In Bergdale v. Commissioner, T.C. Memo. 2014-152, the U.S. Tax Court concluded that the IRS did not abuse its discretion in rejecting an offer-in-compromise that was not submitted on a Form 656, even though it appears that the IRS and the taxpayer may have tentatively reached an oral agreement to settle the tax debt.

Facts & Procedural History

Mr. Bergdale had unpaid employment and FUTA taxes. The IRS filed a notice of federal tax lien against Mr. Bergdale.

Mr. Bergdale filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, requesting the IRS to withdraw the lien.

Mr. Bergdale had previously submitted offers-in-compromise to the IRS in 2005 and 2010, which were previously rejected by the IRS.

The IRS held a face-to-face collection CDP hearing to discuss Mr. Bergdale’s financial documents. Mr. Bergdale did not submit a Form 656, Offer in Compromise, to the IRS during the CDP hearing. The IRS indicated that an offer-in-compromise of $25,000 would be acceptable. Mr. Bergdale told the IRS that he would attempt to find sources from which to fund an offer-in-compromise of $25,000.

Mr. Bergdale then faxed a letter to the IRS saying that he would not be able to fund an offer-in-compromise of $25,000 and instead proposing a new offer-in-compromise of $10,000. The IRS closed the CDP hearing, concluding that his $10,000 offer-in-compromise was not accepted because it was not properly submitted on a Form 656.

Mr. Bergdale asked the tax court to review the IRS’s determination.

Mr. Bergdale argued that a formal offer-in-compromise submitted on a Form 656 was not necessary where informal settlement has been reached. More specifically, Mr. Bergdale argued that he requested an informal offer-in-compromise when he submitted a written letter, along with a Form 433-A and a Form 433-B and other supporting financial documentation, and that the IRS had orally agreed to an offer-in-compromise of $6,000.

The court did not agree with Mr. Bergdale. It distinguished his facts from the facts in a prior case, noting the following about the prior court case:

This Court concluded that the informal letter adjusting the taxpayer’s offer-in-compromise could be characterized as an amendment to a previously filed Form 656 and that there was “no provision in the pertinent regulations or Revenue Procedure that precludes an amendment to an [offer-in-compromise] or requires that such an amendment take any particular form.”

The court went on to note that in the prior case, the taxpayer had actually submitted a Form 656 during the CDP hearing. Mr. Bergdale did not submit a Form 656 during the CDP hearing.

The court concluded that the letter Mr. Bergdale faxed to the IRS that proposed a $10,000 settlement was not an offer in compromise because it was not signed under penalty of perjury and did not include a Form 656, a waiver to allow the IRS to contact third parties, or propose an installment payment of the compromise amount.

The court also addressed the purported oral agreement to settle the tax debt for $6,000. The court did not agree that these negotiations were relevant. The court noted that administrative negotiations regarding compromise of a tax liability are not binding against either party and not enforceable without compliance with Section 7122, which says that only a written and accepted offer is binding.

Thus, the court upheld the IRS’s decision to reject Mr. Bergdale’s $10,000 offer-in-compromise.

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