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Suspension of Statute of Limitations Due to an Offer in Compromise

Posted on Mar. 3, 2022

In United States v. Park, 128 AFTR 2d 2021-6390 (2021), aff’d 128 AFTR 2d 6394 (2021) the magistrate judge, sustained by the district court judge, grapples with the statute of limitations on collection and whether the IRS has timely brought a suit to reduce a liability to judgment. The court determines that the IRS brought the suit timely because of the submission of an offer in compromise by the taxpayer. The case provides the opportunity to discuss not only the way the statute of limitations works in this situation but things taxpayers should consider when deciding to file an offer in compromise.

The collection statute of limitations (CSED) is 10 years from the date of assessment – that means each assessment, since for some taxpayer periods a taxpayer could have multiple assessments creating multiple CSEDs. If the IRS wants to sue someone to reduce the assessment to judgment or to foreclose a tax lien or similar collection suit, it must do so within the CSED. When that period expires, the IRS loses its ability to collect both administratively or by bringing a suit. So, when the IRS brings a suit, the existence of an open CSED marks one of the things that it must prove. Typically, the IRS brings these suits close to the CSED for practical reasons having to do with trying to collect administratively, if possible, before turning to litigation and because the Department of Justice Tax Division attorneys who bring these cases tend, like attorneys everywhere, to wait until the last minute before acting.

The IRS assessed a liability against Ms. Park for 2005 on October 1, 2007 and for 2006 on September 24, 2007. The initial CSED for these liabilities runs on October 1, 2017 and September 24, 2017. On October 31, 2018, the IRS filed suit. Now, it must show that something kept open the CSED or it will lose quickly. Here, both parties agreed that Ms. Park had filed an offer in compromise. The question became how the offer impacted the CSED.

Although she submitted the offer in March of 2008, the court cited the language of Form 656 in determining the start date for the suspension of the CSED:

(k) The offer is pending starting with the date an authorized IRS official signs the form. The offer remains pending until an authorized IRS official accepts, rejects, returns, or acknowledges withdrawal of the offer in writing. If I/we appeal an IRS rejection decision on the offer, IRS will continue to treat the offer as pending until the Appeals Office accepts or rejects the offer in writing.

Here, the parties agreed that the beginning of the suspension occurred on April 17, 2008 when the authorized IRS official signed the Form 656. Note that COVID could create a long gap between the submission of an offer and the signature of the authorized official because the authorized officials, like almost all IRS employees, stayed away from the office for months. Finding this date will provide critical information in any contest of this type. Usually, but not always, the beginning date does not present significant challenges.

As with many offers, the ending involved a series of steps. The offer examiner rejected the offer on August 19, 2008. Pre-COVID, the four-month period between formal receipt and decision was pretty normal. This case almost perfectly reflects a normal offer submitted by the tax clinic at Harvard. Usually, students finish up an offer in late March or early April and the offer group calls up in August requesting more information at a time when no students work in the clinic and I must do all of the follow up work to complete an offer without student assistance. Fall semester offers almost always seem to generate a contact in May once the students leave the clinic to begin exams.

Here, Ms. Park appealed the offer rejection on September 18, 2008. Following her appeal, a Settlement Officer sustained the rejection on February 26, 2009. She, however, did not stop there and requested that the Appeals Team Manager look at the offer rejection. The manager wrote to Ms. Park on July 6, 2009 also sustaining the rejection.

She argues that the offer suspension ended when the Settlement Officer rejected her offer and the IRS argues that the suspension period did not end until the Appeals Team Manager sent the rejection letter. Here are the respective calculations:

Figure: Screen-Shot-2022-02-22-at-8.17.41-PM.png

The IRS submitted to the court its official transcript, seeking to use the transcript to prove the correctness of its determination of the July 6, 2009 date as the correct date for calculating the tolling. It argued that the transcript Form 4340 was entitled to a presumption of correctness unless she presented some evidence to the contrary.

I don’t think the transcript should make much difference in a case like this where the facts are known. The fact that the IRS put its interpretation of the law on an official transcript should carry no weight in assisting the court to find the right conclusion. The real issue turns on the effect of asking for the Settlement Officer’s manager to overturn the decision of the Settlement Officer. Does the taxpayer get that consideration during a period in which the statute of limitations has started running again, or by asking for this additional review does the taxpayer further suspend the statute?

Ms. Park cites to the Internal Revenue Manual in support of her position, but unfortunately for her the manual actually delegates the authority to accept or reject an offer to the manager and says it cannot be redelegated. For this reason, the court rejects her argument as it should.

She next makes an argument I have seen many taxpayers make. She argues that the IRS release of the notice of federal tax lien supports her claim that the statute had run. The IRS counters that the lien release resulted from a mistake. The statute allows the IRS to correct this mistake and that the release itself does not extinguish the liability.

The case is unremarkable but provides a reminder that going up the chain provides a further suspension of the statute of limitations on collection. She made her offer early in the life of the statute and probably did not pay too much attention to the statute until many years later. Since the taxpayer does not control when or if the IRS will seek to bring a collection suit, there is not much she can do as she tries to wait out the statute hoping that her liabilities will drop off the books.

In the clinic we do get clients who come to us near the end of the CSED as well as at the beginning. We are reluctant to file an offer in the last year or two prior to the CSED because of the suspension it brings. Of course, if the client wants to do an offer after a discussion of its consequences, it’s fine to do so. It also makes a difference whether the client has the type of profile that would cause the IRS to bring a suit. Most clinic clients have few assets so do not present the type of case likely to cause the IRS to bring a collection suit. Before it brings such a suit, the revenue officer handling the case needs to show that obtaining the extended statute of limitations the judgment will bring has a relatively high likelihood of allowing the IRS to collect even though it has failed to do so during the initial 10 year CSED.

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