Tuesday, December 10, 2013

Criminal and FBAR Noncompliance, Offers in Compromise and the Public Interest (12/10/13)

Can the IRS deny an otherwise proper offer in compromise because the taxpayer has been involved in some type of activity that the IRS deems against the public interest?  For example, can the IRS deny an offer solely because the taxpayer was prosecuted for evasion of assessment or even payment of the taxes in question?  Or, even if not prosecuted, the taxpayer's activity had the characteristics of being prosecuted?

Keith Fogg of the Procedurally Taxing Blog has an interesting blog on the issue of whether developments in the law "will soon eliminate the ability of the IRS to make public policy or best interest of the government the basis for rejecting an offer in compromise."  See Keith Fogg, Oversight of Offers – Response to Comment raising Thornberry v. Commissioner (Procedurally Taxing Blog 12/6/13), here.  The article has a short summary of the history of the OIC and some valuable links. Professor Fogg believes that the IRS retains some residual right to reject claims on public policy or public interest bases.  The discussion is quite good, so I recommend it generally.

As respects matters relevant to this blog -- federal tax crimes -- here are some excerpts (bold-face by JAT):
Last week I wrote about a CDP case in which the Tax Court remanded the case to Appeals so that the Settlement Officer (SO) could better explain the impact of the taxpayer’s health on the decision to reject an offer in compromise.  In my post I suggested that the SO should have confronted the past criminal tax behavior of the individual directly since I felt it was coloring her decision.  I suggested that she should have decided if a public policy or best interest of the government rejection was warranted.  I further suggested that if she had decided to reject the offer on those grounds, subject to the approval of her supervisor once removed, the Court would not have remanded the case.  [The post he refers to is:  Keith Fogg, Anderson v. Commissioner – Public Policy Determination as Defense to Collection Due Process Challenge (Procedurally Taxing Blog 11/20/13),  here.] 
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With the recent offshore initiatives [OVDP], the IRS faces taxpayers who have hidden their money in tax havens to avoid taxation or to avoid collection.  Once a taxpayer has taken such action, the IRS may forever remain uncomfortable accepting such a taxpayer for an offer in compromise for fear that still more money remains offshore.  I do not suggest these individuals cannot obtain an offer in compromise but simply that situations exist that may cause the IRS to reject an offer even though the Form 433-A (OIC) does not indicate the taxpayer has an ability to pay and the IRS cannot point to specific assets not showing on the form.  It must have room to exercise judgment in those situations.
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As I mentioned in my post, I think the Tax Court would recognize a public policy decision.  Section 7122 provides that the IRS “may” accept an offer in compromise.  It does not dictate that the IRS accept offers and generally does not dictate the approach the IRS uses to decide which offers to accept.  I think that Tax Court review of offers in the CDP cases provides the Tax Court with an opportunity to review whether the IRS has followed the procedures it establishes for acceptance of offers and does not create a constitutional right to prevent the IRS from applying one of its established procedures.  CDP does, however, give the Tax Court the right to insist that the IRS has properly followed both its own procedures and the procedures established by IRC 6320 and 6330.  That is what I take from Thornberry, Anderson v. Commissioner (see my earlier blog post here) and Szekely v. Commissioner (see my earlier blog post here).
I should note that the IRS can certainly take factors involving effective tax administration into consideration.  Regs. § 301.7122-1(b)(3), here.  Thus, per the IRM, "Where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability."  IRM  (11-04-2010), Review of Effective Tax Administration Offers, here; and  (10-14-2011), Effective Tax Administration Offers, here.  If the IRS can consider such policy matters in a taxpayer's favor, then one could argue (as Professor Fogg does) that the IRS may consider such matters in rejecting an offer.  See  (11-21-2013), Additional Review of Real Property Valuations in Certain Cases, here (although under a specific topical discussion, it has a list of items that might result in rejection of an offer as follows (emphasis supplied by JAT):  "There are no other issues that would independently justify rejection of the offer, such as non-compliance, taxpayer failed to provide information necessary to properly evaluate the merits of the offer, public policy matters, etc.").

This, of course, would not mean that all OICs would be rejected on the basis of prior criminal prosecution or FBAR and related tax noncompliance.  But that might be a factor that the IRS can consider.

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