Legal Memorandum: Discretionary Powers of IRS Officers

Issue: If a taxpayer did not fulfill minor obligations in an Offer in Compromise Agreement, but fulfilled them as soon becoming aware of the defaults, may the Internal Revenue Service Officer exercise his discretion to direct that the Offer In Compromise Agreement be reinstated?

If requested by a taxpayer, a collection due process (“CDP”) hearing is required prior to collection of a tax liability by levy and upon filing of a notice of federal tax lien.  See 26 U.S.C. §§ 6320, 6330.  Notice of a right to a hearing prior to the levy, or upon filing of a notice of tax lien, must be sent to the taxpayer.  Id. §§ 6320(a), 6330(a).  The law guarantees the taxpayer a fair hearing before an impartial officer from the IRS Office of Appeals.  Id. §§ 6320(b), 6330(b.)  At the hearing, a taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy,” including “challenges to the appropriateness of collection actions” and “offers of collection alternatives, which may include  . . . an offer-in-compromise.”  Id. § 6330(c)(2)(A.)  The appeals officer (“AO”) must consider whether any proposed collection action “balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”  Id. 6330 (c)(3)(C).  It is the application of this mandatory balancing test that allows the exercise of the AO’s discretion to reinstate the OIC.

In Trout v. Comm’r, 131 T.C. 239 (2008), the court revisited its opinion in, and the Eighth Circuit Court of Appeals reversal of, Robinette v. Comm’r, 123 T.C. 85 (2004), rev’d, 439 F. 3d 455 (8th Cir. 2006).  There the AO’s determination that the taxpayer had breached the terms of his OIC and the AO’s refusal to reinstate the OIC were […]