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IRS Abused Its Discretion by Failing to Consider Proposed Offers and Hardship Claim

(Parker Tax Publishing October 2018)

The Tax Court held that, in a collections due process (CDP) hearing, the IRS abused its discretion by failing to consider a couple's offer in compromise (OIC), installment agreement request, and request for relief due to economic hardship caused by a medical condition. The Tax Court found that the couple's prior negotiations with a collections officer, in the context of which they submitted the same OIC along with financial information supporting their installment agreement and economic hardship claim, was not a previous administrative hearing, so the couple was not barred from resubmitting these items at the CDP hearing. Loveland v. Comm'r, 151 T.C. No. 7 (2018).


James Loveland is a retired boilermaker, and his wife, Tina, is a retired teacher. Over the last decade, the Lovelands experienced financial and health problems. They lost their home to foreclosure in the wake of the recession and housing crisis. Mr. Loveland became disabled due to a heart condition, and Mrs. Loveland survived breast cancer. During this time, the Lovelands stopped paying their taxes, resulting in outstanding tax liabilities for 2011-2014 totaling over $60,000.

In 2015, after the IRS issued a notice of intent to levy on property owned by the Lovelands, the Lovelands entered negotiations with a collections officer. The Lovelands made an offer in compromise (OIC) by submitting a Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. They attached a range of financial information including bank statements, pension and income documentation, and information about expenses and assets. The Lovelands asserted that their health problems and the foreclosure constituted special circumstances that limited their ability to pay.

The collections officer rejected the OIC, finding that the Lovelands could pay the full amount and that the special circumstances they raised did not warrant a decision to accept the offer. The Lovelands initially appealed but decided to instead continue negotiating with the collections officer after learning that a proposed installment agreement would not be considered if an appeal were pending. As part of the negotiations over the installment agreement, the Lovelands agreed to pay $800 each month, and made at least two payments.

In October of 2016, the Lovelands applied for a loan secured by a second mortgage on other property they owned. They planned to use the money to make an $11,500 payment to the IRS to bring their liability below $50,000 in order to qualify for streamlined processing of their installment agreement. On the same day in October 2016 that they filed their loan application, the IRS filed a notice of federal tax lien (NFTL) on the property. With the lien having been filed, the Lovelands were unable to secure the loan, and settlement negotiations came to a halt.

The Lovelands then requested a collections due process (CDP) hearing with the IRS Appeals office. They asked that the lien be released because it disrupted their mortgage refinancing and caused economic hardship. An Appeals officer sent the Lovelands a letter scheduling a hearing in March 2017 and informing them that, for a collection alternative to be considered, they would need to submit a completed Form 433-A along with supporting documents. In response, Mr. Loveland sent a letter asking the Appeals officer to review the Lovelands' previously submitted Form 433-A. He attached the completed form, the earlier letter requesting an appeal of the previous rejection of their OIC, and a Form 433-D, Installment Agreement, for $800 per month. The letter explained Mr. Loveland's health problems, stated that paying any amount at that time would result in economic hardship, and specifically asked what would be classified as exceptional circumstances.

The Appeals officer declined to review the OIC and the proposed installment agreement, concluding that the OIC was not properly appealed and that the Lovelands had not submitted the necessary financial information for the proposed installment agreement. Mr. Loveland explained that he did not appeal the rejected OIC because he hoped to work out an installment agreement. He noted that the Lovelands had been working to obtain a loan and that the NFTL halted their loan application.

Although the Appeals officer did not review the Lovelands' offer, she did calculate a monthly payment that would allow the Lovelands to fully pay the liability in 84 months. She determined, based on what the Lovelands owed, that they qualified for an 84 month installment agreement of $853 per month. There was no evidence that the Appeals officer considered any of the financial information the Lovelands had provided.

In April 2017, the Lovelands received a notice of determination stating that they had requested withdrawal of the lien and an installment agreement, and that the Appeals officer did not consider their proposed installment agreement because they did not provide any financial information. Neither the notice nor the case history notes discussed Mr. Loveland's medical condition or the effect of his disability on the Lovelands' ability to pay the taxes owed. The Lovelands petitioned the Tax Court for redetermination of the decision to sustain the lien.


In a CDP hearing, a taxpayer may raise any issue relevant to an unpaid tax, NFTL, or proposed levy, including challenges to the appropriateness of the collection action and offers of collection alternatives. However, under Code Sec. 6330(c)(4)(A)(i) and Reg. Sec. 301.6320-1(e)(1), a taxpayer may not raise an issue that was raised and considered in any previous administrative or judicial proceeding.

Responding to the IRS's motion for summary judgment, the Lovelands argued that they submitted the requested financial information when they filed the Form 433-A (OIC) and substantiating documents. They asserted that the lien caused economic hardship and attached copies of their rejected loan application. They also cited regulations that detail compromises to promote effective tax administration related to taxpayers with medical conditions or disabilities that limit their ability to pay.

The Tax Court was faced with the unique issue of deciding whether negotiations with a collections officer constitute a previous administrative proceeding under Code Sec. 6330(c)(4)(A)(i) and Reg. Sec. 301.6320-1(e)(1).

The Tax Court sided with the Lovelands and held that the IRS Appeals officer's failure to consider the Lovelands' proposed OIC, installment agreement, and claim of economic hardship constituted an abuse of discretion. The court found that, although the Lovelands had a prior opportunity for a CDP hearing, they never availed themselves of it, but decided instead to continue negotiating with the collections officer. According to the Tax Court, whether a previously rejected collection alternative can be raised at a CDP hearing does not hinge on whether the taxpayer had a prior opportunity to challenge the rejection; it hinges on whether the rejected collection alternative was actually considered at a previous administrative or judicial proceeding. In other words, it is not a question of whether there was a prior opportunity, but whether there was a prior proceeding.

With respect to the installment agreement, the Tax Court noted its holding in a previous case that an Appeals officer validly rejected a collection alternative after the taxpayer failed to provide the financial information necessary to evaluate the merits of the proposal. In another case, there was no abuse of discretion where an Appeals officer declined to consider a collection alternative when the IRS had requested but not received updated financial information. The Tax Court distinguished those decisions by noting that in this case, the IRS never even considered the Lovelands' financial submissions, the age of the information they provided, or whether any significant changes had occurred. While the IRS's stated reason for the rejection of the Lovelands' installment proposal was that they failed to provide financial information, the court found that they did provide such information and the IRS abused its discretion in failing to consider it.

Finally, the court found that the IRS's failure to consider the Lovelands' claim of economic hardship if they were required to pay their tax liability in full was also an abuse of discretion. The court explained that, in a CDP hearing, the IRS is required to consider all issues raised by the taxpayer. The court found that although the Lovelands' economic hardship claim was noted in the administrative record and the notice of determination, the IRS never evaluated the claim. Because the Lovelands explicitly raised the issue of economic hardship, the IRS abused its discretion in failing to consider it, the court concluded.

For a discussion of CDP hearings, see Parker Tax ¶260,540. For a discussion of offers in compromise, see Parker Tax ¶263,165.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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