Offer In Compromise: Alternative to Collection
Have you ever considered filing an offer in compromise with the IRS to "settle your debt for pennies on the dollar"? Until recently, filing an offer in compromise was believed to create an automatic hold on collection action--i.e., the IRS would not be able to levy your property once it was filed. However, an Eighth Circuit Court of Appeals clarifies that an offer in compromise will not prevent a court from granting the IRS’s request to levy on a personal residence.
On August 17, 2018, in United States v. Brabant-Scribner, the Eighth Circuit Court of Appeals held that the IRS levy on a taxpayer’s home was proper even though the IRS had not yet responded to taxpayer’s offer in compromise.1 Specifically, the court determined that the taxpayer’s offer in compromise was not an alternative for collection but rather an alternative to collection. The decision has practitioners questioning exactly when, and how aggressively, the IRS may pursue levy on a principle residence once an offer in compromise has been submitted to the IRS.
An offer in compromise is a procedure which potentially allows a taxpayer to settle unpaid tax accounts for less than the full amount owed. It is typically successful when the amount offered by the taxpayer represents the most the IRS can expect to collect within a reasonable period of time.
During pending status of an offer in compromise, the IRS is unable to levy unless it perceives that the collection of the liability is in jeopardy.2 Significantly, an offer is considered pending or "being reviewed" once an IRS official accepts the offer in compromise for processing.3 According to the Internal Revenue Manual (IRM) 22.214.171.124 (04-18-2016), this is the date the Service official signs the Form 656, Offer in Compromise, and inputs a specific transaction code, TC 480.4 Pending status continues until the date a decision is reached.
Furthermore, the IRS must obtain judicial approval before levying on a taxpayer's home.5 Accordingly, the IRS must demonstrate that "the underlying liability has not been satisfied, the requirements of any applicable law or administrative procedure relevant to the levy have been met, and no reasonable alternative for collection of the taxpayer’s debt exists."6 The taxpayer may then timely object under Reg. §301.6334-1(d)(2) by:
raising a genuine issue of material fact demonstrating that the underlying tax liability has been satisfied, that the taxpayer has other assets from which the liability can be satisfied, or that the Service did not follow the applicable laws or procedures pertaining to the levy.
In Brabant-Scribner, taxpayer had incurred over $500,000 in federal taxes and penalties. Before the matter reached the court, the IRS had already seized the taxpayer’s boat and whatever it could access from her bank accounts. Taxpayer’s house was all that remained for the IRS to levy.
The IRS took the next steps and pulled in the U.S. Department of Justice (DOJ) to petition the court for permission to levy the house. Taxpayer then filed both an offer in compromise with the IRS and an Objection to Petition with the district court. The offer in compromise proposed $1,000 to settle her entire tax debt. The district court disagreed with taxpayer’s position that a levy couldn’t be approved until the IRS responded to the offer in compromise and granted the DOJ’s petition.
Again, per Reg. §301.6334-1(d)(1), the IRS must be able to show that "no reasonable alternative for collection of the taxpayer’s debt exists" in order to obtain judicial approval before levying on a taxpayer's home. The court considered taxpayer’s challenge based on Reg. §301.6334-1(d)(1), focusing on the phrase "alternative for collection."7 The court clarified that an alternative for collection indicates a different source from which the IRS may collect the debt. In other words, taxpayer may have other assets that could be levied to satisfy the debt. On the other hand, the court considered taxpayer’s offer in compromise an alternative to collection—i.e., rather than collecting the debt, IRS will agree to forgive all but a small part of the debt. The court clarified that:
A statement by the taxpayer that she is willing and able to pay something less than what she owes—the essence of an "offer in compromise"—has no place in this scheme, because it has no bearing on whether seizing the home is the only way for the IRS to collect the debt. Such an offer does not involve "other assets from which the liability can be satisfied." [. . .] To the contrary, it involves assets that cannot satisfy the liability, but which the taxpayer hopes the IRS will accept in lieu of full satisfaction.8
Ultimately, the court determined that the IRS had made its case under the regulations and the taxpayer failed to provide a valid rebuttal under Reg. §301.6334-1(d)(2). The court did not consider an offer in compromise—i.e., asking the IRS to accept less than it was owed—to be an "alternative for collection" as required under the regulations. According to this circuit’s interpretation, an offer in compromise is an alternative to collection, and thus has no influence once a court is being asked to grant the IRS’s request to levy. And under those circumstances, the court stated that "[n]othing requires the district court to ensure that the IRS has fully considered a taxpayer's compromise offer before approving a levy on a taxpayer's home."9
It is incredibly rare for the IRS to pursue personal residence seizures, and most practitioners think it is very unlikely that this decision will actually prompt the IRS to increase its efforts in this area. However, for the small number of taxpayers that do end up in this battle with the IRS, this decision provides guidance for district courts to consider. Assuming other districts agree with this regulatory interpretation, taxpayers will find it difficult to prevent levy.
4 IRS Form 656, Offer in Compromise, sets forth the offer’s requirements and terms applicable to both the taxpayer and the IRS. Note that per IRM 126.96.36.199.1 (05-25-2018), the IRS may not process an offer in compromise once the matter has been referred to the U.S. Department of Justice for prosecution or defense.