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Taxpayer's "this pays off my liability" letter wasn't a settlement

Wish it did but...

Longino, TC Memo 2018-175

The Tax Court has upheld IRS's determination to sustain a proposed collection action via lien. Among the arguments rejected by the Court was the taxpayer's argument that IRS, by cashing a check that he had enclosed with a letter stating that the check should be returned if it didn't fully conclude all issues with respect to his tax return, had settled his liability.

Background. Code Sec. 6320(a) requires IRS to give a taxpayer written notice when IRS intends to put a lien on the taxpayer's property. The notice must inform the taxpayer of the right to request an administrative Collection Due Process (CDP) hearing in the IRS Office of Appeals (Appeals).

Appeals is responsible for conducting administrative hearings in collection matters. (Code Sec. 6320(b)) Appeals must verify that the requirements of any applicable law or administrative procedure have been met in processing the case. (Code Sec. 6320(c), Code Sec. 6330(c)(1), Code Sec. 6330(c)(3)(A)) The Appeals Office must also consider any issues raised by the person that relate to the unpaid tax or proposed levy, including offers of collection alternatives, appropriate spousal defenses, and challenges to the appropriateness of the collection action. (Code Sec. 6320(c), Code Sec. 6330(c)(2)(A), Code Sec. 6330(c)(3)(B))

At a CDP hearing, a person may challenge the existence or amount of his or her underlying tax liability if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability. However, a taxpayer is otherwise precluded from contesting the existence or amount of the underlying tax liability at the hearing. (Code Sec. 6330(c)(2)(B)) Appeals must also consider whether the collection action balances the need for efficient collection against the person's concern that collection be no more intrusive than necessary. (Code Sec. 6330(c)(3)(C))

A taxpayer who is dissatisfied with the findings or conclusions of the CDP hearing can appeal the determination to the Tax Court. (Code Sec. 6330(d)(1)) When the Tax Court receives an appeal from a CDP hearing, however, its review is limited to issues that were properly raised during the CDP hearing. Where the taxpayer's underlying liability is not properly at issue, the Tax Court reviews IRS's decision for abuse of discretion only. (Goza, (2000) 114 TC 176)

Facts. The taxpayer, Mr. Longino, filed Form 1040 for 2006. Two days later he filed Form 1040X for 2006. He explained that the amended return included an additional "page of deductions" that he had overlooked when preparing the original return. The amended return requested a refund of $1,396, which IRS issued to him.

IRS processed the two returns separately. IRS first examined the original return and issued a notice of deficiency determining a deficiency of $39,757. Longino filed a complaint in the Tax Court regarding this deficiency.

Meanwhile, IRS processed Longino's amended 2006 return and determined that he was not entitled to the $1,396 refund. In May, 2013, Longino replied and enclosed a check for $1,396. In his cover letter he asked IRS to "confirm that we are now concluded on this tax return issue and we won't have any more issues with IRS on that year". If IRS thought otherwise, Longino requested that it return the uncashed check to him.

The IRS service center did not respond to the statements in Longino's cover letter, but it did assess the $1,396 liability then offset that liability with Longino's $1,396 payment.

The Tax Court then heard Longino's case and held for IRS. (Longino, TC Memo 2013-80) The Court ordered the parties to submit computations for entry of decision under Rule 155.

Longino filed a "Rule 155 response" in which he asserted that he had settled his 2006 tax liability with IRS and thus had no deficiency for that year. To support this theory, he submitted copies of the $1,396 canceled check and the tax bill he had received in March 2013. He characterized this correspondence as indicating that "his total balance due for 2006 was $1,396", which he had paid. The Tax Court found no merit in Longino's argument and entered a decision reflecting a deficiency of $36,715. The Eleventh Circuit affirmed this decision.

IRS timely assessed the deficiency. When Longino did not pay that liability on notice and demand, IRS filed a Notice of Federal Tax Lien (NFTL) in an effort to collect his liability. He timely requested a CDP hearing, which was held with an IRS settlement officer (SO).

At his CDP hearing, Longino expressed no interest in a collection alternative. His sole contention was that he had settled his Federal tax liability for 2006 by tendering the $1,396.

The SO issued a notice of determination sustaining the NFTL filing. As the basis for this action, the SO determined that Longino:

  1. Was precluded from challenging through the CDP procedure the amount of his 2006 tax liability as determined by the Tax Court;
  2. Could not establish that a settlement or compromise of his 2006 liability had occurred, let alone been approved by an authorized IRS officer; and
  3. Had neither requested a collection alternative nor established his eligibility for one.

IRS SO did not abuse his discretion. The Tax Court concluded that the IRS SO did not abuse his discretion.

First, the Court looked to the issue of whether the taxpayer could dispute his tax liability in this Tax Court proceeding. The Court noted that Longino received a notice of deficiency for 2006 and had two opportunities to dispute his liability — once before the Tax Court and a second time before the Eleventh Circuit Court. That decision was thus final. Thus, it concluded, pursuant to Code Sec. 6330(c)(2)(B), that Longino could not relitigate his 2006 Federal income tax liability in the current proceeding.

Longino argued that he was not challenging the previous Court decisions; rather, he said, he settled his 2006 liability for $1,396 through his 2013 exchange of correspondence with IRS. The Court found several reasons to reject this argument.

First, the Court noted that Longino previously advanced this "settlement" argument in response to the Tax Court order directing Rule 155 computations. The Tax Court rejected that argument.

And in any event, the Court said, Longino's argument was meritless. A disputed tax liability may be settled by agreement between the taxpayer and IRS. A settlement of a case pending in the Tax Court is a contract that may be reached through offer and acceptance. Longino did not settle his 2006 tax liability with IRS counsel. Rather, his case was tried in the Tax Court, and he lost.

Nor did Longino reach a settlement with the IRS employee with whom he exchanged correspondence in May 2013. The IRS service center employee with whom he corresponded did not offer to settle any tax liability.

Further, the Court noted that even if the IRS employee were thought to have made a settlement offer, no settlement of any kind is binding on IRS unless it is duly authorized and properly memorialized, e.g., in a closing agreement under Code Sec. 7121. Longino supplied no reason to believe that his IRS correspondent had the requisite settlement authority.

As to the letter that Longino sent with his $1,396 check, the Court said that there can be no settlement unless there is mutual assent to its terms, which Longino did not show. Citing several cases, including Whitesell, TC Memo 2017-84, the Court said that to demonstrate assent by IRS, Longino must do more than show that IRS cashed his check.

As to whether the SO considered all relevant issues that Longino raised, the Court noted that the only issue Longino raised was his contention that he had settled his 2006 tax liability for $1,396. On that point, the SO correctly determined that Longino's correspondence with respect to the $1,396 assessment was unrelated to the liabilities determined in the earlier Tax Court case. The SO further concluded (correctly) that:

  1. The correspondence did not involve an offer or acceptance of any settlement but consisted only of "standard form letters used by the IRS Service Centers" and
  2. Longino did not (and could not) show that any IRS person with he whom he had corresponded had settlement authority.

Longino declined to request a collection alternative of any sort, insisting instead that he had no liability for 2006. The Court concluded that the SO properly determined that Longino had proffered no plausible evidence of a settlement and that there was no abuse of discretion.

References: For taxpayer right to CDP hearing, see FTC 2d/FIN ¶V-6005; United States Tax Reporter ¶ 63,204. 

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