In the case of United States v. Ward, USDC AK,[1] the taxpayers’ attempt to argue that some of the time period the statue for collections was suspended due to the taxpayers filing multiple times for collection relief should be ignored due to defects in those filings made by the taxpayer.  The court decided the taxpayers would not be allowed to use their own mistakes to their advantage.

Taxpayers Filings for Relief

The opinion provides the following details on the original assessment dates and the taxpayers’ various attempts to obtain collection relief:

Defendants’ 1996 tax deficiency and penalty, plus the Tax Court’s additional penalty, were assessed on November 25, 2002. Their 1997 deficiency and penalty were assessed on December 9, 2002. While the statute of limitations would have run out in late 2012, the Government asserts that Defendant-initiated events tolled the IRS’s collection deadline out to July 2021, a few months after the Government filed suit. The tolling events are as follows:

(1) Offer-in-Compromise dated 12/27/2002;

(2) Due Process Hearing request dated 7/15/2003;

(3) Offer-in-Compromise dated 3/5/2004;

(4) Offer-in-Compromise dated 12/4/2008;

(5) Due Process Hearing request dated 12/16/2011;

(6) Offer-in-Compromise dated 3/6/2014; and

(7) Offer-in-Compromise dated 9/23/2015.[2]

The key items being disputed are some of the taxpayers’ filings for offer-in-compromise relief.  The process is explained by the Court as follows:

A taxpayer files an offer-in-compromise through IRS Form 656, wherein he sets forth an offer to settle a tax debt for less than the assessed amount. An IRS official then decides whether the form is administratively processable and, if so, signs the form. At that time, the statute of limitations tolls while the IRS considers the offer on its merits. The statute of limitations begins to run again 30 days after the IRS makes a final decision about the offer.[3]

None of these attempts to obtain relief were successful.  The Court details these various attempts as follows:

Defendants’ first offer-in-compromise argued that the assessments were erroneous. The offer was rejected, and the IRS notified Defendants that it was going to record a lien against their property. In response, Defendants requested a Due Process Hearing with the IRS Office of Appeals as provided for under 26 U.S.C. § 6330. The reviewing appeals officer explained to Defendants’ representative that they could not use the § 6330 hearing process to contest a liability already affirmed by the Tax Court. After months of discussions with Defendants’ representative, the appeals officer sustained the liens and closed the appeal. However, by that time, Defendants had filed a second offer-in-compromise. For this offer, Defendants requested a reduced payment for reasons based on “effective tax administration,” which means when the debtor does not contest liability but argues that collection would cause economic hardship or would be unjust. Defendants submitted “a large file of documentation” with their offer, but it ultimately was rejected for lack of any special circumstances that would justify a finding of hardship or unfairness. Defendants filed an appeal. The reviewing appeals officer sustained the examiner’s decision, and the offer was formally rejected in April 2005.

Defendants filed another offer-in-compromise in late 2008, again based on hardship and fairness. As with the previous offer, an IRS examiner rejected it, Defendants appealed, and the reviewing appeals officer affirmed the rejection. Afterwards, in 2011, the IRS sought to levy against Defendants’ property but again Defendants requested a Due Process Hearing to challenge the levy. The appeals officer saw that the assessments originated from a Tax Court judgment and sustained the levy. Defendants appealed the decision to the Tax Court.

At this time, the IRS assigned the case to a lawyer who failed to realize what the reviewing appeals officer did — that the assessments originated from a Tax Court judgment in 2002 — and therefore agreed to allow Defendants to submit another proposed offer-in-compromise in exchange for dismissal of the case. Six months later, Defendants filed their fourth offer, asserting that they were not liable for the 1996 and 1997 tax deficiencies and offering to settle with the IRS for $1. They submitted four boxes of documents they claimed supported their position. The form was accepted for processing. It was rejected on the merits five days later. Defendants appealed, but the rejection was upheld and the offer was formally rejected in April 2015.

Defendants filed a fifth offer-in-compromise in September 2015, asking the IRS to settle the assessments for $2,808 based in part on their inability to pay. After a rejection of the offer and a failed appeal, the IRS formally rejected the offer in February 2017. After not receiving full payment, the IRS filed this lawsuit to reduce the long-standing assessments to a civil judgment.[4]

Taxpayers Argue Statute on Collections Should Have Expired

As the Court noted, if there had been no suspensions of the statute, the IRS collection statute would have expired years ago in 2012.  In total the IRS argued the various taxpayer actions caused the statute to be extended 3,154 days, moving the statute expiration dates on both years well into the second half of 2021.  The IRS filed suit to reduce the assessments to a civil judgment in March 2021, months prior to the extended statute expiration date should the entire 3,154 days be added to the normal statute expiration.  The balances due at this point, including taxes, penalties and interest, exceed $1 million.  The opinion notes:

Consequently, the IRS is entitled to summary judgment as to the amounts owed by Defendants if it can demonstrate that the ten-year deadline for filing a collection action against Defendants extended through March 8, 2021, the date it filed suit.[5]

Initially the taxpayers argued that the tolling should not take place since the IRS allowed the process to drag on for too long.  The Court was not impressed with this argument:

Defendants argue that the statute of limitations should not toll for these events because the IRS allowed the process to linger unreasonably. There is no reasonableness exception to tolling under the statute. It is tolled while an offer-in-compromise or due process hearing remains pending. The tolling period remains pending until the matter is terminated, withdrawn, or formally rejected by the government. Indeed, the IRS rejected each offer within the 24-month time limit created by Congress in 2005 and applicable to any offer-in-compromise submitted on and after July 16, 2006.[6]

The opinion also notes that the taxpayers themselves were responsible for this extreme delay:

Moreover, as noted by the Government, Defendants caused much of the delay themselves through numerous filings and appeals. This is not a case where Defendants submitted offers and then waited years for answers. The record shows continuous correspondence with the IRS, and Defendants repeatedly appealed the IRS’s initial determinations, regardless of merits. Defendants “made these offers and chose to see them through. There is no legal or equitable basis to hold that against the IRS.”[7]

The taxpayers clarified that they were complaining that the IRS processed a number of meritless offers, arguing that a number of offers they made were invalid on their face and thus the IRS should have rejected them without processing the offers:

They argue that the IRS was unreasonable not because of delays in processing their offers, but because it processed their meritless offers. That is, Defendants concede that the 2002 Tax Court judgment precluded them from contesting the underlying tax liability, and now assert that their first and fourth offers-in-compromise, which improperly attempted to contest liability, were invalid on their face and thus could not have tolled the statute of limitations. That is, they argue that the IRS knowingly accepted at least two offers-in-compromise for processing that it had no basis to consider and that it did so to stall the IRS’s collection deadline.[8]

The Court appeared even less impressed with this argument, stating:

This argument is nonsensical and baseless. “[W]ithout denying that they voluntarily made these offers, [Defendants] attempt to weaponize [their own] supposed impropriety to their benefit.”[9]

Specifically, there was no evidence that shows the IRS processed these numerous offers simply to stretch out the statute:

There is no factual basis to support Defendants’ argument that the IRS tried to delay collection or would want to do so.

No single IRS official reviewed all five of [Defendants’] offers. It was many employees, from examiners to appeal officers, across 15 years. [The] surviving work product shows a good-faith effort to resolve each offer appropriately. To allege the opposite, and claim without evidence that the IRS played out a 15-year scheme to toll the statute, is absurd.[10]

The opinion goes on to note that the multiple filings indicate it was the taxpayer who sought to delay the collection process by these various filings, many of which they now assert were clearly improper:

It was Defendants who primarily benefitted from these delays: “While the offers remained pending, the IRS could not collect payment on the underlying assessments. . . . [B]y filing so many offers, [Defendants] successfully blocked collection for years.”[11]

The opinion also notes there’s no authority for arguing that a taxpayer voluntarily submitting an offer will not toll the statute:

Moreover, there is no legal support for the argument that an offer-in-compromise contesting liability after a Tax Court judgment will not toll the statute. Indeed, any such rule “would have the perverse effect of allowing tax debtors to freeze collection against them by filing frivolous offers, without the return cost of tolling the statute.” The Seventh Circuit recognized as much in United States v. McGaughey, acknowledging that even an offer preordained to fail is nonetheless a quid pro quo where the offeror agrees to suspend the collection deadline in exchange for the IRS to consider his offer.[12]

[1] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/court-reduces-couple’s-20-year-old-assessments-to-judgment/7dmpy (retrieved July 16, 2022)

[2] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[3] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[4] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[5] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[6] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[7] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[8] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[9] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[10] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[11] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022

[12] United States v. Ward, USDC AK, Case No. 3:21-cv-00056, July 6, 2022