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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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litigation hazard, tax appeals, Chicago Tax Attorneys"A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation." - Internal Revenue Manual section 8.6.1.3(2). When you've sent a Letter of Appeal to the IRS asking for an administrative review of a decision that was made by the Examination function regarding your tax dispute, the IRS assigns an Appeals Officer to determine of there is a possibility for settling the issue. The mission of the Appeals Officer is to resolve your case in a way that:

  • Avoids litigation;
  • Is "fair and impartial";
  • Will encourage voluntary compliance;
  • Represents the integrity and efficiency of the IRS.

Because the Appeals Officer's mission explicitly includes the objective of avoiding litigation, they'll generally begin the discussion by going over the various ways in which you could settle out-of-court by reaching a compromise that fully embraces any hazards to the government of litigating the issue.

Hazards of Litigation Defined 

What the Appeals Officer is actually determining is a quantitative analysis of:

  • The likelihood that, if the case goes to Tax Court on the liability issues, what are the chances the government will prevail, and what are the chances that the taxpayer will prevail.
  • The cost of litigation to the government is simply not an issue.

Application of the Hazards of Litigation Standard

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Posted on in IRS

qualified offer, tax court, Chicago Tax AttorneysYour tax return has been audited, and you're reasonably certain that the IRS is (mostly) wrong.  While your inclination might be to take your winning case directly to the Tax Court, there are very good reasons why you should submit a reasonable offer to settle the case before you file your petition starting the litigation.

According to the IRS' own rules, if you make an offer to settle the case administratively (i.e., with the IRS Appeals Division) that is "qualified", and the IRS rejects the offer and you subsequently succeed in the Tax Court, you may be able to recover the costs you incurred in connection with your attempts to administratively resolve the case.

So, what’s a Qualified Offer?  One that is:

  • Made at least 30 days before the case goes to trial in Tax Court;
  • Specifies an amount of liability that you are willing to accept and pay;
  • Designated by you specifically as a Qualified Offer; and…
  • Not withdrawn (by you) before:
    • The IRS rejects the offer,
    • The trial begins, or
    • 90 days go by after the offer is first submitted to the IRS,

Given the high representation expenses typically incurred when dealing with the IRS Appeals Division (and simultaneously preparing for likely litigation), that is a potentially massive amount of money you can save if you are successful in court after submitting the Qualified Offer.  And, there really is not a downside, other than the time and effort it takes to make certain you comply with the requirements.

Details Added by Tax Court

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OIC, Offer in Compromise, Chicago Tax LawyersAn Offer in Compromise (OIC) is essentially a proposal to the IRS asking them to accept less than what you owe. Along with the required OIC forms, you should also submit evidence demonstrating that your offer is the most the IRS can expect to collect from you within a reasonable amount of time. When you submit an OIC, there are three possible results:

  1. Acceptance: You win! They've decided your offer is reasonable given your circumstances. This is…let's just say…"pretty rare" unless you know exactly what you're doing. Historically, offer acceptance has hovered around the 10-20 percent rate;
  2. Rejection: You lose! They've decided your offer isn't good enough; or
  3. Return: You failed! There are a number of reasons you could get a return of your offer.

If Your Offer is Rejected

This seems like pretty bad news, and it's also by far the most common result of an Offer in Compromise. There was a short time recently when OICs seemed to be a bit easier to get through the system. However–due to recent budget cuts and internal policy considerations–the IRS is getting even more (and some would say cynically) "difficult" to convince.

Rejection of an offer comes two ways:

  1. The IRS concludes that there is a "full ability to pay"; or
  2. The IRS comes back with a counter-offer of a higher, acceptable amount to compromise the debt.

Is there a path forward from here if you disagree with either these alternatives? Absolutely; there is an internal appeals process in place. Within 30 days of getting the rejection notice, you can file an appeal in which you clarify precisely why the IRS should have accepted your OIC and what specific errors in analysis they made. We regularly help clients with filing appeals for both types of rejections.

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After a short but welcome honeymoon period during which the IRS absolutely reversed its decades-long historical resistance to granting offers, it now appears as if the agency has returned to its old ways, making offer in compromise again the most difficult alternative for a taxpayer to resolve his or her un-payable debts.

There is simply no doubt that Examiners of Offer in Compromise, and their Appeals Officer counterparts conducting Collection Due Process hearings, have adopted a more reductive, across-the-board scrutiny of offer proposals over the past several months in order to discourage taxpayers from pursuing them.  Here are just a few of the most obvious examples:

  1. Summary "returns" of offers – without appeal rights - when the OIC processing clerk unilaterally determines that the taxpayer is "not in compliance" due to insufficient estimated tax payments made for the current tax year.
  2. For cases in a specific Revenue Officer’s jurisdiction, field determinations that the offers are being submitted "for delay purposes", again resulting in summary returns of the offers, without any appeal rights.  And yeah, the IRS keeps the filing fee and 20% deposit.
  3. Offer Examiners disregarding the 12 month-multiple (and bank account/vehicle exemption offsets) when they determine that the taxpayer could "full-pay" over the remaining months left on the 10-year collection statute – an approach blatantly inconsistent with Offer in Compromise forms and instructions.

It’s hard to conclude that the IRS is employing these draconian measures for any reason other than that the examiners are being told by management that too many offers are being granted, too easily.  Whether this constitutes deliberate, justified enforcement policies, based on frustration with the never-ending flow of submissions by offer mills (many of which admittedly reek of frivolity), or perhaps a targeted response to the specific tactics adopted by those "tax debt relief" firms, there is no doubt that the IRS is making life harder for deserving taxpayers who seek the fresh start promised by the offer in compromise program.

To be sure, we are still getting most offers granted on behalf of our clients.  But the environment has become much less inviting, and we often spend significant time persuading offer examiners to not arbitrarily prejudge the taxpayer and his or her unique situation.  The unintended consequence of these policies is that, when a taxpayer is represented by a knowledgeable, committed tax attorney, there is more, rather than less, managerial involvement and overall time spent on the offer processing.   Clearly, not what the IRS wants or needs at this point.

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