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Tax Court Backs IRS Offer In Compromise Rejection

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It’s been said that it’s foolish for an attorney to represent himself or herself in legal proceedings. Perhaps the tax attorney in a new Tax Court case, Abraham, TC Memo 2021-97, 8/3/21, should have heeded that sage warning.

Aug 23rd 2021
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The Tax Court recently upheld the IRS's rejection of an attorney's “offer in compromise” (OIC) as it was seen as an unreasonably low offer.

For a quick review, an OIC is an agreement between a taxpayer and the IRS settling the taxpayer's tax liability for less than the full amount owed. If the liability can be fully paid through an installment agreement or other means, the taxpayer generally isn’t eligible for an OIC.

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To qualify under the IRS’ OIC program, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year and deposited payroll taxes for the current quarter if he or she is a business owner.

Here’s the catch: Generally, the IRS won’t accept an OIC unless the amount offered by the taxpayer is equal to or greater than the “reasonable collection potential” (RCP). The RCP includes the value that may be realized from the taxpayer's assets—including real estate, automobiles, bank accounts and other property—as well as expected future income (less certain amounts allowed for basic living expenses). This is the requirement that tripped up the taxpayer in the new case.

Key facts: The taxpayer is a successful tax attorney in Michigan and a partner in the law firm he founded in 1995. His firm, and the taxpayer himself, was known for helping clients avoid significant tax liabilities and it specialized in negotiating settlements with the IRS for delinquent taxpayers.

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