information may be appropriate (IRM §5.8.5.3(2)).

The IRS's stated reason for rejecting the Lovelands' proposed installment agreement was that they did not provide financial information, but the court found that the couple had done so and that the administrative record did not indicate that the Appeals officer ever considered the financial information provided by the Lovelands, the age of that information, or whether significant changes had occurred to it. Thus, the court determined that the IRS had abused its discretion in failing to consider that information.

Economic hardship: The Tax Court observed that throughout the administrative process and the Tax Court proceeding, the Lovelands had argued that their poor health affected their ability to pay their outstanding tax liability. Although the IRS referred to the Lovelands' economic hardship claim in its administrative record and notice of determination, it never considered the claim. Under Secs. 6320(c) and 6330(c)(3), it is an abuse of discretion for the IRS to not consider all the issues raised by a taxpayer in a CDP hearing. Therefore, because the Lovelands had explicitly raised the issue of economic hardship, the IRS abused its discretion in failing to consider the issue.

Reflections

The IRS in this case was willing to litigate over a $60,000 tax bill rather than take the time to review the taxpayers' financial information — or even ascertain whether it was current. While the Appeals officer technically did not have to use the financial information the Lovelands originally provided before the CDP hearing, if she had, she could have undoubtedly resolved the case on a basis agreeable to both the IRS and the Lovelands without the time and expense of going to Tax Court.

Loveland, 151 T.C. No. 7 (2018)

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