When you owe the IRS back taxes, sometimes it is best to wait for the IRS’s collection statute to expire.
This wait-and-see approach involves waiting to see if the IRS attempts to collect the tax debt. Sometimes the IRS doesn’t even bother to take any action to collect unpaid taxes.
To succeed, it is important for the taxpayer to not extend the IRS’s collection statute. There are several ways taxpayers can extend the IRS’s collection time. One such way is to submit an offer in compromise to the IRS to try to settle the IRS balance.
There are times when the IRS does not bother to address these offers timely. Months often go by with no communications with the IRS. Taxpayers may experience life events during this time. These life events and delays by the IRS can result in the taxpayer forgetting about the offers they submit to the IRS.
This issue came to a head in United States v. Kidwell, No. 2:16-433 WBS EFB (E.D. Cal. 2017).
Facts & Procedural History
The Kidwell case involved unpaid employment taxes.
The taxes were reported on Form 941 for the period ending September 30, 2004, which was filed on April 4, 2005, and a Form 941 for the period ending December 31, 2004, which was filed on January 31, 2005.
The IRS assessed the taxes on March 28, 2005 and May 23, 2005.
On March 1, 2016, the government sued the taxpayer to reduce the IRS tax debt to a judgment. This would allow the government to continue to try to collect the unpaid taxes beyond the normal 10-year collection statute.
The IRS’s Ten Year Collection Period
The IRS generally has ten years from the day the tax is assessed to collect the tax.
In this case, it would seem that the ten-year period had lapsed by the time the government brought suit to collect the taxes (the tax was assessed in 2005 and the government brought suit in 2016–just over ten years later).
But the analysis does not stop there. There are several actions that can extend the statute. The rules extend the statute when the taxpayer submits an offer in compromise. This is provided for in our tax laws.
About the Offer in Compromise
The offer in compromise is a formal administrative process for submitting a proposal to settle unpaid taxes.
This starts with the taxpayer submitting a Form 656 to the IRS (along with a filing fee), the case being assigned to the IRS Offer Processing Center, and, if the paperwork is filled out correctly, the case being sent on to an IRS offer specialist to work.
The IRS offer specialist will then work the case, sometimes in conjunction with the IRS attorneys, and either approve or deny the offer. The offer specialist may also negotiate with the taxpayer or their tax attorney.
This process can play out over several months (at best) or many years (at worst).
The statute of limitations rule for offers says that the IRS’s ten-year collection statute is suspended while an offer-in-compromise is pending and for thirty days after any rejection or appeal of the rejection.
The Missing Offer in Compromise
This brings us back to this court case.
In this case, the IRS provided records showing that an offer in compromise was submitted, but the IRS could not produce the offer or any other evidence about the offer having been submitted.
The government conceded that the IRS destroyed the relevant administrative records.
This is surprising as the IRS does record all payments. Even if the IRS destroyed the offer files, it would have recorded the taxpayer’s offer fee and should have had a record of that.
The Taxpayer’s Recollection
One would think that taxpayers who are trying to run out the statute of limitations would know whether they submitted an offer in compromise. That was not the case here.
The taxpayer did not recall submitting an offer in compromise:
all of the deposition testimony that defendant points to states that defendant and his agents could not recall whether defendant submitted an offer-in-compromise. Defendant testified that he did not handle the taxes for the business, he “would only be guessing” whether an offer-in-compromise was filed, and it was “a possibility” that his accountant filed an offer for him. (Kidwell Dep. 64:17-65:21.) Defendant’s accountant, Ms. Kendall, stated that she “didn’t even remember [they] did an offer for [defendant].” (See Luoma Decl., Ex. B 52:5-8 (Docket No. 13-3).) Defendant’s business secretary, when asked whether she was aware that defendant made an offer-in-compromise, admitted that she was not the person who was corresponding with the IRS and was “not aware of an Offer in Compromise that [Ms. Kendall] would have made.” (Id., Ex. C 48:6-49:10.)
The taxpayer argued that these facts created a triable issue and that it should get its day in court to prove these items. The court did not agree with the taxpayer.
It should also be noted that the taxpayer argued that the tax liability was his wife’s tax liability, which means any offer would have been submitted for her and not for him. This is a correct argument. The wife would have had to submit the offer, not the taxpayer. The court was not presented with expert testimony explaining this and, as such, it did not find this argument persuasive.
The court concluded that this evidence did not create a triable issue of material fact as to the tolling or expiration of the statute of limitations. As such, it ruled in favor of the IRS.
The Problem and Solution
This is a problem for many taxpayers. The IRS is notoriously slow in processing offer in compromises. The main reason for this is that it requires six to nine months to decide if your offer is acceptable. You should expect that this will likely take longer.
While the IRS is slow in processing offer in compromises, there are ways to speed up the process. First, make sure that you are submitting the correct information. Second, ensure that you have the right documentation. Third, it is usually advisable to contact the IRS to check on the status of your offer–particularly if you do not hear from the IRS within six months.
The taxpayer did not raise this issue in this case, but our tax laws were amended in 2005 to say that an offer that was submitted and not acted upon by the IRS is deemed to have been accepted. If the IRS did in fact receive the offer and could not show that it was rejected, it would seem that the offer was accepted and the taxpayer did not owe the IRS any back taxes. This deemed acceptance may be the solution to the IRS’s dilatory processing of offers in compromise.