Court Review of IRS Abuse of Discretion

BY EDWARD J. SCHNEE

V arious code sections give the IRS discretion to reduce or eliminate a tax liability for equity or hardship reasons. If the IRS fails to reduce a liability, the taxpayer can ask a court to mandate a reduction on the grounds the IRS abused its discretion. This type of judicial review has been the subject of litigation. Recently, a taxpayer won the right to submit information and evidence to the court that was not in the administrative record.

On October 31, 1995, James Robinette and the IRS entered into an offer in compromise for tax years 1983 to 1991. Robinette agreed to pay $100,000 of the total $989,475 liability and to timely file his next five tax returns, which he did; however, the IRS never received his 1998 return. As a result it ruled Robinette breached the offer in compromise and it assessed the additional tax. The taxpayer protested this decision. At the administrative hearing, the IRS representative rejected the taxpayer’s evidence of timely mailing of his return on the grounds the only acceptable proof was a certified or registered mail receipt. Since Robinette did not have either, the IRS rejected his appeal. The taxpayer filed a petition with the Tax Court to reinstate the offer in compromise on the grounds the IRS abused its discretion.

Result. For the taxpayer. The issue before the court was the correct standard of review it should apply. Robinette wanted a de novo (to start anew) review on the grounds the tax liability was at issue. The court rejected this argument; instead it held the appropriate review was for abuse of discretion.

The court then had to decide whether to limit its inquiry to the administrative record as the IRS argued or allow additional evidence (alternate proof he had mailed his 1998 return) as the taxpayer requested. To answer this question, the court had to determine whether the Administrative Procedure Act applied and—consistent with prior decisions—concluded it did not. The court then said its review would be de novo and, therefore, the taxpayer could submit evidence not in the administrative record.

Having won this battle, the taxpayer then had to convince the court the evidence he wished to present regarding the mailing of his 1998 return was relevant to the issues raised. Robinette was successful again. However, in a concurring opinion, several of the judges cautioned future taxpayers not to interpret this case as allowing the introduction of evidence withheld from the administrative hearing. Only new evidence or evidence rejected by the administrator will be considered in addition to the administrative record. In this case the administrator had rejected Robinette’s attempt to present his evidence of timely filing.

Earlier this year the Tax Court, in Commissioner v. Ewing, held that taxpayers could introduce additional evidence the IRS had abused its discretion by failing to grant innocent spouse relief under IRC section 6015 (f). As in Ewing, there were dissenting opinions. Thus the apparent conclusion that all abuse of discretion cases will be decided on the total evidence and not just the administrative record remains in doubt.

Future taxpayers should try to submit all evidence at the administrative hearings. If the evidence is rejected or new evidence comes to light, a taxpayer should be able to convince a court to review all the evidence to determine whether the IRS had abused its discretion. It’s not certain the courts will consider evidence the taxpayer had but chose not to provide at the administrative hearing. With this limitation it appears the courts are willing to consider all evidence an IRS failure to grant a taxpayer relief was an abuse of its discretion.

James M. Robinette v. Commissioner, 123 TC no. 5.

Prepared by Edward J. Schnee, CPA, PhD, Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

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