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Offer in Compromise Tax Debt

IRS Ignore Your Offer in Compromise? What’s Next?


The IRS offer in compromise program provides taxpayers with a remedy for settling back taxes.  It can provide taxpayers with a much-needed fresh start.  Congress has changed the rules for offers.  One change is that offers are deemed accepted if the IRS does not reject them within two years.  This raises the question as to how you get the IRS to recognize an offer in compromise that is deemed to be accepted.  The court addresses this in RAJMP, Inc. v. United States, No. 19-cv-876 AJB (WVG) (S.D. Cal. 2020).

Facts & Procedural History

The taxpayer owed the IRS $8 million in back payroll taxes and penalties.  It submitted an offer-in-compromise to settle the debt.  The offer proposed to pay $400,000.

In July of 2006, the IRS service center in Memphis, Tennessee accepted the offer for processing.  The offer was never rejected.  In July of 2008, the taxpayer paid the $400,000.  The IRS applied the payment to the account rather than applying it as payment of the offer.

The taxpayer then brought suit against the government for:

(1) a continuing breach of contract,

(2) a non-monetary claim under 5 U.S.C. § 702 (second sentence),

(3) violations of the Administrative Procedure Act, and

(4) this count is based on the Court’s anomalous independent equity jurisdiction, the Court’s supervisory power over federal officers and employees and the equity jurisdiction conferred by the Judiciary Act of 1789.

The taxpayer asked the court to: (a) enter final judgment and order enforcing all the terms and conditions of the OIC Contract against the U.S.; including: (1) an order instructing the U.S. to abate any and all balances of the outstanding assessments against RAJMP; (2) issue any other orders in law or in equity the court deems appropriate; (3) award costs; (4) award legal fees.

Deemed Acceptance of Offer in Compromise

Congress amended the Code in 2005 to say that an offer that is not rejected two years after submission, is deemed accepted by the IRS.

This is set out in Section 7122(f), which states:

Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.

Congress did not provide a method for saying how to get the IRS to update its records to reflect the deemed acceptance.

This is where the RAJMP court case comes in.

Remedies for Recognition of Deemed Acceptance

The taxpayer argued that it had no remedy for forcing the IRS to update its records to reflect the deemed acceptance of its offer.  The IRS attorney responded by saying how one is to accomplish this.  The court describes the remedy as follows:

RAJMP could have sought monetary damages under a breach of contract claim pursuant to the Tucker Act, 28 U.S.C. § 1491, or RAJMP could pay the taxes, file an administrative claim for a refund, and then file a refund claim in the district court. Further, RAJMP could wait for the United States to sue to collect the taxes and assert the OIC as a defense, which is in fact what RAJMP is actively pursuing before this very Court in a related case.

While this may be the technically correct answer, these remedies each have significant drawbacks.

The Tucker Act

The Tucker Act allows taxpayers to sue the government for contract disputes.  It does not apply to tax refund suits.  It can only be used for suits that seek monetary relief.  Had the taxpayer in this case brought suit under the Tucker Act, the IRS would no doubt argue that this was a tax refund suit and not a suit seeking monetary relief.  Only only has to look to cases like Wilkens v. U.S., 03-Civ.-1837 (WGB) (D.N.J. Feb. 19, 2004) where the IRS made these arguments with respect to a collateral agreement to settle a tax liability.

Refund Suit Litigation

The refund suit may provide a more certain remedy.  However, having to pay $8 million up front and then suing for a refund isn’t within reach for most taxpayers.  Presumably if the taxpayer could pay $8 million, it would just pay its taxes and not bother with an offer in compromise.

IRS Collection Lawsuit

Waiting for the IRS to sue to collect the debt is also problematic.  With this remedy, it might take the IRS several years to bring suit and then the suit could take several years to resolve.  The penalties and interest would continue to compound during this time.  The taxpayer would be subject to the IRS’s collection activities during this time.  The accruing balance could dissuade others from doing business with the taxpayer, which could result in the taxpayer losing business opportunities.

Going Forward

Congress created this problem in enacting a statute that does not include a remedy.  Congress should amend Section 7122 to provide a remedy for cases like this.  It might even grant the U.S. Tax Court jurisdiction to hear these cases.  Until then, taxpayers have to choose among various remedies given the problems associated with each remedy.