In Zumo v. Commissioner, T.C. Summary Opinion 2013-66, the U.S. Tax Court concluded that the IRS was correct in rejecting an offer in compromise based on doubt as to collectibility. The case provides a good overview of the IRS collection process and how the IRS evaluates offers in compromise.
Facts & Procedural History
Dr. Zumo was a neurologist. The income from his practice has been declining because of a reduction in both patient volume and medical insurance reimbursements.
Dr. Zumo owned their primary residence and thirteen rental properties.
Dr. Zumo’s residence was severely damaged by fire and the rental properties did not yield significant net income. He also owned a liquor store which was operated from the first floor of the property in which he resided and he received royalties from a book he wrote.
Dr. Zumo was married and had a two children.
Dr. Zumo filed federal income tax returns for tax years 2007, 2008, 2009, and 2010, but did not pay the tax reported on these returns.
The tax debt totaled nearly $67,000 and the penalties totaled nearly $11,000.
- The IRS mailed Dr. Zumo a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, advising him that the IRS was going to file a notice of Federal tax lien on October 12, 2011, to collect unpaid liabilities for taxable years 2007, 2008, 2009, and 2010.
- Dr. Zumo submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing (section 6330 hearing), and a Form 656, Offer in Compromise, for 2007, 2008, 2009, and 2010 based on doubt as to full collectibility of the taxes. He offered $10,000 to settle his tax obligations.
- The offer was evaluated by the IRS Office of Appeals.
Dr. Zumo submitted a Form 433-A, Collection Statement for Wage Earners and Self-Employed Individuals, which reflected $9,000 of monthly income $8,850 of monthly living expenses, leaving $150 of disposable monthly income.
Appeals accepted the $9,000 in monthly income, but determined that Dr. Zumo’s allowable monthly expenses were $6,276, leaving a disposable monthly income of $2,724. Appeals reached this conclusion by:
- Increasing Dr. Zumo’s housing expense by $550, as Dr. Zumo had reported $900 and the national standard expense for a four-person family was $1,450 per month.
- Reducing Dr. Zumo’s expenses for two automobiles, public transportation, out-of-pocket healthcare expenses, and total healthcare expenses.
- Disallowing Dr. Zuma’s $500 reported child care expenses given that Dr. Zuma’s wife was a stay-at-home parent.
Appeals also determined that Dr. Zumo had overstated the fair market values of his assets. Appeals ultimately determined that the aggregate fair market value of the assets was $1,000,881 and the assets had an “appeals equity value” of $36,500. Appeals equity value is an asset’s fair market value reduced by 20% of its fair market value and then reduced again by all encumbrances.
Appeals rejected Dr. Zumo’s offer-in-compromise, determining that the tax collection potential was more than the $10,000 petitioner proposed and that he could satisfy his income tax obligations by paying monthly installments.
The IRS offered Dr. Zumo the option of paying either installments of $700 per month over a period of 72 months or installments of $550 per month over the remaining collection period. These amounts are significantly less than the $77,000 tax and penalties that were owed (and this does not even factor in any interest that would be due).
Dr. Zumo tentatively agreed to the $700 a month terms, but eventually declined the offer after the IRS refused to remove the federal tax lien so he could refinance his rental properties. Dr. Zumo then petitioned the U.S. Tax Court, which sustained the IRS’s position. Thus, Dr. Zumo was back to the start of the IRS collections process. Presumably he entered into another installment agreement with the IRS, paid the taxes by selling his properties or with other income or assets, or submitted another offer in compromise.