There are times when the IRS pursues cases that it should not. If this happens to you and you prevail in your case, you should know that the court may order the IRS to pay your attorneys fees and costs. You usually have to make a “qualified offer” to get this type of award.
The qualified offer can help encourage the IRS to settle these types of cases sooner rather than later.
The Lewis v. Commissioner, 158 T.C. No. 3 case provides an opportunity to consider the qualified offer rules. The case involves a qualified offer reserved several remedies that might be granted that would reduce the amount of the offer. The court had to determine whether a qualified offer is valid if it includes caveats. In other words, can a qualified offer be qualified?
Facts & Procedural History
This case involves joint income tax returns filed by a married couple for 2008-2010. The couple was divorced by the time the IRS proposed adjustments for these tax returns. The adjustments increased the tax and imposed penalties.
The taxpayer-wife sent the IRS a letter for a qualified offer pursuant to I.R.C.§ 7430(g). The otter terms were that the taxpayer was to:
- To concede 100% of the tax and 100% of the penalties for the tax years 2008, 2009, and 2010, as set forth on the attached Form 4549-A dated February 12, 2013.
- To agree to the immediate assessment of the increase in tax and penalties set forth on the attached Form 4549-A.3.
The letter also went on to make several reservations:
This is an offer of assessment, not payment, Mrs. Lewis reserves all collection rights that she may qualify for now or in the future, including without limitation, the right to relief under IRC §6015 (innocent spouse), §6159 (installment agreement), §7122 (offer in compromise), §6343 (release of levy), §7811 (taxpayer assistance order), §6502 (statute of limitations on collection), §6325 (release of lien), collection due process, collection appeals program, currently non-collectible status, bankruptcy, and any other current or future law that may serve to reduce the amount or delay the payment of amounts assessed as a result of the acceptance of this qualified offer.
At the time the qualified offer was made, the taxpayer-wife had not yet requested innocent spouse relief. Eventually the IRS granted the taxpayer-wife innocent spouse relief. This resulted in the taxpayer-wife not being liable for any tax or penalties for these years.
Once the tax litigation was resolved in her favor, the taxpayer-wife submitted an motion for an award of litigation costs.
About the Qualified Offer
The qualified offer can be used to encourage settlement. The idea is that the party making the offer is entitled to an award of attorneys fees and costs if the court decides the case in their favor on a basis that is equal to or more favorable than the amount offered.
At the state level, the qualified offer is found in Texas Rule of Civil Procedure 167 and is referred to as an “offer of settlement.” This type of offer can be used to settle sales tax disputes, for example.
The Federal rules also allow qualified offers. For Federal tax cases, this remedy is set out in I.R.C.§ 7430. It says that the offer is “qualified” if it:
- Is made by the taxpayer to the United States during the qualified offer period;
- Specifies the offered amount of the taxpayer’s liability (determined without regard to interest);
- Is designated at the time it is made as a qualified offer for purposes of this section; and
- Remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.
Unlike the Texas offer of settlement, the qualified offer made to the IRS for a tax liability does not have to be filed with the court. It is just a letter provided to the IRS.
Many of the disputes involving qualified offers made to the IRS focus on whether the IRS’s position was substantially justified. This “substantially justified” argument is basically a defense to an award of attorneys fees and costs resulting from qualified offers.
The present case addresses the substantially justified defense. It also addresses whether a qualified offer can reserve remedies such as innocent spouse relief being granted.
Can a Qualified Offer Include Caveats?
Section 7430 says that the qualified offer has to specify the amount of the taxpayer’s liability. The court addressed this specificity requirement given the reservation of the right to innocent spouse relief.
The unique aspect of this case is that the petition did not ask for innocent spouse relief. Innocent spouse relief was not an issue before the court. However, the IRS granted innocent spouse relief. In the decision document submitted to the tax court did not say that the tax and penalties were zero. It said there were none. It went on to say that “that [p]etitioner is entitled to relief under section 6015(c) for tax years 2008, 2009, and 2010.” The IRS seems to have argued that this language means that the IRS was not conceding there was no tax deficiency or penalty due, but rather, the IRS’s position was that there was a deficiency and penalty but that it did not have to reach the issue given the grant of innocent spouse relief.
The court agreed with the IRS. It found the reservation of innocent spouse relief to be a “caveat as to liability.” This caveat meant that the specificity requirement was not met:
An offer that reserves the right to claim relief under section 6015 does not “specif[y] the offered amount of the taxpayer’s liability” because the amount of liability offered depends on potential—and reserved—application of section 6015 and cannot be determined until availability of section 6015 relief is considered (or reservation of the right to claim it is withdrawn).
The court did not address whether the reservation was withdrawn when the IRS agreed to grant innocent spouse relief. The IRS did actually consider and grant innocent spouse relief. One might think that this act perfects the offer and the offer is qualified from that point on during the qualified offer period.
The qualified offer can be used to encourage settlement. Given this court case, one should not include a “caveat as to liability” in their qualified offers. However, caveat language may not be needed.
There may be other ways to accomplish the same result. Given the facts in this case, one option might be to ask leave of court to add an innocent spouse claim to the petition. Then the taxpayer might be able to make a qualified offer based on the grant of innocent spouse relief. Another option might be to just list the specific dollar amount of the offer based on innocent spouse relief being granted. Another option might be to submit a second qualified offer once innocent spouse relief was granted.
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