of an Offer in Compromise May Preclude Further Relief
Bruce M. Bird
2005 - IRC section 7122 authorizes the IRS Commissioner to
compromise a taxpayer’s outstanding tax liabilities.
In general, absent fraud or mutual mistake, accepting an offer
in compromise (OIC) conclusively settles the liability of
the taxpayer specified in the offer. Two recent Tax Court
decisions underscore this notion.
1999, the taxpayer in Joseph Dutton v. Comm’r
[122 T.C. 7 (2004)] submitted Form 8857, Request for Innocent
Spouse Relief, for the taxable years 1984, 1985, and 1986.
On April 24, 2001, the taxpayer submitted an amended Form
656, Offer in Compromise (OIC), in which he offered to compromise
all income tax liabilities for 1986, 1987, and 1993–1999.
The taxpayer submitted his offer on the basis of doubt as
to the liabilities’ collectability. The taxpayer offered
to pay $6,000 at a rate of $250 per month.
656 provides that the taxpayer will not dispute the amount
of the liability once the IRS accepts the offer in writing.
It also provides that the OIC may be withdrawn by the taxpayer
or by his representative at any time before the Commissioner
a letter dated May 7, 2001, an IRS manager informed the
taxpayer of possible partial relief for 1986 and 1987 from
joint and several liability under IRC section 6015(c), but
that relief under other provisions would be denied in full.
In the letter, the IRS manager also stated that no additional
payments would be due, and that, to the best of his knowledge,
after the recommended relief was granted, the petitioner
would be entitled to refunds for 1986 and 1987.
July 9, 2001, the taxpayer’s counsel sent a letter
to the IRS manager regarding the taxpayer’s relief
from joint and several liability. The letter stated that
an IRS employee, in reviewing the taxpayer’s claim,
had referenced IRC section 6015(c) and indicated that there
would be no refund of the disputed debt. In another letter
to the IRS manager, dated July 23, 2001, the taxpayer’s
counsel indicated that he had recently discussed the taxpayer’s
claim for relief with an “innocent spouse coordinator.”
The coordinator indicated that no refund procedure existed
when a claim is approved under section 6015(c).
July 25, 2001, the IRS sent a letter accepting the OIC in
the amount of $6,000, subject to the conditions and provisions
stated on Form 656. The letter listed the taxpayer’s
total account balance, as of April 30, 2001, for 1986, 1987,
and 1993–1999, as $185,962. Balances of $37,162 and
$84,124 related to 1986 and 1987, respectively. The taxpayer
ultimately completed the payment plan for his OIC.
trial, the Tax Court addressed whether the taxpayer is barred
from seeking relief from joint and several liability because
the OIC was accepted or whether the offer can be rescinded
on the basis of a mutual mistake or a misrepresentation.
Tax Court first examined IRC section 6015, which provides
three avenues of relief from joint and several liability.
Section 6015(b) provides relief similar to that available
under former section 6013(e), and also allows a spouse to
be relieved from a portion of an understatement of tax.
Section 6015(c) generally provides for an allocation of
liability for deficiencies as if the spouses had filed separate
returns. Section 6015(f) allows for equitable relief in
situations where relief is unavailable under 6015(b) or
Tax Court next examined IRC section 7122, which governs
OICs. The court noted that an OIC may be withdrawn by the
taxpayer or his representative at any time prior to its
acceptance. The offer is considered withdrawn when the Commissioner
receives such written notification by personal delivery
or certified mail, or when the Commissioner issues a letter
confirming the taxpayer’s intent to withdraw the offer.
fraud or mutual mistake, an OIC, once accepted, will conclusively
settle the liability of the taxpayer as specified in the
offer itself [Estate of Jones v. Commissioner,
795 F.2d 566 (6th Cir. 1986), aff’g T.C. Memo 1984-53].
In order to reopen the case, the mistake must be mutual
and “of material fact sufficient to cause the offer
agreement to be reformed or set aside” [Temporary
Procedural and Administrative Regulations section 301.7122-1T(d)(5)].
its analysis, the Tax Court examined the OIC within the
context of generally established principles of contract
law. A mutual mistake exists where there has been a meeting
of the minds of the parties, and an agreement actually entered
into, but the agreement in its written form does not express
the actual intention of the parties [Woods v. Commissioner,
92 T.C. 776, at 782 (1989)]. Black’s Law Dictionary
(7th ed., 1999) defines a material fact as one “that
is significant or essential to the issue or matter at hand.”
taxpayer argued that the OIC should be set aside because
the IRS manager mistakenly stated that refunds would be
allowed for any relief granted under section 6015(c). The
taxpayer contended that the projected refund allowance would
have eliminated his 1986 and 1987 liabilities, fully paid
his outstanding balance for 1993–1999, and given him
a refund of approximately $81,000. The taxpayer contended
that he would not have agreed to an OIC had he known he
was waiving his right to any refunds.
Tax Court noted that the mistake in question—the incorrect
statement by the IRS manager—occurred approximately
two weeks after the taxpayer had submitted Form 656, under
which the taxpayer would no longer be able to contest his
tax liability for those tax years. The taxpayer did not
put forth any evidence that, at the time of making the offer,
the IRS manager had given him the impression that, if the
offer had been approved, the IRS would have issued him a
refund for tax years 1986 and 1987 under the innocent spouse
rules under IRC sections 6015(b), (c), or (f).
both the mistake in question, and the actions of the taxpayer’s
counsel clarifying the existence of a mistake, occurred
between the time the taxpayer made the offer and the time
the IRS accepted it. While no evidence existed that the
taxpayer’s offer was originally based on his erroneous
assumption of the possible refund windfall in the first
instance, had the taxpayer later wished to withdraw the
offer, he had time to do so.
the Tax Court held that no sufficient mistake existed at
the time the taxpayer submitted his offer or when the IRS
accepted it. Stated alternatively, based on the facts presented,
the taxpayer, in making his OIC, did not rely on any misrepresentations
made by the IRS manager regarding the taxpayer’s right
to receive a refund under IRC section 6015(c).
Tax Court also noted that IRC section 6015(g)(1) refers
to IRC section 7122, which governs offers. Thus, even if
the taxpayer were granted relief under section 6015(b) or
(f), the taxpayer would not be entitled to receive a refund
under the terms of the OIC.
a letter dated January 31, 2003, the taxpayers in Thomas
E. Johnston and Thomas E. Johnston, Successor in Interest
to Shirley L. Johnston, Deceased [122 T.C. 6 (2004)]
made a qualified offer, pursuant to IRC section 7430, to
resolve the taxpayers’ tax liabilities relating to
their docketed cases before the Tax Court for 1989, 1991,
and 1992. In a letter dated February 10, 2003, the IRS accepted
the taxpayers’ qualified offer without negotiation.
The taxpayers then sought to reduce the amounts stated in
the qualified offer by the amount of net operating losses
(NOL) sustained in 1988, 1990, 1993, and 1995.
IRS refused to allow such a reduction, claiming that its
acceptance of the taxpayers’ qualified offer prevented
the taxpayers from reducing the agreed-upon amounts. In
response to the taxpayers’ amended petition claiming
deductions for the NOLs in question, the IRS filed a motion
for summary judgment.
taxpayers contended that their qualified offer included
only items in dispute in the cases before the Tax Court
at the time the offer was made. Furthermore, because the
issue of the NOLs was not in dispute at that time, their
qualified offer was exclusive of the amounts related to
the NOLs. As such, the taxpayers contended the NOLs could
be used to reduce the agreed-upon amounts for the years
its analysis, the Tax Court first noted that all parties
to the controversy agreed that the taxpayers made a qualified
offer within the meaning of IRC section 7430(g). IRC section
7430 provides for the award of administrative and litigation
costs to a taxpayer under circumstances where the taxpayer
is the “prevailing party”; has exhausted available
administrative remedies (in the case of litigation costs);
did not unreasonably protract the administrative or judicial
proceeding; and claimed reasonable costs. The court noted
with emphasis [122 T.C. 6 (2004)], “One way for a
taxpayer to establish that the taxpayer is the prevailing
party is by a comparison of the amount of the last qualified
offer with the portion of the judgment attributable to the
adjustments at issue when that qualified offer was made.”
history indicates that the purpose of IRC section 7430 is
to encourage the settlement of tax cases whenever possible
[S. Rept. 105-174, at 48 (1998), 1998-3 C.B. 537, 584].
In a related decision, Gladden v. Comm’r
[120 T.C. 446, 450 (2003)], the Tax Court held that the
qualified-offer provision encourages settlements by imposing
litigation costs on the party not willing to settle. As
a result, in Johnston, the Tax Court concluded
that no persuasive reason exists why a settlement reached
by reason of a qualified offer should be treated any differently
from any other type of settlement agreement [122 T.C. 6
contracts, settlements are governed by general principles
of contract law. No particular method or form is required
[Dorchester Indus. Inc. v. Commissioner, 108 T.C.
320, at 330 (1997), aff’d. w/o published opinion,
208 F.3d 205 (3rd Cir., 2000)]. Thus, letters of offer and
acceptance can be used to settle an issue. A settlement
agreement is effective and binding once there has been an
offer and an acceptance. To be effective and binding, it
is not necessary that a settlement agreement be filed with
Johnston, the Tax Court held that the taxpayers’
letter dated January 31, 2003, constituted the definite
and material terms of an offer to settle the docketed cases,
and it held that the IRS’s letter dated February 10,
2003, constituted a valid acceptance of that offer. As a
result, the taxpayers’ qualified offer resulted in
an effective and binding contract.
taxpayers further contended that the temporary regulations
promulgated under IRC section 7430 supported their position
that new issues may be raised after an agreement is reached
if the agreement is reached by way of the qualified-offer
provision. Temporary Procedural and Administrative Regulations
section 301.7430-7T(c)(3) contains three requirements for
the offered amount:
It must specify the dollar amount for the liability;
It must be with respect to all adjustments at issue and
only those adjustments; and
It must be an amount that will fully resolve the taxpayer’s
liability for the types of tax and the tax years at issue.
Tax Court held that the plain language of the third requirement,
which provides that the offered amount be that amount which
will fully resolve the taxpayer’s liability, prevents
the taxpayer from raising new issues once a qualified offer
is accepted. In order to comply with the third requirement,
the taxpayers should have at least stated in their letter
that such offered amount was subject to reduction by application
of their NOLs.
Dutton decision stands for the proposition that,
in order for an accepted OIC to be set aside, the taxpayer
must prove either a mutual mistake of a material fact or
a misrepresentation. Note that, although the IRS manager
made a mistaken statement, the taxpayer’s reliance
upon it must be demonstrated in order for an OIC to be set
notable is that the Tax Court in Dutton did not
consider the taxpayer’s argument involving the doctrine
of equitable estoppel. The taxpayer raised this argument
for the first time in his answering brief [122 T.C. 7 (2004)].
The Tax Court makes it practice not to consider new issues
raised at such time and in such manner.
Dutton, the taxpayer, while pursuing an innocent
spouse claim involving tax years 1986 and 1987, submitted
an OIC involving a number of tax years that included 1986
and 1987. Pursuing dual claims involving overlapping tax
years can be a recipe for confusion. The taxpayer should
have waited until his innocent spouse claim had been resolved
before submitting an OIC. Alternatively, the taxpayer (or
counsel) should have rescinded the offer upon discovering
the IRS manager’s statement.
Johnston, the Tax Court mentioned that the taxpayers
should have at least stated in their letter to the IRS—the
qualified offer—that the amount was subject to reduction
by application of NOLs. Stated alternatively, the fact the
NOLs were not in dispute at the time the qualified offer
was made was the result of the taxpayers’ own actions.
Dutton and Johnston decisions serve as cautionary
tales. Care must be taken both in drafting an OIC and in
deciding when to submit it. Typically, absent fraud or mutual
mistake, an accepted OIC will not be set aside, even if
the taxpayer is unaware of or surprised by its collateral
M. Bird, JD, MST, CPA, is a professor of accounting
at Richards College of Business, University of West Georgia,
Carrollton, Ga., and program director of the West Georgia
Low-Income Taxpayer Clinic. He gratefully acknowledges funding
by the Taxpayer Advocate Service of the IRS.