Today, I write about a case in which the IRS rejected the taxpayer’s offer as not in the best interest of the government (NIBIG), a policy-based decision but one separate from public policy rejection according to the Internal Revenue Manual as discussed below. The Tax Court sustains the determination in a CDP case. The case of O’Donnell v. Commissioner, T.C. Memo 2021-134, does not involve an individual convicted of a tax crime, which I think provides a strong cover for the IRS in a challenge to a NIBIG or public policy rejection, but does involve someone with a long history of bad tax behavior. Since many offer candidates come hat in hand seeking an offer after long periods of bad tax behavior, I found today’s case interesting. The relative ease with which the Tax Court sustained the NIBIG rejection suggests to me that it will rarely second guess such a determination by the IRS.
I don’t know how many offers get rejected each year on NIBIG or public policy grounds. As discussed in my recent post on the EPIC case, and the post to which it links discussing a TIGTA report with a suggestion to put this information online, public information about offers is hard to come by, making it difficult, if not impossible, to ascertain this type of information without trying a FOIA request. Even if you get to the publicly available information, all you find is the rather sparse set of information on Form 7249 (Rev. 3-2017) (irs.gov).
No information is publicly available on rejected offers. So, much of the information about IRS offer practice is passed from practitioner to practitioner by word of mouth. Practices that handle large volumes of offers will have a better sense of what the IRS will accept but the information available reminds me a bit of the situation with private letter rulings. While a prior post discusses the history behind making offers public through IRC 6103(k), that code section came into existence long before the modern offer practice at the IRS, which did not develop until 1990. It might be time to take another look at not only how the IRS makes the information public but what information should be public. Should the act of making an offer be public?
I mentioned in the Anderson post that at the time I wrote that post in 2013 I had recently represented an individual with a history of very bad tax behavior including a criminal tax conviction and the SO in that case had raised the specter of a public policy rejection. Though the Villanova and Harvard tax clinics I have directed over the past decade have submitted a couple dozen offers each year, I have not since had an offer examiner or SO raise public policy as a basis for rejecting an offer. I thought a few of the cases might have drawn such an objection based on the client’s history. When with Chief Counsel’s Office, I reviewed hundreds of offers over a period of 15 years prior to retirement, suggested to collection that it consider a public policy rejection a few times, but rarely witnessed the IRS using public policy as a stated basis for rejection.
So, based on my limited experience representing taxpayers, the IRS does not play the public policy rejection card very often. Whether it formally states this as a basis for rejection, I believe that a taxpayer’s behavior giving rise to the liability for which a compromise is sought does factor into the offer examiner’s and SO’s position in unstated ways. In the O’Donnell case, however, we have an explicit statement from the IRS rejecting his offer because of his bad behavior, allowing us to look at the reasoning behind the public policy rejection as well as the level of scrutiny the Tax Court applies in reviewing that decision.
Treas. Reg. 301.7122-1(c)(3)(ii)(A) provides that a “history of noncompliance with the filing and payment requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws. The IRS signals that it does not want its offer examiners using this basis for rejection lightly by requiring the approval of the second level manager if the examiner seeks to reject an offer as NIBIG or on public policy grounds.
IRM 220.127.116.11 gives details about offer rejections. Since over half of submitted offers that pass the processability review get rejected, this IRM provision gets a fair amount of use. IRM 18.104.22.168.1 details the basis for a NIBIG rejection while IRM 22.214.171.124.2 details the basis for public policy rejections. I confess some confusion on the reason the IRS would choose a NIBIG rejection over a public policy rejection. In the first paragraph describing NIBIG rejections the manual cites to Rev. Proc. 2003-71 and states:
The decision whether and when to accept an offer to compromise a liability is within the discretion of the Service. In keeping with IRM 126.96.36.199.17, Policy Statement P-5-100, an offer will only be accepted if it is determined to be in the best interest of both the taxpayer and the Service. In addition to the criteria discussed in Section 4.02, the Service may take into account public policy and tax administration concerns in determining whether an offer to compromise is acceptable.
This seems like public policy to me, but the manual clearly distinguishes between the two types of rejections. While I mentioned above that a criminal tax conviction could provide an easy basis for a public policy rejection, the manual provision dealing with public policy rejections, IRM 188.8.131.52.3 provides
(4) An offer will not be rejected on public policy grounds solely because:
– It would generate considerable public interest, some of it critical.
– A taxpayer was criminally prosecuted for a tax or non-tax violation.
You should definitely read the manual provisions if you have a client facing a potential NIBIG or public policy rejection. Because case law on offers only occurs in the context of CDP, the decisional law remains sparse, making the O’Donnell case all the more important for the potential insight into this type of decision that it provides.
Judge Lauber describes Mr. O’Donnell’s tax behavior in his opinion:
Petitioner failed to comply with his Federal income tax obligations for a very long time. For two decades (if not longer) he failed to file returns and failed to pay the tax shown on substitutes for return (SFRs) that the IRS prepared for him. Among the years for which he failed to meet his obligations were 2006, 2010, 2011, 2013, and 2014. The IRS for those years assessed deficiencies, additions to tax, and interest totaling more than $430,000. As of May 2016 petitioner’s outstanding liabilities for all open years exceeded $2 million.
Pretty bad but not so bad that the IRS sought to bring a criminal case against him for failure to file or evasion of payment. As the manual suggests the IRS need not have a criminal case in order to reject based on NIBIG or public policy and a criminal conviction does not automatically result in such a rejection.
When Mr. O’Donnell submitted his offer, the IRS first rejected it because he had not paid his estimated taxes for the year of the submission. Offer examiners love this type of rejection because it requires little effort in order to move a case off of their desk. Unfortunately, Mr. O’Donnell’s representative wrote back and pointed out he did not have an obligation to make estimated tax payments during the year at issue, sending the offer examiner back to the drawing board. Despite his long-term bad tax behavior, Mr. O’Donnell offered the IRS $280,000, which is not chump change and the IRS calculated that his reasonable collection potential (RCP) was $286,744. So, his offered amount closely fit the IRS criteria. Mr. O’Donnell’s licenses related to his insurance and financial business had been revoked so his representative argued that his future earnings potential was not at all clear.
Upon reconsideration, the offer examiner, presumably having gotten the higher level approvals required by the manual, rejected the offer on a NIBIG basis. Because a notice of federal tax lien (NFTL) had been filed while the offer was pending (raising serious questions why the NFTL had not been previously filed with an outstanding liability of this amount), Mr. O’Donnell took the opportunity to bring a CDP case. The SO reviewing his case sustained the determination to reject the offer, stating:
acceptance of his offer was not in the Government’s best interest given his history of “blatant disregard for voluntary compliance.” Because offer acceptance reports are available to the public under section 6103(k)(1), the Appeals Office concluded that acceptance of petitioner’s OIC would “diminish future voluntary compliance.”
Apparently, the SO had not read my prior blog post or the TIGTA report and did not realize how few people actually read offer acceptance reports and how little those reports could possibly diminish the public’s view of voluntary compliance, but it’s hard to argue with the conclusion that Mr. O’Donnell had exhibited a blatant disregard for voluntary compliance. Despite the determination, the SO offered a partial pay installment agreement that seemed pretty reasonable. While orally agreeing to this offer, Mr. O’Donnell did not follow through to sign the agreement, resulting in the determination letter sustaining the filing of the NFTL.
In the Tax Court, the IRS filed a motion for summary judgment. The Tax Court notes that it is only looking to see if the decision to reject the offer was “arbitrary, capricious, or without sound basis in fact or law.” Mr. O’Donnell argued that he offered an amount equal to 97.6% of the RCP. The Court cites to the NIBIG manual provisions discussed above and to Mr. O’Donnell’s long history of non-compliance while he ran a successful insurance and finance business in finding that the decision to reject the offer was “well within the guidelines set forth in the IRM. We have repeatedly held that an SO does not abuse his discretion when he adheres to published IRM collection guidelines.”
The decision does not surprise me. I think the hardest thing for the IRS was having an offer examiner willing to get the necessary approvals for the NIBIG rejection but after that, with these facts, the result was hard for Appeals or the Tax Court to second guess. Although the IRS’ abysmal practices in the public display of offer information makes it impossible to easily know how many times it makes a NIBIG or public policy rejection, my experience tells me it does not do so very often. When it does, the taxpayer will struggle to overcome the determination even when offering an amount equal to the RCP. To get this offer accepted, I think Mr. O’Donnell may have needed to have offered something high enough above the RCP to make it an offer the IRS could not refuse.