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Tax Court sees fault in handling of couple's offer in compromise

An offer in compromise is one method for taxpayers in California to pay delinquent tax debts to the Internal Revenue Service. The IRS will accept an OIC on a handful of grounds, including doubt as to collectability, where the taxpayer does not have the income or assets to satisfy the debt. Because an OIC settles the tax liability for less than the total amount owed, the IRS wants to make absolutely sure that the taxpayer cannot pay the debt in full.

To that end, taxpayers must provide financial information substantiating their claim that they cannot pay the full amount. The IRS will look at this information and may challenge the taxpayer's listing of income and assets. A recent Tax Court case concerning an elderly California couple's OIC request shows some of the things that can go wrong when a taxpayer's OIC is evaluated.

The couple owed over $51,000 to the IRS, but because of their lack of substantial income or equity in their assets, they submitted an OIC for $5,500. Their financial statements disclosed that their real estate holdings were underwater and their monthly living expenses exceeded their monthly income. They revealed they were making ends meet with credit cards and support from their children.

An IRS settlement officer disagreed with the financial statements, however. She recalculated the couple's income, expenses and equity to show that their reasonable collection potential would allow them to pay the debt in full. The Appeals Office therefore rejected the couple's OIC. But the Tax Court found problems with the settlement officer's analysis.

In this case, the settlement officer failed to explain why she made changes to the couple's expenses and income. The officer also did not consider the spouses' age or health. At the time the tax controversy began, the spouses were 74 years old and the wife was in poor health, clearly limiting their future income potential.

These and other deficiencies in the settlement officer's examination prompted the Tax Court to send the case back to the Appeals Office so that the couple would have a further opportunity to be heard. The Tax Court's decision emphasizes the need to have quality representation in a dispute with the IRS so that any errors, omissions and incorrect judgments made by the IRS can be detected, prevented and litigated if necessary.

Source: U.S. Tax Court, "Jones v. Comm'r," T.C. Memo. 2012-274, Sept. 26, 2012

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