In Winters v. Commissioner, T.C. Memo. 2012-183, the U.S. Tax Court concluded that the IRS correctly rejected an offer in compromise submitted based on doubt as to collectibility based in part on the taxpayer not providing records to establish the income of a person who resided in his home.

Facts & Procedural History

Mr. Winters lived in Montana. He filed a Form 1040, U.S. Individual Income Tax Return, for tax year 2008 to report $42,896 federal income tax due.

Mr. Winters only paid $11,069 of the tax shown due in his tax return.

Mr. Winters submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing (Form 12153), and (2) Form 656, Offer in Compromise.

After the IRS lost these forms and Mr. Winters provided proof of mailing, the IRS assigned the case to the IRS Office of Appeals.

Appeals made the following observations:

Reviewed offer. TP listed his occupation as roofing on the Form 433B. He is a sole prop of a upscale roofing company specializing in copper, lead and zinc roofs and other architectural metal work. Income was the only issue in the appeal. TP claims an economic hardship. TP claimed a 24,336 loss in 2010. I found he is apparently living with a Myrna Williams. The couple deposited 132,745 in their joint checking account over a three month period in April, May and June 2010. 56,000 of that was a wire transfer from, apparently, a separate account of Myrna’s. Without that deposit, the couple deposited 77,765 over the three months or an average of 25,921 monthly. Myrna is also a sole prop of some sort of business. She reported a 10,546 profit in 2010. I question the 2010 1040.

Appeals then wrote Mr. Winters a letter, asking for various items, including the following:

When considering an offer in compromise where only one member of a joint household is liable for the tax, I need to know the income of the non-liable party. I’ll compute total household income and allow you a pro-rata share of expenses based on your contribution to household income. Therefore, please send documentation of Myrna Williams’ 2011 year-to-date income from all sources.

Mr. Winters did not provide this information, Appeals closed the case, and Mr. Winters asked the tax court to review the determination.

While not addressed in the court opinion, one of the issues was whether Mr. Winters was obligated to provide records showing the income of Myrna Williams. The case does not indicate that they are married.  It also seems to indicate that Montana law applies. Montana is not a community property state, where each spouse generally has a property interest in one half of the other party’s income and is equally liable for necessary expenses.  The case does indicate that Ms. Williams was not liable for the tax debts at issue in the case.

How Does The IRS Determine How Much To Collect?

The IRS collection rules provide a housing, clothing, etc. allowances to use in determining the taxpayer’s reasonable collection potential. The IRS uses this reasonable collection potential to determine whether it can collect from the taxpayer and how much it can collect. This factors into the decision to accept an offer in compromise to settle the tax debt or to enter into an installment agreement to pay the tax debt.

The IRS uses national and local standards or set amounts to determine various expenses. The IRS is only to use actual expenses if the IRS “determines that the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses.” The rules do not allow the IRS to use actual expenses where the taxpayer’s expenses are less than the standard amount. This begs the question why Mr. Winters would only be entitled to “pro-rata share of expenses based on your contribution to household income.” This appears to be in error.

Mr. Winters, who represented himself in tax court, did not raise this issue and the court did not address it. Instead, the court sustained the IRS’s denial.

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