Source is Journal of Accountancy July 2004
Journal of Accountancy, July,
2004 by
Edward J. Schnee
Taxpayers unable to pay their income tax liability
may make an offer in compromise under IRC section
7122 to settle the tax bill. Such an offer can,
however, have a negative impact on other rights
available to taxpayers, as the Tax Court recently
demonstrated.On September 3, 1999, Joseph Dutton
filed a request for innocent spouse relief for tax
years 1984 to 1986. On April 24, 2001, he filed Form
656, Offer in Compromise, for tax years 1986, 1987
and 1993 to 1999. On May 7, 2001, the IRS sent
Dutton a letter granting partial relief from joint
and several liability under IRC section 6015(c) for
1986 and 1987. The letter said he could receive a
refund of taxes he had paid for those years.
Dutton's attorney received a second letter from the
IRS dated July 23, 2001, stating no refund was
permitted if the IRS granted relief under section
6015(c)--contrary to the implication in the first
letter.
On July 25, 2001, the IRS accepted Dutton's offer
in compromise. On August 12, 2002, it notified
Dutton he was riot entitled to relief from joint and
several liability under sections 6013(c), 6015(b),
(c) and (f) for 1986 and 1987. Dutton filed suit in
Tax Court requesting that relief and asking for the
previously accepted offer in compromise to be set
aside so he could receive a refund. The IRS said the
court should not set aside the offer and Dutton was
not entitled to relief from liability.
Result. For the IRS. The court immediately
dismissed the taxpayer's request for relief under
section 6013. Since the petition listed only section
6015, the court could not grant relief under section
6013. The court next turned to the issue of setting
aside the offer in compromise.
Section 6015(g) says a taxpayer will receive a
refund--where appropriate--if the IRS grants relief
from joint and several liability under section 6015
unless IRC sections 6511, 6512(b), 7121 and 7122
apply. It also says no refund is permitted if relief
has been granted under section 6015(c). Section 7122
says an accepted offer in compromise settles the
taxpayer's liability unless the request is withdrawn
before accepted. The only exception is in cases of
fraud or a mistake.
Since an offer in compromise is a contract, the
court said it should be analyzed under general
contract law, which provides a contract can be set
aside if both parties have made a mistake as to a
basic assumption and the mistake has had a material
effect. The regulations under section 7122 provide
for reopening an offer if there is a mutual mistake
as to a material fact.
The taxpayer argued he was mistaken as to the
availability of a refund because of the letter he
had received from the IRS in 2001. The court
rejected this argument because the IRS had notified
Dutton that no refund was permitted before he
accepted the offer. He should have withdrawn his
offer if he wanted to pursue a refund claim.
The court's conclusion appears to be very clear.
An accepted offer in compromise terminates tax
disputes absent a mutual, material mistake as to the
basic facts of the case. In addition, new final
regulations say no refund is permitted under section
6015 if a taxpayer enters into an accepted offer in
compromise. Future taxpayers must be prepared to
live with any deal they make.
* Joseph Dutton v. Commissioner, 122 TC no. 7.
Prepared by Edward J. Schnee, CPA, PhD, Hugh
Culverhouse Professor of Accounting and director,
MTA program, Culverhouse School of Accountancy,
University of Alabama, Tuscaloosa.
COPYRIGHT 2004 American Institute of CPA's
COPYRIGHT 2004 Gale Group
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