The IRS offer in compromise program is one avenue for settling tax debts for less than the amount owed. There are three different types of offers that can be submitted under this program. The court in Eberhardt v. Commissioner, T.C. Summary 2004-147, addressed each one. The case provides a good overview of how the IRS and the courts evaluate these different types of offers.

The Facts in the Eberhardt Case

The Eberhardts 1995 Form 1040, U.S. Income Tax Return, reported medical expense deductions and the pension-related casualty or theft loss.

The IRS audited the return and proposed to disallow the medical expense deductions and the pension-related casualty or theft loss and the case was closed to the IRS Office of Appeals.

Appeals disallowed the medical expense deductions and the pension-related casualty or theft loss and issued a statutory notice of deficiency.

The Eberhardts filed a petition with the U.S. Tax Court, which sided with the IRS. The IRS began collections efforts following the court proceeding, which included issuing a final notice of intent to levy.

The Eberhardts requested a collection due process hearing and submitted an offer-in-compromise for $1,000 based on doubt as to liability, doubt as to collectibility, and effective tax administration.

The IRS did not accept the offer-in-compromise and the Eberhardts asked the U.S. Tax Court to review the denial.

Doubt As To Liability Not Considered Twice

The IRS did not consider the offer-in-compromise based on doubt as to the tax liability. It noted its policy of not considering this type of offer when the liablity was established by the courts. The Eberhardts’ tax liability was previously considered by Appeals and by the tax court.

The Eberhardts challenged the IRS’s policy. The tax court agreed with the policy, noting that doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability.

Doubt as to Collectibility Was Not Satisfied

The IRS reviewed the offer-in-compromise based on doubt as to collectibility. The IRS evaluated the Eberhardts reasonable collection potential and concluded that they could pay the entire liability within a reasonable period of time. Both Mr. and Mrs. Eberhardt were employed and their monthly income exceeded their allowable monthly expenses.

The Eberthardts challenged the IRS’s determination. The court agreed with the IRS, upholding the IRS’s evaluation and application of its collection standards.

Effective Tax Administration Not Warranted

The IRS reviewed the offer-in-compromise based on effective tax administration. This option is available if collection of the full liability would create economic hardship.

The term “economic hardship” means the inability of the taxpayer to pay his or her reasonable living expenses. The IRS concluded that the Eberhardts could pay the full amount of the liability by making monthly payments and still pay for their reasonable living expenses.

The court considered the following factors in concluding that there was no economic hardship in this case:

  • Whether the taxpayers were capable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayers’ financial resources would be exhausted providing care and support during the course of the condition;
  • Although taxpayers have certain monthly income, whether that income is exhausted each month in providing for the care of dependents with no other means of support; and
  • Although taxpayers have certain assets, whether the taxpayers are unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities.

The Eberhardts claimed that they could not pay the tax in full because they had a substantial amount of short-term debt, the expenses of deferred maintenance on their home, and the need to fund their retirement savings over a limited number of years. The court concluded that this did not rise to the level of a financial hardship.

The Takeaway

This case provides a good overview of the IRS’s offer in compromise and the types of offers that can be submitted. Offers based on doubt as to liablity will not be considered if there was a prior consideration by the IRS or the courts. The other types of offers require a close scruitiny of the financial circumstances. The inability to save for retirement, even if the taxpayer is nearing retirement age, will generally not be found to be a sufficent to qualify for an offer.

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