Ron Isley, the musician, has apparently had his share of problems, including bankruptcies and a criminal tax prosecution. Recently, the Tax Court issued an interesting opinion dealing with the question whether back taxes that were the subject of a criminal tax prosecution can be reduced through an offer in compromise when the defendant cannot pay in full. Isley v. Comm’r, 2013 U.S. Tax Ct. LEXIS 31 (Nov. 6, 2013).
To provide the context, Isley was convicted for several counts of tax evasion and one count of willful failure to file a tax return in a case involving tax years 1997-2002. 2013 U.S. Tax Ct. LEXIS 31, slip op. at *12. The judgment and probationary commitment order issued by the district court required Isley to pay his taxes for the relevant years. Id.
While in prison, Isley received tax lien notices and levy notices covering years that had been the subject of his criminal case, as well as three subsequent years. These notices included notice of his right to request a collection due process hearing under Sections 6320 and 6330 of the Internal Revenue Code. Id. slip op. at *13. Mr. Isley sought a hearing and ultimately proceeded to pursue an offer in compromise that covered all of the relevant taxes due. While the appeals officer was inclined to accept Mr. Isley’s offer, the IRS Chief Counsel’s office recommended rejection.
Section 7122(a) of the Code, which provides Congressional authority for the Secretary of the Treasury to compromise tax claims, qualifies that by indicating that this authority exists “prior to reference to the Department of Justice for prosecution or defense and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.” I.R.C. § 7122(a). Isley’s offer was therefore rejected.
While the plain language of Section 7122(a) seems to make this a straightforward issue, there are complications. Sections 6320 and 6330 give every taxpayer the right to be heard prior to a levy against his property or a lien filing, and among the subjects that the taxpayer is entitled to raise is a collection alternative, such as an offer in compromise.
The parties attempted to reconcile the apparent conflict, offering very different approaches:
- Isley took the position that Section 7122(a) only applied when a case was actively being handled by the Department of Justice.
- The government took the position that the IRS lacked any authority to even process Mr. Isley’s offer in compromise in light of Section 7122(a).
The Court resolved this issue with a sensible middle ground position. It rejected Isley’s position that Section 7122(a) was only a bar in cases that were active, ruling that there was no indication that Sections 6320 and 6330 of the Code were intended to modify Section 7122(a). 2013 U.S. Tax Ct. LEXIS 31, slip op. at *29-*30.
But the Court also rejected the government’s position that an offer in compromise could not be pursued. Instead, it held that Section 7122(a) simply meant that the IRS appeals officer could not unilaterally approve Mr. Isley’s offer without prior approval from the attorney general. Id., slip op. at *30-*32. Because the offer should have been referred to the Department of Justice, the Court concluded that the decision to sustain the liens and levies was premature. Consequently, the case was sent back to appeals for further proceedings.
Jim Malone is a tax lawyer in Philadelphia. © 2013, Malone LLC.