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IRS Properly Returned Offer in Compromise

Posted on Dec. 17, 2019

The case of Brown v. Commissioner, T.C. Memo 2019-121 provides several important statements concerning offers in compromise. It’s only through the window of Collection Due Process (CDP) that we get judicial review of offers. Here the review provides guidance on several aspects of the offer in compromise. The case also provides an important reminder regarding CDP cases and what to expect when you go to Tax Court. The case also inaccurately describes the IRS filing a notice of federal tax lien (NFTL). I will spend a little time on the NFTL issue at the end.


Starting with the CDP decision in the case, the Court declined to allow petitioner’s attorney, a seasoned Tax Court practitioner, to place into evidence his notes of phone calls with two IRS employees working the case. The court refused to allow the notes because they were not in the administrative record before the Appeals employee reviewing the case. We have written about the importance of building the administrative record most recently in the context of the new provision in the innocent spouse statute coming out of the Taxpayer First Act. It can be difficult to remember to get everything into that record. The Brown case demonstrates what happens when something does not make it into the administrative record though it is not at all clear that this evidence would have made a material difference in the outcome of the case. With the passage of TFA and the new code section IRC 6015(e)(7), building the administrative record has become critical in innocent spouse cases. In CDP cases where you are located can make a difference. The Ninth Circuit, the circuit to which an appeal would lie in Brown, is one of the circuits holding that the Tax Court should make its decision based on the administrative record. That circuit precedent plays a role in the outcome of this issue here.


With respect to offers, the first decision of the court deserving note is the decision that the offer examiner did not err in returning the offer once the existence of an investigation by the IRS Collection Division Abusive Tax Avoidance Transaction (ATAT) group became known. This part of the IRS Collection Division was developed about two decades ago as a means of putting extensive resources to difficult cases and in particular to cases with offshore assets. When the IRS developed the collection queue in the early 1980s it went from a system of dividing all of the collection cases in a district by the number of revenue officers. Under that system revenue officers could have hundreds of cases in their inventory making management of those cases extremely difficult. In reducing the number of cases to a manageable number for each revenue officer, it also seemed that many collection managers began putting a premium on closing cases without taking a deep dive into the difficult cases. I remember commenting to a manager how a certain revenue officer seemed to send to the District Counsel’s office a lot of interesting collection cases. I intended the comment as a compliment; however, the manager’s view of the revenue officer was that he put too much time into his cases causing him not to keep up with the inventory. That manager’s view of how a revenue officer should manage their inventory was common. So, taxpayers with difficult collection cases often got a pass because the manager did not want the revenue officer to put the time into a case needed to develop difficult cases. (Similar problems exist in the examination division causing the end of audits on small businesses and partnerships.)

To combat the problem of glossing over difficult cases, the IRS developed a specialty collection group designed to handle the tough cases and not to worry about number of hours on a case. These groups had a compliance mission somewhat like that of criminal investigation rather than a strictly revenue gathering focus. If the taxpayer’s collection case resided in part in the ATAT group, it means that the IRS had significant concerns that the taxpayer was taking steps to keep assets away from the IRS. The Internal Revenue Manual provided that the OIC specialist should return the offer when learning of the existence of a taxpayer’s account in the ATAT group. In Brown, the OIC specialist followed the IRM instructions. The Tax Court found that doing so was appropriate and the Appeals employee reviewing the CDP case did not err in agreeing with this decision.

The IRS manual provisions regarding cases pending with the ATAT group make sense. Stopping an offer while the ATAT group makes its determination seems an appropriate way to balance collection concerns with offer in compromise possibilities. Returning the offer does not keep the taxpayer from submitting it at a later point and does not signal a policy rejection of the offer. Still, it’s also understandable that the return of the offer for this reasons raises concerns from the taxpayer’s perspective. It may be difficult for a taxpayer to know if a revenue officer group investigating their tax situation is an ATAT group. Had the taxpayer known that his account was in the hands of an ATAT group then the taxpayer, undoubtedly, would not have submitted an offer in compromise with an $80,000 payment up front. To the extent that a disqualifying condition existed with respect to the offer, there should be some way to let the taxpayer know of the impact of that condition before the acceptance of the money.

The taxpayer also argued that the OIC specialist should not have returned the case because a TEFRA audit was pending. The IRM provides for the return of an OIC if a pending TEFRA audit exist. The IRM also provides that an OIC could not be accepted until all TEFRA audits had reached their conclusion. The Tax Court agreed that returning the case was appropriate given the IRS procedures that apply to this situation.

The taxpayer further argued that the 20% down payment he made when he submitted the OIC should be returned to him. The court noted that the taxpayer knew at the time of submitting the OIC that the IRS would keep this 20%. The court did not agree that the return of the offer allowed petitioner to see a return of the money paid with the OIC. I agree with this in general; however, I am troubled by how it plays out in a situation like this where the IRS reason for returning the offer may not be readily apparent to the taxpayer or the representative in making the offer. If the taxpayer knew of or should have known that the IRS would return the offer in his situation, then I am fine with the IRS keeping the 20% payment. If the taxpayer did not have a reasonable basis for knowing that the existence of some part of his outstanding liability in an ATAT group prevented the IRS from considering the offer then the taxpayer did not have real knowledge necessary to evaluate whether to pursue the offer.

Rarely, if ever, would the client of a low income tax clinic end up in an ATAT group. So, I do not know what type of notice, if any, that a taxpayer receives when their account ends up in an ATAT group. Given the consequences to an offer of having your account in an ATAT group, some notice to the taxpayer alerting them to the fact an ATAT group has their account and the consequence of that fact would alleviate the unfairness perceived in this situation.

The taxpayer’s last argument concerns the effect of returning the offer. The taxpayer argued that because the return of the offer was improper, the offer continued in existence at the IRS. The taxpayer further argued that because the offer continued in existence, the time the offer was pending with the IRS exceeded 24 months. Because the offer was with the IRS for more than 24 months with no action, the taxpayer argued that the offer was deemed accepted. For prior post regarding the two year rule see here and here. Since offer cases only get reviewed by the Tax Court and result in an opinion if submitted with a CDP request, this issue rarely appears before the Tax Court. Here, the court had little difficulty determining that the period during which the offer was pending with the IRS ended when the IRS returned the offer. As a result, the offer was not deemed accepted under IRC 7122(f). I remain very interested in hearing from anyone whose offer has aged into acceptance under this rule.


In one sentence of the opinion the Tax Court made a common, but unfortunate, mistake as it described the NFTL. The way the court discussed the lien perpetuates a myth that confuses many people trying to understand the federal tax lien (FTL) and the NFTL.

Here’s what the court said “On April 2, 2015, respondent filed an NFTL against petitioner’s personal residence for $35,268.” The problem with this statement is that the IRS does not file the NFTL against a taxpayer’s residence. The IRS files the NFTL against the taxpayer. The FTL has by that time already attached to all of the taxpayer’s property and rights to property including the taxpayer’s personal residence. Assuming the IRS files the NFTL in the locality where the taxpayer residence is located, the NFTL will perfect the FTL with respect to the personal residence and other real property owned by the taxpayer which is located in the locality in which the NFTL is filed. The NFTL will also perfect the FTL with respect to all of taxpayer’s personal property if it is filed in the locality of the taxpayer’s residence.

Perfecting the FTL means that the IRS will defeat other creditors listed in 6324(a) – purchasers, holders of a security interest, mechanics lien holders and judgment lien holders – who file their lien or security interest or purchase the taxpayer’s property after the filing of the NFTL. Filing the NFTL also means that the taxpayer’s liability to the IRS becomes public knowledge as the filing of the NFTL serves as an exception to the general disclosure laws of IRC 6103 that a taxpayer’s tax and tax return information is something between the taxpayer and the IRS.

I suspect that the Tax Court knows that the NFTL is not filed against the taxpayer’s residence and its description of the situation was just an attempt to shorthand the effect of the NFTL since the residence may have been the only asset owned by the taxpayer where the NFTL had a major impact; however, the description fosters continued misunderstanding of the NFTL. Many practitioners and the vast majority of taxpayers think of the NFTL in the way the Tax Court described it. It’s unfortunate to have the wrong understanding of the NFTL in an opinion of the Tax Court. The sentence that mischaracterized the NFTL did not adversely impact the case or otherwise have any impact that I can perceive but it does call for slightly tighter language in describing the NFTL in order to assist others in understand the scope and limitations of the NFTL. For a detailed explanation of the NFTL, its scope and effect, see Chapter 14A.04-10 of Saltzman and Book, “IRS Practice and Procedure.”

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