The IRS makes decisions about tax returns, back taxes, etc. These decisions may be made by one or more persons within the IRS.
These decisions may be made by IRS employees whose job functions and missions are not the same. This is most evident in the context of IRS audits. The IRS auditor’s mission is to verify that the IRS assesses the correct amount of tax. The IRS Office of Appeal’s mission is to settle taxes not based on the correct amount, but based on the hazards to the government in litigating the cases.
What happens when the first decision-maker at the IRS tries to unduly influence the second decision-maker? This is allowed in some instances. For example, IRS auditors are allowed to submit transmittal letters to the IRS Office of Appeals that can include just about anything the IRS auditor wants to include. It can include factual and legal misstatements about the case. It can even include slanderous statements about the taxpayer. These misstatements and slander can impact the decision Appeals makes in the case.
There are other examples of this. The court addresses a similar situation in Mason v. Commissioner, T.C. Memo. 2021-64. In Mason, the taxpayer submitted an offer in compromise to settle a tax debt. The IRS revenue officer submitted a Form 657 to the IRS offer unit. The Form 657 included questionable conclusions that resulted in the IRS returning the offer to the taxpayer unprocessed. This case provides an opportunity to consider the Form 657 as an example of a form that allows one IRS employee to influence the decision of another IRS employee.
Facts & Procedural History
The taxpayers owed the IRS back taxes. The IRS assigned the case to Revenue Officer Jacquelyn Jacobson to collect. The revenue officer notified the taxpayers that they had equity in their residence and that they needed to sell it to pay the back taxes or the IRS would seize the house. This type of statement is not consistent with IRS policy.
On the same day, the revenue officer sent the taxpayers a notice of intent to levy.
The taxpayers responded to the notice of levy by:
- Filing an offer in compromise with the IRS to settle their tax debt. They mailed the offer to the address listed in the offer in compromise forms, the IRS’s Centralized OIC Unit.
- Filing a collection due process hearing request to ask for a collection hold. They apparently mailed this request to the IRS revenue officer.
The revenue officer learned that the taxpayers submitted the offer to the IRS’s Centralized OIC Unit. Upon learning of this, the revenue officer completed a Form 657, Offer in Compromise Revenue Officer Report, to say that the taxpayer’s offer was submitted to delay collection actions.
The IRS’s Centralized OIC Unit apparently received the revenue officer’s Form 657 as it returned the offer to the taxpayers based on it being submitted to delay collection actions.
The IRS Appeals Office received the collection due process hearing request, and merely reviewed the IRS’s rejection of the offer. Appeals did not review the offer itself. By reviewing the rejection, Appeals in turn rejected the collection due process hearing request.
Litigation ensued in the U.S. Tax Court. The question was whether the IRS Appeals Office abused its discretion by not considering the merits of the offer the taxpayer submitted.
About the Offer in Compromise
The offer in compromise program can be a great way to resolve unpaid tax debts. These offers are worked by a separate group within the IRS.
This group makes sure that the offer meets IRS guidelines for being processible. Then it assigns the offer to an offer specialist to consider the merits of the offer. If the offer is not found to be processible, it is not sent on to the offer specialist to consider the merits.
The offer is generally required to be submitted to the IRS’s Centralized OIC Unit. The instructions say that if you reside in: AZ, CA, CO, HI, ID, KY, MS, NM, NV, OK, OR, TN, TX,
UT, WA, you are to mail the offer to the Memphis IRS Center COIC Unit. Residents of other states mail their offers to the Brookhaven IRS Center COIC Unit.
If there is a revenue officer, the taxpayer is not required to submit the offer to a revenue officer.
About IRS Revenue Officers
IRS revenue officers are the IRS’s local collectors. Their job is to verify the liability and collect the liability.
Most IRS revenue officers are professional and courteous. There are other revenue officers who are rude, threatening, and even those who disappear for months (if not years) before doing anything on cases.
Revenue officers almost always ask taxpayers to submit any offer in compromise directly to them. They do this so that they can attach the Form 657, as noted above.
If the taxpayer submits their offer to the IRS’s Centralized OIC Unit, this unit is supposed to email the revenue officer to get the Form 657. The revenue officer is supposed to respond to the email within four days of receipt.
This form allows the revenue officer to explain whether the offer was just submitted to delay the IRS’s collection actions. If the revenue officer notes that the offer is for delay, the IRS Centralized OIC Unit is allowed to return the offer to the taxpayer unprocessed.
The taxpayer basically has no say or recourse in these cases. Their only option may be to wait for the revenue officer to attempt enforced collections, if this remedy is still available for the case, to pursue a collection due process hearing with the IRS Office of Appeals.
Returning an Offer Based on Taxpayer Delay
The issue before the court was whether Appeals had to consider the merits of the offer or if it could merely review the IRS Centralized OIC Unit’s return of the offer.
Before getting to this issue, it should be noted that it does not appear that the IRS Centralized OIC Unit should have returned the offer unprocessed.
The IRS’s policy manual says that an offer should not be returned to the taxpayer based on delay by the taxpayer if the offer is submitted during a collection due process hearing:
Generally, an offer submitted during a CDP hearing should not be returned under solely to delay criteria, as discussed in IRM 188.8.131.52, Offer Submitted Solely to Delay Collection, unless the OE/OS manager agrees IRM requirements are met and the RO manager verifies enforcement action is anticipated subsequent to the offer return.
Note: The PE will not make the Solely to Delay determination on CDP offers, the OE/OS will make that determination and send a copy of the return letter to the settlement officer
The offer in this case was submitted during a collection due process hearing, it was just mailed to the IRS Centralized OIC Unit rather than submitted to the revenue officer with the collection due process hearing request. This suggests that the offer should not have been returned to the taxpayers unprocessed.
IRS Appeals Has to Consider the Merits of the Offer
Even if the offer could be returned to the taxpayers unprocessed, Appeals should have made its own determination on the merits of the offer.
According to the court, this is what Appeals is tasked with doing:
What we hold is that the Masons did make an offer that should have been considered on its merits by SO Rush. See sec. 301.6330-1(e)(3), Q&A-E1, Proced. & Admin. Regs. (Appeals will consider “[a]ny offers by the taxpayer for collection alternatives” (emphasis added)). Not only were the CDP proceedings close in time to when the Masons made their offer to the Centralized Unit, but their offer was physically in front of SO Rush, and it was supported by financial information that was current by the Commissioner’s own standards. See IRM pt. 184.108.40.206(2) (Mar. 23, 2018) (financial data should be no more than 12 months old). SO Rush had the full offer packet, Form 656 and all, submitted by the Masons just days before they requested a CDP hearing.
This case and policy helps ensure that the taxpayer’s offer gets fair consideration by the IRS. Absent such a rule, a revenue officer’s unsupported statement in a Form 657 would be conclusive. This is particularly troubling given that the facts do not seem to support the conclusions listed in the Form 657 in this case. The Form 657 is not an IRS determination that the taxpayer can appeal or contest. It is just a statement in the IRS’s records. Had this case not involved a timely collection due process hearing request, the taxpayer would have had no remedy or ability to appeal the IRS’s decision.
There are several types of bad behavior exhibited by revenue officers. This case is an example. The revenue officer, Jacquelyn Jacobson, had ample evidence that the offer was not submitted to hinder or delay IRS collections. The taxpayers put forth valid arguments and explanations in support of their offer. It does not appear that the revenue officer should have made some of the statements in the Form 657.
Those who owe back taxes and are assigned a revenue officer like IRS Revenue Officer Jacquelyn Jacobson in this case, can and should send their offers to the IRS Centralized OIC Unit rather than providing them to the revenue officer. This decreases the chances that the revenue officer will try to taint the offer. This type of revenue officer might be tied up with other projects and/or simply not respond to the Centralized OIC Unit timely. This can allow the offer to get a less biased consideration by the Centralized OIC Unit before a tax appeal is even needed.