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March 15, 2007

IRS Incentive to Delay Processing Cases: Extra Tax Penalties & Interest

IRS Debts

Houston Tax Attorney

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I think that most citizens would agree that the IRS should not benefit from failing to do its job in a timely manner. The recent United States v. Ryals case provides an example of how the IRS can benefit from denying taxpayer claims and delaying the collection of taxes.

Ryals Case

Ryals owed taxes for tax years 1977 and 1978. The tax court found Ryals liable for these taxes in 1989 and the IRS assessed the taxes at that time. By March 2003 Ryals tax liability had grown (due to tax penalties and interest) from just over $500,000, which was the amount assessed, to just over $1,500,000.

Between 1989 and 2003 Ryals was convicted of a tax crime and he submitted two offers in compromise that were rejected by the IRS. The IRS filed suit against Ryals for the unpaid tax debt on May 20, 2003. The main question for the court was whether the IRS collection statute had expired.

The court looked at the impact of three Congressional amendments which addressed whether submitting an offer in compromise tolls the IRS collections statute, to conclude that the collections statute expired 19 days AFTER the IRS filed suit against Ryals – which, unfortunately for Ryals, made it possible for the IRS to maintain its tax court case.

Quote from the court’s opinion that I couldn’t resist mentioning:

“Whether or not such a construction is at odds with temporary regulations issued, congressional intent, or the initial position of the Government as stated in its motion for summary judgment is irrelevant because the clear words of the statute command this result.” I really like this sentence. It is powerful. There is nothing like a court disregarding IRS-created law, Congress, an IRS attorney, and a taxpayer all in one sentence….

Court’s Conclusions 

The court did agree with the IRS position that an IRS wage levy by the IRS can in fact continue after an offer in compromise is “pending,” so long as the wage levy was filed prior to the IRS accepting an offer in compromise for consideration. I personally do not agree with this “law,” as it gives IRS employees a strong incentive to delay in accepting offers in compromise for consideration.

IRS’s Offer In Compromise Program 

Many of us will remember last year’s move by the IRS to consolidate the offer in compromise program by having all offers that are submitted be screened by one IRS office – which was supposed to speed up the offer processing time. This move has not only slowed down the processing of offers in compromise (yes, the IRS is actually getting slower), it also puts the IRS in a very good position to delay processing offers where a wage levy should be filed against taxpayers (the very thing that the IRS chides taxpayers for doing – even though IRS employees do it too).

Under the old IRS procedure for processing offers in compromise, the appeals office would not be able to have direct and impermissible contact with the exam or collections function to determine whether a wage levy was appropriate. Now, the offer processing center probably can have this type of contact as it does not seem to be impermissible ex parte contact (in that the appeals officer or even office that ultimately considers the case is not the one that initially received the offer in compromise for processing).

Cases like this really are unfortunate. Taxpayers should not be penalized by coming forward to make offers to settle their tax liabilities.

Also, taxpayers should demand something more of their chief tax collection agency. Having to argue about 19 days when the IRS had over 20 years to collect this tax has to be embarrassing for IRS administrators and employees (to say the least) and having to live with a tax debt for two decades is unduly burdensome for taxpayers.

There is something wrong with the IRS being rewarded for incompetence by being able to obtain a court judgment for a million dollars worth of penalties and interest that it would not have been entitled to collect had it done its job sooner rather than later.

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